Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why This Bookkeeping Firm Sold at 4 Times EBITDA
Transcript
- Lucas: So there's a bookkeeping firm that just sold for 4 times EBITDA, and honestly, that number made me do a double take. I mean, bookkeeping is about as steady as it gets in the service world. Luna: Four times does sound low for a business with sticky clients. What was the story? Lucas: The firm had around 80 small-business clients, mostly monthly bookkeeping, some payroll. Revenue was about 1.2 million, EBITDA around 300,000. Profitable, no debt, client turnover was under 10 percent a year. Looks like a solid asset. Luna: So why did it sell for so little? Was there something lurking in the books? Lucas: The first thing that jumps out: almost none of those clients were on a contract. They were month to month. The owner had built the business on handshakes and relationships, which is great for cash flow, but a buyer can't count on that revenue continuing. Luna: month to month feels normal for bookkeeping, though. Isn't that just how the industry works? Lucas: It is, but that's exactly the problem. When you have 80 clients with no commitment, a buyer has to underwrite the risk that a good chunk could leave within 90 days. And in this case, the owner was the relationship for probably half the clients. They didn't even have a formal client portal or a dedicated account manager for most accounts. Luna: So the business was really the owner's personal network, not a standalone operation. Lucas: Right. And the buyer knows that the moment the owner walks out the door, a chunk of the revenue might evaporate. That's classic key-person risk, and it's a multiple killer. We talked about that with the consulting firm back in episode 145, but it's even more acute here because bookkeeping is such a commoditized service. Luna: Commoditized how? I mean, there are a lot of bookkeepers, sure, but clients still need someone they trust. Lucas: Absolutely, but from a buyer's perspective, the service itself is easily replicated. There are thousands of firms that can do monthly bookkeeping at a similar price point. There's no proprietary software, no unique process, no barrier to entry. So the buyer isn't paying a premium for the service—they're paying for the client relationships, and those are fragile. Luna: Makes sense. So what could the owner have done to get a higher multiple? Lucas: The most obvious fix is to get clients on annual contracts. Even if it's just a one-page agreement that bundles in a monthly review meeting, that converts a month to month relationship into a recurring commitment. A buyer will pay more for a revenue stream that has a contractual tail. In this case, if even 50 percent of clients had signed a one-year agreement, I'd bet the multiple would have been closer to 6 or 7 times. Luna: Is that really enough to move the needle? Clients can still cancel a contract early. Lucas: Sure, but the point is that a contract signals intent. It takes effort to cancel, and it gives the new owner time to build their own relationship with the client. Plus, you can structure it with a 60-day notice period, which protects the revenue stream during the transition. Buyers see that as a meaningful reduction in risk. Luna: What else was dragging the multiple down? Lucas: The owner was the only point of contact for about half the clients. No account managers, no team leads. So even if the revenue was steady, the operational risk was huge. The buyer would have to hire or train someone to replace the owner, which costs money and time. That's risk you have to discount. Luna: So it's not just about the clients being tied to the owner, but also about whether the business can run without them day-to-day. Lucas: Exactly. And there's also the fact that the firm had no written processes. The owner knew how to onboard a client, how to handle a payroll issue, how to do the month-end close—but none of it was documented. So a buyer would have to reverse-engineer how the business actually operates, which is a big red flag. Luna: That's interesting because a lot of small service businesses run on the owner's knowledge. But for a buyer, that's scary. Lucas: Right. And I think the final piece is that the firm's client base was what you'd call undifferentiated. They had a mix of restaurants, retail shops, a few professional practices—but no niche. That means the marketing and sales effort has to be broad, and the client acquisition cost is higher. Buyers like to see a specialization that makes it easier to replicate the sales model. Luna: So if you're a bookkeeper listening to this, what's the one takeaway? Lucas: I'd say the biggest lever is to move from a service to a subscription mentality. Bundle your services into a monthly package and put clients on an annual term. That alone can add a couple of turns to your multiple. And document your processes, even if it's just a simple checklist. It signals that the business can survive without you. Luna: It's funny, because the owner probably thought they were building a stable business, but from a buyer's view, it was fragile. Lucas: Yeah, and that's the gap between how owners see their business and how buyers do. The owner saw 80 loyal clients who had been with them for years. The buyer saw 80 month to month contracts with no process and one person holding it all together. Luna: So the 4 times multiple was almost generous, then. Lucas: Honestly, given the risk profile, I'd say it was fair. There are plenty of businesses like this that don't sell at all because buyers can't underwrite the uncertainty. The fact that they got a deal done at 4 times shows the buyer had a plan to stabilize the client base post-sale. Luna: What kind of plan? I mean, how do you stabilize a client base that isn't under contract? Lucas: The buyer told me they planned to immediately implement client onboarding agreements—basically renew every client within the first 90 days. They also brought in a dedicated account manager to shadow the owner during the transition. So they had a clear playbook to de-risk the purchase. That's what made the deal feasible. Luna: That's smart. So the low multiple wasn't just a discount—it was a reflection of the work the buyer would have to do to make the business sustainable. Lucas: Exactly. And that's a lesson for any owner thinking about selling: the multiple you get is often a direct measure of how much work the buyer has to do to replace you and secure the revenue. The less work, the higher the price. Luna: We talk a lot about multiples and exit planning on this show, and I love that we can share these real numbers. It's one of the reasons I enjoy doing this. Lucas: Yeah, and it's also why we keep the show ad-free. We want to give you practical, specific takeaways without any noise. If these conversations have helped you think about your own business or maybe even plan an exit, and you want to support that, the link is buy me a coffee dot com slash fexingo. No pressure, just if you find value in what we do. Luna: And we really do appreciate that. But back to bookkeeping—I think one thing that's often overlooked is the role of client concentration. Was that an issue here? Lucas: It wasn't a huge issue, but there was one client that made up about 15 percent of revenue—a regional restaurant group. That's not alarming, but combined with the other risks, it added to the buyer's concerns. If that client left, it would take a big chunk of EBITDA with it. Luna: So even a moderate concentration, when layered on top of no contracts and founder dependence, can push the multiple down further. Lucas: Right. It's not any single factor that kills the multiple—it's the combination. The buyer is looking at the whole risk profile and assigning a discount accordingly. Luna: So what should an owner do if they're planning to sell in the next 2 or 3 years? Lucas: Start by getting 60 to 70 percent of your clients on annual contracts. Then document your top five processes. Then hire a second-in-command who can handle client relationships. These three things can take a year or two, but they can add 2 to 4 turns to your multiple. In this firm's case, that could have been an extra 600,000 to 1.2 million dollars on the sale price. Luna: That's a big difference for a business of that size. Lucas: It really is. And the good news is, these are all things the owner can control. It's not about market conditions or buyer sentiment. It's about de-risking the business from a buyer's perspective. Luna: I think that's a great note to end on. Thanks for breaking down this case, Lucas. Lucas: Thanks, Luna. And if you're thinking about selling your own business, look at it through a buyer's eyes. That's the best way to boost your multiple.