Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why Recurring Revenue Lifts a Business Sale Multiple
Transcript
- Lucas: So Luna, I keep coming back to this one sale that really shows the difference between a business that sells for a premium and one that doesn't. There's a commercial laundry service in the Midwest — industrial uniforms, linens for hotels and restaurants. It just sold for 9.5 times EBITDA. Luna: 9.5 times for a laundry business? That sounds high for something so… well, unglamorous. Lucas: Exactly, and that's the point. It wasn't the glamour that drove the multiple — it was the revenue structure. Eighty-two percent of that company's revenue came from multi-year contracts with a handful of regional hospital chains and hotel groups. Those contracts had automatic renewal clauses and built-in price escalators tied to inflation. Luna: So the buyer wasn't buying a laundry service. They were buying a stream of predictable cash flow. Lucas: Precisely. The buyer told the broker — off the record — that they priced it as if they were acquiring a small utility. That's the recurring revenue premium in action. Luna: Can you put a number on that premium? Because I hear 'recurring revenue' thrown around a lot, but I've never seen it quantified. Lucas: Yeah, so the data I've seen from business broker surveys over the past couple of years is pretty telling. For service businesses below five million in revenue, the median sale multiple sits around 4.5 to 5 times EBITDA. But once you get recurring revenue above about 60 percent of total, that median jumps to 7 to 8 times. And when it's above 80 percent, you're looking at 9 to 11 times. Luna: So in this case, they were above 80 percent, and they landed at 9.5. Right in that sweet spot. Lucas: Right. And to make it concrete, let's say this laundry business did about four million in EBITDA. At 4.5 times, that's eighteen million. At 9.5 times, it's thirty-eight million. Twenty million dollars of difference, almost entirely because of the contract structure. Luna: Twenty million dollars is a lot of coin for something that isn't even a product. It's just how you sign your customers. Lucas: Exactly. And here's where it gets interesting for owners listening. You don't have to be a software company to build recurring revenue. You just have to be willing to change how you sell. Lucas: I remember a different sale last year — a commercial HVAC repair business. Fantastic technician team, great reputation, but almost all of their revenue was one-off service calls. No contracts. The owner sold for 3.2 times EBITDA. He was frustrated because he thought he had a better business than the guy down the street who sold for 5 times. But the market was telling him something else. Luna: So buyers are basically saying, 'I'll pay more if I can count on the money coming in next year without having to re-sell every customer.' Lucas: That's exactly it. A buyer is taking on risk when they purchase a business. Recurring revenue reduces that risk. And in a higher interest rate environment — which we've been in for a while now, into August of 2026 — buyers are even more risk-averse because their financing costs are higher. Luna: So the premium for recurring revenue has probably gotten even bigger recently. Is that fair to say? Lucas: I think so, yeah. When money is more expensive, buyers are more selective. They want cash flow they can bank on. The spread between a recurring and non-recurring business has widened in the last couple of years. Some brokers I talk to say it's now two to three turns of EBITDA, sometimes more. Luna: Two to three turns — that's enormous. So what's the practical advice for an owner who wants to build that kind of revenue before they sell? Lucas: The first thing is to look for the 'annuity' in your existing client base. Every business has some customers who are more predictable than others. Start by identifying the top 20 percent of your clients who already buy regularly — maybe they use you monthly, or they always call you back for the same service. Formalize those relationships into contracts. Luna: But won't some customers resist signing a contract? I mean, what's in it for them? Lucas: That's the key question. You have to give them something — a price lock, priority service, a guaranteed response time. In the laundry case, the company offered a slightly lower rate per pound in exchange for a three-year commitment. The customer got budget certainty, the business got revenue certainty. It's a win-win. Lucas: Another angle is to introduce a subscription or membership model. Even a simple 'annual maintenance plan' can convert a one-off buyer into a recurring one. For a commercial laundry, that might be a monthly linen service instead of a per-load fee. For a repair business, it's a quarterly maintenance contract. Luna: So you're swapping a transaction for a relationship. And buyers pay a premium for relationships