Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why Distribution Wins Over Product in Business Sales
Transcript
- Lucas: So last month I sat down with a broker who told me about an HVAC parts distributor that sold for eleven times EBITDA. Not a flashy tech company, not a franchise. Just a guy with a warehouse and a very loyal customer base. Luna: Eleven times. That's well above the typical multiple for a distribution business, which usually lands somewhere in the four to six range. What made this one special? Lucas: That's the question I wanted to answer. And the answer, it turns out, has nothing to do with the product. It's all about the distribution network. This company had been around for thirty years, and they'd built relationships with hundreds of independent HVAC contractors across three states. Those contractors didn't just call when they needed a part — they called first, every time. Luna: So it's the repeat purchase behavior that matters. Not just having customers, but having customers who see you as the default option. Lucas: Exactly. And that's a really different kind of asset than, say, a proprietary widget. A widget can be reverse-engineered, a competitor can copy it. But a distribution network takes years, sometimes decades, to build. It's local, it's personal, and it's incredibly sticky. Luna: I've heard the phrase 'the moat is the relationship' used in this context. Can you give us a concrete example of how that played out here? Lucas: Sure. So the owner — his name is Mike — told me that when a national competitor opened a branch twenty miles away, they tried to poach his top ten accounts with aggressive pricing. They offered ten percent off list for a year. And only one contractor even took a meeting. Mike said, 'I don't compete on price. I compete on the fact that I know every contractor's truck by heart, and I can get them the part they need in twenty minutes.' Luna: That's a powerful anecdote. And the buyer clearly believed it. What did the due diligence look like? Did they just take Mike's word for it? Lucas: No, of course not. The buyer hired a consultant to survey the top thirty customers. They asked about supplier switching behavior, how often they bought, what would make them switch. And the results were striking — something like ninety percent of those customers said they'd never switched to another distributor in the last fifteen years. That's data, not just anecdote. Luna: So that's the kind of evidence that justifies a premium multiple. But I'm curious — how did the structure of the deal actually work? Because eleven times EBITDA is one thing, but the terms matter too. Lucas: Right. The buyer, a private equity group, structured it with a base price of eight times EBITDA at closing, and an earnout that could take it to eleven times if the company hit certain revenue retention targets over three years. And here's the interesting part — the earnout wasn't tied to growth. It was tied to keeping at least ninety-five percent of the existing customer base. Luna: So they were betting on the stickiness of the network, not on expansion. That's a smart way to align incentives, because the seller knows the customers best and can help transition those relationships. Lucas: Exactly. And that's a key takeaway for anyone thinking about selling a distribution business. If you can show a buyer that your customers are loyal, not just numerous, you're in a much stronger negotiating position. The question buyers ask isn't 'how many customers do you have?' It's 'do those customers have a reason to stay?' Luna: And in distribution, the reason to stay is often logistical — it's about speed, reliability, and personal relationships. Not just price. Lucas: Right. And there's another layer to this. Mike's business also had a proprietary software system that tracked each contractor's equipment history, so when a contractor called, the sales rep could pull up their whole account in seconds and recommend the right part. That's a form of embedded switching cost that's hard to replicate. Luna: So the software wasn't a separate asset — it was a support system for the distribution network. I think a lot of sellers make the mistake of thinking they need a unique product to get a high multiple, when really it's the customer moat that matters. Lucas: That's the big lesson. And it's not just for distributors. Think about any business with a recurring customer base — a commercial laundry service, a waste management company, even a software firm. The product is almost secondary to the relationships and the infrastructure that keep customers coming back. Luna: I was reading recently about how some buyers are now paying up for 'recurring revenue' even in traditional industries, like pest control or janitorial services. It's the same principle. The more predictable the cash flow, the higher the multiple. Lucas: And that's why we're seeing more and more sellers invest in contracts and subscription models even in brick and mortar businesses. It's not just about the revenue — it's about the signal it sends to buyers. A business with seventy percent recurring revenue is fundamentally less risky than one with a few big accounts that could leave tomorrow. Luna: In Mike's case, what percentage of his revenue was recurring, roughly? Lucas: He didn't have formal contracts, but about eighty-five percent of his revenue came from customers who had bought from him at least once a month for the past five years. That's effectively recurring, even if it's not contractual. And that's a distinction buyers understand well. Luna: So how does a seller actually prove that kind of loyalty in a way that a buyer will believe? I mean, anyone can say 'my customers love me.' Lucas: That's where a data room matters. You want to show purchase history frequency, customer tenure, and maybe even a churn analysis over the last five years. And if you can, have a third party conduct a customer satisfaction survey. That costs a few thousand dollars, but it can add a full turn to your multiple. Luna: That's a great practical tip. I know a lot of listeners are thinking about selling in the next few years. Anything else they should start doing now? Lucas: Start documenting your customer relationships beyond just invoices. Keep notes on key contacts, preferences, and any interactions that show the depth of the relationship. Buyers love to see that you know your customers personally — it reassures them that the relationships are transferable. Luna: And that's something you can't fake. It takes years to build that kind of institutional knowledge. Lucas: Right. And that's exactly why distribution networks command a premium. It's not just the parts in the warehouse. It's the trust that a contractor has in the person on the other end of the phone line at seven in the morning when their truck breaks down. Luna: That's a great way to frame it. It makes me think about how much of our own show relies on trust, too. We don't run ads, and we never will. We want these conversations to be purely useful, with no agenda other than helping you make smarter business decisions. Lucas: And if you've found value in that kind of honest conversation, we'd love it if you supported the show in a small way. You can do that at buy me a coffee dot com slash fexingo. It keeps the lights on and the show completely ad-free. Luna: No pressure, ever. Just know that if you do, it helps us keep doing what we're doing. Lucas: But back to distribution. There's one more angle that I think is worth exploring: the exit strategy itself. Mike didn't just sell to the first private equity group that called. He had three offers — one from a competitor, one from a family office, and one from the PE group. And he chose the PE group not because they offered the highest multiple, but because they had a clear plan for preserving the company's culture and customer relationships. Luna: So the buyer's approach to the asset matters just as much as the price. That's a good reminder that the highest offer isn't always the best offer. Lucas: Absolutely. Mike said he felt like the competitor would have stripped out the personal touch that made his company special. The PE group, on the other hand, wanted to learn from him, not change everything overnight. That's a rare quality in a buyer. Luna: And that's something sellers should put as much weight on as the multiple. You're not just selling your business — you're handing over your life's work. You want to make sure it's in good hands. Lucas: Exactly. And in the end, that's what made this deal successful. The sale closed in June, the earnout targets are looking very achievable, and Mike is staying on for twelve months as a consultant. It's a win-win. The buyer gets a stable, loyal customer base, and Mike gets a smooth transition and a nice payday. Luna: It's a great case study. I think the takeaway for any listener is: if you're in a distribution-heavy business, don't undervalue your network. It might be your most valuable asset. Lucas: And if you're thinking about buying one, look past the product and ask about the customers. That's where the real value lies.