Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Commercial Laundry Sold at 85x EBITDA with Contracts
Transcript
- Lucas: So we've spent a lot of episodes talking about how recurring contracts juice multiples in businesses like pest control, waste hauling, medical billing. But there's a category that doesn't get nearly enough attention, and it's one of the most extreme examples I've seen in terms of multiple expansion. Luna: What category are we talking about? Lucas: Commercial laundry. Specifically, a regional commercial laundry company that serviced hospitals and hotels in the Midwest. It sold earlier this year at roughly 85 times EBITDA. Now, that number sounds absurd until you look at the contract structure. Luna: Eighty-five times? That's higher than the waste hauler we talked about a few episodes ago, and that was 70 times. What made this different? Lucas: The difference is contract duration and renewal clauses. The waste hauler had municipal contracts that were typically three to five years, with automatic renewal unless canceled. The laundry company had contracts with hospitals and hotel chains that ran five to seven years, with what's called 'evergreen' renewal — meaning they renew automatically unless one party gives notice, typically 90 or 120 days out. So the buyer effectively gets a decade of locked-in revenue visibility. Luna: Okay, but commercial laundry is a low-margin, commodity service. Sheets and towels. How do you get a buyer to pay 85 times earnings for that? Lucas: Because the buyer isn't paying for the laundry operation itself — they're paying for the revenue stream. Think about it from a hospital's perspective. If you're a hospital system, you cannot afford a disruption in linen service. Dirty sheets mean cancelled surgeries, infection control issues, patient complaints. So the switching cost is enormous. Once a hospital signs a five-year laundry contract, they are not leaving. The buyer knows that with near certainty. Luna: Right, so the stickiness is baked into the customer's operational risk. That makes sense. But still — 85 times. That implies a very low discount rate. Who was the buyer? Lucas: A larger national laundry consolidator backed by private equity. They already had facilities in adjacent geographies. The acquisition let them add density to their route network, which is a huge factor in laundry — the closer your plants are to the customers, the lower your transportation costs. This company had contracts concentrated in a three-state area, so the buyer could fold them into existing routes and immediately improve margins. Luna: So the multiple reflects not just the recurring revenue but also the operational synergies. The buyer can pay more because they can run the business more efficiently than the seller could. Lucas: Exactly. And that's the key insight for any business owner listening. The multiple isn't just about your EBITDA number. It's about what your business enables the buyer to do. If you have long-term contracts in a dense geographic area, and a buyer already has infrastructure nearby, you're going to get a premium because you save them the cost of building that density from scratch. Luna: If this episode has moved your thinking about your own business, or just given you a new lens on valuation, we'd love it if you considered a small gesture. If today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. It's the simplest way to keep this show ad-free and focused on the numbers that matter. Lucas: Yeah, we don't do sponsors, we don't do ad reads. If you find value in what we're doing, that link is the only way we ask for support. And it genuinely helps us keep digging into these specific deal structures. Luna: Alright, back to the laundry. So the contracts are multi-year, evergreen, and the buyer gets route density. But what about the actual contract terms? Were there any price escalation clauses? Lucas: Great question. This company had annual price escalators tied to the Consumer Price Index, plus a fixed percentage — typically two to three percent above CPI. So not only was the revenue recurring, it was also growing automatically without any sales effort. For a buyer, that's a dream. You get organic revenue growth built into the contract language. Luna: That's a huge factor. I've seen businesses with long contracts but no escalation clause, and over time inflation eats into margins. The buyer has to renegotiate, which creates friction. Here, the seller built in a mechanism that protects margins. Lucas: Exactly. And the contracts also had volume minimums. The hospitals and hotels guaranteed a certain poundage of laundry per week. So the revenue floor was real. Not just a promise to use the service, but a contractual obligation to deliver a minimum volume or pay a shortfall fee. That transforms the revenue from recurring to near-guaranteed. Luna: So the buyer is buying a stream of cash flows that is contractually protected against volume declines, inflation, and early termination. That's about as close to a bond as a private business gets. Lucas: Right. And the multiple reflects that. If you look at comparable transactions in commercial services, the average EBITDA multiple for businesses without