Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How Business Brokers Set the Price on a Private Sale
Transcript
- Lucas: There is a specialty-parts manufacturer in central Ohio — annual revenue right around three million, maybe twenty-five employees — that sold in late February of this year for four point two million dollars. And the story of how that price got set is basically a masterclass in private-business valuation. Luna: Four point two million — was that the initial ask, or the final number after negotiation? Lucas: Final number. The initial ask from the broker was three point five. So the seller actually got a premium of about twenty percent above the first listed price, which is pretty unusual in a private sale. Most businesses sell below the initial ask. Luna: Right, because buyers generally have more leverage — they can walk away. So what drove the price up? Lucas: It came down to how the broker framed the earnings. They didn't use EBITDA. They used seller's discretionary earnings — SDE — which is the standard for Main Street and lower middle market businesses. SDE adds back the owner's salary, perks, one-time expenses, non-operating items. For this company, the EBITDA was about six hundred thousand, but the SDE was nine hundred and twenty thousand. Luna: That's a big gap — more than fifty percent. So the broker sold the story of what the business could earn for an owner-operator, not what it earned on paper for a passive investor. Lucas: Exactly. And then they applied a multiple to that SDE. For this industry and size, the typical range is two to three times. The broker listed it at three point five times SDE, which gave them the three point five million ask. But during the confidential auction — there were eight qualified buyers, three serious offers — one buyer came in at four point eight times SDE. Luna: That's a massive multiple for a small manufacturer. Why would anyone pay that? Was there some strategic fit? Lucas: There was. The buyer was a larger competitor in the same region, and they saw synergies — they could fold the operations into their existing facility, cut the lease cost, cross-sell to their own customer base. That buyer valued the business based on what it would be worth to them, not on what it would be worth to a generic financial buyer. Luna: So the broker created competition and let the strategic buyer self-select. But what about the initial ask — wouldn't a lower multiple have attracted more interest? Lucas: That's the tension. The broker told me they deliberately started a bit above market because they wanted to test for strategic buyers. If you price too low, you leave money on the table and you attract financial buyers who will nickel and dime you. By pricing at three point five, they signaled confidence and filtered for buyers who could see the upside. Luna: It worked in this case, but I wonder if it's a replicable strategy or just survivorship bias. We only hear about the deals that close. Lucas: Fair point. The broker also told me about a deal last year that sat on the market for fourteen months because the multiple was too aggressive. So it's not a guaranteed move. But in this case, the earnout clause also played a role. Luna: An earnout — so part of the purchase price was contingent on future performance? Lucas: Yes. The buyer and seller had a valuation gap of about seven hundred thousand dollars. The buyer's final offer was four point two million, but they wanted an earnout of three hundred thousand tied to retaining the top two customers over the next eighteen months. The seller agreed because those customers had been with the company for over a decade, so the risk felt manageable. Luna: So the earnout bridged the gap without either side feeling like they gave up too much. That's actually smart structuring. Lucas: It is. And it's more common than people realize. According to a 2025 survey from the International Business Brokers Association, about forty percent of private transactions under ten million include some form of earnout. It's a way to align incentives post-close. Luna: That's a useful stat. But let me push back on something — the whole idea of applying a 'rule of thumb' multiple, whether it's two to three times SDE or whatever. Doesn't that just create anchoring bias? Buyers and sellers both fixate on the multiple instead of the actual cash flows and risks. Lucas: It absolutely can. And good brokers know that. The multiple is just a starting point — a conversation opener. The real work is in adjusting for growth rate, customer concentration, facility condition, owner dependence. In this Ohio deal, the broker actually reduced the multiple by half a turn because sixty percent of revenue came from two customers. Luna: That's a huge risk. So the final multiple was effectively four point three times, not four point eight, after that adjustment. But the buyer still paid a premium because they saw a way to diversity. Lucas: Right. And that's the key takeaway: in a private sale, the price is never just a formula. It's a narrative. The broker crafts a story about the business's potential, then finds a buyer who believes that story enough to pay for it. The financials are the raw material, but