Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Private School Sold at 15x EBITDA with Enrollment Contracts
Transcript
- Lucas: Last month, a mid-sized private school in the Pacific Northwest closed for just over 15 times its trailing EBITDA. That’s roughly double the typical multiple for an education business. Luna: 15x? That is eye-popping for a sector that usually trades in the 6 to 8 range. What was the secret sauce? Lucas: The school had shifted from month to month tuition billing to multi-year enrollment contracts. By the time the school went to market, over 80 percent of its students were signed up for at least two years, with auto-renewal clauses. Luna: So they turned tuition from a variable revenue stream into something that looked a lot like a software subscription. Lucas: Exactly. And the market rewarded that predictability. The buyer was a regional education group backed by private equity, and they paid a premium because the school’s future cash flows were essentially locked in. Luna: This show is free for everyone, and we want to keep it that way. If these conversations have moved your work forward in some small way, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the podcast ad-free. Lucas: Appreciate that, Luna. And yeah, that link is buy me a coffee dot com slash fexingo. Now back to why that contract book mattered so much. Lucas: The school had historically run on month to month billing. Students could withdraw with 30 days' notice, and the school saw average annual churn of about 22 percent. That made it hard to forecast revenue, and it depressed the multiple when similar schools were sold. Luna: Because a buyer sees that churn and has to discount future earnings. They don't know if that revenue will still be there next year. Lucas: Right. So the school’s leadership spent three years re-engineering the enrollment process. They introduced a two-year contract option with a modest tuition discount—about 5 percent off the month to month rate. They also added an auto-renewal clause that kicked in unless the family opted out in writing 60 days before the contract ended. Luna: Did families push back? Lucas: Some did, but the school framed it as a commitment to stability for the student—no disruption mid-year. And because the discount was real, about 60 percent of new families chose the two-year contract from the start. Then the school worked through the existing families, offering the same deal in exchange for locking in current tuition rates for two years. Luna: So they grandfathered the existing families into the lower rate if they signed up. That’s a classic retention play. Lucas: Exactly. Over three years, the share of students on contract went from less than 10 percent to 82 percent. And churn dropped from 22 percent to 6 percent. That 6 percent was almost entirely families moving out of the area, not voluntary withdrawals. Luna: So the school effectively transformed its revenue from a non-recurring, seasonal model into a subscription-like one. And the multiple followed. Lucas: It did. The school’s trailing EBITDA was about $1.8 million. At a typical 7x multiple, that would have been $12.6 million. Instead, with those contracts in place, they got 15x, or $27 million. That’s more than double the value for what was essentially the same revenue—just structured differently. Luna: I love that the transformation didn't require growing revenue. It was purely about making the existing revenue more predictable. Lucas: Right. And the buyer—a group that now owns seven schools across three states—told the broker that the contract book was the single biggest factor in their willingness to pay a premium. They said it removed most of the integration risk. They knew the families were locked in for at least another year, giving them time to improve operations without worrying about enrollment cliff. Luna: Let's talk about the mechanics of the contracts themselves. Were they truly binding, or could families break them? Lucas: They were binding with one exit: if a family moved more than 25 miles away, the contract could be terminated without penalty. Otherwise, the tuition was due for the full two years. That gave the buyer confidence. The school also built in a small tuition insurance fee—about $150 per year—that covered up to six months of tuition if a student had to leave for medical reasons. That took away the last psychological objection from families. Luna: So the contracts were tough but fair. And the insurance mitigated the catastrophic scenario. Lucas: Exactly. The school’s broker told me that in the first round of buyer inquiries, every single serious buyer asked about the contract structure. They didn't care much about the curriculum or the facilities. They just wanted to know how sticky the revenue was. Luna: That mirrors what we hear in other subscription-like businesses. Recurring revenue has become the holy grail for acquirers across industries. Lucas: And it's not just schools. We've talked about pest control, janitorial services, software—all of those saw multiple expansion when they added contracts. But the education sector was lagging. Most private schools still operate on a month to month or semester basis. That's a huge opportunity for owners who are thinking about an exit. Luna: What about a smaller school—say, a boutique preschool with only 50 students? Could they pull off a similar transformation? Lucas: Yes, but the economics are tighter. The cost of implementing a new billing system and legal review of contracts might be $10,000 to $15,000. For a school with $500,000 in revenue, that's manageable. But the multiple lift might be less dramatic because the buyer pool is smaller. That said, I've seen a preschool in Colorado that did exactly this—three-year contracts with annual tuition increases tied to CPI—and it sold at 12x EBITDA, which was still above market. Luna: So the principle scales, even if the multiple doesn't jump as high. Lucas: Right. And there's a counterexample: a school in Ohio that tried to sell without any contracts. It had month to month enrollment, and despite solid financials, it sat on the market for 18 months and eventually sold at 5.5x EBITDA. The broker said the lack of enrollment commitments scared off every institutional buyer. Luna: So the difference between 5.5x and 15x was literally a piece of paper—the contract itself. Luna: That's a return on investment most venture capitalists would envy. Lucas: Exactly. And the interesting thing is that the school's leadership didn't initially think of the contracts as an exit strategy. They implemented them to reduce administrative churn and stabilize enrollment. The valuation bump was a happy byproduct. Luna: So the lesson for any business owner listening: even if you're not planning to sell soon, building a recurring revenue model—whether through contracts, subscriptions, or retainers—can dramatically increase your company's value when you do decide to exit. Lucas: And it doesn't have to be complicated. For the school, it was a two-page contract with an auto-renewal clause, a small discount for commitment, and a tuition insurance opt-in. That's it. Three changes that took a year to implement but transformed the business's valuation. Luna: I'm curious—what did the families think? Did the school see a dip in enrollment when they first introduced the contracts? Lucas: Initially, yes. About 10 percent of the existing families chose not to renew when their month to month arrangement ended. But the school backfilled those spots with new families who were fine with the two-year commitment—especially given the 5 percent discount. Within 18 months, enrollment had recovered and was actually 3 percent higher than before. Luna: So the school traded short-term churn for long-term stability. And ended up ahead. Lucas: Exactly. And for the families who stayed, the contract actually created a positive feedback loop. They knew the school was financially stable, so they were more likely to recommend it to friends. The school's referral rate went up after the contracts were introduced. Luna: That's an underrated benefit: contracts signal quality to parents. If you're willing to commit for two years, you're telling the world the school is worth it. Lucas: Right. And the buyer, of course, saw that as a brand strength. The regional education group plans to keep the contract model in place for all its schools. They've already started rolling it out to the other six schools in their portfolio. Luna: One more thought: for a business owner who's listening and thinking, 'I don't run a school, I run a dog grooming business or a tutoring center'—does this apply? Lucas: Absolutely. Any business with repeat customers can create a contract model. Dog groomers can offer a monthly membership with a set number of visits. Tutoring centers can sell semester-long packages. The key is to shift the customer from transactional to relational. The more you can make revenue predictable, the more a buyer will pay. Luna: And the higher the multiple, the more you get paid for your years of hard work. Lucas: That's the bottom line. The Pacific Northwest school is a perfect case study in how a simple operational change can double your exit price. It's not about fancy technology or a new marketing campaign. It's about structuring your revenue so that it sticks. Luna: And that's a lesson worth taking to the bank.