Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Consulting Firm Sold at 14x EBITDA by Firing Its Worst Clients
Transcript
- Lucas: We get a lot of questions from owners of service businesses — consultants, agencies, law firms — about how to position for a sale. And the conventional wisdom is always the same: grow revenue, diversify your client base, clean up your books. Luna: Right. And that works for a lot of companies. But what about the owner who does the opposite — actually shrinks revenue on purpose? Lucas: That's exactly what we're looking at today. There's a boutique management consulting firm based in Chicago — we'll call them North Shore Advisors — that sold in late 2025 for 14 times EBITDA. That's roughly double the average multiple for a consulting business of that size. Luna: Fourteen times. And you said they shrank revenue. How much? Lucas: About 15 percent top-line. But here's the key: the owner chose to fire his bottom 10 percent of clients by revenue. Not the ones causing trouble — the ones that were profitable on paper but eating up disproportionate senior time. The clients with the lowest net promoter scores and the highest number of scope-creep requests. Luna: So he fired clients who were paying him. That takes guts. What was the financial impact in the short term? Lucas: In year one, revenue dropped from about $4.2 million to $3.6 million. But here's the thing — those clients generated 30 percent of the support tickets and 40 percent of the after-hours calls. When they left, the team basically got a productivity boost. The founder told me his senior consultants suddenly had capacity to do the work they were actually hired for. Luna: And I'm guessing the remaining clients were happier too. Lucas: Absolutely. Net promoter scores jumped from 42 to 78 within 18 months. More importantly, the EBITDA margin went from 18 percent to 34 percent. So while revenue was down, profit was actually up. And that's what buyers care about. Luna: Walk me through the math. At 18 percent margin on $4.2 million, that's about $756,000 in EBITDA. At a 7x multiple — which is more typical for a consulting firm — the valuation would be around $5.3 million. Lucas: Right. And after the purge, at 34 percent margin on $3.6 million, EBITDA is about $1.22 million. At 14x, that gives you a valuation of roughly $17 million. So he gave up $600,000 in revenue and gained $12 million in enterprise value. Luna: That's one of the best returns on firing a client I've ever seen. But why did the buyer pay 14x? That's still well above market for a consulting firm. Lucas: Two reasons. First, the revenue became significantly more predictable. The remaining clients had longer contracts, higher retention rates, and fewer change orders. A buyer can model that cash flow with a lot more confidence. Second, the client concentration improved. After the purge, the top client was only 12 percent of revenue, down from 22 percent before. Diversification plus predictability is a powerful combination. Luna: So the buyer saw a cleaner, less risky business. And they paid up for it. Lucas: Exactly. The buyer was a mid-sized strategic acquirer — a larger consulting firm looking to expand into the Midwest. They told the founder that the quality of the client list was the single biggest factor in their decision to offer a premium. They didn't want to inherit a bunch of high-maintenance clients right after closing. Luna: Which is exactly what happens in a lot of acquisitions. The buyer overpays for revenue, then spends the first two years managing problem clients. Lucas: Right. The founder of North Shore actually said something interesting. He told me: 'I spent 15 years afraid to fire anyone. When I finally did, I realized I'd been subsidizing my worst clients with the time I should have been spending on my best.' That's the kind of operational clarity that shows up in the financials. Luna: And in the multiple. So how did he actually do it? I imagine firing clients is awkward, especially if you've had relationships for years. Lucas: He did it methodically. First, he ranked every client by three metrics: revenue, gross margin, and the amount of partner-level time required per dollar of revenue. Then he identified the bottom decile on a composite score. He didn't fire them all at once — he gave six months' notice, offered to help transition to other firms, and in some cases even recommended competitors. Luna: That's a classy move. And probably helped with retention of the remaining clients too — word gets around. Lucas: It did. His best clients saw that he was serious about quality. A few of them even increased their spend after the change. And the employees noticed too — turnover dropped significantly because senior consultants weren't burning out on low-value work. Luna: So what's the takeaway for a business owner listening right now? Should they go fire their worst client tomorrow? Lucas: Not necessarily tomorrow. But I'd say: run the analysis. Calculate the fully loaded cost of serving each client, including the opportunity cost of your best people's time. You might find that your top line is hiding a margin problem. And if you're thinking about selling in the next two to three years, cleaning up that client roster now could be the single highest roi move you make. Luna: It's counterintuitive, but it makes perfect sense. Buyers aren't buying revenue — they're buying future earnings. And future earnings are more predictable when you've already cut the dead weight. Lucas: Exactly. And this principle applies beyond consulting. We've seen it work for software companies with unprofitable accounts, for manufacturing firms with high-return customers, even for a landscaping company that fired its residential clients and focused on commercial contracts. The specific numbers change, but the logic is the same. Luna: Let's talk about the risks, though. Because if you cut too deep, you could end up with a concentration problem. If you fire the bottom 10 percent and suddenly your top client is 30 percent of revenue, that's worse. Lucas: That's a real risk. The founder of North Shore was careful about that — he made sure no single client exceeded 15 percent after the cuts. You also have to consider the emotional cost. Some long-term clients become friends. But if you're planning to sell, you have to separate the personal from the financial. Luna: And there's also the execution risk. You fire a client, your revenue drops, and if you don't replace that capacity with higher-value work, your margins might not improve. Lucas: Right. That's why the two-year runway is important. The founder of North Shore spent those two years reallocating his senior team to higher-value projects, cross-selling to existing clients, and raising rates on the clients who stayed. By the time he went to market, the business was running more efficiently than it ever had. Luna: It reminds me of something I read about a law firm that did a similar thing. They fired their bottom tier of clients — the ones who paid slowly and complained constantly — and their realization rate went from 85 percent to 96 percent. Same logic, different industry. Lucas: It's a pattern. And it's one that a lot of owners overlook because they're so focused on top-line growth. They think more revenue equals more value. But the math often says the opposite. A smaller, more profitable, more predictable business is almost always worth more than a larger, messier one. Luna: Especially in a private sale where the buyer is doing a lot of due diligence. They'll find the messy clients anyway — better to have already cleaned house. Lucas: Exactly. And that's the core lesson from North Shore Advisors. The owner didn't just sell a business — he sold an optimized machine. And he got paid for it. Luna: You know, I think this is a great example of why we keep doing these episodes. We dig into real cases like this, and hopefully it helps someone listening make a better decision about their own business. Lucas: That's the goal. And honestly, it's why we keep this show ad-free. We don't want to interrupt the conversation with commercials. If you find value in these case studies, and you want to support the work that goes into them, the most direct way is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference. It keeps us independent and focused on the stories that matter. Lucas: Right. So back to the consulting firm — one other detail I want to mention. The buyer also required that the founder stay on for 18 months post-close. And the founder negotiated a clause that he couldn't be forced to work with any client he had fired. That ensured the culture stayed intact. Luna: That's smart. So the earn-out period didn't undo all the progress. Lucas: Exactly. And that's a lesson for sellers too — think about what you want the business to look like after you leave. If you've spent years building a high-quality client base, you don't want the buyer to immediately dilute it. Luna: So to summarize: for service business owners considering an exit, consider a client profitability analysis. Identify the bottom 10 percent. Develop a transition plan. And give yourself two years to execute. The multiple expansion could be substantial. Lucas: That's the playbook. And if you want a deeper dive, we'll put a link to a client profitability template on the show notes page. It's a simple spreadsheet that walks you through the calculation. Luna: Perfect. Next week, we're looking at a completely different angle — how a manufacturing business used a tax strategy to effectively double its sale price. Lucas: That's a good one. We'll see you then.