Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Pest Control Firm Sold for 12x EBITDA with Recurring Revenue
Transcript
- Lucas: So there's a pest control company in the Southeast — family-owned, about thirty years old, maybe a dozen trucks — that sold earlier this year for what looked like a software multiple. We're talking eleven-point-seven times EBITDA on a two-point-eight million dollar earnings number. Luna: That is a big number for a service business. What was the buyer's logic there? Lucas: It came down to one thing — recurring revenue. About eighty-five percent of their revenue came from annual service contracts. Termite bonds, quarterly pest control plans, that sort of thing. The buyer — a mid-sized roll-up platform backed by private equity — looked at that and said, 'This looks like a subscription business.' Luna: Right, because those contracts renew automatically in most cases. So the buyer gets predictable cash flow from day one. Lucas: Exactly. And the seller had done something smart about five years ago. They started converting their one-time customers — the people who called because they saw a rat — into recurring service agreements. They trained their technicians to upsell at every visit. By the time they put the company on the market, they had over three thousand active contracts. Luna: So the buyer wasn't just buying history. They were buying a future revenue stream they could project with some confidence. Lucas: That's the core of it. And the buyer modeled out the churn. They looked at the last three years and saw net retention above ninety-five percent. That's a number that would impress a SaaS investor. So they paid up. Luna: What about the deal structure? Was it all cash up front or earn-outs? Lucas: The base price was roughly thirty-three million dollars — again, about eleven-point-seven times the adjusted EBITDA. The seller got seventy percent in cash at close. The remaining thirty percent was structured as a rollover equity stake in the combined entity. So the seller still has skin in the game if the contracts perform. Luna: That's a pretty seller-friendly structure. Usually we see more earn-out pressure when there's a premium multiple involved. Lucas: Normally yes. But the buyer had a specific thesis. They already owned six pest control companies in adjacent geographies. They knew the synergies were real — they could fold this company into their existing routing software, their call center, their purchasing contracts. They calculated that post-close, the combined EBITDA margin would expand by about four hundred basis points. Luna: So the premium wasn't just about the recurring revenue. It was about the cost savings they could capture. Lucas: It was both. The recurring revenue gave them confidence on the top line. The operational synergies gave them a margin story. Put those together and the math on eleven-point-seven times actually made sense from their perspective. Luna: Walk me through the adjustments. How did the seller get to that two-point-eight million EBITDA number? Lucas: The seller had been running the business fairly lean from a tax perspective. They were expensing vehicles that should have been capitalized. The owner's salary was above market because he was also doing some operations work. So the broker worked with the CPA to add back about four hundred thousand dollars of discretionary expenses and non-recurring items. That brought reported EBITDA from about two-point-four million up to the two-point-eight the deal was based on. Luna: So a hundred and fifty thousand dollars in add-backs per point of multiple. Worth the effort. Lucas: Absolutely. And importantly, those add-backs were legitimate. The buyer's own due diligence confirmed them. The vehicles were genuinely long-life assets, the owner's successor was already in place at a lower salary. There was no funny business. Luna: What was the buyer's biggest concern during due diligence? Lucas: The contract renewal rate. They audited a random sample of about two hundred contracts going back five years. They wanted to see if the ninety-five percent retention was real or if it was being propped up by discounts or aggressive sales tactics. What they found was that the retention was driven by service quality — low cancellation rates even on full-price renewals. Luna: That's the kind of thing that justifies the multiple. If the buyer had found a bunch of contracts that were barely profitable or held together with promotional pricing, the deal might have fallen apart. Lucas: It could have, or the multiple would have been renegotiated. There's a reason the broker insisted on clean contract data before going to market. They knew the recurring revenue was the hook, but they also knew the buyer would kick the tires hard. Luna: I want to go back to the churn rate for a second. Ninety-five percent net retention — that's great. But what's the renewal period on those termite bonds? Are we talking annual or multi-year? Lucas: Most were annual. Some of the termite treatments have multi-year guarantees, but the billing is set up as an annual subscription. And the buyer's model assumed about five percent annual churn on the contract base. They also factored in a small amount of organic growth from the existing customer base — cross-selling mosquito control, for example. Luna: So the buyer's internal rate of return projection must have been pretty attractive. Especially with those synergies. Lucas: The buyer's internal models were targeting a mid-twenties IRR over a five-year hold. That's solid for a platform acquisition in a fragmented industry like pest control. And because the underlying business is recession-resistant — people still need pest control — the downside risk was manageable. Luna: I'd love to hear what you think the lessons are for other service business owners listening. What should they take away from this? Lucas: First: if you don't have recurring revenue, think about how to build it. Even if it's just a maintenance contract or a subscription for consumables, it changes the conversation with buyers. Second: get your financials clean two years before you sell. Those add-backs only work if the buyer can verify them. Third: understand what makes your retention stick. The buyer in this case paid a premium because they believed the contracts would stay. Luna: And that's something you can start doing tomorrow — tracking your contract renewal rates, segmenting by customer type, understanding why people leave. Lucas: Yeah. And it's worth saying: not every service business can get to twelve times EBITDA. But if you can get your recurring revenue above seventy percent and your net retention above ninety percent, you are suddenly competing for a different class of buyer. The private equity firms that usually look at software will start paying attention. Luna: It's a reminder that valuation isn't just about earnings. It's about the quality and predictability of those earnings. Lucas: Exactly. And that's something we talk about a lot on this show — the difference between selling a job and selling a business. This pest control company was clearly the latter. Luna: So, you know, this kind of conversation is exactly why we keep making these episodes. If you've gotten something out of them — maybe a new idea for your own business, or a way to think about a sale — a couple of dollars a month is genuinely what keeps these going. It's buy me a coffee dot com slash fexingo. No pressure, but it makes a real difference. Lucas: Yeah, I'll second that. It's a small thing that adds up. And it keeps the show independent and ad-free. So thank you to anyone who has already done that. Luna: Alright, let's get back to the deal. One thing I wanted to ask — what happened to the original owner after the sale? Lucas: He stayed on as a regional manager for about six months to help with the transition. Then he retired. He's been fishing in the Gulf ever since, from what I hear. The rollover equity meant he still has a financial interest in the combined company, but he's not in the day-to-day. Luna: That sounds like a good outcome. He got a premium price, a clean exit, and a piece of the upside. Lucas: It really is the ideal scenario for a lot of business owners. And it all traces back to a decision he made five years earlier to shift the business model from transactional to recurring. Luna: It's a good case study. Thanks for walking us through it. Lucas: Happy to. Next time we'll look at a deal where the multiple was low but the seller still came out ahead — because of the terms.