Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Hardware Store Sold at 7x EBITDA with No Inventory Count
Transcript
- Lucas: Today's story is about a hardware store in central Ohio — family-owned, three locations, about eight million in revenue. It sold earlier this year for seven point one times EBITDA. And the twist is: the seller had never done a physical inventory count. Not once, in forty-two years of business. Luna: Wait — never? Like, not even a year-end count for taxes? Lucas: Never. The owner tracked inventory by memory and handwritten purchase logs. He had a shed out back with pallets he couldn't even remember ordering. When the buyer's CPA asked for the inventory schedule, the seller said — and I'm quoting — 'It's all in my head.' That nearly killed the deal. Luna: And this is the kind of thing listeners of this show tell us is most useful — the real-world mess. Look, it takes a village to make a show like this work, and a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's what keeps it ad-free and lets us dig into these messy stories. So thank you to those folks. Lucas: Yeah, genuinely — that support is what makes this possible. Anyway, back to the hardware store. The buyer was a regional retail operator who had already bought and sold five stores. He knew inventory was the biggest risk in a product-based business. Without a verified count, he had no idea what he was actually buying. Luna: So how do you even start negotiating when the seller can't produce a number? Lucas: The broker on the deal — a woman named Diane Colson, who works out of Columbus — brought in something called a 'sale or return' inventory mechanism. Essentially, the buyer would take all inventory at closing, but the seller would be on the hook for any items that didn't sell within ninety days. The seller would have to buy back unsold stock at cost. Luna: That's clever. It shifts the risk back to the seller, but it also gives the seller an incentive to help the buyer sell through the inventory quickly. Lucas: Exactly. And it capped the seller's exposure. He agreed to a two-hundred-thousand-dollar cap on buybacks. That was about ten percent of total inventory value. The seller figured he could handle that. And the buyer got comfort that he wouldn't be stuck with a garage full of obsolete snow shovels in June. Luna: Did the seller end up having to buy back much? Lucas: Forty-seven thousand dollars' worth. Mostly slow-moving electrical fittings and some odd-season paint. But here's the interesting part — the seller used his own knowledge to help the buyer move the rest. He called up contractors he'd known for years and told them where to find specific items. The buyer was actually impressed. Luna: So the seller's 'head inventory' became an asset in the transition, not just a liability. Lucas: Right. And that's a lesson for any business owner with product on the shelves. If you can't produce a clean inventory report, you can still add value by being present during the transition. But it's way better to have the books in order before you list. Luna: What multiple did they settle on? You said seven point one times EBITDA. Lucas: Seven point one. EBITDA was about one point two million, so the enterprise value came to roughly eight and a half million. That multiple is actually a little below the median for retail hardware — which usually runs closer to eight times — but the inventory risk dragged it down. The buyer got a discount for taking on the uncertainty. Luna: And the seller still came out ahead because he didn't have to do a full count. He saved maybe thirty thousand dollars on an inventory service — and that cost him about six hundred thousand in implied value. Not a great trade. Lucas: That's exactly the math. Thirty thousand in savings, six hundred thousand in lost value. And that's the story we keep seeing: sellers who think 'close enough' on their books will cost them multiples of what a proper accounting system would have cost. Luna: Let's talk about the earn-out structure that sealed the deal, because I know you mentioned there was one. Lucas: Yes. The buyer wanted a one-year earn-out tied to gross margin. If the store maintained a margin above thirty-five percent for twelve months, the seller would get an additional two hundred thousand. That gave the seller a direct incentive to help the buyer manage inventory turns and pricing. Luna: And did the seller hit it? Lucas: Barely. Thirty-five point two percent. The earn-out paid out in full. And the buyer told me later that having the seller around for those twelve months was worth more than the two hundred thousand. He learned which products turned fast, which suppliers were reliable, and which customers needed hand-holding. Luna: So the earn-out became a transition tool, not just a financial kicker. Lucas: Exactly. And that's a better outcome than a clean inventory count would have produced. If the seller had done a count, the deal might have closed faster and at a higher multiple, but the buyer might not have had that handover period. Sometimes the mess creates the structure that makes the transition smoother. Luna: Still, I think most listeners should hear this as: get your inventory counted before you sell. You're leaving money on the table. Lucas: Absolutely. A one-time count — or better yet, a perpetual inventory system — costs a few thousand dollars and can add hundreds of thousands to your sale price. This seller got lucky that the buyer was flexible and that the broker had a creative solution. But most buyers would just walk. Luna: What about the other two locations? Were they included in the sale? Lucas: Yes, all three. But the inventory problem was concentrated at the main store. The smaller locations had less stock and the manager kept decent records. The buyer actually said he might spin off the smaller stores later — they had cleaner operations and could fetch a higher multiple on their own. Luna: So the seller might have been better off selling the clean stores separately? Lucas: Potentially. But the seller wanted a clean exit — one check, one closing date. He was seventy-three and ready to retire. He didn't want to manage two separate sale processes. So he accepted the blended multiple. That's another lesson: convenience has a price. Luna: And the buyer? What's his plan for the business? Lucas: He's consolidating the back office and bringing in a proper inventory management system — barcode scanning, automated reorder points, the works. He told me he expects to boost gross margin by two to three points within eighteen months just by reducing shrinkage and dead stock. Luna: That's the kind of operational improvement that justifies the discount he got on the purchase price. Lucas: Exactly. He paid eight and a half million for a business that, with proper inventory controls, might be worth eleven or twelve million in three years. And the seller got his eight and a half million and a two-hundred-thousand-dollar earn-out. Not a bad outcome for a guy who never counted a single screw. Luna: I think the key takeaway is: inventory is the most common post-close dispute in Main Street deals. If you can avoid that fight by spending a few thousand dollars upfront, you should. Lucas: Absolutely. And if you can't — if your books are a mess — then at least negotiate a mechanism like sale or return. But know that you're leaving money on the table. Next episode, we're going to look at a service business that sold with no receivables — a cleaning company that switched to a prepaid model. It's a good one. Luna: Looking forward to it. Until then.