Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Water Testing Lab Sold at 600x EBITDA with Government Contracts
Transcript
- Lucas: Most exits we cover in this show, the high multiple comes from recurring revenue tied to memberships or subscription models. But there's another kind of recurring revenue that's even stickier: government contracts. Luna: You mean like a business that sells to cities or municipalities? Lucas: Exactly. Today we're looking at the sale of AquaCheck Laboratories, a water testing company based in Columbus, Ohio. They tested drinking water for about forty municipal water systems across the Midwest. And when they sold earlier this year, the multiple was six hundred times monthly EBITDA. Luna: Six hundred times monthly — that's fifty times annual. For a lab business. That's well above what a typical manufacturer or service firm would fetch. Lucas: Right. To understand why, you have to look at the revenue profile. AquaCheck had contracts with cities that auto-renewed every three to five years. Some had been in place for over a decade. The churn was essentially zero. Municipalities don't switch water testing labs lightly — the regulatory paperwork and chain of custody protocols make it a nightmare to change vendors. Luna: So the buyer, CleanTech Holdings, was paying for a locked-in client base that generates cash flow rain or shine. Recession-proof. Lucas: Exactly. And there was a strategic angle. CleanTech is a larger environmental services firm that already did wastewater treatment and industrial cleaning. They wanted to add drinking water testing as a complementary service line. Buying AquaCheck gave them an instant footprint in the municipal market with zero ramp-up time. Luna: What was the actual deal structure? Was it all cash upfront? Lucas: It was a mix. The purchase price was about fourteen million dollars. Sixty percent cash at close, thirty percent in CleanTech stock, and a ten percent earnout tied to retaining the contracts for two years. The owner, a guy named Tom Reilly, stayed on as a division manager for twelve months to smooth the transition. Luna: That earnout — only ten percent? Usually we hear about twenty or thirty percent. Why so low? Lucas: Because the contracts were so solid. CleanTech's due diligence showed that in the previous five years, AquaCheck had lost exactly one client, and that was because the town merged with a larger city system. The retention risk was minimal, so the earnout was more a formality. Tom had negotiated hard on the up-front price. Luna: And he got it. Fourteen million for a company that probably did around two hundred and eighty thousand in monthly EBITDA. Lucas: Roughly that. But the beauty of the deal wasn't just the headline multiple. It was the fact that the buyer was willing to pay that much because they could immediately cross-sell their other services to those forty cities. The lab was a foot in the door. Luna: Let me ask a practical question: if a small business owner is listening and thinking, 'I want to build something like that,' what do they need to get right? Lucas: First, you need a service where switching costs are high. Water testing is perfect because regulators require certified labs, annual audits, and consistent data history. Once a city has five years of data from one lab, starting over is a bureaucratic headache. Second, you have to make your contracts auto-renewing with multi-year terms. AquaCheck's contracts had automatic renewal clauses unless the city gave ninety days notice. In practice, only one city ever did. Luna: And the cities themselves were diverse — not all in one state. That reduces political risk. Lucas: Exactly. Tom had expanded into three states over the years, so no single state budget crisis could tank the business. That geographic diversification was a big factor in the multiple. CleanTech saw that and knew the revenue was spread across forty independent clients. Luna: There's a lesson here about how to present a business for sale. Tom didn't just hand over a financial statement. He organized a spreadsheet showing each contract, its start date, renewal date, annual revenue, and the number of years they'd been a client. That transparency made due diligence fast and gave CleanTech confidence. Lucas: And that's something we often hear from brokers: the easier you make it for a buyer to say yes, the more leverage you have on price. Tom also had a third-party valuation done before he went to market. He knew his number and didn't budge. Luna: What about the employees? I'm curious how the lab technicians factored into the deal. Lucas: CleanTech required all twelve employees to sign non-compete and non-solicit agreements as a condition of closing. Tom had