Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Landscaping Firm Sold at 9x EBITDA by Building a 12-Month Contract Book
Transcript
- Lucas: There's a landscaping company in Portland, Oregon — does about four million in revenue, standard seasonal work, mowing and maintenance — that sold last October for seven and a half times EBITDA. Luna: That's nearly double the typical multiple for that sector. Most landscape firms trade between four and five and a half times. Lucas: Right. And the owner didn't grow revenue dramatically. What changed was the shape of the revenue. If today was useful to you, the way these conversations stay ad-free is listener support — buy me a coffee dot com slash fexingo. It's what keeps the show running. Luna: Yeah, and it takes two seconds. Back to that Portland company — what exactly did they do? Lucas: They built a contract book. Eighteen months before the sale, roughly thirty percent of their clients were on some kind of recurring agreement. By the time they went to market, that number was over sixty percent. Twelve-month contracts with automatic renewal, a thirty-day cancellation window. Luna: So they went from seasonal and project-based to something that looked a lot more like a SaaS business. At least from a cash-flow perspective. Lucas: Exactly. And that changed the whole conversation with buyers. A buyer looking at a seasonal business sees risk. They see weather dependency, client churn every spring, the need to re-sell the same accounts year after year. Revenue that hits in Q2 and Q3 and disappears in Q4 and Q1. Hard to finance, hard to forecast. Luna: But a contract book smooths that out. Even if the work is seasonal, the commitment is annual. Lucas: And that's what lenders and private equity firms want to see. Recurring revenue is the single biggest driver of multiple expansion in the lower middle market. A study by the Pepperdine Private Capital Markets Project put a number on it — businesses with more than fifty percent recurring revenue trade at an average multiple two full turns higher than those with none. Luna: So this owner essentially added two turns of EBITDA multiple just by changing the contract structure. Did they have to change anything operationally to make that work? Lucas: A few things. First, they standardized service tiers. Before, every client had a custom package — mow this area, trim these bushes, maybe we'll mulch in spring. Hard to bill consistently, hard to renew. They simplified to three tiers. Basic, Premium, and Elite. Each with a fixed monthly price and a clear scope of work. Luna: That makes renewals easier because the client knows exactly what they're getting. No surprises. Lucas: Second, they invested in a simple CRM. Not a big ERP implementation — they used a tool called Jobber, which is pretty common in the service industry. Tracked contract start and end dates, automatic renewal reminders, churn reporting. The owner told me they spent about two hundred dollars a month on the software and maybe ten hours a week retraining dispatchers to use it. Luna: Ten hours a week for eighteen months is about four thousand dollars in labor. Cheap relative to the valuation bump. Lucas: Absolutely. The third change was financial. They switched from cash-basis to accrual accounting. Most small landscaping companies run on cash basis because it's simpler and defers tax. But when you're trying to sell, accrual gives a much clearer picture of deferred revenue and contract liabilities. Luna: And buyers love deferred revenue because it's cash they've already collected for service they haven't delivered yet. It's a liability on the balance sheet, but it's a positive signal about client commitment. Lucas: Right. The company's CPA initially pushed back — said it would create a tax bill on unearned revenue. But the owner worked with a transaction advisor who explained that the sale itself would be structured as an asset sale, and the accrual conversion was just for the valuation model. They did a mock accrual set of books for the trailing twelve months, and that's what the buyer underwrote. Luna: So they didn't actually change their tax accounting. They just presented an accrual-adjusted view for the buyer. That's a smart workaround. Lucas: It's common in these deals. The buyer's banker wants to see the recurring revenue stream, but the seller doesn't want to pay tax on money they haven't earned yet. So you present a bridge schedule that reconciles cash to accrual. The buyer gets their comfort, the seller keeps the tax timing advantage. Luna: What was the actual contract penetration rate they achieved? Sixty percent you mentioned? Lucas: Sixty-two percent of active clients on annual contracts by the time the offering memorandum went out. The rest were still month to month or one-off. But the key metric the buyer focused on was the contract renewal rate — which hit eighty-nine