Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Small IT Firm Hit 18x EBITDA by Recurring Revenue
Transcript
- Lucas: So a twelve-person managed IT services firm in Greenville, South Carolina — they called themselves GreenTech Solutions — sold earlier this year for eighteen times EBITDA. That's almost double what the typical IT services business fetches. And it wasn't because they had some proprietary software or a huge client list. They had about a hundred and twenty small-business clients, mostly dental offices and law firms. Luna: Eighteen times. I've seen similar-sized MSPs struggle to get half that. What was the trick? Lucas: The owner had shifted the entire client base from break-fix — you know, you call them when your server crashes — to a hundred percent recurring revenue over about eighteen months. He did three specific things that any service business could borrow, and I want to walk through each one because they're not complicated. Luna: Okay, break it down. What was the first move? Lucas: First, he redesigned the pricing model. Instead of one flat monthly fee, he created three tiers — Essential, Pro, and Enterprise — with increasing levels of remote monitoring, backup management, and security. He also added a hardware as a service option, so clients could lease workstations and servers through the firm, bundled with support. That gave him a second revenue stream that was just as predictable as the service fees. Luna: Right — so the hardware lease becomes a lock-in. Once they've got your machines, you're not going to jump to a different provider every month. Lucas: Exactly. And he priced the hardware lease so that the margin was about the same as the service margin — roughly forty percent. The buyer told me that the hardware as a service book alone was worth about four times EBITDA in their valuation model, because it had multi-year terms built in. Luna: That's smart. What was the second change? Lucas: He implemented a mandatory quarterly business review for every client. I know that sounds administrative and boring, but it did two things. First, it forced his team to proactively identify issues — a failing drive, an expiring warranty — before they became emergencies. Second, it gave him a natural moment to upsell. If a dental office was adding three new workstations, he'd propose the hardware as a service option right there in the review. Luna: And it also builds the relationship with the client's decision-maker, so they're less likely to leave when a cheaper competitor calls. Lucas: Exactly. His churn rate dropped to under three percent annually. For a small MSP, that's exceptional. And a buyer looks at that and sees a revenue stream that's essentially an annuity. Luna: What was the third piece? Lucas: This one is the least sexy but maybe the most important. He documented everything in a standard operating procedure runbook. Every client had a folder with their network diagram, password vault, software licenses, backup schedule, and a log of every quarterly review. When the buyer came in for due diligence, they could pick any client at random and see exactly how that client was serviced. Luna: That removes so much risk from the buyer's perspective. They're not buying a business that relies on one guy's memory. Lucas: Right. The owner told me the buyer's diligence team spent exactly one day on operations review. They didn't find a single missing password or undocumented server. That kind of reliability is why they were comfortable paying eighteen times. Luna: And that makes me think — I actually worked with a similar business a few years ago, a fifteen-person MSP in the Midwest. They had great revenue, decent margins, but they could never get past a four times multiple. Why? Because they hadn't standardized anything. Each technician had their own way of doing things, there was no runbook, and the owner was the only one who knew how to handle the biggest clients. Lucas: Yep, that's the classic trap. You're buying a job, not a business. And a buyer will discount that heavily because they know if the owner leaves, the clients will start calling the owner's cell phone, not the help desk. Luna: So let me ask you — is an 18x multiple realistic for the average listener who owns a service business? Or is this an outlier? Lucas: It's definitely an outlier, but it's replicable. The industry average for MSPs is around five to seven times EBITDA. Getting to eighteen requires all three of those things to be in place — recurring revenue, low churn, and documented operations. But I've seen businesses that do two of the three get ten to twelve times. Even just fixing the pricing model and adding a quarterly review cadence could move you from five to eight times. Luna: And that extra three turns on a million dollars of EBITDA is three hundred thousand dollars in your pocket. Lucas: Exactly. And by the way, if these conversations have moved your work forward in some small way, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds our ability to make this many episodes without ads. Luna: Yeah, it's a small group, but it keeps us independent. We don't have to chase sponsors or tailor the content to please anyone. We just get to follow the stories that matter. Lucas: So back to GreenTech. The owner, a guy named Mark, told me the hardest part was the first six months of the transition. His clients were used to calling him when something broke, and suddenly he was asking them to sign a contract and pay a monthly fee for proactive monitoring. Luna: How did he sell it to them without losing half his client base? Lucas: He positioned it as a upgrade. Instead of saying 'you now have to pay this monthly fee,' he said 'we're moving to a model where we prevent problems before they happen, and it includes this new security package and hardware replacement program.' For existing clients, he grandfathered them into a discounted rate for the first year. He only lost about eight percent of his clients, and most of those were the ones who were already unprofitable — the ones who called once a year and paid by the hour. Luna: So he actually improved his margins by pruning the bottom. Lucas: Right. And those lost clients represented maybe five percent of revenue but consumed thirty percent of his support time. After the transition, his net margin went from twelve percent to twenty-two percent in about a year. Luna: That margin expansion alone would boost the multiple. Buyers pay more for higher margins because it means the business is more efficient and less risky. Lucas: Exactly. And that's the story. Three changes — tiered pricing with hardware as a service, quarterly business reviews, and a documented runbook — took a twelve-person shop from a five-times to an eighteen-times outcome. It's not complicated, but it requires the owner to step back from the day-to-day and build systems. Luna: And that's the part most owners struggle with. They're so good at fixing servers that they don't take time to fix their business. Lucas: Exactly. Mark told me he spent about six hours a week for six months just documenting processes and meeting with clients. That's a hundred and forty-four hours of work that returned millions in valuation. Luna: A hundred and forty-four hours. That's less than four work weeks. Lucas: Right. So for any business owner listening, the question is: what's your version of that hundred and forty-four hours? Whether you're in IT, landscaping, or consulting, the same principles apply — recurring revenue, documented systems, proactive client management. That's the recipe. Luna: And if you want to see the actual pricing sheet Mark used or the quarterly review template, we'll link to them in the show notes. Lucas: Good call. Next episode, we're going to look at a manufacturing company that doubled its multiple by fixing its supply chain. See you then.