Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Family-Run Machine Shop Sold at 22x EBITDA with Niche Certification
Transcript
- Lucas: Luna, I want to talk about a machine shop in Ohio. Family-run, twenty-two employees, about two point two million in revenue. It sold recently for a multiple that most people in small manufacturing would find hard to believe. Luna: Okay, I'm listening. What's the number? Lucas: Twenty-two times EBITDA. On a business that was essentially a job shop making titanium brackets and housings for aerospace clients. Luna: Twenty-two times? That's tech-company territory. Most small manufacturers are lucky to get six or seven times. Lucas: Exactly. And that's the puzzle we're going to unpack. Because the business itself wasn't growing fast — revenue was essentially flat for three years. It wasn't particularly profitable on paper either, about eighteen percent EBITDA margins. Nothing that screams premium. Luna: So what was it? Lucas: One thing: an AS9100D certification. That's the aerospace quality management standard. It's not easy to get, and it's not cheap. This shop spent about forty thousand dollars and eighteen months to achieve it. But once they had it, they effectively became one of maybe three certified shops within a two-hundred-mile radius that could handle complex titanium work. Luna: So it's a moat. A regulatory moat that cost forty grand to build. Lucas: Exactly. And here's the key: the certification doesn't just say 'you can do the work.' It says you have a documented quality system that auditors have verified. For defense contractors and big aerospace primes, that's non-negotiable. They cannot legally source certain parts from uncertified shops. Luna: That changes the buyer pool completely. Lucas: It does. The buyer in this case was a mid-tier defense contractor based in Michigan. They had been buying titanium parts from this shop for years. But they wanted to bring that capability in-house — reduce supply chain risk. And because the shop had the certification, the buyer didn't have to go through the eighteen-month process themselves. They just acquired the certification along with the equipment. Luna: So the certification itself became an asset that the buyer valued highly. Lucas: Exactly. The buyer's internal analysis showed that getting certified from scratch would cost them roughly three hundred thousand dollars in direct costs plus at least two years of lost production time. So paying a premium for a shop that already had it made economic sense. Luna: That math explains the multiple. The buyer is essentially paying to skip the queue. Lucas: Right. And the seller was smart about timing. The owner was in his late sixties, no succession plan. He had been approached by a few private equity groups over the years, but they always offered six or seven times EBITDA because they saw a commodity business. He held out until a strategic buyer came along. Luna: How did he find that buyer? Lucas: Through the broker — a niche manufacturing M&A shop that specifically focused on aerospace supply chain deals. They knew that defense contractors were actively looking for certified capacity. So they didn't market the business broadly; they targeted maybe ten potential buyers, all defense primes or their tier-one suppliers. Luna: That's a smart approach. Narrow funnel, high-intent buyers. Lucas: It also meant the seller didn't have to disclose financials to dozens of tire-kickers. The broker prepared a one-page teaser that led with the certification, the client list, and the fact that the shop had never had a rejected part in five years. Luna: A hundred percent on-time delivery and zero rejections — that's a powerful track record. Lucas: Absolutely. And it reinforces the certification's value. AS9100D requires rigorous documentation and traceability. This shop wasn't just certified; they lived it. Every batch of titanium came with a material cert, every machining step was logged, every tool change recorded. That level of process discipline is exactly what defense buyers need. Luna: So for a small business owner listening, what's the takeaway? Is it 'go get AS9100D' specifically, or is the lesson broader? Lucas: The lesson is broader. It's about finding a certification or accreditation that creates a barrier to entry in your specific market. For a food manufacturer, it might be SQF or BRC certification. For an electrical contractor, it might be a specific safety rating. For a software firm, it might be SOC 2 Type II. The key is that the certification is expensive and time-consuming enough that competitors won't bother, but valuable enough that buyers will pay a premium for it. Luna: And the seller has to be willing to make that investment before the exit, not after. Lucas: Exactly. This owner invested the forty thousand dollars and eighteen months about three years before selling. At the time, he told the broker he wasn't sure it was worth it. The certification didn't immediately bring in new customers. But it locked in the existing ones and made the business far more attractive to