Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Kitchen Exhaust Cleaning Business Sold at 450x EBITDA
Transcript
- Lucas: We spend a lot of time on this show talking about recurring revenue. The standard line is that contractual, predictable income is what drives double and triple digit EBITDA multiples. But today I want to look at a business where the renewal rate was so close to 100 percent for so many years that the multiple hit four hundred and fifty times EBITDA. Luna: Four hundred and fifty? That's not a typo? Because the highest we've covered before was the car wash at twelve hundred, but that was membership-based. What's this one? Lucas: It's a commercial kitchen exhaust cleaning company. They clean the hoods, ducts, and fans above restaurant stoves. Fire codes and health departments require it quarterly or monthly depending on volume. If you skip it, you risk a fire, a failed inspection, or even a shutdown. Luna: So it's mandatory maintenance. That means demand isn't discretionary. But how do you get to four hundred fifty times? That implies the earnings were tiny relative to the sale price. Lucas: Exactly. The business had about fifty thousand dollars in EBITDA on roughly two hundred thousand in revenue. The sale price was around twenty-two and a half million. That's four hundred fifty times the fifty thousand. But here's the nuance: almost all of that revenue came from multi-year contracts with automatic renewal clauses. The churn rate was below one percent per year over the last decade. Luna: Okay, so the absolute EBITDA is low, but the quality of that EBITDA is incredibly high. The buyer is essentially buying a stream of future cash flows that are almost guaranteed. Lucas: Right. The company operated in a dense metro area with hundreds of restaurant clients. The contracts were transferable, and the buyer — a large facilities management firm — planned to bolt on additional services like grease trap cleaning and fire extinguisher inspections. They were paying for the customer list and the recurring revenue model, not for the current earnings. Luna: So the EBITDA multiple is misleading if you think of it as a ratio of profit to price. It's more like a multiple of annual contract value. Was there any growth built in? Lucas: Modest. About three to five percent a year from price escalators tied to inflation. But the real upside for the buyer is cross-selling. That's why they paid so much. They saw that every restaurant already had a relationship with this company. Adding another service is a much lower acquisition cost than winning a new client from scratch. Luna: It reminds me of a point you've made before: the best small businesses to sell are the ones that look like a toll road. The customer has to pay regularly because not paying is worse. Lucas: Exactly. In this case, the toll is mandated by the fire marshal and the health department. The owner started the company twenty years ago as a one-truck operation. He built a reputation for being reliable, which meant restaurants never had a reason to switch. By year ten, he was turning away new clients because he couldn't staff enough crews. Luna: That's a nice problem to have. But I imagine selling such a small EBITDA business to a large buyer requires some creative structuring. Was it all cash? Lucas: The buyer paid about sixty percent upfront, with the rest in an earn-out tied to retention over three years. The earn-out was basically risk-free because the contracts were already in place. The seller also agreed to stay on for six months to transition relationships. The total deal value was twenty-two and a half million. Luna: That's a great exit for someone who likely started with a pressure washer and a van. Let's take a quick step back — because this is exactly the kind of episode that makes me think about how we fund this show. Lucas: Same here. Look, we keep the podcast ad-free because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. It's not a lot of people, but it's enough to keep us researching these deep dives. If these conversations have moved your work forward in some small way, that's the link. Luna: Yeah, we really mean that. No ads, no sponsor breaks, just the two of us talking about what actually happens when a business changes hands. Thanks to those who already support us — you know who you are. Lucas: Alright, back to the kitchen exhaust story. One of the smartest things the seller did was document every contract renewal. He had a spreadsheet showing the date each client signed, the number of renewals, and the length of the relationship. When the buyer's due diligence team saw that average client tenure was eight years, they stopped asking questions. Luna: That's a lesson for any service business owner. Buyers love data that proves stickiness. A ten-year client is worth ten times a two-year client, even if the revenue is the same. Lucas: There's another angle here that people miss: the contracts had escalation clauses that triggered automatically with the consumer price index. So the buyer didn't even have to negotiate price increases. That made the cash flow even more predictable. Luna: So what was the buyer's name? Can we say? Lucas: I can't name the buyer because it was a private deal with a non-disclosure. But it was a multi-billion dollar facility services company that already serviced commercial kitchens in other capacities. They saw this as a perfect add-on. Luna: Was there any competitive tension? I imagine other buyers might have wanted that contract book. Lucas: There were three offers. Two from regional players and one from the large national firm. The seller chose the national firm partly because the earn-out was more straightforward and partly because the cultural fit felt right. The national firm promised to keep the existing staff and not change the brand for at least two years. Luna: Culture matters even in a transaction that's essentially a numerical equation. The seller cared about his employees and his reputation. Lucas: Exactly. And that's something a lot of first-time sellers overlook. They think it's all about the highest price. But the structure, the timeline, and the post-sale role matter just as much. In this case, the seller walked away with about thirteen million after taxes and fees. He's now retired in Arizona. Luna: Thirteen million from a kitchen exhaust cleaning business. That's the power of recurring revenue tied to regulation. So for our listeners who run service businesses, what's the one takeaway? Lucas: If your service is something a customer can't easily cut — because of law, safety, or operations — you have a potential asset worth multiples of its current earnings. Document every contract, build a retention history, and keep your churn below five percent. You don't need to be big; you need to be sticky. Luna: That's it for today. Next episode we'll look at a business that went the opposite direction — high growth, high churn, but still a great exit. Lucas: See you then.