Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Packaging Distributor Sold at 80x EBITDA with Take-or-Pay Contracts
Transcript
- Lucas: I want to talk about a packaging distributor that sold for 80 times EBITDA. And I know that sounds like a typo, but it's not. Luna: Eighty times? That's the kind of multiple you hear about for software companies, not a business that ships boxes. Lucas: Exactly. This was a regional packaging distributor based in the Midwest — four million in revenue, about thirty percent EBITDA margins, so roughly one point two million in EBITDA. The sale price came in at ninety-six million dollars. Luna: And the buyer wasn't a private equity shop chasing a platform roll-up? Lucas: It was actually a larger strategic competitor — another packaging distributor that wanted to expand into that market. But the multiple wasn't driven by synergies alone. It was driven by the contract structure. Luna: take or pay contracts. That's what you're getting at, right? Lucas: Exactly. Every single customer in that business — about sixty accounts — was under a take or pay agreement. Minimum purchase commitments even if they didn't place orders. And these weren't one-year deals; they were three to five year terms with automatic renewal clauses. Luna: So the buyer wasn't buying a distribution company. They were buying a stream of guaranteed cash flows. Lucas: That's exactly how the valuation was framed. The seller's broker positioned it as an annuity of contracted revenue, with a small upside from over-usage. The buyer modeled it as a bond with a yield premium. And because the contracts were legally binding and had survived multiple renewals, the risk of churn was virtually zero. Luna: What kind of customers were these? Small manufacturers? Lucas: Mostly mid-sized food processors and industrial assemblers — companies that relied on consistent supply of corrugated boxes and protective packaging. For them, the take or pay was actually a benefit because it guaranteed supply and pricing stability. The distributor had been building these contracts for over a decade. Luna: So how did the seller originally get customers to agree to take or pay in a commodity business? Lucas: That's the smart part. They offered a fixed-price guarantee for the contract term — basically locked in pricing that was slightly below market at signing, but protected the customer from spikes. And they provided just-in-time inventory management as a value-add. So the customer got cost certainty and supply reliability, and the distributor got revenue predictability. Luna: And the buyer saw that and said, 'We'll pay almost a hundred million for a four-million-dollar revenue business.' Lucas: The buyer's internal rate of return projection was still attractive because they could layer in their own purchasing volume and reduce COGS. But the key was the contractual moat. The buyer didn't have to worry about revenue retention post-acquisition. Luna: You've been covering multiples for years. How rare is an 80x EBITDA in a non-tech, non ip business? Lucas: In my experience, extremely rare. The highest I'd seen before this was a waste hauler we covered — that was 70x, but that had municipal contracts with population-based pricing. This packaging distributor was private commercial contracts. It's an outlier, but it's replicable if you structure your revenue correctly. Luna: Replicable seems like a strong word. Most small business owners don't have the leverage to demand take or pay from their customers. Lucas: That's fair. It takes time and a differentiated service. But the principle — converting transactional revenue into contractual revenue — is accessible to many B2B businesses. Think about it: a cleaning company that signs annual contracts, a landscaping firm with multi-year maintenance deals, an IT support company with monthly retainers. The multiple expansion from 3x to 6x is realistic just by adding contracts. Luna: But 80x? That required a perfect storm. Lucas: It did. The seller had a unique combination: high customer concentration in stable industries, contracts that were long and auto-renewing, and a buyer who had strategic urgency to enter that geography. Not every business can get there, but the takeaway is that contract quality directly drives multiple. Luna: One thing that stands out to me: the seller didn't have a tech platform. This wasn't a software-enabled distributor. It was just good old-fashioned contract discipline. Lucas: Right. No proprietary software, no patents. Just a legal structure that created economic lock-in. And the due diligence process was straightforward — the buyer's lawyers reviewed the contracts, confirmed they were enforceable, and that was the bulk of the valuation work. Luna: That's a real contrast to some of the tech businesses we've covered where the buyer spends