Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Niche Manufacturer Sold at 14x EBITDA with Proprietary Process
Transcript
- Lucas: You don't always need recurring revenue to get a double-digit EBITDA multiple. Sometimes the moat is something you can't see — it's locked inside a furnace. Luna: Okay, that sounds like a very specific example. Which furnace are we talking about? Lucas: There's a small specialty metal fabricator in the Midwest — family-owned, about twenty employees, makes custom brackets and housings for medical imaging equipment. Not exactly a high-growth glamour business. But it sold a few months ago for fourteen times EBITDA. Luna: Fourteen times for metal bending? That's more than many SaaS companies get. What was the hook? Lucas: The hook was a proprietary annealing process. Annealing is a heat treatment that relieves internal stresses in metal. This company had developed a very specific temperature ramp and quench cycle for a specialty aluminum alloy used in MRI machines. The cycle was never patented — the founder kept it as a trade secret in a single notebook. Luna: So the buyer wasn't buying the customer contracts. They were buying the notebook. Lucas: Essentially yes. There were three main customers, none under long-term contract. But the buyer was a German industrial firm that makes similar components for the European medical market. They'd been trying to replicate that specific alloy treatment for five years. Acquiring this shop saved them their own R&D timeline. Luna: And the founder just had that knowledge in his head. How do you even value something like that in a deal? Lucas: The broker structured it in two pieces. There was a base multiple of nine times EBITDA for the hard assets and the customer relationships. Then an additional five times EBITDA premium specifically for the proprietary process — payable as an earn-out over three years, tied to the founder staying on to train the German engineers. Luna: I love that. So the earn-out wasn't about revenue targets. It was about knowledge transfer milestones. Lucas: Exactly. The founder had to document the process, run the German team through it, and certify that they could reproduce it independently. Each milestone unlocked a third of that premium. Luna: But here's the risky part — no patent. What if the founder dies before the earn-out ends? Or what if the process leaks during due diligence? Lucas: The broker used a controlled data room. The proprietary formula and cycle parameters were never shown in full. Instead, a metallurgical engineer hired by the buyer conducted a blind test — he gave the buyer's team samples of the finished product, and they tested the material properties. They confirmed the results without ever seeing the recipe. Luna: That's clever. So the buyer validated the output without accessing the input. Lucas: Right. And the founder had a key-man life insurance policy naming the buyer as beneficiary for the earn-out period. That gave both sides comfort. Luna: Listening to deals like this, I'm reminded how much value lives in the specifics — the thing that only you know how to do. It makes me think about the role of shows like this in surfacing those strategies. Lucas: Same here. And honestly, if these conversations have moved your work forward in some small way, there's a really direct way to make sure they keep happening. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: It adds up fast. And it keeps the whole thing ad-free. Lucas: So back to the metal fabricator — I think one of the most instructive parts is how the broker positioned the company to buyers. They didn't lead with the financials. They led with the metallurgical capability. Luna: Meaning the offering memorandum started with the process, not the profit? Lucas: Exactly. The first page was a one-paragraph description of the annealing breakthrough and the industries it served. The financials came on page three. They knew the strategic buyers would care more about the technical moat than the revenue trend. Luna: And did it work? How many buyers came through? Lucas: Twenty-two initial inquiries. Six signed NDAs. Three toured the facility. Two made offers. The German buyer won because they offered the highest earn-out component and a longer transition period. Luna: What was the founder's biggest regret? Something always comes up in these cases. Lucas: He told the broker he wished he'd documented the process earlier. He spent six months of evenings writing down the procedure from memory. He said there were details he'd forgotten and had to re-run experiments to recover. Luna: That's a huge lesson for any owner with trade secrets. Don't wait until you're selling to write them down. Lucas: Yeah. And the broker added a clause that if the founder's documentation turned out to be incomplete, the earn-out would be adjusted. There was a small escrow for that. Luna: Smart. So all around, it's a deal that depended on trust but backed it up with structure. Lucas: Exactly. And the multiple — fourteen times — makes sense when you consider the buyer's alternative. They estimated it would cost them eight million dollars and three years to develop a comparable process in-house. The acquisition cost them four million total, including the earn-out. Luna: So the buyer got a two-year head start and saved four million dollars. That's a clear ROI case. Lucas: And the founder got a retirement that was two to three times what a generic manufacturer would have fetched. All because he had one proprietary cycle in a notebook. Luna: I wonder how many small manufacturers are sitting on similar knowledge and don't realize it. Lucas: That's exactly the question. The broker said he's now asking every manufacturing client: 'What do you do differently that your competitors can't copy in a year?' If they can't answer, they're a commodity business. If they can, there might be a premium waiting. Luna: And that premium might be invisible on the balance sheet. Lucas: Totally. So if you're an owner listening — take an afternoon to think about your own notebook. What's the one thing you do that no one else does? Write it down. You might be leaving money on the table. Luna: And if you've already written it down, maybe it's time to talk to a broker. Lucas: Exactly. That's the kind of story we'll keep digging into.