Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Machine Shop Sold at 6x EBITDA With No Broker
Transcript
- Lucas: So picture this: a precision machine shop in Cleveland, Ohio, doing about three million in revenue, seven hundred thousand in EBITDA. The owners are a couple in their late sixties, no kids interested in taking over, and they decide to sell the business themselves. No broker, no investment banker, no intermediary. They end up closing at a six times ebitda multiple — about four point two million dollars. Luna: Six times EBITDA on a small manufacturing shop sounds strong. How did they pull that off without a broker? Lucas: They did three things that most sellers skip. First, they got their financials audit-ready — not a full GAAP audit, but they had a CPA prepare three years of reviewed financial statements with clean notes. Second, they identified their ideal buyer profile early: a regional competitor that could benefit from their customer concentration in aerospace. And third, they structured the deal so the buyer didn't feel like they were taking a leap of faith. Luna: I want to circle back to that buyer profile. But first, how did they even find a buyer without a broker's network? Just list it on BizBuySell and hope? Lucas: They actually started with their own industry association — the Precision Machined Products Association. They put a discreet notice in the member newsletter saying 'ownership transition planned, open to strategic conversations.' That one notice got them three inbound leads. One was a private equity roll-up platform that wanted to buy multiple shops. Another was a direct competitor based in Michigan. The third was a local business owner who wanted to diversify. Luna: So the competitor was the strategic buyer. That's usually the one who pays the highest multiple because they see synergies. Lucas: Exactly. The Michigan competitor had just lost a big contract with an automotive supplier because they couldn't handle the volume. Acquiring this shop gave them immediate capacity and a footprint in Ohio. They were willing to pay six times EBITDA because the acquisition would pay for itself within eighteen months. Luna: But here's the question: when you don't have a broker running the process, how do you know the multiple is fair? You're not seeing market data. You're not getting that competitive tension. Lucas: They did two things. First, they had a business valuation done by a third-party firm — cost them about five thousand dollars. That valuation gave them a range of five to seven times EBITDA for a shop of their size and profitability. So they knew six was within reason. Second, they quietly talked to two other potential buyers to create a backup option. They never let the Michigan buyer know there was competition, but having that alternative gave them confidence in their walkaway number. Luna: That's smart. So they effectively ran a mini auction without a broker. But then comes the hard part: due diligence. Did they handle that themselves too? Lucas: They hired a transaction attorney — about fifteen thousand dollars in legal fees — who drafted the purchase agreement and managed the due diligence checklist. But the owners themselves organized all the documents: customer contracts, supplier agreements, equipment leases, employee handbooks, environmental reports. They created a digital data room using a simple Dropbox folder. The buyer's team spent two weeks reviewing everything. Luna: And nothing blew up? In small manufacturing, there's always something — a broken machine, a customer concentration risk, a pending lawsuit. Lucas: One big issue did come up: the shop's lease had only three years remaining, and the landlord wouldn't commit to a renewal until six months before expiry. That scared the buyer. So the seller negotiated a lease extension as a condition of the sale — they went to the landlord and said 'we're selling the business, we need a five-year renewal to close the deal,' and the landlord agreed. That was a critical moment. Luna: So the seller had to solve a problem that they didn't create. That's common in these deals. But I'm curious about the earnout — because on a four-point-two-million-dollar deal with a strategic buyer, there's usually some performance contingency. Lucas: There was a six-month earnout worth up to three hundred thousand dollars based on retaining the top three customers. The seller stayed on as a part-time consultant for those six months. The earnout was structured as a simple percentage of revenue generated from those accounts. The buyer wanted that assurance because customer relationships in machine shops are often tied to the owner. Luna: And did the earnout pay out? Lucas: It paid out in full. All three customers stayed. The seller was motivated to make the transition smooth because they had skin in the game. Luna: So what's the takeaway? If a listener is thinking about selling their business without a broker, what are the must-haves? Lucas: Three things. One: clean financials prepared by a CPA who understands M&A, not just tax compliance. Two: a clear buyer profile — don't just sell to whoever shows up, target someone who will pay a premium for your specific assets or customer base. Three: a good transaction attorney who has done private deals before. That attorney is your safety net for the legal and negotiation aspects you don't know. Luna: And maybe a fourth: patience. This couple spent about nine months from first conversation to closing. That's fast for a small deal, but it's not instant. Lucas: Right. They started in January, closed in September. And they turned down an offer at five times EBITDA in April. That discipline came from having that third-party valuation and the backup buyer. If they'd been desperate or impatient, they could have left a million dollars on the table. Luna: That's a good note to end on. Thanks for walking through that, Lucas. Lucas: Yeah, and if this kind of conversation has helped you think about your own business or career move, we'd love it if you considered supporting the show. We keep it ad-free by choice, and listener support at buy me a coffee dot com slash fexingo makes that possible. No pressure, just if you find value here. Luna: Absolutely. It's a small way to keep these episodes coming without interruptions. And now, back to the machine shop — one more thing I wanted to ask about the earnout structure. Lucas: Sure, what's your question? Luna: The earnout was based on revenue from top customers. But what if those customers had reduced their orders for reasons unrelated to the seller's efforts? Like an industry downturn. Lucas: That's a great point. In this deal, the earnout was actually tied to revenue targets that were set at the trailing twelve-month average. So if a customer cut orders by twenty percent because of an industry downturn, the earnout would have been lower. The seller took that risk. But they also had a floor — a minimum payout of fifty thousand dollars even if targets weren't met. That gave them some downside protection. Luna: That floor is smart. I've seen earnouts where the seller gets nothing if a customer leaves for any reason. That's a raw deal. Lucas: Yeah, and this seller negotiated that floor early in the process. It's a good example of why you need an attorney who's done earnouts before. The devil is in the definitions. Luna: Alright, so final thought: if someone is considering a self-directed sale, what's the one resource they should look at first? Lucas: I'd say the 'Exit Planning' workbook by the Business Enterprise Institute. It's a step-by-step guide that covers everything from valuation to transition. And it's free. That, plus a good CPA, can get you eighty percent of the way there. Luna: Good advice. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.