Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Manufacturing Business Sold at 7x EBITDA by Fixing One Mistake
Transcript
- Lucas: So there's this precision metal stamping company in Ohio. Family-owned, about 40 employees, 12 million in revenue. The owners came to me last year and said they wanted to sell. They'd gotten a valuation from a regional firm that pegged them at 6 times EBITDA. Luna: And 6 times is about right for a job shop in that space, isn't it? Lucas: Exactly. Industry average for small contract manufacturing is 5 to 6.5. So they were in range. But here's the thing — they had one customer that made up 40 percent of revenue. A tier-one automotive supplier. And that single fact was suppressing their multiple by at least a full turn. Luna: Wait — so the valuation firm didn't adjust for that? They just gave them a straight multiple? Lucas: They did a standard market comp. But comps don't capture buyer psychology. When a strategic buyer looks at a business where 40 percent of revenue walks out the door if one purchasing manager retires or one model gets discontinued, they discount the hell out of it. That buyer is thinking: I'm not buying a business, I'm buying a single customer relationship. Luna: Right. And the seller sees steady revenue and thinks it's a strength. But to a buyer, it's a risk concentration. Lucas: Exactly. So we sat down and I told them: you can sell now for maybe 6 times, which on 2 million of EBITDA gets you 12 million. Or you can spend 18 months reducing that concentration, and I think we can get you to 7 times, maybe 7.5. That's 14 to 15 million. The delta is 2 to 3 million on the sale price. Luna: And they went for it? 18 months is a long time when you're already thinking about an exit. Lucas: They were skeptical. The owner was 62, tired of the grind. But his son, who was the COO, convinced him. They had a strong balance sheet, so they could absorb some short-term pain. They hired a part-time business development person — cost them about 90K a year, plus commissions. And they started targeting medical device and aerospace work. Luna: Those are both higher-regulation, longer sales cycle industries. Did they have the certifications? Lucas: They had ISO 9001 and AS9100D for aerospace. They didn't have ISO 13485 for medical. That was a six-month process to get certified. Cost about 50K in consulting and audit fees. But they got it. And in that 18-month window, they brought on seven new customers. Their top customer went from 40 percent to 18 percent. Revenue actually grew to 14 million because the new customers had higher margins. Luna: So the EBITDA went up too. Lucas: Significantly. From 2 million to 2.6. So now you've got a business with 2.6 in EBITDA, diversified customer base, higher-margin end markets. We went to market and got six letters of intent. Three from strategic buyers — larger contract manufacturers who wanted the medical capability. Two from financial buyers — private equity firms doing add-ons. One from a family office. Luna: What was the final multiple? Lucas: 7 times even. But with a small earnout kicker on top. The buyer was a mid-sized aerospace and defense contractor based in Indiana. They paid 18.2 million at close, with another 800K possible if the company hit revenue targets over two years. Luna: So the earnout was relatively small — less than 5 percent of the total. Lucas: Right. And that was intentional. The owners didn't want a big earnout because they'd seen too many blow up. They preferred a lower all-cash number with a small upside. I think that was smart. Luna: But not every seller can afford to take 18 months to diversify. What if you don't have the balance sheet or the patience? Lucas: That's the real tension in this business. If you can't afford the transition, you have to be honest with yourself about the price you'll get. I've seen sellers who refused to diversify and eventually sold to a financial buyer at 5.5 times. They left money on the table, but they got liquidity when they needed it. Luna: So it's a classic risk-reward calculation. Lucas: Exactly. And the key is to identify which risk the buyer is most afraid of. In this case, it was customer concentration. In other deals, it might be key-person risk, or lease risk, or technology obsolescence. Every business has one or two things that spook buyers. If you fix those before you go to market, you control the narrative. Luna: And in this case, the fix was almost mechanical. Diversify customers, get a certification, grow revenue. It's not glamorous, but it works. Lucas: No, it's not glamorous. But it's effective. And I think a lot of business owners underestimate how much buyers pay for certainty. A diversified customer base, long-term contracts, recurring revenue — those things command a premium that shows up in the multiple. Luna: Speaking of certainty — you mentioned the buyer did a deep dive on their customer contracts during due diligence. How did that go? Lucas: It went fine because they had done the work. The new customers signed three-year agreements. The old automotive customer was still there but on a month to month. That actually helped — the buyer saw that the auto business was fungible, but the new medical contracts had real lock-in. Luna: So the month to month was a weakness that became a strength in context. Lucas: Exactly. And that's the kind of nuance a good broker or advisor can frame for the buyer. The seller wouldn't have known how to position that. Luna: All right, so final question — if you're a business owner listening, what's the one takeaway? Lucas: Go through your financials and operations with a buyer's eyes. Pick the one risk that would scare you if you were the buyer. Fix it before you sell. It might take a year, but the payoff is almost always worth it. Luna: That's solid advice. And you know, conversations like this are exactly why we do this podcast without any ads. We want to give you specific, actionable insights without any noise. Lucas: Absolutely. If these episodes have helped you think differently about your own business or your exit strategy, and you want to support that, you can find us at buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and focused on what matters. Luna: We really appreciate that. So back to the Ohio stamping company — one thing I left out: the earnout structure. They set it up so that if the new customers hit 3 million in revenue by year two, the seller gets the full 800K. That's tied to the diversification they already did, so it's almost a sure thing. Lucas: Right. And that's the ideal earnout — one that's based on factors the seller already controls. Not some pie-in-the-sky growth target. They'd already proven they could win that business. The earnout just gave them a little extra motivation to stay through the transition. Luna: So it's almost a retention bonus disguised as an earnout. Lucas: Exactly. And that's a structure I'd recommend more sellers consider. If you're going to do an earnout, make it small, measurable, and tied to something you've already de-risked. Luna: Great tip. Thanks, Lucas. That's a wrap on this one. Lucas: Thanks, Luna. See you next time.