over transactions. Lucas: Exactly. And here's a stat that sticks with me: businesses with more than 70 percent recurring revenue are about twice as likely to sell for over 8 times EBITDA compared to those with less than 30 percent recurring revenue. That's from a dataset of over two thousand small business sales I've seen over the years. Luna: Okay, but what about the other side? What are the risks of chasing recurring revenue too hard? Like, are there downsides? Lucas: Good question. The biggest risk is concentration. If you sign a handful of big multi-year contracts, and one of them represents 40 percent of your revenue, that can actually hurt your valuation. Buyers worry about what happens when that contract ends. So the goal isn't just recurring revenue — it's diversified recurring revenue. Lucas: In the laundry case, they had maybe 12 contracts, and the largest was 18 percent of revenue. That's a healthy spread. If it had been one contract for 80 percent, the multiple would have been a lot lower, even with the recurring nature. Luna: So it's not just about the recurring part, it's about the mix. You want a bunch of streams, not one waterfall. Lucas: That's a perfect way to put it. And there's another subtle thing buyers look at: the churn rate. Even with contracts, you need to show that historically, renewals happen. If you have a 95 percent renewal rate, that's a strong signal. If it's 80 percent, buyers will start discounting. Luna: So the takeaway for owners is pretty clear: start building recurring revenue now, not the year before you sell. You need a track record. Lucas: Right. Buyers want to see at least two to three years of history with that recurring mix. If you start two years before a sale, you might be able to show a trend. But the really strong valuations go to owners who built that predictability over five or more years. Lucas: And that's what I love about this topic — it's one of the few levers where the owner has real control. You can't control the market multiple, but you can control the shape of your revenue. And that shape is worth millions at the exit. Luna: It's almost like you're engineering your own exit multiple. And hey, speaking of building something that sustains itself — I've been thinking about how this show is kind of the same way. We're not selling anything, we're just giving you the tools. Lucas: Yeah, and that's only possible because a small group of listeners chips in a few dollars a month over at buy me a coffee dot com slash fexingo. That's literally what funds the research and production that goes into episodes like this one. No ads, no sponsors, just listener support. Luna: And it's not about reaching a huge number — it's about a few people who find real value here and want to keep it going. If that's you, it's a small way to keep these conversations alive. Lucas: Exactly. And honestly, it's the same principle we're talking about today — a small, reliable base of support is worth more than a thousand one-off listeners. Anyway, back to the recurring revenue playbook. Lucas: So let's say you've built that recurring revenue. What's the next step to maximize your multiple? It's the contract terms themselves. Buyers love contracts with auto-renewal, no easy escape hatch for the customer, and price escalation built in. The laundry company had all three. Luna: So it's not just that the revenue is recurring — it's the quality of the recurrence. A contract that can be cancelled with 30 days' notice is worth less than one that requires 180 days' notice and has a penalty clause. Lucas: Right. And one more thing: make sure your contracts are transferable. If the contract says it terminates on a change of ownership, that's a red flag for buyers. You want contracts that explicitly allow the new owner to step in without renegotiating. Lucas: I've seen deals fall apart at the finish line because a key contract wasn't transferable. The buyer assumed it would carry over, and then the seller discovers the customer has a change of control clause. That's a six-figure mistake, sometimes seven. Luna: That's a really practical tip. So to sum up: build recurring revenue, diversify it, make the contracts sticky, and make them transferable. That's the formula for a higher multiple. Lucas: That's the formula. And remember, it doesn't matter if you're in laundry, HVAC, or software — the principle is the same. Buyers pay for certainty. The more you can de-risk your business, the more they'll pay. Luna: And it's never too early to start. Even if you're five years out from selling, those small changes today compound into a much bigger exit. Lucas: Absolutely. So the question I'd leave you with is this: if you're an owner, what percentage of your revenue could you honestly call recurring today? And what's one step you could take this quarter to move that number up? Because that one step might be worth twenty million dollars when you sell.