Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / Why a Plumbing Business Sold at 45x EBITDA with Contracts
Transcript
- Lucas: Alright, today I want to talk about a deal that honestly made me double-check the multiple. A twelve-truck residential plumbing company in Phoenix sold earlier this year for forty-five times EBITDA. Luna: Forty-five? That's not a typo? Because even the high-end trades deals we've covered top out around thirty. Lucas: Not a typo. And the business wasn't growing fifty percent a year. Revenue was up about twelve percent year-over-year. The trick was entirely in the contract structure. Lucas: The owner had spent three years converting every job — every drain snaking, every water heater install — into an annual service agreement. Customers paid a flat fee per year, and in return they got priority scheduling and a discounted hourly rate if something broke. Luna: So he basically turned a plumbing company into a subscription business. What percentage of revenue ended up recurring? Lucas: Eighty-seven percent. The data room showed a renewal rate of eighty-seven percent across thirty-two hundred contracts. That's what the PE firms saw and said, 'This isn't a trades business, this is an annuity.' Luna: And the multiple jumped from, what, a typical seven to nine times for a service business, all the way to forty-five? Lucas: Exactly. The owner originally thought he'd sell for maybe eight times. He'd been in business for twenty years, was tired of managing plumbers. But he hired a broker who specialized in 'subscription-based services' and they ran a limited auction. Lucas: Six interested parties came to management meetings. Three made offers. The winning bid was from a regional strategic — a larger home services roll-up that already owned HVAC and electrical companies in the Southwest. Luna: So they paid up because they could fold those contracts into their existing call centers and routing software. The synergies were real. Lucas: Right. The buyer calculated they could drop the contract servicing cost by about twenty percent just by using their own dispatch platform. That alone added two turns of EBITDA margin. Lucas: But here's the part I found most interesting — the actual cash flow. The business was doing about two million in EBITDA. At forty-five times, that's ninety million dollars. Luna: For a twelve-truck plumbing company. That's insane. Was the owner able to walk away entirely or did he have to stay on? Lucas: He stayed for six months as a 'customer experience advisor.' Basically he took calls from the biggest contract holders to smooth the transition. After that, full exit. He's now living in Costa Rica. Luna: Good for him. But I want to push back a little — is this really replicable for a typical plumber? Converting existing customers to annual contracts takes a lot of sales effort and a willingness to say no to one-off work. Lucas: You're right. The owner told his broker he lost about fifteen percent of his old customers who didn't want a contract. But the contracts that remained were stickier and he could schedule them in advance, so his trucks were more efficient. Lucas: His gross margin went from forty-two percent before the conversion to fifty-eight percent after two years. That's partly pricing power and partly fewer wasted trips. Luna: So he traded top-line volume for predictability and margin. And the market rewarded that massively. Lucas: Yeah. And the lesson for any service business owner listening is: contract structure is the single biggest lever you have to increase your exit multiple. It matters more than growth rate, more than geography, almost more than profitability. Luna: I've seen that with pest control and landscaping too. But plumbing feels harder because emergencies are unpredictable. How did he get customers to commit? Lucas: He bundled it with a 'peace of mind' inspection. Twice a year his techs would check every fixture, flush the water heater, look for leaks. If they found something small, they fixed it on the spot. The contract basically said, 'You'll never have a surprise flood at 2am.' Luna: And if a pipe burst at 2am, did the contract cover that? Lucas: It did, but at a discounted labor rate. The customer still paid for parts. The important thing was they got a guaranteed four-hour response window. That was the value proposition. Lucas: Now, the renewal data was the crown jewel. Buyers love seeing cohort analysis — how many customers from 2022 renewed in 2023, then 2024. His broker built a chart that showed each vintage cohort had at least eighty-four percent renewal. Luna: That's the kind of data that makes a buyer ignore the fact that it's a plumbing company and just see the cash flow. Lucas: Exactly. And that's why I think we'll see more trades businesses trying this model. The premium is just too big to ignore. Luna: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. We don't run ads, so that support keeps us digging into deals like this. Lucas: Yeah, it's a small group but it makes a real difference. If these conversations have moved your work forward in some small way, that's the URL — buy me a coffee dot com slash fexingo. Now back to the plumbing deal. Lucas: So the auction process itself was interesting. The seller's broker sent out a teaser that didn't even mention plumbing. It said 'residential services platform with 87% recurring revenue.' Luna: Smart. They marketed the financial profile, not the industry. Lucas: Exactly. The first round of bids came in at thirty to thirty-five times. But the strategic buyer, the roll-up, saw something the financial buyers missed — they could route those plumbing calls through their existing HVAC call center and save two full-time dispatchers. Luna: So they bid forty-five, which still gave them a good return after those synergies. Lucas: Right. Their internal rate of return model showed they'd earn their cost of capital back in four years. And the seller walked away with ninety million dollars. Lucas: One more detail — the owner had a non-compete for five years and he can't start another plumbing company in Arizona. But he didn't want to. He's done. Luna: That's the dream exit. And it all came down to converting transactions into relationships. Lucas: Yeah. So if you own a service business and you're thinking about selling in the next three to five years, start moving to a contract model now. It takes time to build that renewal history. Luna: And if you're a buyer, look for businesses that have already done that work. They're rare, but they trade at completely different multiples. Lucas: Next episode we'll look at a commercial cleaning company that used a similar approach but with janitorial supplies recurring revenue. Another fun multiple story. Luna: Looking forward to it.