Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Tree Service Sold at 9 Times EBITDA
Transcript
- Lucas: So we've talked about a lot of deals on this show, from laundromats to dental labs, but today's one is a tree service. And the headline number is nine times EBITDA. Which, honestly, sounds modest compared to that dental lab at eighteen times, but the story is way more interesting than the multiple. Luna: Nine times for a tree service? I feel like that's actually pretty solid for that industry. What made it land there? Lucas: Right, so let's set the scene. This is a company in the Pacific Northwest, been around for about twenty years. Owner's name is Mark. He started it with one truck and a chainsaw, grew it to about three million in revenue. EBITDA was around four hundred thousand, which puts that nine times at roughly three point six million on the deal. Luna: Okay, so it's a decent-sized small business. Not a mom and pop with one crew, but not a big enterprise either. Lucas: Exactly. And the interesting part is the revenue mix. About seventy percent of it came from commercial contracts — property managers, municipalities, a couple of golf courses. The rest was residential. And that commercial base is what got buyers in the door. Luna: But those contracts — were they recurring? Because we've talked about how recurring revenue boosts a multiple. Lucas: That's the catch. There were no formal contracts. Mark had relationships. He'd been pruning the same golf course for fifteen years, the property managers basically just called him when they needed something. No signed agreements, no retainer, nothing. It was all handshake and habit. Luna: So a buyer would look at that and say, 'What am I actually buying here?' Lucas: Precisely. And that's why you'd expect a lower multiple, maybe six or seven times. But there were a few things that pushed it up. First, Mark had an incredible reputation. I'm talking a four-point-nine star Google rating with over three hundred reviews. In a service business, that kind of online proof is gold. Luna: But reviews don't transfer to a new owner, do they? Lucas: They do if you structure the deal right. And that's what happened here. The buyer was a larger regional landscaping company, about fifteen million in revenue. They wanted to expand into tree work without building it from scratch. So they weren't just buying revenue, they were buying a platform, a team, and a name. Luna: Ah, so a strategic buyer. That changes the calculus. They can layer on their own back office, cross-sell to their existing clients, all that. Lucas: Exactly. And that's a big reason the multiple climbed. But there were also some classic addbacks that helped. Mark's salary was a hundred fifty thousand, but the market rate for a working owner in that role was closer to ninety. So that's sixty grand of addback. He also had a truck that was fully expensed but barely used for personal stuff, so they backed that out too. Luna: Okay, so we're inflating EBITDA a little. But you mentioned there was a moment in due diligence that nearly killed the deal. Can you tell us about that? Lucas: Oh, this is the part I love. So the buyer's team is doing their diligence, and they ask for a list of all commercial clients. Mark says sure, and he hands over a spreadsheet. But the buyer's CFO notices something odd. The phone numbers are all personal cell numbers, and the notes column has things like 'calls his wife's phone first' or 'prefers text after five.' Luna: Wait, these were clients he had on his personal phone? Not a CRM or even a company database? Lucas: Yeah. He had a company phone, but he never used it for anything important. All his contacts were on his personal iPhone. And that freaked out the buyer. They thought, 'If Mark walks, those relationships walk with him.' It's a classic owner-dependence issue, and we've seen it sink deals before. Luna: But it didn't sink this one. So what happened? Lucas: They renegotiated. The buyer said, 'We'll do the deal, but we need two things. First, Mark has to stay on for two years as a consultant. Second, we want a twenty percent holdback in escrow for eighteen months, tied to the retention of the top ten commercial clients.' Luna: That's a pretty big holdback. But it makes sense if you're worried about client attrition. Lucas: And Mark agreed. He was sixty-one, wanted to retire, and the buyer offered him a nice consulting fee for his time. So the deal closed at nine times, with that holdback, and from what I hear, the retention has been solid. But the whole thing could have been avoided if Mark had just put his contacts in a CRM years ago. Luna: Yeah, that's such a common story. So many owners keep everything in their head or their personal phone, and they don't realize how much that hurts their valuation. Lucas: And it's not just the contacts. It's the lack of any recurring revenue, the seasonal swings, the fact that a lot of the work is weather-dependent. Buyers look at that and discount the cash flow. Even with a strategic buyer, you're not getting a SaaS multiple. Luna: Right. So let's talk about seasonality. Tree service in the Pacific Northwest — are they working all year round? Lucas: Mostly, but there's a lull in the winter. Storm cleanup spikes, but the regular pruning and removal work drops off. So the revenue is lumpy. The buyer had to factor in that they'd need to smooth out the cash flow, maybe add snow removal or other services to keep the crews busy. Luna: And that's something a strategic buyer can do, but a pure financial buyer might balk at. Lucas: Exactly. And that's why you see so many of these deals go to strategic buyers rather than private equity. They have the operational expertise to handle the seasonality. Luna: Now, we've talked about a lot of different deals on the show. How does this one compare to, say, that janitorial business at eleven times, or the trucking fleet at six? Lucas: Great question. Janitorial had recurring contracts, even though they were month to month, and a low-cost asset base. That pushed it to eleven. Trucking had huge capital expenditures and a lot of owner involvement in the dispatch, so it landed at six. This tree service sits in between — some recurring-ish revenue, but not contractual, and a moderate asset base with trucks and equipment. Luna: So nine times feels like a fair middle ground, all things considered. Lucas: I think so. And the other thing that helped was that Mark had clean financials. He wasn't hiding a bunch of personal expenses or running things through the business. That's rare in this industry, and it gave the buyer confidence. Luna: Clean books, no surprises. That alone can add a turn or two to a multiple. Lucas: Absolutely. The buyer's banker told me they'd seen deals fall apart over a missing receipt. Mark had his stuff together, and that's a lesson for any business owner listening: if you're thinking about selling, get your financials investor-ready before you even list the business. Luna: And a CRM. Don't forget the CRM. Lucas: Ha, yeah. That's the one that stings. But let's step back. What can a listener take away from this deal? I think it's that the multiple is a function of what the buyer perceives as risk and what they can do with the business after they buy it. Mark's business was a great platform for a strategic buyer, and that's why he got nine times instead of six. Luna: So if you're an owner listening and you think your business is worth more, the question is: can you show a buyer how they'll grow it? That's what moves the needle. Lucas: Exactly. And on that note — a lot of what we talk about on the show is about helping owners get those better outcomes. And honestly, these conversations are free because of the listeners who support us. If you've gotten something out of the show, a couple of dollars a month makes a real difference. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, and every little bit goes toward keeping the show ad-free and research-backed. We appreciate it. Lucas: But back to Mark. He closed the deal in August of this year, right in the middle of the busy season, which was smart. It showed the buyer the business at its best. If you're thinking about selling, timing your listing to line up with your strongest quarter is a real, tangible strategy. Luna: And it gives the buyer confidence that the revenue isn't just a fluke. Lucas: Right. So the next time you hear about a business selling for a certain multiple, ask yourself: what's the buyer's plan? What risk are they taking on? And what did the owner do to make that risk feel manageable? That's the real story behind the number. Luna: And maybe check your own phone for client numbers. Just saying. Lucas: Ha, that's the takeaway. Thanks for listening, everyone. We'll see you next time.