Are Maintenance Contracts Really Worth the Premium? - Searchfunder

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by a searcher from University of Toledo
in Miami Beach, FL, USA

9mos ago

Are Maintenance Contracts Really Worth the Premium?

In my search I’ve noticed a recurring theme, especially in service-based businesses here in South Florida: many sellers put a significant premium on their “recurring maintenance contracts.” On the surface, that sounds great — predictable revenue, sticky customers, and higher valuation multiples. But when I dig deeper, I often find the contracts are loosely enforced, renewal rates aren’t tracked, and customers can cancel at any time. Because of that, I’ve started discounting the value of these agreements pretty heavily unless I can verify actual renewal/retention rates over multiple years. Otherwise, I treat them more like one-off jobs than true recurring revenue. Curious how others are approaching this: Do you underwrite maintenance contracts as true recurring revenue, or discount them like I do? Any frameworks you use to validate the real stickiness of these agreements? Have you ever seen a seller’s claims about “recurring” revenue hold up under diligence?

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reply by a searcher 9mos ago
in Miami, FL, USA

I’ve run into the same issue across contracting and construction. Owners of $0M to even $40M EBITDA contractors often try to spin maintenance work into “re-ocurring” or “soft recurring” revenue. The reality is that unless it is contractually structured with recurring payment intervals, whether monthly, quarterly, or annually, it does not warrant the premium they expect. There is a clear difference between annuity-like contracts that are truly predictable, break-fix or semi-reocurring services that may feel sticky but are not locked in, and project-based retrofits that are far less deserving of any sort of premium from an investor standpoint. The mistake I see smaller investors make is paying a “recurring” multiple for revenue that is really project-driven or rather lumpy, which leaves a smaller margin of safety and makes for a tough exit profile if no one sees the recurring positioning. Break-fix work can sometimes be interesting, but you have to dig into the contract terms, historical renewal rates, pricing mechanics, and the type of customers and end markets being served. Even then, in my experience, it rarely justifies a true recurring revenue multiple, but rather lands somewhere in the middle.

reply by a lender 9mos ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I can tell you from a lender perspective, if the contracts are not firm the lenders typically look at them as cancellable at any time. If the business has customer concentrations with these larger customers it can make it difficult if the contracts are worded loosely to get lenders comfortable with the contracts being sticky.

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