Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Family Firm Sold at 10x EBITDA by Solving Its Succession Problem
Transcript
- Lucas: So there's this family-owned manufacturer in Wisconsin, third generation, makes precision metal parts for medical devices. Been around since the 1950s. And the grandson who's been running it for the last fifteen years decides he wants to retire. He's got two kids, neither wants the business. One's a graphic designer in Portland, the other's a lawyer in Chicago. Zero interest. Luna: That's a pretty common story, right? The founder's dream doesn't survive the next generation. Lucas: Exactly. And the default move for a lot of owners in that spot is to just call a broker, get a valuation, and sell to whoever shows up first. This guy almost did that. The initial broker estimate came in at about 5.5 times EBITDA, which is low for a profitable manufacturer with sticky customer contracts. Luna: Why so low? Lucas: Because the business was entirely dependent on him. He was the CEO, the lead sales guy, and the quality control manager rolled into one. Buyers look at that and say, 'If you leave, this thing falls apart. So we're discounting for key-person risk.' And they're right. Luna: So what did he do instead of just accepting that? Lucas: He hired a business advisor — not a broker, a consulting firm that specializes in what they call 'exit readiness.' The first thing they did was a dependency audit. They mapped every single business process and flagged every place where only the owner knew how something worked. Luna: That must have been a long list. Lucas: Over 40 critical processes, from quoting new jobs to approving supplier payments to troubleshooting a specific CNC machine that the owner had jury-rigged a fix for twenty years ago. The consultant said, 'You need to systematize this before you even talk to a buyer.' Luna: And that takes time, I imagine. Lucas: Eighteen months. They hired an outside CEO — a guy who had run a similar-sized shop in Ohio. The owner stepped back to chairman. They created written procedures for every critical process. They installed an ERP system that actually tracked production data. They cross-trained three people on the CNC fix. Luna: And the key employees — did they stick around? I feel like when an owner steps back, people get nervous. Lucas: That's where retention packages came in. The owner gave the top five managers three-year earn-out agreements tied to the sale price. If the business sold for over a certain multiple, each of them got a six-figure bonus. That locked them in and gave them incentive to help the new CEO succeed. Luna: So the business becomes less dependent on one person, more institutional. That's got to change the valuation math. Lucas: Completely. After those 18 months, they brought in an investment banker — not a local broker, a middle-market M&A firm — and ran a targeted auction. They identified five strategic buyers who already served the medical device space and could absorb the company without losing key customers. Luna: And what did the offers look like? Lucas: Three bids came in. The winning offer was from a publicly-traded contract manufacturer based in Minnesota. They paid 10 times EBITDA — almost double what that first broker had estimated. And the deal closed in four months because the due diligence was clean. No messy owner dependency, no undocumented processes. Luna: So the owner walked away with roughly twice what he would have gotten if he'd just taken the first broker's valuation. Lucas: And the employees got their earn-out bonuses. The company kept operating as a division. No mass layoffs. It's one of those rare win win wins. Luna: The lesson I take from this is that 'exit readiness' isn't just about tidying up financial statements. It's about making the business work without you. Lucas: Exactly. And that's hard, because most owners are the business. They've never had to separate themselves from it. But the market pays a premium for businesses that can survive the founder's departure. Luna: Yeah, and it's a real process. I mean, 18 months is a long time to commit when you're already thinking about retirement. Lucas: It is. But look at the math: if your business is worth $5 million at 5x EBITDA, and you can get it to $10 million at 10x, that's $5 million more for sticking with it an extra year and a half. That's a pretty good hourly rate. Luna: True. And the alternative is leaving money on the table for the sake of convenience. Lucas: One thing I want to add — the owner told me he almost backed out twice. Once when the consultant bill hit $50,000 in the first month, and again when the new CEO wanted to change the sales compensation plan. He said it felt like losing control. Luna: But he stuck with it. Lucas: Because the advisor kept showing him the math. 'Every dollar you spend on systemization comes back fivefold in valuation.' And it did. Luna: If this episode moved your thinking forward in some small way, that's the spirit behind buy me a coffee dot com slash fexingo. It's a way to keep these conversations ad-free and focused on the concrete stuff. Lucas: Yeah, we hear from listeners who say they used a specific play from the show in their own deal. That's what it's for. If today helped, that's the link. Luna: So the big takeaway: if you're a family business owner without a successor, don't just wind down or take the first offer. Systematize, professionalize, and then go to market. Lucas: And hire an advisor who's done it before. This guy's mistake was almost going straight to a broker. The readiness phase is where the value is created. Luna: Alright, next time we'll look at a case where the seller actually fired their broker halfway through the process — and still got a great deal. Lucas: That one's got some drama. See you then.