Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Hardware Store Sold at 55x EBITDA with Owner Financing
Transcript
- Lucas: You walk into a hardware store in a town of about 8,000 people, and the owner’s been behind the counter for 43 years. The store’s been in the family since 1958. You’d think a business like that sells for some sentimental number, maybe 3 or 4 times earnings. This one sold for 55 times EBITDA. Luna: Fifty-five times? That’s a multiple you’d expect for a SaaS company with 90% gross margins, not a place that sells nails and paint. Lucas: Exactly. And it wasn’t because the business was growing fast. Revenue was flat for three years. Margins were typical for retail hardware — think 35 to 40 percent gross. But the deal structure let the buyer pay that multiple without writing a huge check upfront. Luna: So this is where owner financing comes in. Walk me through the actual numbers. Lucas: The asking price was $2.1 million. EBITDA was about $38,000 — that’s a very small number for the price. But here’s the key: the building was owned free and clear by the business, valued around $800,000. And the inventory was about $600,000 at cost, turning over slowly but consistently. Luna: So the real multiple on operating earnings was inflated by the real estate and inventory? That makes a little more sense. Lucas: Partially. But even stripping those out, the buyer paid more than the business’s cash flow would justify in a conventional bank loan. The buyer put down $200,000 of his own money. He got a $500,000 SBA loan. Then the seller agreed to carry a note for $800,000 at 6 percent interest, with payments structured from the store’s cash flow. Luna: That’s a seller note. But 800k is still a lot if EBITDA is only 38 grand. How do you service that debt? Lucas: You don’t, with just the EBITDA. That’s the part that made the deal possible. The seller also agreed to an earn-out tied to inventory turnover. If the buyer could increase turns from 2.5 to 3.5 within two years, the seller would get an extra $150,000. And the buyer also gave the seller a 5 percent royalty on any increase in gross profit above the trailing average. Luna: So the seller is essentially betting that the buyer can improve operations. And the buyer gets to pay the note from the improvement, not from existing earnings. Lucas: Right. And the store had a fiercely loyal customer base. The buyer was a former contractor who knew the community. He planned to extend hours, add a small tool rental section, and push higher-margin items like lawn care chemicals. The earn-out gave him a clear incentive to execute. Luna: I’ve seen data that seller-financed deals close about 40 percent faster on average than all-cash or fully bank-financed deals. That’s from a 2024 Pepperdine study on private capital markets. Lucas: That study is spot-on. And it’s not just speed — it’s also deal certainty. When a seller is willing to hold paper, you skip a lot of the bank underwriting hurdles. The buyer and seller already trust each other because they’ve negotiated face to face. Luna: But I have to ask — what happens if the buyer defaults? The seller gets the business back, but it’s now run by someone who couldn’t make it work. The customer relationships might be damaged. Lucas: That’s the real risk. In this deal, the seller mitigated it by keeping the real estate in a separate LLC that he leased to the business at market rate. If the buyer defaults, the seller still owns the building and can find a new operator or sell the leasehold. He also retained a security interest in the inventory. Luna: So the seller is protected on two fronts — real estate and inventory. That makes the note less risky. Lucas: Exactly. And the buyer gets to step into a business with 80 years of accumulated goodwill. The store had customers who came in twice a week and knew the staff by name. You can’t build that quickly with marketing spend. Luna: That goodwill is what justified the multiple, in a way. The buyer was buying a revenue stream that had been stable for decades, plus a motivated seller who would help him succeed. Lucas: And the seller had another motivation beyond money. He was 67, no children interested in the business. He wanted to see it continue under someone who cared about the community. The earn-out and royalty gave him a way to stay involved as a mentor for the first two years. Luna: I think that’s a part of small business exits that gets overlooked. The legacy aspect. Especially in smaller towns, the seller often wants the business to survive, not just to cash out. Lucas: Absolutely. And that’s why deal structure matters so much more than the headline multiple. A seller who’s flexible on terms can often get a higher total price than one who demands all cash upfront. Because the buyer can pay more when the payments come from future earnings. Luna: This is the kind of conversation that actually makes you think differently about what a business is worth. If today’s episode moved your thinking forward in some small way, these conversations stay ad-free because of listener support. Buy me a coffee dot com slash fexingo — that’s how people who find value here help keep it going. Lucas: Yeah, it really does make a difference. And speaking of value — let’s look at one more detail in this deal. The note had a balloon payment after seven years. The buyer’s plan was to refinance once the store’s EBITDA had grown enough to qualify for a conventional loan. That’s common in owner-financed deals: the seller carries the risk for the first few years, then the buyer graduates to bank financing. Luna: So the seller is essentially acting as a bridge lender. And if the buyer succeeds, the seller gets paid off early, plus the earn-out. Lucas: Right. And in this case, the store’s EBITDA did grow — by about 15 percent annually over the first three years, driven by the new tool rental and extended hours. The buyer refinanced in year four, paid off the note, and the seller walked away with the full $800,000 plus the earn-out. Luna: That’s a win-win. The buyer got a business he couldn’t have afforded otherwise, and the seller got a premium price with tax advantages from installment sale treatment. Lucas: And the town kept its hardware store. That’s the part that doesn’t show up in a multiple. For a lot of small business owners, that’s worth more than an extra half-turn of EBITDA.