percent over the previous twelve months. That's the number that justified the multiple. Luna: So the buyer wasn't just buying the contracts. They were buying the system that produced those renewals. Lucas: Exactly. The owner also provided a twelve-month forward revenue projection based on the existing contract book, which showed ninety-two percent of projected revenue already under contract. That eliminates most of the risk in a seasonal business. The buyer's lender approved the deal based on that projection alone. Luna: That's the part that surprises me. A bank lending against future landscaping contracts. But I guess if the renewal history is solid, it's not that different from lending against a subscription software company's ARR. Lucas: It's not. And more banks are getting comfortable with this kind of asset-based lending for service businesses. The SBA 7 program, for example, has specific guidelines for recurring revenue businesses. A good SBA lender can use the contract book as collateral. Luna: Did the owner have to personally guarantee the loan? Lucas: The buyer did, yes. The seller was long gone by then. But the buyer's personal guarantee was easier to get because the cash flow was predictable. The bank stress-tested the scenario where contract renewals dropped to seventy percent, and the business still covered debt service. That was the tipping point. Luna: So what's the lesson for a business owner listening who runs a seasonal company — landscaping, pool service, snow removal, whatever — and thinks they'll never get above five times? Lucas: Start with the contract. You don't need a hundred percent conversion. Even getting to fifty or sixty percent on annual contracts, with a renewal rate above eighty-five percent, will change how a buyer sees your business. The multiple expansion is real. In this case, the owner walked away with about three million dollars more than if they'd sold at the industry average multiple. Luna: Three million dollars from a CRM subscription and a few accounting adjustments. Lucas: Plus the hard work of selling those contracts to clients. But the operational cost was maybe fifty thousand over eighteen months. The return on that investment was about sixty to one. Hard to find that kind of leverage anywhere else in a business. Luna: I want to circle back to the CRM choice. You said they used Jobber. What's the alternative for someone who wants to do this but doesn't know where to start? Lucas: There are a bunch — Jobber, ServiceM8, Housecall Pro, Kickserv. They all do basically the same thing: scheduling, invoicing, contract management, renewal reminders. The key isn't the software, it's actually using it to track renewals. Most service companies buy the CRM and then ignore the renewal module. This owner was obsessive about it. He personally reviewed the renewal report every Friday. Luna: So the owner became the renewal system. That's hard to scale, but for a sale within two years, it's exactly what you need. Lucas: Right. And post-sale, the buyer can hire a customer success person to take over that function. The owner just had to prove the model worked. Once the buyer saw the data, they were confident they could replicate it. Luna: I've also heard that some landscaping companies use prepaid annual contracts — where the client pays the full year upfront in exchange for a discount. Did this company do that? Lucas: They offered it as an option. About twenty percent of their contract clients took the prepaid annual plan. It was a nice cash-flow boost, but the buyer didn't value it much higher than monthly contracts because the revenue recognition was similar. The main thing was the commitment, not the payment timing. Luna: Got it. So the core takeaway is: if you're selling a seasonal business, find a way to wrap a recurring revenue layer around it. Doesn't have to be perfect — just enough to show a buyer that the cash flow isn't a one-time miracle. Lucas: That's exactly it. The market is awash in buyers who want predictable cash flow. They'll pay a premium for it. And the seller who can package their seasonal business to look like a recurring revenue machine is the one who gets the multiple. Luna: I think this is one of those rare cases where a relatively small operational change has an outsized impact on valuation. I'm curious — have you seen this work in other seasonal industries? Lucas: Yes. We'll probably do a whole episode on pool services and snow removal. But the pattern is the same: standardize the offering, lock in the commitment, track the renewal rate, and present it in accrual-adjusted financials. If I had to pick one homework item for a business owner planning an exit in the next two years, it's this — build your contract book. It's the cheapest multiple expansion you can buy. Luna: Alright, that's a great place to leave it. Thanks for the case study. Lucas: Thanks, Luna.