Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Niche Software Firm Sold at 15x Revenue with 80 Percent Recurring Revenue
Transcript
- Lucas: Luna, I recently got the full tear sheet on a deal that closed last August — a niche HVAC scheduling software company based out of Denver. The headline number: fifteen times revenue. Luna: Fifteen times? I mean, for SaaS we usually see four to eight times revenue. What made this one different? Lucas: Exactly. The typical SaaS range in the lower middle market is six to eight times recurring revenue. This firm did fifteen. And the secret sauce was recurring revenue percentage — eighty percent of their top line was subscription-based, with a three percent monthly churn rate. Luna: So the buyer was essentially paying for a predictable annuity, not just a revenue stream. Who was the buyer? Lucas: A large private equity platform that already owned a field-service software suite. They had been looking for an HVAC bolt-on for over a year. The seller was a two-founder team who had bootstrapped the business for ten years, never taken outside capital, and had about forty employees. Luna: Bootstrapped, no outside capital — that usually means clean cap tables, no messy investor preferences. That probably helped the valuation as well. Lucas: It absolutely did. The founders owned 100 percent of the equity. So when a buyer came in, there was no negotiation with minority holders, no drag-along complications. The deal was just a straight purchase of all membership interests for eight million dollars in cash. Luna: Eight million on a revenue base of what — roughly five hundred thirty thousand? That math checks out to fifteen times. But let's dig into that recurring revenue number. How did they get to eighty percent? Lucas: The firm built a scheduling and dispatch platform specifically for commercial HVAC contractors — think companies that service office buildings, restaurants, retail chains. The founders realized early that contractors hated per-seat licensing, so they priced per technician per month. That gave them a steady monthly recurring revenue stream. Luna: And the remaining twenty percent — what was that? Professional services? Lucas: Yes, implementation and custom integrations. But here's the crucial part: those services were typically one-time fees per new customer. So the revenue mix was getting more recurring over time, not less. The buyer's due diligence showed that the recurring percentage had increased from sixty percent three years prior to eighty at close. Luna: That trend line is exactly what private equity wants to see — improving predictability. I bet the three percent churn also played a big role. For a niche vertical SaaS, three percent monthly churn is actually quite low. Lucas: It's below average. Most vertical SaaS products in field services see five to seven percent monthly churn. This company had a net revenue retention of over one hundred percent because they up-sold additional technician seats as their customers grew. So even though some customers churned, the remaining ones spent more. Luna: That's the holy grail for a buyer — low gross churn plus expansion revenue. It means the revenue base is self-healing. Did the deal have an earnout? Lucas: No earnout. All cash at close. The founders walked away with eight million dollars split between them, no ongoing strings. And that's rare for a company that size. Usually, when you see a multiple that high, the buyer insists on an earnout to protect against post-close revenue drop-off. Luna: So why no earnout here? Was it the competitive dynamics? Lucas: Exactly. The buyer knew there were at least two other interested parties — a strategic competitor and another PE firm. The seller ran a controlled auction with a boutique investment bank that specialized in vertical SaaS. When the buyer realized they might lose the deal, they waived the earnout requirement and offered a full cash-out. Luna: That's a great example of how competition can completely change deal structure. If the seller had gone with a single buyer, they'd probably be looking at a three-year earnout right now. Lucas: And the seller's preparation was meticulous. They had clean financial statements audited by a regional CPA firm, a detailed customer concentration analysis showing no single customer was more than five percent of revenue, and a product roadmap that the buyer found compelling. The diligence took only forty-five days. Luna: Forty-five days is fast, especially for a deal with no earnout. Usually, buyers want more time to validate recurring revenue metrics. How did they move that quickly? Lucas: The seller had a data room that was already ninety percent complete before they even went to market. They had everything — customer contracts, support tickets, code repository stats, even a summary of feature requests. The buyer's VP of Corporate Development told the broker it was the most organized data room he had ever seen for a company under ten million in revenue. Luna: That's a huge lesson. Sellers who treat the data room as a strategic asset, not a compliance exercise, get better terms. And they close faster. Lucas: You know, Luna, this episode is a good example of the kind of practical, real-world deal breakdown that we try to bring every week. And the reason we can do it without ads is because of listeners who find value in it and choose to support the show. Luna: Yeah, it's a small gesture that makes a big difference. If today's episode gave you one idea that could help in your own business or career, consider throwing a few bucks our way at buy me a coffee dot com slash fexingo. Lucas: It keeps us independent and lets us dig into deals like this one — the ones that don't make headlines but have real lessons. Alright, back to the HVAC software deal. One more interesting detail: the buyer kept the entire management team in place. Luna: That's unusual for a bolt-on acquisition, especially at a fifteen times revenue multiple. Normally, buyers want to integrate and cut costs. What changed? Lucas: The founders had built a very specific culture around customer support — they answered support calls themselves during peak hours. The buyer recognized that the brand's value was tied to that hands-on service. So they offered the founders long-term employment contracts with performance bonuses, not equity. The founders accepted because they genuinely liked the work. Luna: So the buyer effectively bought a team, not just a codebase. That's smart. If you gut the team, the recurring revenue can evaporate fast. Lucas: Exactly. The buyer also agreed to keep the product on its existing tech stack for at least two years. No forced migration. That reduced the risk of customer churn during the transition period. Luna: That kind of operational autonomy is rare in PE acquisitions. Usually, the playbook is consolidate and cross-sell. Here, they seem to have taken a more hands-off approach. Lucas: Right. And it worked because the platform was already generating strong free cash flow — about thirty percent EBITDA margins on top of the fifteen times revenue multiple. So the buyer was paying for a cash-flowing asset, not a growth story. The growth was a bonus. Luna: Thirty percent EBITDA margins plus low churn plus expansion revenue — that's a trifecta. I can see why they paid up. Any lessons for a typical business owner listening in? Lucas: Two main ones. First, focus on recurring revenue as a percentage of total revenue. If you can get that above seventy percent, you unlock a whole different buyer pool. Second, clean up your data room before you even start talking to buyers. This seller's preparation saved weeks of due diligence and helped them avoid an earnout. Luna: And the third lesson — run a competitive process. Even if you think you have a natural buyer, invite one or two others to the table. It changes the leverage dynamic completely. Lucas: Absolutely. The difference between a single-buyer negotiation and a three-buyer auction can be two to four turns of valuation improvement. In this case, it was the difference between an earnout and a clean exit. Luna: So final question — do you think fifteen times revenue is sustainable for niche SaaS in the current market, or was this an outlier? Lucas: I think it's an outlier for the lower middle market, but it signals that buyers are willing to pay premium multiples for the right metrics. If you have eighty percent recurring revenue, low churn, and a clear competitive moat, you might not get fifteen times, but you could get ten to twelve. And that's still a great outcome.