Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why This Restaurant Supplier Sold at Just 9 Times EBITDA
Transcript
- Lucas: So there's this restaurant equipment supplier in the Midwest—they sell ovens, fryers, walk-in coolers, the whole kitchen package—and they just closed a deal at nine times EBITDA. Which sounds decent until you hear the story behind it. Luna: Nine times feels low for a supplier that's been around for a decade. What was the catch? Lucas: The catch is that roughly seventy percent of their revenue came from new-build projects. Restaurants opening from scratch. And that revenue is inherently lumpy. One quarter they'd land three big contracts, the next quarter nothing. Buyers look at that and immediately discount it. Luna: So they were basically a project-based business wearing a supplier costume. Lucas: Exactly. If you strip out the equipment sales, their only recurring piece was a small slice of service contracts and replacement parts—maybe fifteen percent of revenue. And that's what the buyer actually wanted. They paid nine times for the core, but they were really buying the customer list and the service relationships. Luna: And if they'd flipped that mix, they might have seen a much higher multiple. Lucas: Right. Compare this to the ice machine rental business we covered last season—that one sold at six hundred times EBITDA. Now, that number is a bit of a statistical animal because of how they reported income, but the point stands: recurring revenue, especially rental or subscription-style, commands a premium. This supplier could have pushed toward twelve or thirteen times if they'd converted more of their base to preventive maintenance contracts. Luna: That's a huge swing. A couple of points on the multiple can mean millions in your pocket. Lucas: And that's exactly why I wanted to dig into this deal. It's not a sexy business, but the lesson is universal. Buyers are paying for predictability, not just revenue. And this supplier had the raw material to build that predictability—they just never prioritized it. Luna: Before we go deeper, I know our listeners are the reason we can do this deep-dive every week. A few of them chip in through buy me a coffee dot com slash fexingo, and honestly that's what keeps the lights on. No ads, no sponsors, just that. If these episodes have helped you think about your own exit, that's the way to keep it going. Lucas: Yeah, it's a small group that already does, and we're grateful. Now, back to the supplier. The interesting part is how the broker positioned this deal. They didn't hide the lumpiness—they showed a five-year average revenue and highlighted the growth in the service division. Luna: So they leaned into the part that was growing, even if it was still small. Lucas: Exactly. And it worked, because the buyer came in with a clear thesis: they could cross-sell service contracts to the existing equipment customers. They saw the potential to double that fifteen percent recurring slice within two years. So they paid a fair multiple for the core, and they're banking on the upside. Luna: That makes sense. But what about the seller? Did they leave money on the table? Lucas: In hindsight, yes. If they'd invested in a service salesperson two years before the sale, they could have grown that recurring revenue to thirty or forty percent. That alone might have pushed the multiple to eleven or twelve. But they were busy chasing the next big construction deal, and that's a classic trap. Luna: It's so easy to get caught up in the adrenaline of a big project. Lucas: And that's the thing—those big deals feel great, but they skew your risk profile. Buyers see that concentration and they worry: what happens when the local construction cycle turns? And in this case, the seller was also dependent on two general contractors for half their revenue. That's double concentration. Luna: Did that come up in the diligence? Because that would spook me as a buyer. Lucas: It came up, but the buyer had a plan. They had their own relationships in the region and felt they could retain those contractors. Plus, the aftermarket service revenue was steady enough to stabilize the base. So they took the risk, but they priced it in. That's why the multiple ended at nine and not higher. Luna: So the buyer basically got a discount for taking on that risk. Lucas: Yes, and that's actually fair. The seller got a clean exit, the buyer got a platform. But the bigger point is, if you're thinking about selling in the next three to five years, start shifting your revenue mix now. It's the highest-leverage thing you can do. Luna: What would you tell a founder who's listening and says, 'I'm in a similar boat, what do I do first?' Lucas: First, get a handle on your customer concentration. If any single customer is more than fifteen percent of revenue, that's a red flag. Second, look for any recurring element in what you already sell—parts, service, software, even a subscription for consumables. And third, hire someone to sell that recurring piece. It's a long-term play, but it pays off at the exit. Luna: And I'd add one more thing: don't wait until you're ready to sell. Buyers can smell desperation, and rebuilding your revenue mix takes time. Lucas: Absolutely. This supplier's story is a perfect example of that. They had a solid business, but they didn't invest in the future revenue stream until it was too late. Now the buyer is going to reap the benefits of that service growth they built themselves. Luna: So the real takeaway isn't about the multiple at all, is it? It's about the quality of the business you're selling. Lucas: That's exactly right. The multiple is just a reflection of that quality. If you want a higher number, you have to make the business better. And 'better' almost always means more predictable, more recurring, less dependent on a few big customers. Luna: I keep thinking about the ice machine rental comparison. It's such a dramatic difference, but it's fundamentally the same equipment. Lucas: It's the same category of asset, but one is sold as a product, the other as a service. And the market rewards the service model because it's sticky. Once you have an ice machine on a roof, the customer is not switching every year. That's the kind of thing buyers pay up for. Luna: So if you're a product business, how can you start moving toward that service model without a huge pivot? Lucas: Start with warranties. Offer an extended service plan on the equipment you sell. That gives you recurring revenue and a reason to stay in contact. Then you can upsell preventive maintenance, and before you know it, you have a service division that's thirty percent of revenue. Luna: And that's exactly what the buyer of this supplier is planning to do. So the blueprint is out there. Lucas: It is. And if you're this supplier's competitor, you now have a clear roadmap. The seller took the cash, but the buyer is taking the future. It's a bit of a cliche, but in this case, it's literally true. Luna: I think that's a great place to leave it. One real case, one concrete lesson. Lucas: Yeah. And if you're thinking about selling, start asking yourself: what would a buyer love about my business? And what would they discount? Fix the discount before you call a broker. Luna: That's the kind of advice you can't get from a valuation calculator.