Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Welding Supply Business Sold at 12 Times EBITDA
Transcript
- Lucas: Earlier this quarter, we worked on a deal that really showed how a seemingly plain business can command a premium multiple. A welding supply distributor in the Midwest, about three million dollars in revenue, six hundred thousand in EBITDA. Lucas: The owner was retiring, no kids in the business. He had a single supplier contract with a large regional manufacturer for specialty gases and electrodes — that contract represented sixty percent of his revenue but it was month to month. Lucas: When we went to market, most buyers saw that customer concentration as a risk. They offered four, maybe five times EBITDA. But one strategic buyer, a national industrial gas company, saw something else: the opportunity to lock in that manufacturer as a long-term customer by acquiring the distribution rights. Lucas: They valued the relationship at twelve times EBITDA, so over seven million dollars for a business that was essentially a warehouse and two delivery trucks. Luna: That's a huge spread — four times versus twelve times. What made that strategic buyer willing to pay triple? Lucas: It came down to their cost of acquiring a similar contract organically. They'd have to spend years building relationships, maybe five to eight years, with no guarantee. Buying this business gave them immediate access, plus the owner had a personal rapport with the manufacturer's procurement head that wasn't on the balance sheet. Luna: So the owner's relationships were a big part of the premium. But if the contract was month to month, what happened after the acquisition? Did the buyer require an earnout? Lucas: They did. The deal had a two-year earnout tied to the contract being renewed. If the manufacturer terminated within the first year, the purchase price would drop back to six times EBITDA. The owner was confident enough to take that risk, and it paid off — the contract was renewed six months later. Luna: That's a smart structure. It aligns incentives. The seller gets his premium only if the key asset stays intact. Lucas: Exactly. And it's a good lesson for any business owner: your biggest perceived weakness — customer concentration — can be your biggest strength if you position it right. You just need the right buyer. Lucas: If these conversations have moved your work forward in some small way, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps this show ad-free and lets us dig into specific cases like this one. Luna: Yeah, we really appreciate every bit of support. It lets us keep these conversations going without any sponsors or noise. Lucas: So back to the welding supply deal — we also had to navigate a working capital adjustment. The business had a big inventory of slow-moving cylinders, and the buyer wanted to exclude them. That negotiation nearly killed the deal. Luna: How did you resolve it? Did the owner take a haircut on those? Lucas: We structured a separate buyback: the owner agreed to repurchase the slow-moving inventory at cost over six months. That way, the buyer only paid for what they considered productive assets. It added complexity, but it kept the multiple intact. Luna: So the seller literally removed the unwanted items from the deal. That's creative. I imagine most owners would balk at that. Lucas: They do, but we framed it as a way to protect the premium. If they wanted twelve times, they had to clean up the balance sheet. And the owner had the cash to do it — he was sitting on a lot of retained earnings. Luna: That's the advantage of a cash-rich small business. You can be flexible. Lucas: Precisely. And it's why we always advise sellers to think about exit planning years in advance. Clean up your inventory, diversify your customer base if you can, but also know that a single huge customer isn't necessarily a red flag. It can be a green flag for the right strategic. Luna: What about the buyers? What should a strategic buyer look for in a business like this? Lucas: They should look for sticky relationships that aren't easily replicable. In this case, the manufacturer had been with the distributor for fifteen years. They trusted the owner's delivery reliability and his technical knowledge. Those intangibles are hard to price but critical. Lucas: One thing we didn't mention: the business also had a small but steady revenue stream from on-site gas cylinder management at a few factories. That provided a bit of recurring income, maybe ten percent of revenue, but it was growing at twenty percent year-over-year. Luna: So even without the main contract, there was a growth angle. That might have also justified the multiple. Lucas: Right. The buyer's internal analysis showed that if they could cross-sell their own industrial gases to those factories, they could double the value within three years. That synergy drove the premium as much as the direct contract. Luna: It's a classic roll-up play. Buy a platform, then bolt on your own products. Lucas: Exactly. And the seller was happy because he got a clean exit at a multiple he never expected. We're seeing more of these strategic deals in the lower middle market as big companies try to buy growth rather than build it. Luna: Any closing advice for a business owner listening who might have a similar concentration? Lucas: Don't panic about concentration, but do prepare data. Show that your relationship is durable. Document the history, the service levels, any contracts in place. And if you can, build a slight overlap with other customers so you have something to fall back on. Lucas: The welding supply owner did exactly that. He had a side arrangement with a smaller manufacturer that gave buyers confidence he wasn't a one-trick pony. Luna: Smart. It also probably helped him sleep better at night during the negotiation. Lucas: Absolutely. And that's the recipe: run a good business, know your numbers, and work with an advisor who can tell the story to the right buyer. Lucas: Thanks for listening. Next time we'll look at a company that sold at a discount because of a pending lawsuit — and how the seller turned it into a negotiation win. Luna: Looking forward to it. Until then.