Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Niche SaaS Firm Sold at 20x EBITDA via Recurring Revenue
Transcript
- Lucas: So there's this little construction software company — call it RenoSight, just to give it a name — that sold earlier this year for a reported 20 times EBITDA. Luna: 20 times? That is well above the typical range for a small business. Most of the deals we talk about are between 6 and 15. Lucas: Exactly. And what's interesting is that the company only had about 1.2 million in revenue and maybe 400,000 in EBITDA. Not a giant. But the multiple came from one thing: recurring revenue. Luna: So they had a subscription model. But a lot of SaaS companies have subscriptions and don't get that kind of multiple. Lucas: Right. The key was how clean their recurring revenue was. They had about 85% of customers on annual contracts, with average contract lengths of 18 months. And they had less than 5% annual churn over the prior three years. For a strategic buyer, that's almost like buying a bond with upside. Luna: Who was the buyer? Another software company? Lucas: A mid-sized construction ERP firm — think the kind of company that does accounting and payroll for general contractors. Their existing product had a scheduling module but nothing for project-specific tracking. RenoSight filled that gap perfectly. The buyer could cross-sell to their own 8,000 existing customers on day one. Luna: So the strategic value was higher than what a financial buyer would pay. Lucas: Huge. A private equity firm would have looked at 400K in EBITDA and offered maybe 6 to 8 times, call it 2.4 to 3.2 million. This deal reportedly closed at just over 8 million. The premium was all strategic. Luna: That's a massive gap. How did the founder get that kind of outcome? Lucas: The founder, a guy named Mark, had been running the business for about seven years. Originally he sold a perpetual license with a small annual maintenance fee — maybe 20% of the license cost. A few years before the sale, he shifted entirely to annual subscriptions. That took a hit to upfront cash, but it transformed the revenue profile. Luna: And that transformation was what the buyer valued. Lucas: Exactly. But here's the detail that mattered most: during due diligence, the buyer's team looked at the renewal history. They didn't just look at the average churn rate — they wanted to know if any customers had let their subscription lapse and then come back. That kind of 'resurrected' customer counts differently in their models. Luna: And did RenoSight have that problem? Lucas: A handful — maybe 8% of the customer base had churned and returned at some point. The broker advised Mark to clean up the data. He identified those accounts, noted them separately, and showed that the re-acquired customers had re-signed at higher price points. That turned a potential red flag into a positive story about pricing power. Luna: So the broker actually helped frame the data in a way that supported the valuation. Lucas: That's what good brokers do. They don't just find a buyer — they help you package the story. In this case, the broker also advised Mark to renegotiate a few of the largest contracts before listing. There were three big customers paying month to month. Mark offered them a 10% discount to switch to an annual commitment, and two of them took it. That immediately increased the predictable revenue stream. Luna: Simple move, but I bet a lot of founders don't think of doing that before a sale. Lucas: Most don't. They're focused on running the business, not on positioning it for exit. Mark told me he spent about four months prepping — cleaning up the books, tightening the contracts, getting the churn data clean. The broker said that prep work added at least a couple million to the final price. Luna: So the multiple wasn't just about having recurring revenue. It was about having clean, predictable, multi-year recurring revenue. Lucas: That's the whole game. And it's worth noting: this wasn't a flashy Silicon Valley SaaS. This was a niche tool for construction project managers. They had maybe 300 customers, mostly mid-sized contractors in the Southeast. But the revenue was sticky, the market was growing, and the buyer had a clear use case. Luna: What about the founder's role post-sale? Did he have to stay on? Lucas: Standard earnout — he agreed to stay for 18 months as a product manager. But the structure was unusual: the earnout was tied to retaining existing customers, not to revenue growth. So his incentive was to keep the customers happy and renewing, not to push for aggressive new sales. That aligned perfectly with the buyer's goal of protecting their investment. Luna: Seems like a smart structure. And it probably made the due diligence easier because the buyer knew the founder wouldn't