Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Distribution Business Sold at 50x EBITDA with Customer Contracts
Transcript
- Lucas: So there's this story that's been making the rounds in the M&A advisory world — a small, regional HVAC distribution business, about 15 million in revenue, sold for 50 times EBITDA. Luna: Wait, 50 times? That's a multiple you'd expect from a SaaS company with 90 percent gross margins, not a parts distributor. Lucas: Exactly. And that's exactly why it's worth talking about. The business wasn't particularly high-growth — call it 5 percent top-line annually. It wasn't tech-enabled in any fancy way. But it had something buyers are increasingly prizing above almost everything else: multi-year supply contracts with automatic renewal clauses. Luna: So the contracts themselves were the asset — not the inventory, not the trucks. Lucas: Right. The inventory was standard HVAC parts — compressors, coils, thermostats. Nothing proprietary. But the company had locked in about 80 percent of its revenue through three-year agreements with small to mid-size HVAC installation firms. And those contracts had clauses that made them really hard to cancel: 90-day notice periods, auto-renewal unless the customer affirmatively opted out, and volume minimums tied to pricing discounts. Luna: So the distributor basically traded a small pricing discount for long-term revenue visibility. Lucas: Exactly. And that visibility turned into a data asset. Because once you have three years of consistent purchase patterns across hundreds of customers, you can start predicting revenue at the account level with high confidence. And that's what the buyer — a mid-market private equity firm — really paid for. Luna: Alright, let's break down the numbers. Fifteen million in revenue, what was the EBITDA margin? Lucas: About 18 percent, so roughly 2.7 million in EBITDA. At 50 times, that's a 135 million dollar enterprise value. For a regional distributor. The buyer structured it as 70 percent upfront, 30 percent earnout tied to customer retention over the next two years. Luna: That earnout tells me the buyer was mostly buying the renewal stream, not the physical assets. Lucas: Bingo. The physical assets — warehouse, fleet, inventory — were maybe 15 million. The rest was goodwill and, really, the contract book. The buyer's thesis was that they could bolt on additional product lines to the same customer base and cross-sell without any incremental acquisition cost. Luna: So this is basically a playbook for any B2B distributor with sticky customers. What are the key ingredients to replicate that multiple? Lucas: First and most important: multi-year contracts with automatic renewal. If you're selling month to month, you're leaving money on the table at exit. Second: customer concentration under 10 percent for any single client. This distributor's top customer was 7 percent of revenue. Third: digital transaction history that shows predictable purchase cadence — not just sales data, but the pattern of reorders. Luna: And I imagine the gross margin profile matters too. Distribution typically runs 20 to 30 percent gross margin. What was theirs? Lucas: They were at 28 percent gross margin, which is healthy but not exceptional. What pushed the multiple up was the combination of that margin with the contractual lock-in. Buyers are willing to pay for certainty. A SaaS company with 90 percent gross margin but high churn might trade at 30 times EBITDA. A distributor with 28 percent margin and near-zero churn can trade higher because the risk of revenue loss is so low. Luna: So it's the inverse of the old rule — higher margin doesn't always mean higher multiple if the revenue is less predictable. Lucas: Exactly. And we're seeing more of these 'distribution as a service' valuations. Private equity firms are building platforms around these sticky contract books. There was a similar deal last year — a janitorial supplies distributor with five-year contracts sold at 35 times EBITDA. The pattern is spreading. Luna: Let's talk about the buyer's perspective for a second. What does a PE firm do with a business like that after the deal? Lucas: Typically, they do two things. First, they centralize purchasing to improve gross margin by 200 to 300 basis points. This distributor was buying from multiple wholesalers; the PE firm consolidated to one national supplier and got better pricing. Second, they layer on a CRM system to track contract renewal dates proactively. The original owner had been managing renewals on a spreadsheet — the PE firm automated follow-ups and increased renewal rates from 92 to 97 percent. Luna: So the multiple was justified because the buyer saw a clear path to margin improvement and retention lift. Lucas: Right. And that's the key for any business owner listening: you don't need to be a tech company to get a tech-like multiple. You just need to prove that your revenue is contracted and predictable. If you run a distribution business, start by converting your top 20 customers to annual or multi-year agreements. That alone can double your exit multiple. Luna: What about the earnout structure? The 30 percent earnout tied to retention — is that common in these deals? Lucas: Very common when the multiple is above 30 times. The buyer wants to align incentives. If you as the seller believe your customers will stay, you should be willing to put some of your consideration at risk. In this case, the earnout paid out fully because retention stayed above 95 percent. The seller walked away with close to 130 million total. Luna: That's a life-changing outcome for a regional distributor. And it didn't require a fancy tech platform. Lucas: It didn't. It required discipline in contracting and a willingness to share data with potential buyers. The seller had prepared a 'contract book' — a simple PDF listing every customer, contract start and end date, annual revenue, and renewal history. That document was probably worth 50 million dollars in the negotiation. Luna: So if you're a business owner listening, start building that document now. And on that note — Luna: You know, conversations like this are exactly why we keep doing these shows. They're free, they're ad-free, and they run because listeners chip in a couple of dollars a month. Lucas: It's true. A few dollars from people who find value in the episodes genuinely covers the hosting, the transcription, the research. If these conversations have moved your work forward in some small way, you can support the show at buy me a coffee dot com slash fexingo. Luna: And we don't run ads, so listener support is what keeps this going. It's a small thing that makes a real difference. Lucas: Alright, back to the deal. So after the earnout paid out, the buyer started acquiring smaller distributors in adjacent geographies and folding them into the same contract structure. Luna: So the original owner's contract playbook became the template for a roll-up. Lucas: Exactly. They bought three more distributors in the next 18 months, each with month to month customer relationships. They converted those to multi-year contracts using the original company's terms, and the combined entity is now up for sale again — this time at an expected multiple of 40 to 45 times EBITDA. Luna: So the original owner essentially created a blueprint that multiplied in value across multiple acquisitions. Lucas: Right. And that's the bigger lesson: contract data is a strategic asset. It's not just about getting paid regularly — it's about building a business that can be valued like an annuity. Any distributor, any wholesaler, any B2B service business with recurring customers can do this. Luna: What's the one thing you'd tell a distributor who wants to start today? Lucas: Pick your five largest customers and propose a two-year contract with a 5 percent discount. If they say yes, you've just increased the value of that customer relationship by maybe 10 to 20 times. Then rinse and repeat. Within two years, you could have 60 percent of revenue under contract. That changes everything at exit. Luna: And if they say no? Lucas: Then you know which customers aren't sticky. That's valuable information too. You can focus your retention efforts on the ones who will commit. Either way, you learn something that increases your business value. Luna: Alright, that's a solid takeaway. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.