Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Bakery Chain Sold for 9x EBITDA by Fixing Its Supply Chain
Transcript
- Lucas: So, earlier this year, a regional bakery chain in the Midwest sold for 9 times EBITDA. That's well above the typical 5 to 6 times that bakeries usually fetch. The reason wasn't a bidding war or a hot market — it was a supply chain fix. Luna: A bakery? I mean, flour and sugar are commodities. How much margin can you really squeeze out of that? Lucas: That's exactly what most sellers assume. But this owner spent about 18 months before listing and consolidated from seven different flour and sugar suppliers down to two. He negotiated long-term contracts with volume discounts and locked in prices for three years. That alone boosted gross margins by about 8 percentage points. Luna: Eight points is massive for a low-margin business like baking. What was the gross margin before? Lucas: Around 32 percent. After the fix, it hit 40. And then he added route optimization software for his delivery trucks — cut fuel costs by 12 percent and reduced spoilage because deliveries were faster. Luna: So the EBITDA went up, and the multiple followed. But why would buyers pay more per dollar of EBITDA just because margins improved? Lucas: Because buyers see lower risk. A business that's dependent on spot prices for flour is exposed to commodity swings. A business with locked-in contracts and optimized logistics is predictable. And predictability is what drives multiples up. Luna: Right. So the multiple isn't just about how much you earn — it's about how reliably you can earn it. Lucas: Exactly. The broker on this deal told me that when they ran the due diligence data room, the supply chain contracts were the first thing the buyer's team asked to see. They didn't even look at the revenue growth first. Luna: That's a shift. A lot of owners think buyers care most about top-line growth. But in a mature business like a bakery, it's the cost structure that matters more. Lucas: And the owner made one more smart move. He used the savings to fund a small marketing campaign aimed at local grocery chains. He ended up signing two new contracts that added about 15 percent to revenue, but more importantly, those contracts had automatic price escalation clauses tied to inflation. Luna: So the new revenue was also protected against cost inflation. I can see why a strategic buyer would pay up for that. Lucas: The buyer was actually a larger regional bakery conglomerate. They wanted to expand their footprint and saw this business as a platform acquisition. The supply chain efficiency meant they could fold it into their network without major integration headaches. Luna: And the seller walked away with 9 times EBITDA. Ballpark — what does that translate to in dollars? Lucas: The business was doing about 3 million in EBITDA, so the sale price was around 27 million. That's a big jump from the 15 to 18 million it might have fetched at a 5 or 6 times multiple. Luna: That's a 50 percent premium just from fixing the supply chain. I wonder if this works for service businesses too. If you're a marketing agency, your input costs are mostly labor. You can't lock in salary rates the way you lock in flour prices. Lucas: It's harder, but the principle still applies. For a service business, the equivalent would be standardizing delivery, automating repetitive tasks, and reducing reliance on a few star employees. Anything that makes earnings more predictable and less dependent on specific people or spot pricing. Luna: So it's about de-risking the cost side, not just growing revenue. That's a lesson a lot of business owners miss. Lucas: Absolutely. And the bakery owner didn't stop there. He also renegotiated his lease on the main production facility. He extended it from three years to seven years, with a fixed annual escalator of 2 percent. That removed another uncertainty for the buyer. Luna: That's smart — especially since we've covered episodes where a short lease almost killed a deal. Buyers hate the risk of having to relocate or renegotiate rent right after closing. Lucas: Right. And the buyer in this case was willing to pay the premium because they could underwrite the future cash flows with confidence. They knew exactly what flour would cost, what rent would be, and what fuel would cost for the next three to seven years. Luna: I want to push back on one thing though. By locking in long-term contracts, the seller reduced his flexibility. What if flour prices drop below his contracted rate? He'd be stuck paying above market. Lucas: Fair point. But in this case, the contracts had a floor and a ceiling — within a band of plus or minus 5 percent of the spot price. So he wasn't completely locked in, but the buyer saw stability. And the seller judged that the risk of a commodity spike was greater than the risk of a dip. Luna: That makes sense. And I guess the multiple expansion more than compensated for any potential margin compression from a dip. Lucas: Exactly. And the deal closed in February of this year, so it's a recent example. The market for small and mid-sized businesses is still active, but buyers are being more selective. They want to see operational rigor, not just revenue growth. Luna: It's a good reminder that preparation before listing can change the outcome dramatically. A year of supply chain work turned what could have been a 5x deal into a 9x deal. Lucas: And that preparation doesn't cost much relative to the payoff. The route software was about 5 thousand dollars a year. The time spent negotiating contracts was the owner's own. It's one of the highest roi activities a seller can undertake. Luna: You know, conversations like this remind me why we keep this show free from ads. If these insights help you prepare for a sale or even just think differently about your business, then that's the whole point. Lucas: Exactly. We deliberately don't run ads because we think the value should be in the content itself. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: No pressure at all. Just knowing people listen and find it useful is what keeps us going. Lucas: Alright, back to the bakery. One more thing I want to highlight: the supply chain fix also reduced customer concentration. Before, the bakery had one customer — a school district — that made up 40 percent of revenue. That's a risk factor. But because they optimized routes, they could profitably serve smaller accounts. Luna: So they diversified their customer base, which also lowers risk. The buyer probably valued that highly. Lucas: Yes. By the time of the sale, the largest customer was only 15 percent of revenue. That change alone could have added a turn to the multiple. Luna: It's almost like the supply chain fix had these secondary effects — better margins, lower concentration, longer lease, predictable costs. All of that compounded into a higher valuation. Lucas: That's the key takeaway. A single operational improvement can cascade into multiple valuation drivers. And the owner didn't need to double revenue or invent a new product. He just tightened up the machine. Luna: So for any business owner listening who's thinking about selling in the next two or three years — where should they start? Supply chain is one area, but what are other high-leverage fixes? Lucas: I'd say look at your revenue concentration, your lease length, your supplier dependency, and your gross margin trends. Anything that makes the business more predictable and less dependent on a few big variables will be rewarded. Luna: It's about building a business that a buyer can underwrite without crossing their fingers. Lucas: Right. And the bakery example shows it's never too early to start. The seller began 18 months before listing. That was enough time to implement changes and show a track record of improved margins. Luna: Alright, I think we have enough to chew on. Next episode, let's talk about the opposite problem — what happens when a business has great margins but a messy cap table. Lucas: That's a good one. Capitalization issues can kill a deal faster than any operational problem. We'll dig into that next time.