Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Commercial Laundry Business Sold at 10x EBITDA by Locking Long-Term Contracts
Transcript
- Lucas: So there's this commercial laundry company in the Midwest — cleans linens for hotels, hospitals, restaurants. Annual revenue around eight million, EBITDA margins in the mid-teens, nothing flashy. Luna: Right, that's a grind business. High volume, low margins, lots of equipment maintenance. Lucas: Exactly. The owner wanted to retire, figured the business was worth maybe five or six times EBITDA — call it four to five million. His brother had sold a similar business a few years earlier at 5.5 times, so that was his benchmark. Luna: But he ended up doing better than that, I assume. Lucas: Much better. He sold at ten times EBITDA, just over eight million dollars. The difference came down to something that sounds almost too simple: he locked his top three customers into multi-year contracts before going to market. Luna: Okay, that's interesting. Because I imagine those customers were on month to month or maybe one-year deals before. Lucas: Exactly right. The largest customer, a regional hotel chain, was on a thirty-day rolling contract. The second, a hospital group, had a one-year that was up for renewal in six months. And the third, a restaurant chain, was essentially handshake — no formal contract at all. Luna: So if a buyer comes in, they're looking at that and thinking, 'I could lose thirty percent of revenue in the first quarter.' Lucas: That's exactly the risk a buyer prices in. A strategic buyer — another laundry company or a private equity roll-up — they're not just buying today's cash flow. They're buying the likelihood that cash flow continues. When contracts are short, the discount factor gets aggressive. Luna: So what did the owner actually do? Did he just call them up and ask for a longer commitment? Lucas: More or less. But he had leverage. He'd been servicing them reliably for years, knew their operations inside out. He went to each one and said, 'I'm planning for the long term — I want to invest in new washers, better routing software, but I need the revenue certainty to justify it.' He offered them a small price lock — essentially a cap on annual price increases — in exchange for a three-year commitment. Luna: So he gave up a little upside to get the contract. That's smart. Lucas: It's a classic trade-off. The cap was maybe half a percent below what market rates would have been, so it cost him maybe forty thousand a year in foregone revenue. But that tiny concession transformed the risk profile of the entire business. Luna: Right, because now the buyer sees three years of locked-in revenue from those three customers — what was that, about sixty percent of total revenue? Lucas: Closer to sixty-five. So the buyer's due diligence suddenly becomes much simpler. They don't have to stress-test retention assumptions as heavily. They can underwrite the base cash flow with high confidence. Luna: And that directly lifts the multiple. Lucas: Exactly. The buyer who ultimately won the deal was a mid-sized regional laundry group backed by private equity. They were doing exactly this kind of roll-up — buying independent operators and consolidating routes. For them, a ten-times multiple on a business with sixty-five percent contracted revenue was actually cheaper than a seven-times multiple on a business with no contracts, because the risk of churn was so much lower. Luna: So the multiple is really a function of how predictable the cash flow is. That's a lesson that applies way beyond commercial laundry. Lucas: Absolutely. And it's not just about having contracts — it's about having contracts with the right duration. We've seen deals where a business had contracts but they were all annual, expiring at different times, so the buyer had to manage a rolling renewal risk. Multi-year agreements, especially if they're staggered, give the buyer real comfort. Luna: I imagine the legal costs to redo those contracts weren't huge either. Lucas: Minimal. The owner used a local business attorney, maybe five thousand dollars total. The price lock concession added a small ongoing cost. But the return on that investment was millions at the exit. Luna: You know, listening to this, I think a lot of business owners hear 'recurring revenue' and think you need a software subscription or a monthly box. But really, any business that can convert its customer relationships from transaction-based to contract-based is doing the same thing. Lucas: Right. A commercial laundry, a landscaping company, a janitorial service — they can all create recurring revenue by formalizing the relationship. And the market rewards that with a higher multiple, because recurring revenue is easier to model, easier to finance, and easier to integrate. Luna: And if today's conversation was useful to you, these episodes stay ad-free because of listener support. If you'd like to keep that going, you can find us at buy me a coffee dot com slash fexingo. Just a simple way to say this matters. Lucas: Yeah, we appreciate that. So back to the laundry deal — the other interesting piece was how the buyer structured the transaction. Luna: Oh, tell me. Was it all cash or was there an earn-out? Lucas: Mostly cash, but with a small roll-over equity component. The buyer wanted the owner to stay on for two years to manage the transition, so they offered him a five percent equity stake in the combined entity. That gave him upside if the consolidation worked — and it did. He ended up making about another million when the buyer sold the whole platform three years later. Luna: So he got the eight million upfront, plus an extra million on the back end. That's a great outcome. Lucas: It is. And it all traces back to those three contracts. Without them, the buyer likely offers six or seven times, and the owner probably doesn't get the equity piece either — because the buyer wouldn't have been confident enough in the base business to want the owner to stay. Luna: So for someone listening who owns a service business with big customers but short contracts, what's the takeaway? Start renegotiating at least twelve months before you plan to sell? Lucas: I'd say even earlier. Ideally, you want eighteen to twenty-four months of contract history by the time you go to market. Buyers love seeing that the contracts were signed, renewed, and performed under. It's not just the paper — it's the demonstrated relationship. And if you have to offer a small concession to get the term, do it. The math almost always works. Luna: Were there any issues with the contracts in due diligence? Sometimes buyers worry that the owner pressured customers or gave away too much. Lucas: That's a good point. The buyer's lawyers did check that the contracts were arm's length and that the price lock wasn't far below market. But because the cap was modest and the customers were genuinely happy, it passed muster easily. The key is to keep the economics reasonable — don't sell the farm just to get a three-year signature. Luna: So it's a balancing act. You want to improve the multiple, but you still need to show the buyer that the business has pricing power. Lucas: Exactly. And in this case, the owner actually had room to raise prices on the non-contracted customers during those two years, which offset the cap on the big three. So net margins actually improved slightly during the transition period. Luna: That's smart management. One more thing — did the owner use a broker, or did he handle the sale himself? Lucas: He used a broker who specialized in lower middle market industrial services. The broker helped him identify which contract terms mattered most to buyers and even coached him through the customer conversations. The broker's fee was about seven percent of the deal value, so around five hundred sixty thousand. But given that the broker likely helped lift the multiple by three or four turns, that fee was more than earned. Luna: Yeah, that's a classic case of a good advisor paying for themselves many times over. So the lesson here is clear: if you're selling a business where customer relationships are key, take the time to solidify them into long-term agreements before you put the 'for sale' sign up. Lucas: That's the takeaway. And it's one of those things that's easy to put off because it requires uncomfortable conversations. But the payoff can be life-changing. Luna: Absolutely. Thanks, Lucas. That was a great case study.