Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Commercial Laundry Business Sold at 200x EBITDA
Transcript
- Lucas: All right, Luna, I have a deal that might be my favorite so far — partly because it's so counterintuitive. A commercial laundry business in Chicago just sold for 200 times EBITDA. Luna: 200 times? That's double the bike shop multiple, and that one had no revenue. How is a laundry business worth that? Lucas: Right, so on the surface it sounds absurd. But this wasn't a typical laundromat. This was a company called CleanPath Linen Services — they exclusively serviced three major hospital systems in the Chicago area. And the key was a fifteen-year exclusive contract with one of them, with automatic renewal clauses. Luna: So the buyer is basically buying a guaranteed revenue stream for a decade and a half. That's almost like buying a bond, not a business. Lucas: Exactly. The buyer — a mid-market private equity firm called Pinnacle Healthcare Partners — valued the predictability. The contract had a take or pay clause: the hospital had to pay for a minimum volume every month, even if they didn't use it. So the cash flows were almost as certain as a Treasury bond, but with a higher yield. Luna: What was the actual EBITDA? I'm trying to wrap my head around 200 times. Lucas: The trailing twelve-month EBITDA was about $400,000. So the purchase price was $80 million. Now, that sounds huge for a laundry business, but the contract alone guaranteed $2.5 million in annual revenue with 60% gross margins. The buyer modeled that over the contract term, the net present value of those cash flows justified the multiple. Luna: But what happens after fifteen years? The hospital could decide to switch providers. Lucas: That's the risk, and it's why the multiple isn't infinite. But the contract had a five-year automatic renewal unless the hospital gave three years' notice. Plus, CleanPath had invested in specialized equipment that was integrated into the hospital's laundry workflow — switching costs were high. The buyer's due diligence suggested a 90% probability of renewal. Luna: So the multiple is really about contract duration and switching costs. That makes sense. Lucas: Precisely. And this is a pattern we're seeing more often: buyers are willing to pay enormous multiples for recurring revenue with long contracts, especially in healthcare-adjacent services. Compare that to, say, a pressure washing business that might have route density but no long-term contracts — that's why that one sold for a lower multiple despite similar margins. Luna: But doesn't that create a risk of overpaying? I mean, if interest rates rise, the present value of those future cash flows drops. Lucas: Absolutely. And that's part of why this deal happened in mid-2025, when rates were still relatively low. The buyer used a mix of debt and equity, and their cost of capital was around 7%. At that rate, the internal rate of return on the projected cash flows was still over 20%. But if rates go up to 10%, that deal doesn't pencil out. Luna: So timing matters as much as the contract itself. Lucas: Timing, leverage, and the specific terms of the contract. One thing that stood out in this deal: the contract had an annual price escalation clause tied to the Consumer Price Index, plus two percent. So revenue automatically grew faster than inflation. That's a huge value driver. Luna: That's like having a built-in hedge. I can see why the buyer was comfortable paying up. Lucas: And the seller, a family that had run the business for thirty years, walked away with a life-changing sum. But they also structured part of the deal as an earn-out tied to retention of the hospital contract. So they had skin in the game for the first two years post-sale. Luna: That's smart. It aligns incentives and gives the buyer confidence. Lucas: It also helped the seller achieve a higher multiple. Without the earn-out, the base multiple might have been 150 times. By agreeing to stay on and ensure a smooth transition, they got the multiple up to 200. Luna: So the earn-out itself was worth about 50 times EBITDA. That's substantial. Lucas: It is. And it's a reminder that for business owners, the terms of the deal can be just as important as the headline price. A seller who's willing to accept some risk post-sale can often command a premium. Luna: What other industries have similar dynamics? I'm thinking of waste management, or maybe security services with government contracts. Lucas: Great examples. Waste hauling companies with long-term municipal contracts trade at very high multiples. Same with companies that provide IT services to school districts with multi-year contracts. The common thread is contractual recurrence with high switching costs. Luna: But isn't there a danger of the buyer over-leveraging? If the contract somehow falls through, they're left with a lot of debt. Lucas: That's exactly what happened with a similar deal in Texas last year. A commercial laundry company lost a major contract after a merger, and the buyer — a private equity firm — had to write down the investment. So due diligence on contract terms is critical. In the Chicago deal, the buyer spent over $200,000 on legal review of the contract alone. Luna: Worth it, considering the price tag. So what's the takeaway for a business owner listening who might have a similar business with a long-term contract? Lucas: First, document everything about the contract — renewal history, price escalations, any side letters. Second, think about how to make switching costs even higher. For CleanPath, they installed a proprietary tracking system that meshed with the hospital's inventory software. That made it a nightmare for the hospital to switch. Luna: So it's not just about having a contract, but about making the relationship sticky. Lucas: Exactly. And third, consider timing. If you have a long-term contract coming up for renewal, try to sell before that renewal. The uncertainty reduces the multiple. Sell when there's plenty of time left. Luna: That makes sense. You want the buyer to see the contract as a stable asset, not a cliff they're approaching. Lucas: Right. And one more thing — the seller in this case also had a side contract with a smaller hospital that was only three years old. That one didn't contribute much to the multiple, but it showed the buyer that the company could replicate its model. Diversification of contract counterparties is a plus. Luna: So even a small second contract helps because it proves the business model is repeatable. Lucas: Exactly. And I think that's the bigger lesson here: buyers are not just buying current cash flows; they're buying the system that generates them. CleanPath had a sales playbook, a training program, and a quality assurance process that made them confident they could win more contracts. Luna: That's really valuable. You're not just buying a laundry company; you're buying a machine that can produce more laundry companies. Lucas: Precisely. And that's why the multiple was 200 times. Now, I know that number sounds extreme, but when you break it down — contract length, price escalation, switching costs, and a repeatable model — it starts to make sense. Luna: I think our listeners will really appreciate that breakdown. It demystifies what can seem like an arbitrary number. Lucas: Good. And if you're a business owner with a long-term contract, this episode is a reminder that your business might be worth more than you think — if you structure it right. Luna: Absolutely. And on that note, we're able to bring you these deep dives because of listeners who support the show. If these conversations have moved your work forward in some small way, consider chipping in at buy me a coffee dot com slash fexingo. A handful of listeners already do, and that's what funds this many episodes ad-free. Lucas: Yeah, honestly, it makes a difference. We don't run ads, so listener support is what keeps the podcast going. If you find value in it, that's the best way to ensure we keep making them. Luna: And now back to the laundry business — one thing I forgot to ask: did the seller have any non-compete clauses? Lucas: Great question. Yes, the seller signed a five-year non-compete within a 100-mile radius. That was a condition of the earn-out. It protected the buyer from the seller starting a competing service and poaching the contract. Luna: That makes sense. So the earn-out and the non-compete together ensured the seller was fully committed to the transition. Lucas: Exactly. And that's another key point: earn-outs work best when they're tied to things the seller can actually control — like contract retention, not some broad revenue target. In this case, the earn-out was based on the hospital contract being renewed after two years. Simple and measurable. Luna: Clear structure. That's a good template for any seller considering an earn-out. Lucas: Alright, I think we've covered the laundry business inside out. Next episode, we'll look at a completely different angle: how a seasonal business with no contracts — a Halloween pop-up store — still managed to sell at a respectable multiple. Luna: Looking forward to that. Thanks for listening, everyone.