Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why a Language School Sold at a 16 Times EBITDA Multiple
Transcript
- Lucas: So there's this language school in Austin — a small one, maybe a couple dozen students at a time — and it just sold for sixteen times EBITDA. Not a tech company, not a franchise, just a school teaching Spanish and English to adults. Luna: Sixteen times. For a language school? That's got to be some kind of record around here. Lucas: It's on the higher end, yeah. And when I first heard the number, I assumed there must be something unusual — maybe a big real estate asset in the deal, or some proprietary curriculum. But no, the real story is boring. It's recurring revenue from corporate contracts. Luna: Meaning companies pay for their employees to take classes, month after month. Lucas: Exactly. About sixty percent of the school's revenue came from corporate clients — local firms in tech, healthcare, construction — paying for on-site or virtual English and Spanish courses. Those contracts were multi-year, with auto-renewal clauses, and they'd been stable for three or four years. Luna: So a buyer looks at that and sees predictable cash flow, not just a bunch of individual students who might vanish next semester. Lucas: Right. And that's the key. The multiple isn't about the growth story; it's about the quality of the revenue. A twenty percent EBITDA margin on that kind of recurring base is worth a lot more than a hundred percent margin on one-off student fees. Luna: But what about the students who pay their own tuition? That's the other forty percent, right? How did that factor in? Lucas: The owner had actually worked to diversify that too. They had evening classes, weekend workshops, even a small online component. And the buyer — a regional education group — liked that because it meant no single student or corporate client accounted for more than ten percent of revenue. That's a huge de-risking factor. Luna: So no customer concentration. That's what you always warn about. Lucas: Exactly. In our last few episodes, we've seen deals tank because one client was half the revenue. Here, the opposite — a spread of small and medium-sized contracts. The buyer could model the cash flow without worrying about one phone call killing the business. Luna: But I'm guessing the owner had to do something else to get that multiple. Maybe step back from the day-to-day? Lucas: That's the other half of the story. The owner was a former teacher who'd built the school over twelve years. But for the last two years, they had a full-time director of instruction handling the curriculum and the teachers, and a general manager for the operations. The owner only came in for strategic stuff. Luna: So it wasn't a one-person show anymore. That's a big deal for a buyer. Lucas: Huge. The buyer told me later that they would have walked away if the owner was still the only one who knew how to schedule classes and manage the payroll. Instead, the GM had been there four years, and the director of instruction had been there three. The owner was replaceable. Luna: So the multiple reflects not just the revenue but the fact that the business can run without the founder. That's the transferable value. Lucas: And that's what separates a job from a business. A job sells for maybe two or three times earnings. A business — with systems, a team, and recurring contracts — can sell for five to ten times, sometimes more. Luna: Sixteen times still feels like a lot though. What's the justification for that specific number? Lucas: Well, part of it was the growth trend. Revenue had been growing about twelve percent year-over-year for the last three years, and the margins were improving as they added more corporate clients. But the buyer also saw cost synergies — they run several schools already, so they could centralize marketing and admin. Luna: So the buyer is paying for the future they can create, not just the current cash flow. Lucas: That's exactly right. They could plug this school into their existing back office, drop the overhead, and instantly improve the margin. For them, sixteen times was actually a good deal. Luna: It makes sense. But I have to ask — how did the owner actually get the business ready for this? I mean, they must have started preparing years in advance. Lucas: They did. About three years out, they brought in a consultant to clean up the books. There were some expenses that were personal — the owner's car, a few family meals charged to the card. They had to separate that out so the true EBITDA was clear. Luna: That's the usual advice, but does it actually make a difference? Buyers always do their own adjustments anyway. Lucas: It does, because it sets the baseline. If the owner presents a messy P&L, the buyer's first instinct is to discount everything. But if the owner has already made the adjustments, it builds trust. And it also helps the owner see what the real earning power is — so they can fix problems before they're magnified in due diligence. Luna: Did they have to do that with the contracts too? I mean, were the corporate agreements all written down properly? Lucas: Funny you should ask, because that was the one hiccup. About a year before the sale, the owner found that a couple of contracts had expired and had just been continuing on a handshake basis. So they had to go back and get those renewed properly — with the same terms, but now on paper. That took a few months. Luna: Because a buyer is not going to pay a premium for verbal agreements. Lucas: Right. The deal almost fell apart during due diligence because of that. But they fixed it in time, and the buyer appreciated the transparency. The lesson there is — if you have recurring revenue, make sure the contracts are airtight and transferable. Luna: What about the team? Did they have to worry about teachers leaving after the sale? Lucas: That was a big concern. The buyer required that the director of instruction and the GM stay on for at least twelve months after the close. And the owner had already set up retention bonuses for key teachers — paid out if they stayed a year post-sale. That wasn't a huge cost, but it showed the buyer that the talent was locked in. Luna: So in the end, what did the owner walk away with? I mean, we know the multiple, but what's the actual number? Lucas: The school had about one point two million in revenue, and just under five hundred thousand in EBITDA. Sixteen times that is roughly eight million. But the deal structure was interesting — the buyer paid about sixty percent in cash at close, with the rest in an earn-out tied to hitting certain revenue targets over the next two years. Luna: So the owner is not fully out of the game yet. Lucas: Right, but they're basically retired from day-to-day. They'll stay on as a consultant for six months, but they don't even need to be in the office. The earn-out is mostly about the corporate accounts they introduced staying on board. Luna: It sounds like a well-structured deal. Both sides got what they wanted. Lucas: And that's really the takeaway. The sixteen times multiple wasn't luck. It was the result of years of deliberate work — building a real team, locking in recurring contracts, and cleaning up the books. Any small business owner could start doing that today. Luna: It's a great case study. I think a lot of our listeners who own service businesses — whether it's a tutoring center, a consulting firm, or a language school — can learn from this. Lucas: They can. And look, if these conversations have moved your work forward in some small way, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds making this many of these shows. Luna: Yeah, it keeps us ad-free and independent, which we love. And honestly, even a dollar a month helps cover the hosting and the coffee. Lucas: That's right. And it doesn't change what we talk about — we're not beholden to anyone. So if you've gotten value from these episodes, that's the way to keep them coming. But back to the language school — one thing I didn't mention is how the owner found the buyer. Luna: Oh, right. Was it through a broker or a direct approach? Lucas: They actually interviewed three brokers and ended up going with a boutique firm that specialized in education services. That broker brought in the regional group we talked about — they'd been looking to expand in Texas, and this school was a perfect fit. Luna: So getting the right broker made a difference. Lucas: It did. The broker helped position the school, ran a competitive process with three serious bidders, and that bidding war pushed the multiple up from an initial offer of around twelve times to sixteen. That's a four-times EBITDA difference — worth about two million dollars. Luna: Wow. So the broker paid for themselves many times over. Lucas: Absolutely. And it's a reminder that selling a business is a skill, not just a transaction. You want someone who knows the market, knows the buyers, and can negotiate on your behalf. Luna: So what's the one thing our listeners should take from this episode? If they run a service business, what's the first step? Lucas: Start by looking at your revenue concentration. If any single client is more than twenty percent of your top line, that's a red flag. Work to diversify. And then make sure your contracts are in writing. Those two things alone could add a couple of turns to your multiple when you sell. Luna: That's practical and doable. Great episode. Lucas: Thanks, Luna. And to our listeners — maybe the next case study we tell is your own.