structured compensation with retention bonuses that paid out over two years. That kept the team intact and reduced turnover risk. The lab manager, who had been there fifteen years, got a three-year employment contract. Luna: So the buyer was buying the team, not just the contracts. Lucas: Absolutely. And that's another reason the multiple was high. The employees had deep relationships with the city water superintendents. If the lab manager leaves, the relationship gets strained. CleanTech wanted to avoid that completely. Luna: One thing that strikes me is how unglamorous the business is. It's not sexy. It's just a consistent need. That's the kind of business that flies under the radar but generates serious wealth for the owner. Lucas: Tom Reilly started AquaCheck in 1998 with a single contract and a rented lab space. He built it slowly, never took outside funding, and sold for fourteen million. He's not a household name, but he executed a near-perfect exit. Luna: And it's a reminder that for sellers, the best time to prepare for an exit is years before you want to sell. Tom had clean books, diversified clients, and long contracts. Lucas: If those conversations about preparation have moved your own thinking forward in some small way, I'll just mention that this show stays ad-free because a handful of listeners chip in through buy me a coffee dot com slash fexingo. That support literally funds the time we spend researching cases like this. Luna: It's a small group, but it keeps us independent. No sponsors, no fluff. Just the real numbers and deal stories. Lucas: And we're grateful. So, back to Tom's story — one thing he did early was insist on annual price escalation clauses tied to inflation. Every contract had a two percent automatic increase. That meant revenue grew even without adding clients, and it compounded over the years. Luna: That's brilliant. So when CleanTech looked at the numbers, they saw a revenue stream that not only stuck but also increased automatically. Lucas: Exactly. And that's a tactic any service business with long-term clients can adopt. It doesn't work for one-off transactions, but for recurring contracts, it's gold. The buyer sees a growing top line without effort. Luna: What about the downside? Government contracts can be slow to pay sometimes. Lucas: True. Municipalities often pay in sixty to ninety days. AquaCheck had a line of credit to cover cash flow gaps, and they factored some receivables early on. But as the company grew, they built enough cash reserves that it stopped being an issue. Tom told me he considered net-30 payment terms a deal-breaker in negotiations, but he realized the revenue stability was worth the wait. Luna: So the trade-off is cash flow timing for revenue certainty. Lucas: Right. And once you have a dozen contracts, the cash flow smooths out because billing cycles are staggered. It's a manageable risk if you plan for it. Luna: I want to ask about the broker. Did Tom use a broker? Lucas: He did, a boutique firm called Summit Business Advisors out of Cincinnati. They specialized in environmental services. Their fee was five percent of the first million, three percent on the rest. Tom said it was the best money he ever spent because they identified CleanTech as a strategic buyer and handled all the confidentiality agreements. He didn't have to worry about his employees or clients finding out early. Luna: That's a key point for owners: use a broker who knows your industry. A generalist might have marketed AquaCheck to financial buyers who would have offered a lower multiple. Lucas: Exactly. Summit knew that the strategic buyers — environmental service companies looking to expand — would pay a premium for existing relationships. They sent a teaser to fifteen targeted buyers, got three letters of intent, and CleanTech's offer was the highest by a wide margin. Luna: So the lesson for owners: build recurring revenue, lock in contracts, diversify clients, and hire a specialist broker. That's the recipe for a high multiple. Lucas: And don't forget the inflation escalators. Tom's contracts gave him an extra forty thousand dollars a year in revenue without lifting a finger by the time he sold. Small details compound. Luna: It's interesting — we often think of high multiples coming from flashy tech or trendy services. But a water testing lab with government contracts is about as boring as it gets. Yet it produced a life-changing exit. Lucas: Boring businesses with predictable cash flow are exactly what sophisticated buyers are hunting for. They don't want drama. They want reliable returns. AquaCheck is a textbook case. Luna: Alright, next episode we'll look at another exit angle. Thanks for the breakdown, Lucas. Lucas: Thanks, Luna.