Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why a Commercial Laundry Business Sold at 200x EBITDA with Recurring Contracts
Transcript
- Lucas: So we've talked a lot on this show about businesses that sell for huge multiples — 400, 500, even 900 times EBITDA. But a lot of those were route-based or subscription-based. Today I want to look at a commercial laundry business that sold for 200 times EBITDA, and the key wasn't just recurring revenue — it was the quality of those contracts. Luna: Right, because not all recurring revenue is created equal. A month to month cleaning contract is very different from a three-year deal with a hospital. Lucas: Exactly. This business was in the Midwest — family-owned, about 15 years old. They serviced hotel linens, restaurant uniforms, and medical scrubs for a regional hospital network. The entire business was built on seven multi-year contracts, all with automatic renewal clauses and built-in price escalators tied to CPI. Luna: Seven contracts — that's concentrated. Did that scare off buyers or attract them? Lucas: Both, actually. Some buyers saw concentration risk — if one contract walks, you lose 15 to 20 percent of revenue. But the right buyer — a mid-size regional laundry consolidator — saw it differently. They already had 12 similar contracts in neighboring states. For them, these seven contracts were bolt-on acquisitions that immediately dropped to their existing overhead. Luna: So the synergy was huge. They could fold the routes into their existing trucks, use their own chemicals, maybe even cross-sell to the same hotel chains. Lucas: Exactly right. The buyer's cost to serve each contract dropped by about 30 percent post-acquisition because they already had infrastructure within a 50-mile radius. That's a big part of why they paid 200 times EBITDA — they weren't buying cash flow, they were buying a platform to layer onto. Luna: So the multiple isn't really about the business standing alone. It's about what it's worth to a specific buyer. Lucas: That's a really important point. The seller had originally listed at 120 times EBITDA with a business broker, and got no offers for six months. Then a different broker — one who specialized in commercial laundry — came in, re-packaged the contracts, highlighted the renewal history and the CPI escalators, and brought it to a strategic buyer who paid 200 times. Luna: So the first broker didn't understand what made the contracts valuable. Lucas: Right. The first broker just saw 'recurring revenue' and slapped a standard multiple on it. But the second broker knew that hospital contracts in this region had an average retention rate of 11 years. Hotels were shorter — about 4 years — but the restaurant uniforms had been renewed automatically for 9 years without a single renegotiation. That history matters. Luna: And the buyer could verify that during due diligence. They could call the hospital's procurement office and confirm the relationship. Lucas: Exactly. The seller had all the renewal letters and price adjustment notices in a binder. It was a dream for due diligence. That transparency is part of why the deal closed in 45 days — which is fast for a deal of that size. Luna: You know, Lucas, this reminds me of something we touched on in the junk removal episode — where the route density data made the difference. Here, it's contract quality instead of route density. Lucas: Yeah, and it's a great comparison. In that case, the recurring revenue came from repeat customers on a route. Here, the recurring revenue is contractual. Both can command high multiples, but the risk profiles are different. A route can shift if a competitor offers a lower price. A contract has a legal lock-in, at least for the term. Luna: But only if the contract is well-written. I've seen contracts with easy-outs for the customer — 30-day termination clauses, no penalty. Those don't command a premium. Lucas: That's the key. In this case, the contracts had 90-day notice periods for non-renewal, and the automatic renewal meant the customer had to actively opt out. Human inertia being what it is, renewal rates were over 95 percent. That's the kind of structural advantage buyers pay up for. Luna: And the price escalator tied to CPI — that's rare in small business contracts. Most small laundry businesses just eat inflation. Having that clause meant the buyer could forecast margin preservation. Lucas: Absolutely. The seller's accountant had modeled that over the last five years, the CPI escalator added about 2.5 percent to revenue annually without any volume growth. So the buyer could underwrite a baseline growth rate just from inflation. That's a huge de-risker when you're paying 200 times EBITDA. Luna: At that multiple, the payback period is 200 years of current EBITDA. But with the synergies and escalators, the buyer's real payback is probably closer to 6 or 7 years. Lucas: That's exactly how they looked at it. They told the seller, 'We're not paying for your past earnings. We're paying for the platform you built and the contracts you locked in.' And they structured part of the consideration as an earn-out tied to retention of three key contracts over the next two years. Luna: So the seller had skin in the game post-close, which aligns incentives. Lucas: Right. The seller stayed on as a part-time consultant for 18 months, mainly to manage relationships with the hospital and the two largest hotels. The earn-out was based on those three contracts being renewed. They all were, obviously — the seller had been hand-holding those clients for a decade. Luna: So the seller ended up with a higher total price than the upfront cash would have been, and the buyer got confidence that the revenue wouldn't vanish. Lucas: Exactly. It's a win-win when structured properly. And I think that's the broader lesson here — if you're a business owner with recurring contracts, don't just hand a buyer a list of clients. Show them the renewal history, the contract terms, the escalators, the relationship depth. That's what justifies the multiple. Luna: And if you're a buyer, you need to verify all of that. Call the clients, read the fine print, understand the notice periods. A 200-times ebitda multiple on shaky contracts is a disaster waiting to happen. Lucas: Yeah. And the honest truth is, we get to talk about deals like this because listeners support the show. A number of you chip in monthly through Buy Me a Coffee dot com slash Fexingo, and that's what keeps these episodes coming five days a week without ads. Luna: It's true. We don't have sponsors, we don't run ads, and we want to keep it that way. So if the show has helped you think about your business or your next acquisition, that's the place to throw in a few bucks. Lucas: And we really appreciate it. So back to the laundry business — one other detail I found fascinating. The seller had a data room with 10 years of monthly P&Ls, contract copies, renewal letters, and even customer satisfaction scores. The buyer's CFO said it was the cleanest data room they'd ever seen in a sub-$5 million deal. Luna: That's rare. Most small business owners don't keep that kind of documentation. But it clearly paid off. Lucas: It did. It shortened the due diligence period, reduced the number of reps and warranties the buyer demanded, and allowed the deal to close with minimal legal fees. The seller spent about $3,000 organizing everything, and it probably saved them $20,000 in legal costs and got them a higher multiple. Luna: So the lesson for sellers is: get your data room in order before you list. It's one of the highest roi activities you can do. Lucas: Absolutely. And for buyers, look for sellers who have that level of organization. It's a signal of how the business was run. This laundry business wasn't just well-run — it was run with an exit in mind. The owner had been preparing for three years. Luna: That's deliberate. And it worked. Lucas: Yeah. So if you're thinking of selling in the next few years, start building that data room now. Document your contracts, your renewal history, your customer relationships. It might be the difference between 120 times EBITDA and 200 times. Luna: And if you're buying, don't be afraid to pay up for quality. But do your homework.