Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a One-Client IT Firm Sold for 9 Times EBITDA
Transcript
- Lucas: So we've talked a lot about how recurring revenue and diversified client bases can lift a multiple. But what happens when the exact opposite is true — when a business is dangerously dependent on one single client? You'd assume the multiple gets crushed. Luna: That's the conventional wisdom, right? Concentration risk is a huge red flag for any buyer. Lucas: Exactly. But this episode, we're looking at an IT services firm that just sold at nine times EBITDA despite 80 percent of its revenue coming from a single client. And I want to unpack how that happened, because it's not a fluke — it's a masterclass in deal structuring. Luna: Okay, I need the details. What was this business, and how did the owner pull that off? Lucas: So the firm was a managed IT services provider in the Midwest, about four million in revenue, roughly one point two million in EBITDA. The owner, a guy named Mark, had built a niche supporting a regional healthcare network — think clinics, private practices, that kind of thing. That one client made up the bulk of his recurring contracts. Luna: And he wanted to sell? Most owners in that position think they have no exit. Lucas: Right, and Mark himself told me he nearly didn't list it. He figured no buyer would touch it. But his broker pointed out something: the client wasn't just a customer — they were a partner. The contract had three years left, and the relationship had survived two prior renewals. That's sticky, and a strategic buyer could see the value in that. Luna: So the broker's pitch was that concentration isn't always a deal-killer — it's about the quality of the relationship. Lucas: Exactly. And the buyer pool confirmed it. They had three serious offers, all from regional IT firms looking to expand into healthcare IT. The winner wasn't the highest price on paper — it was the one that structured the deal to address the risk head-on. Luna: Talk me through the structure. How do you de-risk an 80 percent concentration in a way that justifies nine times EBITDA? Lucas: So the deal had two main components. First, a twenty percent upfront cash payment, then the rest was a mix of seller financing and an earnout tied to the client's renewal. The seller financing — about twenty-five percent of the total — was structured over five years at a reasonable interest rate. That gave Mark a strong incentive to help retain the client after close. Luna: But the earnout is the interesting part. How did they set that up? Lucas: The earnout was based on the client's contract renewal, which happens in eighteen months. If the client signs for another three years, Mark earns an additional one million dollars. If they renew for only two years, he gets half of that. If they don't renew at all, he gets nothing. Luna: So the buyer was essentially paying for the relationship, but only if it actually persists. Lucas: And Mark was confident because he knew the client's decision-makers personally. That's the kind of hand-off a buyer can't easily replicate. He also agreed to stay on for twelve months as a consultant — not a full-time role, but just enough to ensure a smooth transition. Luna: And the client had to approve the sale, I assume? That's a big one in these situations. Lucas: Yeah, that's key. The contract had a change of control clause, so the client could have walked if they didn't like the new owner. Mark brought the client's CIO into the process early. He introduced the buyer's team, facilitated meetings, and even shared his own vision for how the client would benefit from the new firm's scale. That's what turned a potential objection into an endorsement. Luna: So the client didn't just tolerate the sale — they were part of making it happen. Lucas: That's the fundamental shift. Instead of selling a business with a risky concentration, Mark sold a relationship that the buyer couldn't easily acquire on its own. The buyer was paying for access to that healthcare network, not just the IT contracts. Luna: You know, it reminds me of something I read about a marketing agency that sold at a premium because its top client was a famous consumer brand. Same principle — the client's name itself carried value. Lucas: Exactly. But the difference here is that Mark's client wasn't a household name. Still, the strategic value was enormous for the buyer, who had been trying to break into healthcare IT for years without success. Luna: I wonder if the multiple would have been higher if the concentration was lower. I mean, nine times is solid, but with a more diverse book, could he have gotten twelve or fifteen? Lucas: That's the trade-off, and Mark knows it. He told me that he might have gotten a higher multiple with less concentration, but he also might not have had a business at all. The concentration was what made the business possible — it gave him predictable revenue for a decade. And frankly, nine times EBITDA is not a bad outcome for a main street business. Luna: So what's the lesson for other owners in a similar boat? It's not 'diversify or die' — it's more nuanced. Lucas: It's about being realistic about what you have. If you have