Kingsway Financial's Strategic Acquisition of Southside Plumbing and Its Implications for Long-Term Value Creation

Kingsway Financial Services (NYSE: KFS) has cemented its position as a leader in the asset-light skilled trades sector with its recent acquisition of Southside Plumbing, a $4.0 million revenue-generating business in Omaha, Nebraska. This $6.75 million deal, structured with a $4.0 million cash payment, a $0.5 million seller note, and a potential $1.125 million earn-out tied to a 75% EBITDA growth target, underscores Kingsway's disciplined approach to capital allocation and long-term value creation. For investors, the transaction offers a compelling case study in how strategic acquisitions, recurring revenue models, and scalable platforms can drive sustainable growth in a fragmented industry.

Financial Rationale: A Win-Win Structure

The acquisition's financial terms reflect Kingsway's focus on balancing upfront cost control with future upside. At full earn-out, the effective EBITDA multiple is 7.5x ($6.75 million total purchase price / $0.9 million EBITDA). This aligns with industry benchmarks for skilled trades businesses, which typically trade at 4x–7x EBITDA, depending on recurring revenue and growth potential. Southside's 70% recurring revenue profile—a rarity in the sector—justifies a premium valuation.

The earn-out structure is particularly noteworthy. By linking 16.6% of the purchase price to a 75% EBITDA growth target, Kingsway incentivizes Southside's founder, Josh Gruhn, to drive operational improvements. This aligns with Kingsway's broader strategy of retaining key operators post-acquisition, a practice that has historically preserved revenue stability and customer relationships. The seller's 20% equity stake further ensures alignment, reducing the risk of post-acquisition attrition.

Recurring Revenue: The Engine of Predictable Growth

Southside Plumbing's 70% recurring revenue mix is a critical differentiator. In an industry prone to cyclical demand, recurring contracts for commercial and residential maintenance provide a stable cash flow base. This is particularly valuable for Kingsway, which has prioritized businesses with “runway” for margin expansion. Southside's service and repair segment has already demonstrated 20% annual growth, suggesting untapped potential for cross-selling and customer retention.

The company's customer mix—70% commercial, 30% residential—adds resilience. Commercial clients, such as property management firms and industrial clients, tend to have longer-term contracts and higher margins, while residential clients provide a consistent, low-cost revenue stream. This duality is rare in the plumbing sector and positions Southside as a scalable asset within Kingsway's Skilled Trades platform.

Growth Leverage: Scaling Through Strategic Financing

Kingsway's ability to execute this acquisition without overleveraging is a testament to its financial discipline. The company secured a $15.7 million private placement in June 2025 and a new credit facility with Newburyport Bank, including a 7.5% fixed-rate term loan and revolving credit lines. These tools enable Kingsway to fund acquisitions while maintaining a conservative debt profile.

The Skilled Trades platform's trailing twelve-month adjusted EBITDA has grown from $18.0–19.0 million in Q1 2025 to $22.0–23.0 million by Q2 2025, reflecting the compounding effect of strategic acquisitions. With five deals completed in the first half of 2025 alone, Kingsway is accelerating its pace of growth, targeting 3–5 acquisitions annually. This rapid scaling is possible due to the asset-light nature of the businesses, which require minimal capital for integration.

Industry Benchmarks and Long-Term Value Creation

Kingsway's approach mirrors broader trends in the skilled trades sector. According to industry data, asset-light businesses with recurring revenue and low capital intensity command higher EBITDA multiples, often 5x–7x, compared to traditional trades. Southside's 7.5x multiple at full earn-out is within this range, suggesting Kingsway is acquiring at reasonable valuations.

The company's KSX segment, which includes Southside and other skilled trades acquisitions, has outperformed its Extended Warranty segment in recent quarters. While the latter saw a 32% EBITDA decline in Q2 2025, the KSX segment grew EBITDA by 31%, driven by operational efficiencies and revenue diversification. This divergence highlights the strategic shift toward skilled trades as a core growth engine.

Investment Implications

For investors, Kingsway's acquisition of Southside Plumbing represents a low-risk, high-reward opportunity. The company's disciplined capital allocation, focus on recurring revenue, and scalable platform position it to compound value over the long term. Key risks include integration challenges and macroeconomic headwinds, but the asset-light model and recurring revenue streams mitigate these concerns.

The stock's recent performance, as shown in the chart, reflects market confidence in the strategy. With a robust pipeline of potential acquisitions and a strong balance sheet, Kingsway is well-positioned to deliver consistent EBITDA growth and shareholder returns.

Conclusion

Kingsway Financial's acquisition of Southside Plumbing is a masterclass in strategic value creation. By leveraging recurring revenue, aligning incentives, and maintaining financial flexibility, the company is building a durable platform in the skilled trades sector. For investors seeking exposure to a high-growth, asset-light model with clear financial metrics, KFS offers a compelling long-term opportunity. As the industry continues to consolidate, Kingsway's disciplined approach will likely outperform peers, making it a standout in the search fund space.