Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Cleaning Franchise Hit 42x EBITDA with Contract Stacking
Transcript
- Lucas: So a commercial cleaning franchise in the Midwest just sold for a multiple that a lot of SaaS companies would envy. Luna: How high are we talking? Lucas: Forty-two times trailing twelve-month EBITDA. On a business that was basically mops, vacuums, and a fleet of Toyota Siennas. Luna: That's wild. I think the typical cleaning business trades at maybe four to six times EBITDA. Lucas: Exactly. So the question is — what did this franchise owner do differently? And the answer is something I'm calling 'contract stacking.' Luna: Contract stacking. I like that. Walk me through it. Lucas: It's not just offering more services. It's structuring those services under a single, multi-year master service agreement with built-in price escalators and automatic renewal unless the client opts out. Luna: So it's not about having a menu of one-off cleanings. It's about bundling them into one sticky contract. Lucas: Right. This franchise had around 120 commercial accounts. Each account signed a three-year MSA that included daily janitorial, twice-weekly deep cleaning, monthly carpet extraction, quarterly disinfection, and — this was the smart one — on-call waste removal. Luna: Waste removal? That's not even cleaning. Lucas: No, but it's a natural extension. The same crew can handle it. And once you're in the building every day, the switching cost for the client becomes enormous. If they want to fire you, they don't just lose the cleaning — they lose waste, disinfection, carpet care. They have to recontract with three separate vendors. Luna: And this franchise owner created that structure intentionally? Or did it evolve? Lucas: It was intentional. The owner told the broker he studied how regional facilities-management firms like ABM and C&W Services structure their accounts. He reverse-engineered it for a smaller operation. Luna: So the playbook is: become the single point of contact for everything facility-related. That's essentially a mini fm company. Lucas: Exactly. And that's what attracted the buyer — a mid-market PE firm that already owned a facilities-management platform. They paid 42x because they could fold these contracts into their existing network and instantly increase revenue per account without adding headcount. Luna: Let's talk numbers. What was the actual EBITDA? Lucas: About $1.8 million on $6.2 million in revenue. That's a 29% margin, which is strong for cleaning — typical is 15 to 20 percent. Luna: So the contract stacking improved margins too, not just revenue stickiness. Lucas: Yes. Because once you have a crew on-site, adding disinfection or waste removal costs almost nothing in extra labor. It's pure margin expansion. Luna: I'm thinking about the churn rate. With three-year contracts and auto-renewal, what was their actual retention? Lucas: Under 2% annual churn. The broker said out of 120 accounts, they lost maybe two per year. And one of those was a company that moved buildings. Luna: That's insane for a service business. Most cleaning companies lose 10 to 15 percent of accounts annually. Lucas: And this is where the buyer's due diligence got interesting. They didn't just trust the churn number — they audited every contract. They called clients to confirm they understood the auto-renewal clause and were okay with it. Luna: And were they? Lucas: Most said they barely noticed. The service was consistent, so they didn't care. A few said they appreciated not having to renegotiate every year. Luna: That's the sweet spot — contracts that work for both sides. Lucas: Right. But there's a risk here. If you stack too many services, you become over-reliant on a single client segment. This franchise's largest client was 8% of revenue. That's manageable. But if one client accounted for 20% or more, the multiple would have been lower. Luna: So diversification matters even within the stacking strategy. Lucas: Absolutely. The broker said the buyer ran a concentration analysis. They wanted to see that no single contract was irreplaceable. The franchise passed because the largest contract was still under $500,000 annually. Luna: What about the actual sale process? Did they go to auction or negotiated directly? Lucas: It was a limited auction. The broker contacted eight strategic buyers and four PE firms. Four made it to the data room. Two submitted final bids. The winning bid came from that facilities-management PE group. Luna: And the multiple — 42x — was that the highest? Lucas: It was. The other bid was around 30x. But the lower bid had a much bigger earnout component. The winning bid was mostly cash at close. Luna: So the owner didn't have to stay on. That's the dream for a lot of franchisees. Lucas: He actually did stay for a six-month transition. But after that, he's out. The PE firm put in their own regional manager. Luna: You know, this reminds me of something we talked about with that IT firm a few episodes back — the one that hit 40x with recurring contracts. Same principle, different industry. Lucas: It's the same structural insight: if you can turn a service business into something that behaves like a subscription, the multiple goes up. Cleaning doesn't sound like SaaS, but the economics can be surprisingly similar. Luna: And it's interesting that the buyer was a platform PE firm, not a cleaning company. They valued the contracts more than the operational know-how. Lucas: Because they already had the know-how. They bought the revenue stream and the client relationships. They can put their own technicians on the route. Luna: So for a cleaning franchise owner listening right now — what's the one takeaway? Lucas: Start thinking like a facilities manager, not a cleaner. Look at your existing accounts and ask: what else could we do for them? And then package it into a multi-year contract with auto-renewal. You don't need to be a $6 million business. Even at $1 million, stacking two additional services could double your multiple. Luna: And if the listener is thinking about selling in the next three to five years, start stacking now. Because the buyer will want to see at least two years of that contract performance. Lucas: Exactly. One of the things the buyer flagged was that the contracts were all signed within an eighteen-month window. They wanted to see that the model wasn't a flash in the pan. Luna: So you need to prove it works before you can sell on it. Lucas: Right. And that's part of why the multiple was so high — the contracts had been renewing for three years. The data was clean. Luna: Alright, so contract stacking is the new playbook for service business exits. I'm sold. Lucas: It's a good one. And we'll keep bringing you these case studies because we think they're genuinely useful for owners thinking about their next move. Luna: And we can keep doing that because listeners like you support the show directly. We don't run ads, and that's intentional. If you find value in these episodes and want to help keep them ad-free, you can find us at buy me a coffee dot com slash fexingo. Lucas: It's a small gesture that makes a big difference for us. And we appreciate every one of you who's contributed. Luna: Alright, back to the data. Lucas, you mentioned the contracts had price escalators. How were those structured? Lucas: Annual increases tied to the CPI, plus two percent. So if inflation was three percent, the contract went up five percent. The clients accepted it because the base rate was competitive. Luna: That's smart — inflation protection built in. Lucas: And it meant the EBITDA grew even without adding new accounts. That's the kind of organic growth story that PE firms love. Luna: One more thing — what did the franchise owner do before this? Was he a cleaning guy? Lucas: He was actually a regional manager for a uniform rental company. So he came from the world of route-based service with contracts. He understood the model before he entered cleaning. Luna: So he imported the contract model from one industry to another. Lucas: Exactly. And that's often where the best multiples come from — taking a proven structure and applying it to a fragmented, old-school industry.