Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Niche Software Firm Sold at 21 Times EBITDA
Transcript
- Lucas: So there's this niche construction-software company — I'll call it BuildCore, though that's not its real name — that just sold for twenty-one times EBITDA. And I keep coming back to that number because it's absurd on its face for a business with maybe twelve million in revenue. Luna: Twenty-one times is double what we usually see in this show. What made them special? Lucas: That's the question, right? And when I dug into the deal, it wasn't one magic thing — it was three structural forces stacking on top of each other. First, the niche: they do project-management software specifically for commercial drywall and steel stud contractors. That's not a sexy market, but it's a sticky one. Luna: So they're not trying to be everything to everyone. Lucas: Exactly. They own this tiny corner. And because their product is built around the actual workflow of those trades — bid management, material takeoffs, crew scheduling — switching costs are brutal. Once a drywall contractor learns the system, they're not leaving. That's recurring revenue with a moat, and buyers pay up for that. Lucas: Second force: the revenue mix. About seventy percent of their ARR was on annual contracts, auto-renewing, with a ninety-day notice period. So a buyer could underwrite that revenue with confidence. It wasn't month to month churn; it was locked-in for the next year. Luna: That's the recurring revenue story we've talked about before. But what got them from, say, twelve times to twenty-one? Lucas: The third force: a genuine auction. They had two private-equity firms and a public competitor all bidding at the same time. And that public competitor was the key — they saw BuildCore as a way to instantly own that niche and cross-sell to their existing customer base. Strategic buyers can justify a higher multiple because they can squeeze out synergies. Luna: So it's not that the business was inherently worth twenty-one times — it's that three buyers convinced themselves they could extract more value than the standalone financials showed. Lucas: Right. And that's a really important distinction for our listeners. The multiple isn't just about the business; it's about the competitive dynamics of the sale process. But here's the thing — none of that would have mattered if the seller hadn't done the prep work to make the business auction-ready. Luna: What does auction-ready actually look like in practice? Lucas: Let's start with the cap table. The founder had taken a few small angel investments early on, and the docs were messy — no clean vesting schedules, some convertible notes that were still technically outstanding. Before going to market, they did a full cleanup: converted those notes, bought out one early investor who wasn't adding value, and got to a single-class common stock structure. That's a big deal because buyers hate uncertainty around ownership. Lucas: Second, contracts. They had about forty enterprise customers, but the contracts were all slightly different — different renewal dates, different notice terms, some with no auto-renewal at all. They standardized every contract onto the same template, with the same ninety-day auto-renewal and price escalation tied to CPI. That took them about six months, but it made the revenue look far more predictable. Luna: So they were basically restructuring the business to fit the buyer's due diligence checklist before the buyer even showed up. Lucas: Exactly. And then the financials. They had been running on cash accounting, which is fine for taxes but terrible for a deal. Their broker helped them convert to accrual-based financials for the trailing two years, and they got a third-party audit. That audit cost them about forty thousand dollars, but it took away a whole layer of buyer skepticism. Luna: Forty grand is not nothing for a twelve million revenue company. But I bet it paid for itself many times over in the final price. Lucas: It did. And this is where the owner-dependence piece comes in, which we've touched on before. The founder was the classic technical founder — brilliant, but the business ran through him. Every sales deal, every support escalation, every product roadmap decision. He knew that would tank the multiple, so he spent the eighteen months before the sale building out a leadership team and documenting processes. Lucas: He hired a VP of sales, a VP of customer success, and a COO. By the time they went to market, the founder's role had been deliberately minimized to product strategy and vision — not day-to-day operations. That was a hard transition for him, but it was the difference between a business that a private-equity firm could see running without the founder and one that would collapse without him. Luna: And the buyers clearly believed it. Twenty-one times is a huge bet on the team, not just the software. Lucas: Absolutely. Now, let's talk about the deal structure, because the headline multiple only tells part of the story. The total consideration was about thirty-eight million dollars — twenty-one times the trailing EBITDA of one point eight million. But the structure was: sixty percent cash at close, twenty percent in a rollover equity, and twenty percent in an earnout tied to the next two years' revenue growth. Luna: So even though the headline multiple is twenty-one, the seller didn't walk away with thirty-eight million in cash that day. Lucas: Right. The cash at close was about twenty-three million. And the earnout was tied to hitting twenty-five percent revenue growth in year one and year two — which, given their historical growth of around thirty percent, was aggressive but achievable. But there's a subtle catch: the earnout is based on revenue, not EBITDA. That means the buyer can spend heavily on sales and marketing to hit that revenue target, and the seller's earnout could get diluted by those investments. Luna: That's a classic earnout trap, which we've covered before. So the seller needs to be really clear on what the earnout is actually measuring. Lucas: Exactly. And in this case, the seller negotiated a floor on EBITDA within the earnout calculation, so the buyer couldn't just blow up margins to chase revenue. That's a smart protection that a good broker would have pushed for. Luna: You keep mentioning the broker's role. What does a broker actually do in a deal like this, beyond just listing the business? Lucas: The broker is the one who builds the confidential information memorandum, the CIM, that positions the story. They'll highlight the revenue quality, the niche dominance, the team depth — all the things that the buyer will later verify. But the broker's real value is in running the auction process: identifying the right buyers, creating a competitive timeline, and managing the data room. Lucas: In BuildCore's case, they hired a broker who specialized in software and had a database of active acquirers. That's not a generic business broker; that's someone who knows the strategic buyer landscape and can generate that auction tension. Luna: And that's probably worth the 3 to 5 percent commission, right? Because a good broker might add a multiple point or two. Lucas: Yeah, a good broker can easily be the difference between a six-times and a nine-times exit. But I want to be careful not to overstate the repeatability of this story. BuildCore is a software company with recurring revenue in a defensible niche — that's a rare combination in the small-business world. Most businesses are service businesses with high owner dependence and low switching costs. They're not going to get twenty-one times, and that's okay. Luna: But the preparation playbook — the cap table cleanup, contract standardization, financial audits, team building — that's portable to almost any business. Those are the things that can add a turn or two even to a more ordinary company. Lucas: Exactly. So if you're a business owner listening and you're thinking about selling in the next three to five years, start now. You don't need to be a software company to make your business cleaner and more predictable. Just doing a few of those things could be worth a multiple point or two when you eventually sell. Lucas: And that multiple point or two could be the difference between retiring comfortably and retiring very comfortably. Luna: It really can. And you know, this kind of practical insight is exactly why I love doing this show. It's the kind of thing that, if it helps someone make even a slightly better decision, that's a win. Lucas: And if these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a tiny gesture that makes a real difference for us. We appreciate every one of you who does. Lucas: That's the thing — it's not about the money, it's about knowing people are listening. So, back to BuildCore. The deal closed in June, and the founder is staying on for a two-year transition as CEO of the acquired division. He told the broker that the earnout is his real motivation, not just the cash. He wants to prove that his business can grow inside a bigger company. Luna: That's a nice ending. But what's the lesson for the listener who isn't selling a software company anytime soon? Lucas: I think the lesson is that the multiple isn't just something that happens to you. You have some control over it. The market pays for reduced risk and increased predictability. Every step you take to make your business less dependent on you, more contractually solid, more auditable — that's a step toward a higher multiple. And you can start that process years before you're ready to sell. Luna: So it's not about timing the market or hoping for a bubble. It's about being ready when the right buyer shows up. Lucas: Exactly. And that's the real takeaway: the deal doesn't start when you list the business. It starts years earlier, with the quiet, unglamorous work of making your business something a buyer can underwrite with confidence.