strategic acquirers. Luna: So it's a long-term play. And it requires a certain kind of owner — someone who thinks about the business as an asset to be sold, not just a job to be run. Lucas: That's a key distinction. Many small business owners optimize for cash flow and lifestyle. But if you want to maximize exit value, you need to think like a buyer. What would make this business harder to replicate? What would make it worth more to a competitor or a larger firm? Luna: And in manufacturing, the answer often comes down to certifications, customer concentration, and proprietary processes. Lucas: Let's talk about the proprietary process angle. This shop had one — they had developed a method for machining thin-wall titanium tubes that reduced waste by about thirty percent compared to industry standard. But they never patented it. They kept it as trade secret. Luna: Was that a mistake? Lucas: In this case, no. Because the process was embedded in the way they set up their CNC machines, the tool paths, the cooling fluid mix. A patent would have disclosed it. And the buyer was buying the whole operation — they wanted the people who knew the process, not just the IP. Luna: So the process was part of the goodwill. The buyer was paying for institutional knowledge. Lucas: Exactly. And that's part of why the multiple was so high. The buyer wasn't just buying equipment and certification; they were buying a team that could execute flawlessly. The seller agreed to stay on for twelve months post-close to train the new owners' staff. Luna: That's a common earn-out structure. But twelve months is on the shorter side. Lucas: It is. And the seller got a higher multiple partly because he was willing to stay. The buyer wanted continuity. They knew that if the key machinists left, the certification wouldn't matter as much. So they structured the deal with retention bonuses for the senior machinists, paid out over two years. Luna: That's smart. In a small shop, the people are the business. Lucas: Right. And the broker helped the seller realize that. The seller initially wanted to sell and walk away immediately. But the broker explained that the buyer would pay more for a smooth transition. So the seller agreed, and it added about two turns to the multiple. Luna: So we're talking about a business that was worth maybe ten times EBITDA as a standalone asset, but commanded twenty-two times because of the certification, the clean record, the proprietary process, and the seller's willingness to stay. Lucas: Exactly. Each of those factors added maybe two to three turns. The certification was probably worth four or five turns on its own. The defense contractor buyer was willing to pay a premium because the alternative — building or buying a similar capability — would have cost them more in time and money. Luna: And that's the fundamental dynamic: premium multiples come from solving a buyer's specific problem, not from being a generic profitable business. Lucas: That's the whole episode in one sentence. If you're a small business owner thinking about exit, ask yourself: what problem does your business solve for a potential buyer that they can't easily solve themselves? If the answer is nothing, you're a commodity. If the answer is something like an aerospace certification, you might just get twenty-two times EBITDA. Luna: And speaking of things that solve a problem, I want to mention something that helps us keep this podcast ad-free and focused on content like this. Lucas: Yeah, it's a small thing, but if today's episode moved your thinking forward in some way, you can find us at buy me a coffee dot com slash fexingo. That's the only place listener support goes, and it's what keeps us independent. Luna: Even a dollar helps us justify the research time. And we don't run ads, so this is it. Lucas: Right. Back to the machine shop. One last detail I think is worth noting: the seller didn't just get a high multiple — he got a clean exit. The deal was all-cash at close, no seller note, no earn-out beyond the twelve-month consulting agreement. Luna: That's rare in small business M&A. Most deals have some deferred consideration. Lucas: It is. But the buyer had a strong balance sheet and a strategic imperative. They wanted the shop locked up before a competitor could bid. So they came in with a clean offer and a short due diligence period. The whole process took about four months from LOI to close. Luna: That's fast. Especially for a manufacturing deal with a certification audit involved. Lucas: The buyer already knew the shop's quality system because they'd been auditing them as a supplier for years. So due diligence was mostly about confirming the financials and the equipment condition. No surprises. Luna: Another advantage of selling to a current customer. Lucas: Absolutely. And that's the final lesson: build relationships with potential acquirers long before you plan to sell. Treat your best customers as future buyers. The trust is already there. Luna: Great episode. Thanks for breaking that down. Lucas: That's all for today. See you next time.