a concentrated book, you need to be proactive: understand the client's commitment, document the relationship, and be prepared to structure the deal to share the risk with the buyer. That's what made this deal work. Luna: And I guess it also helps to bring the client into the loop early, like Mark did. Lucas: Absolutely. If the client is on board, you've essentially eliminated the biggest due diligence concern. The buyer's fear is that the client leaves after the sale, and Mark's strategy directly addressed that fear. Luna: You know, before we go deeper into the numbers, I want to touch on something. We've been doing this show ad-free since the beginning, and that's a deliberate choice we've made. It keeps the conversations honest and focused on what's actually useful to you, not on what a sponsor wants us to say. Lucas: Yeah, and that's something I'm really proud of. But it also means we rely on listeners who find value in what we do. If this show has helped you think about your own business or a sale you're considering, and you want to support that mission, the link is buy me a coffee dot com slash fexingo. It's a simple way to keep us going. Luna: And it's not about perks or anything — it's just about keeping this resource available to everyone who needs it. Lucas: Right. Okay, back to Mark's deal. One thing I want to dig into is the valuation math. The nine times multiple — how much of that was driven by the earnout structure versus the base price? Luna: Yeah, because the earnout is contingent, so it's not guaranteed. How did that factor into the stated multiple? Lucas: So the base purchase price was about eight times EBITDA — that was the headline number. The earnout could push the total consideration to over twelve times if the client renews for the full three years. But the way they announced it, they called it a nine times EBITDA deal, which is a blended view assuming the earnout partially pays out. Luna: So the multiple is a bit of a range, depending on the earnout's success. Lucas: Exactly. And that's a common structure in these deals. The buyer hedges the risk, and the seller gets rewarded for helping to retain the client. It's a classic win-win, but it requires a lot of trust between the parties. Luna: What about the seller financing? That's another way to bridge the gap, right? Lucas: Yes, and in this case, the seller financing was critical. The buyer wasn't a huge private equity firm; it was a family-owned IT company that needed time to pay. Mark agreed to finance twenty-five percent of the deal over five years at a market rate. That gave the buyer liquidity and gave Mark a steady income stream post-sale. Luna: And the interest rate on that seller note — was it favorable to Mark? Lucas: It was around seven percent, which is reasonable for a subordinated note in this market. Mark could have gotten more if he pushed, but he wanted the deal to close. The relationship with the buyer mattered to him — he'd known the family for years through industry events. Luna: So the whole deal was built on relationships — the client, the buyer, the broker. It's almost like selling a business is a relationship business in itself. Lucas: It really is. And I think that's the takeaway for any owner: your next buyer might be someone you've known for a decade, not a random private equity fund. That's why networking and reputation matter even in small business exits. Luna: So what's Mark doing now? Did he walk away clean, or is he still tied up in the earnout? Lucas: He's still actively involved. The earnout period runs another eighteen months, and he's been consulting with the new owner on the client's quarterly business reviews. He told me he's actually enjoying it — it's less stress than running the whole company, but he still gets to stay in the game. Luna: That sounds like a good retirement strategy, honestly. A gradual exit rather than a hard stop. Lucas: It's a model that more owners should consider. Instead of selling and disappearing, you stay on for a while, ensure the transition is smooth, and then ease into the next chapter. It reduces risk for the buyer and often increases the total payout for the seller. Luna: So if someone's listening and they have a business with a similar concentration risk, what's the one thing they should do today? Lucas: Start by documenting the relationship. Put together a file that shows the client's history, the terms of your contract, and the key decision-makers. Have a conversation with them about your plans — not necessarily about selling, but about the future of the business. That alone can change the narrative from 'risky' to 'strategic'. Luna: And maybe talk to a broker who's seen deals like this before. That's what made the difference for Mark. Lucas: Absolutely. A good broker doesn't just list the business — they help you position it. Mark's broker was worth every penny, and I think that's a story in itself. Luna: I'd love to hear that broker's side of the story. Maybe we can have them on the show sometime. Lucas: That's a great idea for a future episode. For now, I think the lesson is clear: concentration risk can be managed, but it takes planning and a willingness to structure the deal creatively.