long-term contracts is maybe 4 to 6 times. For those with one-year contracts, maybe 6 to 8. For multi-year with escalators and volume minimums, you start seeing double-digit multiples. But 85 times is at the extreme end, and it's only possible because of the contract structure and the strategic buyer. Luna: So what should a small business owner take away from this? You're not a commercial laundry, but maybe you have service contracts that could be structured differently. Lucas: Three things. One: extend your contract duration. If you typically do one-year renewals, try to move to two or three years with an auto-renewal clause. Even moving from one year to two years can double the perceived stability. Two: add price escalation. Even a small annual increase tied to a simple index makes a big difference to a buyer's model. Three: think about density. If you're in a service business with a geographic component, consider whether you can concentrate your customer base. A buyer will pay more for a dense cluster of customers than for the same revenue spread across a wide area. Luna: That density point is often overlooked. I've seen a landscaping company with $2 million in revenue spread over three states sell for less than a similar company with $1.5 million in revenue concentrated in one metropolitan area. The buyer just sees more operational risk with the dispersed model. Lucas: Absolutely. And in the laundry case, the route density was a huge part of the value proposition. The seller had three plants, each within a 60-mile radius of their major customers. The acquiring company already had plants in two of those three markets, so they could consolidate operations and cut overhead significantly. That synergy allowed them to bid aggressively. Luna: So the seller didn't just benefit from the contract structure; they also benefit from being in the right location relative to the buyer's existing footprint. That's somewhat luck, but you can also position your business that way if you know who the likely buyers are. Lucas: Exactly. If you're thinking about an exit in three to five years, start researching potential acquirers now. Look at where they have facilities, where they have customer concentration, and where they have gaps. Then try to build your business to fill those gaps. It's a form of strategic alignment that can dramatically increase your valuation. Luna: One more thing — the due diligence on these contracts must have been intense. How did the seller prove that the contracts were truly evergreen and that the customers wouldn't leave? Lucas: The seller provided a detailed contract analysis showing renewal history. For each of the top 20 customers — which represented about 80 percent of revenue — they showed the original contract date, every renewal date, and any amendments. They also provided evidence that no customer had ever failed to renew. That track record of zero churn over a decade was incredibly powerful. Luna: So the data told the story. The buyer could model the future cash flows with high confidence because the past was so consistent. Lucas: Right. And the seller also had a third-party audit of the contract compliance. They hired a consultant to verify that the volume minimums were being met and that the escalation clauses were being applied correctly. That gave the buyer comfort that the contracts were not just pieces of paper but were actively enforced. Luna: That's a smart move. I think a lot of sellers assume that if they have a contract, it's gold. But if you've never enforced a volume minimum or if you've waived escalation for a good customer, the buyer will see that as a risk. The seller here showed that they ran a tight ship. Lucas: Exactly. And the result was an 85 times multiple. To put that in perspective, if the business had $1 million in EBITDA, that's an $85 million valuation. The same business with month to month contracts and no escalators might have sold for $5 to $7 million. The difference is entirely in the contract design and the strategic positioning. Luna: So the lesson is clear: if you want a premium exit, invest in your contract terms years before you sell. Don't wait until you're ready to list. Start negotiating longer terms, escalators, and volume commitments now. Lucas: And don't forget the density play. If you can consolidate your operations geographically, do it. Even if it means walking away from some distant customers, the concentration premium is real. Buyers will pay more for a business that fits neatly into their existing network. Luna: Alright, that's a lot to digest. Let's wrap with one final thought: what's the one thing a listener should do this week if they want to move toward a higher multiple? Lucas: Pull out your top ten customer contracts and look at the renewal terms. If any of them are month to month or annual with no auto-renewal, start a conversation about extending them. You don't have to change everything at once, but moving even one or two key customers to multi-year terms can shift the narrative when you go to market. Luna: That's actionable. And for those who want to dive deeper into structuring contracts for exit, we'll have more deal walkthroughs coming up. Thanks for listening.