leave and the customers wouldn't leave either. Lucas: Exactly. The whole deal was built around certainty. And that's the through line for any small business owner thinking about selling: if you can show a buyer that the revenue will keep coming without you, you unlock a completely different valuation. Luna: I think that's the most practical takeaway. It's not about being the biggest — it's about being the most predictable. Lucas: And that's a lesson that applies way beyond software. Any business with repeat customers on some kind of recurring arrangement — service contracts, subscriptions, membership programs — can benefit from the same thinking. Luna: Yeah, we've seen it in pest control, landscaping, even bakeries. But the multiples tend to be higher in tech because the margins are better. Lucas: True. RenoSight had gross margins around 78%, which is typical for SaaS. That's hard to match in a service business. But the principle is the same: recurring revenue with low churn and high margins is the holy grail for acquirers. Luna: You know, it's funny — the way Mark structured his earnout, focused on retention rather than growth, actually made the deal more attractive to the buyer. It's almost like he was saying, 'I'm not trying to juice the numbers; I'm trying to protect what we've built.' Lucas: And that kind of alignment is rare. Most founders want to maximize their payout upfront, but the smart ones realize that a deal that works for both sides is more likely to close and more likely to feel good afterward. Mark walked away with about 5 million after taxes, and he still has a job he enjoys running a product team. Luna: That's a nice outcome. And it's a reminder that a good broker can make a huge difference in both the process and the price. Lucas: Absolutely. If these conversations have moved your own thinking forward in some small way, I'll just mention that a handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that literally helps fund making this many episodes. No pressure, just a quiet thank you to those who already do. Luna: Yeah, it's a listener-supported show, and that keeps it ad-free. We appreciate every single person who's part of it. Lucas: Anyway, back to RenoSight — the other thing Mark did that was smart was he got his financials audited by a third-party CPA firm for the two years before the sale. That's unusual for a company his size, but it meant the buyer didn't have to do deep forensic work during due diligence. Luna: That probably saved weeks of back and forth, and maybe even prevented the deal from falling apart. Lucas: Exactly. A lot of small business sales collapse because the buyer finds something unexpected in the books. Pre-audited financials basically say, 'Here's the truth, vetted by someone independent.' It builds trust instantly. Luna: So the combination of clean recurring revenue, audited financials, and a strategic buyer — that's what got them to 20 times. Lucas: Plus the broker's advice on contract renegotiation. It was a team effort. But the founder had the foresight to start preparing years before he was ready to sell. He switched to subscriptions in year four, even though it hurt cash flow short-term. That long-term thinking is what made the exit possible. Luna: Are there any other examples you've seen where a company got a huge multiple not because of size but because of how clean the business was? Lucas: One that comes to mind is a tiny HR compliance firm — about 600K in revenue, 200K EBITDA — that sold for 5 million, which is 25 times. They had a single product, a compliance checklist tool used by small manufacturers. Every customer was on a three-year contract auto-renewal, and they had zero churn in five years. It was absurdly clean. Luna: Zero churn? That's almost unheard of. Lucas: It was because the product was tied to a regulatory requirement. If you didn't use it, you risked OSHA fines. So customers just kept paying. The buyer was a larger compliance company that wanted that sticky customer base. The multiple was insane, but it made sense because the buyer could sell their other products to those same customers. Luna: So the lesson repeats: find a customer need that's recurring and defensible, and the multiple follows. Lucas: That's the formula. Whether it's software, services, or even a physical product sold on subscription, the market rewards businesses that can show a predictable future. And the best time to start building that predictability is years before you plan to sell. Luna: Alright, I think that's a solid note to end on. Thanks for walking through the RenoSight deal. Lucas: Sure thing. Next episode we'll look at a completely different kind of sale — a manufacturing company that actually lost money but still got bought. There's a story there. Luna: Looking forward to it.