Preserve and Enhance Your Legacy Through Thoughtful Succession

I used to chase recurring revenue like it was the holy grail. We all did. The pitch was simple: lock in those contracts, watch churn disappear, and sleep easy knowing the cash would keep rolling in. Turns out the data has a much more boring story to tell.

A couple years back I spent way too many nights digging through that Yale SOM study on 59 fully realized search fund exits. They split the companies into buckets by recurring revenue percentage at entry and tracked what actually happened at sale. I kept waiting for the chart that showed the 90-percent-plus recurring deals crushing everything else. It never appeared. The returns were basically flat across the board. Low recurring, medium recurring, sky-high recurring — the numbers just didn't move the needle.

What did show up loud and clear was on the entry side. The higher the recurring piece, the more everyone paid for it. Buyers, including us at times, happily gave away an extra turn or two of EBITDA multiple because it felt safer. So you end up in this weird spot where the very thing you thought was going to protect your returns actually got arbitraged away before you even closed.

We almost walked from one deal last year for exactly this reason. Beautiful SaaS-like revenue, 92 percent recurring, but the seller knew it and priced it like a public software company. We ran the numbers six different ways and kept coming back to the same conclusion: we were buying the stability at full price and leaving ourselves almost no room to create value. We passed.

These days I look for something more like 50 to 75 percent recurring. Enough to keep the lenders happy and give you some visibility, but not so much that the entry multiple is already priced for perfection. A pest control route business with annual contracts and sticky customers can deliver better economics than a pure subscription play that trades at 7x on day one.

The real drivers I care about now are simpler: Can the customer actually stop paying us if times get tough? How sticky is the relationship beyond the contract language? Can we still raise prices every year? Those things matter a lot more than whether the revenue is labeled "recurring" on a spreadsheet.

Look, recurring revenue is nice. I'm not saying burn the contracts. But it's rarely the secret sauce everyone makes it out to be. In the end, the deals that actually compound are the ones where we bought right, ran them hard, and didn't overpay for the illusion of safety.

I still remember the first time I ran the post-debt cash numbers on a deal and realized we were barely going to clear the bar. That moment changed how I look at every acquisition now. In self-funded search funds the real scoreboard in year one is not EBITDA growth or some fancy exit multiple. It is simply how much cash actually hits your account after debt service, a modest salary, and keeping the lights on.

Most deals in our $500K to $1.5M EBITDA range close somewhere between $2.5 million and $7.5 million enterprise value. The capital structure is usually 70 to 80 percent SBA debt, a chunk of seller paper, and the rest your equity. At today's rates that debt service can eat 45 to 55 percent of EBITDA right off the top. So the whole game becomes keeping your equity check under a million while still generating 25 to 40 percent cash-on-cash in the first full year.

Entry price is the biggest lever. Buy at 4.5 times instead of 5.8 times and you save real money that flows straight to your pocket. Strong free-cashflow conversion matters even more. We love businesses that turn 65 percent or better of EBITDA into cash with almost no CapEx. Negative working capital is pure gold.

We almost lost one HVAC roll-up last year because the numbers looked fine on paper but the cash yield came in at 18 percent after debt. We pushed the seller harder on note terms, got better pricing, and closed at 4.2 times with 75 percent debt. First-year cash-on-cash jumped to 47 percent. Small adjustments, big difference.

I weight cash-on-cash return potential at 17 percent in our matrix because it forces discipline. It tells you whether you can actually live off the business while you fix it. High endurance and clean cash conversion almost always mean better lender terms and lower rates. That extra 3 or 4 points of debt capacity compounds fast.

Seller financing is another underused trick. Every extra point of seller paper at a reasonable rate lifts your cash yield noticeably. I have seen operators treat it as an afterthought and leave real money on the table.

At the end of the day cash-on-cash is the metric that keeps you honest. Buy right, finance smart, and run the business tight and the cash shows up early. That is what actually lets you sleep at night and compound over time. Everything else is just noise.

The test I actually use is embarrassingly simple. In a real downturn a commercial property owner will happily delay new carpet and lobby renovations. But they will never, ever cancel the elevator inspections. Code violations, insurance problems, tenant lawsuits — the risk is immediate and expensive. Demand stays basically flat even when the economy shrinks.

That one example cuts through a lot of theory. Businesses where spending is driven by regulation, safety, or pure necessity simply do not drop as hard in tough times. Census Bureau data from 2008–2009 and 2020 shows these sectors averaged less than 8 percent revenue decline. Discretionary stuff like marketing agencies or seasonal landscaping routinely fell 30 to 40 percent. The difference is night and day.

I run every target through three quick checks. First, how did revenue actually hold up in the last real recession? Second, is the service tied to a law, liability, or operational must-have? Third, can customers realistically walk away if money gets tight? A fire suppression inspection company with annual mandated contracts across 200 buildings usually passes with flying colors. A promotional printing shop with project-based work usually does not.

We almost missed one pest control deal early on because the recurring piece looked average. But when we dug in we saw the contracts were sticky, the route density was excellent, and customers literally could not cancel without health-code issues. Cash flows barely dipped in 2020. That business now sits in the top quartile of our endurance scores.

Lenders notice this stuff too. SBA underwriters give higher loan-to-value and better terms to these resilient models. The same stability shows up in steadier cash-on-cash yields and stronger exit multiples. Buyers pay up for businesses that do not scare them in a downturn.

I weight structural endurance at 14 percent in our matrix because it protects the equity check when everything else gets noisy. In leveraged deals with personal money on the line, downside protection is not a nice-to-have. It is table stakes.

The elevator maintenance test is blunt on purpose. When the economy turns, you want to know the phone will still ring next month. Businesses that pass this test consistently make self-funded search fund math work. The rest just add unnecessary stress.