months auditing code and customer churn metrics. Lucas: Completely different ballgame. In this case, the buyer was essentially underwriting a portfolio of contracts. The business itself — the trucks, the warehouse, the staff — was almost secondary. The contracts were the asset. Luna: Let's talk about the seller's post-sale life. Did they stay on? Lucas: They did a two-year earnout, but it was structured as a consulting agreement, not an employment contract. The seller had already trained a general manager to run day-to-day operations, so the transition was smooth. The earnout was tied to retention of the contracts — which, because they were take or pay, was essentially guaranteed. Luna: So the earnout was basically just deferred purchase price with a tax advantage. Lucas: Exactly. The seller collected the full ninety-six million, but about twenty million was paid out over two years as a consulting fee. That gave the buyer some working capital relief and gave the seller favorable capital gains treatment on a portion. Luna: Smart structuring. And the buyer got what they wanted? Lucas: From what I can tell, yes. The buyer integrated the contracts into their own portfolio, and because they had larger purchasing power, their margins actually improved. The acquisition paid for itself within about five years on a cash-on-cash basis. Luna: That's a great result. But I'm wondering — how many small business owners are sitting on contracts like this without realizing their value? Lucas: I think a lot. Many owners focus on revenue growth and forget that contract structure is a multiplier. A business with two million in revenue and three-year contracts might be worth twice as much as the same business with one-year contracts, even if the revenue is identical. Luna: And the buyer pool is wider too. Strategic buyers love contractual revenue because it reduces integration risk. Lucas: Exactly. This is where a good business broker adds value — they can help an owner understand how to position their contract portfolio to maximize multiple. But ultimately, the work has to be done years before the sale. Luna: So for an owner listening today, what's the one actionable takeaway? Lucas: Look at your top twenty customers. If even half of them could be moved to a multi-year commitment with a small incentive — a price lock, a service upgrade, priority allocation — you're building equity. It doesn't have to be take or pay. Even annual contracts with auto-renewal can double your multiple. Luna: And if you don't have a broker yet, start interviewing now. The best ones will help you structure these deals before you're ready to sell. Lucas: Yeah, and that's actually a good segue into something I want to mention. We get to dig into deals like this every week because of a small group of listeners who support the show. If you find these conversations useful — if they've changed how you think about your own business — you can help keep them going. Luna: Yeah, we keep the show completely ad-free. No sponsor reads, no interruptive ads. It's funded entirely by listeners who chip in a few bucks a month at buy me a coffee dot com slash fexingo. Lucas: And honestly, that's it. A handful of people covering the costs so we can keep doing deep dives like this one. No pressure ever — but if the show's been valuable, that's where you can find us. Luna: Alright, back to the contracts. So for a business owner who wants to start building this kind of revenue predictability, what's the first step? Lucas: I'd start with your existing contracts. Look at renewal dates, termination clauses, and pricing escalators. The goal is to extend the average contract length and add automatic renewal unless the customer opts out. Even moving from one-year to two-year terms can be a negotiation win. Luna: And you need to be willing to give something in return. Price certainty, as you mentioned, is a powerful incentive. Lucas: Right. And don't underestimate the power of inertia. Many customers will accept auto-renewal if you make it easy and give them a small discount. They don't want to renegotiate every year either. Luna: So the packaging distributor in this episode — they had a decade of contract data. That gave the buyer confidence that the contracts would stick. Lucas: Exactly. History of renewals is the best evidence. If you can show that 95 percent of your contracts renew, a buyer will underwrite that as recurring revenue. And that's when multiples get interesting. Luna: I think the biggest takeaway for me is that contract structure is a strategic asset, not just an operational detail. Lucas: That's the whole episode in a sentence. The value of a business isn't just what it earns — it's how reliably it will earn it in the future. Contracts are the tool that turns uncertainty into certainty. And buyers pay a premium for certainty.