Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Two-Person Consulting Firm Sold at a Market Range Multiple
Transcript
- Lucas: So there's this boutique consulting firm that just sold for seven point two times EBITDA, and the interesting part is it only had two owners and no real sales team. The whole thing ran on their personal relationships. Luna: Seven point two times on a services business with two rainmakers? That feels like the top of the range for that sector. Lucas: It's actually smack in the middle. We've seen professional services deals hang anywhere from five to nine times, but the spread usually comes down to how the buyer feels about retention risk. And this deal had a structure that made the buyer feel very safe. Luna: And before you get into the weeds — if today's episode gives you one idea you can use when you eventually sell, know that the reason we can keep making these shows without ads is listener support. If this was useful, buying us a coffee at buy me a coffee dot com slash fexingo is the easiest way to keep that going. Lucas: Yeah, we read every note that comes through that link, and it genuinely keeps the lights on. So, the firm we're talking about — let's call it Northbridge Partners, not their real name — had about two point four million in revenue and a thirty-eight percent EBITDA margin. Luna: That's roughly nine hundred thousand in EBITDA. So the deal was somewhere in the mid six millions. Lucas: Right. The headline number is fine, but the reason it didn't crater to five times is the transition plan. The two partners agreed to stay on as employees for twenty-four months, and they put a chunk of the purchase price into an earnout tied to client retention. Luna: So the buyer was basically saying, we'll pay you a premium, but only if you prove the relationships actually transfer. Lucas: Exactly. And the sellers were confident enough to say yes. They had a client concentration that wasn't scary — the top client was about fourteen percent of revenue — but they knew the real asset was the partner relationships. So they structured the earnout around what they could control. Luna: What was the earnout tied to specifically? Lucas: Two metrics. Ninety percent of the top twenty clients had to renew for a second year, and the firm had to hit ninety-five percent of the trailing twelve-month revenue run rate at the end of year one. If they hit both, the earnout paid out in full — which was about fifteen percent of the total deal value. Luna: Fifteen percent is meaningful, but not so big that it feels like a gamble. It's more like a bonus for doing what you said you'd do. Lucas: And that's the thing — buyers love earnouts when they're structured around metrics the seller can actually influence. Revenue retention is controllable. Gross margin is controllable. But a lot of sellers get tripped up on earnouts tied to EBITDA, because the buyer can screw with expenses and kill the payout. Luna: So the lesson there is not to just accept any earnout. You need to understand what's inside the black box. Lucas: Exactly. And the other piece that lifted the multiple was the minority stake. The sellers rolled fifteen percent equity into the new entity. That told the buyer they had skin in the game beyond the transition period, and it aligned incentives on things like new business development. Luna: Did the buyers also have a specific reason for wanting that minority stake? I mean, beyond just alignment. Lucas: The buyer was a mid-sized regional consulting group that wanted to expand into the niche Northbridge served — which was regulatory compliance for mid-sized manufacturers. They didn't have that expertise internally, so they weren't just buying a client list. They were buying a capability and a reputation. Luna: So this is a strategic acquisition, not a financial one. That alone can add a turn or two to the multiple. Lucas: Exactly. A financial buyer would have stressed the owner dependence and probably landed closer to five times. But the strategic buyer saw the compliance niche as a platform for their own growth, so they were willing to pay for exclusivity and the partners' expertise. Luna: And the partners also had a clean financial picture. I'm guessing they didn't have a ton of addbacks. Lucas: That's a good point. The owners were disciplined. They paid themselves market salaries, they didn't run personal expenses through the business, and they had audited financials for the past three years. So the EBITDA number was clean. That's rare for a firm this size. Luna: Clean financials probably saved them from a nasty surprise in due diligence. I've seen deals fall apart over a misclassified expense. Lucas: Oh, absolutely. And the other hidden asset was their documentation. They had standard engagement letters, clear scopes of work, and a CRM that actually tracked project history. The buyer could see exactly what each client had been charged and what the deliverable pipeline looked like. Luna: That's the kind of stuff that makes a buyer feel like they're buying a business, not just a job. Lucas: Right. And that perception is worth real money. The deal closed in five months, which is fast for a services company. There were no earnout disputes, no post-closing surprises, and the sellers got their full payout at the one-year mark. Luna: So what was the actual multiple on the upfront payment versus the total? Because the earnout and rollover equity muddy the headline number. Lucas: Good question. The upfront cash consideration was about five point eight times EBITDA. The earnout, if fully earned, added another one point one times. And the rolled equity was valued at roughly one point seven times, though that only pays out if the combined business performs. Luna: So the headline seven point two is really the sum of parts. The guaranteed part was closer to five point eight. Lucas: Exactly. And that's a really important distinction for sellers to understand. When you see a headline multiple in a press release, it often includes earnouts and rollover equity that aren't guaranteed. You need to ask your broker to break down the guaranteed cash component. Luna: And in this case, the sellers were fine with that because they were confident they'd hit the targets. Which brings us back to the earnout metrics being within their control. Lucas: Right. They knew their clients. They knew the renewal cycles. They had a ninety-three percent historical retention rate. So the earnout was almost a certainty in their minds. That's not arrogance — that's data. Luna: So for our listeners who own a services business, what's the one thing they should take away from this deal? Lucas: I'd say it's the combination of two things: get your financials and contracts in order before you go to market, and be willing to structure the deal to address the buyer's biggest fear. In services, that fear is always client loss. If you can show you've thought about that and are willing to put some skin in the game, you have way more negotiating leverage. Luna: Yeah, the sellers here didn't just sell a business. They sold a plan for continuity. Lucas: And that plan is what got them the seven point two. In the end, the multiple is less about the sector average and more about how you de-risk the deal for the buyer. Northbridge did that better than most. Luna: Well, if you're thinking about selling, this is a case worth studying. And if you want more episodes like this, you know where to find us. Lucas: Appreciate you listening. That's it for this one.