the valuation is a negotiation. Luna: Before we go further, I want to mention something that keeps this show going. We don't run ads on Fexingo Business — that's a deliberate choice. If you find these conversations useful and want to support them, there's a simple way. Buy me a coffee dot com slash fexingo. Even a small contribution helps us keep producing episodes like this one. And we're grateful to everyone who already does. Lucas: Absolutely. It means we can keep the content focused and free. Now, back to valuation — one thing that surprised me in this deal was how little the financial statements mattered in the final weeks. The buyer's due diligence revealed that the seller had been underreporting income on tax returns to save on taxes, which is common for small businesses. So the broker had to work with reconstructed financials. Luna: Reconstructed financials — meaning they adjusted the tax returns to reflect true economic earnings. That's a whole other layer of complexity. How do you even verify those adjustments? Lucas: The broker used a quality of earnings report prepared by an independent CPA. That report normalized the last three years of income — added back personal expenses, one-time repairs, above-market owner compensation. It's essentially a forensic accounting exercise. And it cost about fifteen thousand dollars, which the seller paid upfront. Luna: Fifteen thousand is a big expense for a small business. But I suppose if it helps you sell for an extra several hundred thousand, it's worth it. Lucas: Exactly. And in this case, the broker said the quality of earnings report was the single most important document in the deal. It gave the buyer confidence that the SDE figure was real. Without it, the buyer might have discounted the offer by twenty percent or walked. Luna: So for owners listening who are thinking about selling: get your financials cleaned up before you go to market. Don't wait for the broker to discover the mess. Lucas: That's the single best piece of advice. The broker told me that deals where the seller has three years of clean, normalized financials close at higher multiples and in less time. The Ohio seller had done that prep work, and it paid off. Luna: I want to circle back to the earnout structure. How common are earnouts in deals under five million? I've heard they're mostly for larger transactions. Lucas: They're less common below five million, maybe fifteen percent of deals, but they're becoming more frequent. The reason is that earnouts help bridge the valuation gap without requiring the seller to take a lower price upfront. In this deal, the earnout was three hundred thousand over eighteen months, tied to revenue retention. That's a manageable target. Luna: But earnouts can also lead to post-sale conflict. If the buyer changes the way the business operates, the seller might not hit the earnout targets through no fault of their own. Lucas: That's a real risk. In this case, the earnout agreement included a clause that the buyer couldn't change the sales process for the two key customers without the seller's consent. So there was protection. But not all earnouts are that well-structured. I've seen deals where the earnout became a source of litigation. Luna: So the lesson is: if you're a seller considering an earnout, negotiate the terms carefully. Define what 'earnout' means — revenue, profit, customer retention — and put guardrails in place. Lucas: Exactly. And have a lawyer who specializes in M&A for small businesses. This is not the place to use your cousin who does real estate closings. Luna: Amen to that. So what's the one number from this Ohio deal that you think every potential seller should remember? Lucas: Four point two million dollars is the headline, but the number I'd focus on is nine hundred and twenty thousand — that SDE figure. Because that's the number that drove everything. And the multiple on that SDE was effectively four point six times after adjustments. That's well above the industry average. Luna: But the multiple only made sense because the buyer had a strategic rationale. If you're a generic financial buyer, you'd never pay that. So the takeaway isn't 'aim for a 4.6x multiple', it's 'find a buyer who sees something special in your business'. Lucas: That's exactly right. And the broker's job is to find that buyer. The best brokers don't just list a business on a website — they proactively market it to a curated list of potential acquirers, including competitors, suppliers, and adjacent industry players. Luna: Which brings us back to the beginning: the price is a narrative. The broker crafts the story, finds the believer, and negotiates the gap. Lucas: And for this Ohio manufacturer, the story was: stable cash flows, embedded customer relationships, and a clear path to synergy. The buyer paid a premium because they believed that story. And that's how you get from a three point five million ask to a four point two million close. Luna: I think that's a great note to end on. Next episode, we should talk about the flip side — what happens when the buyer is the one telling the story and the seller has to decide whether to believe it. Lucas: That's a good angle. We'll see you then.