Ray's 7x: The Price of Admission He Won't Pay
Ray, 58, founded a specialty metal fabricator 26 years ago. Revenue is $18M, EBITDA $2.1M, and he expects to sell at 7x - roughly $14M - in four years. He pays himself $450K; a market-rate general manager would cost $260K. Ray personally owns the three largest accounts (44% of revenue) and signs off on every quote above $15K. There is no controller, so his CPA rebuilds the financials on an adjusted basis each spring. His daughter works in sales but has no pricing or spending authority. He told you: "I don't want to build an empire. I want to keep doing the engineering and cash out at 62." He has no written plan and has twice declined to interview GM candidates.
1. Ray expects 7x. Identify the binding constraint across owner readiness, business readiness, and personal readiness, and lay out a sequenced 12-month plan. Be specific about what must precede what, and why.
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Step 1 - Rebuild the number Ray is actually selling.
- The $190K gap between his $450K comp and a $260K market GM is not a free add-back. It only becomes real EBITDA once someone else is actually doing the job. Until then a buyer treats it as an unsupported adjustment.
- Even if you allow it, defensible EBITDA is roughly $2.2–2.3M on paper, but the transferable earnings are lower because 44% of revenue lives in Ray's phone.
- A buyer underwriting that concentration will either shave 2–3 turns or hold price with an earnout and escrow tied to account retention.
Step 2 - Locate the constraint. The three legs (owner readiness, business readiness, personal readiness) are not equally binding here. Personal readiness is thin but two decades of company-paid lifestyle means he has no cash-flow plan - that's a workstream, not the gate. Business readiness is plainly deficient (no GM, no controller, no pricing process). But the binding constraint is owner readiness: he has decided the GM is optional. Business readiness cannot move until he accepts that hiring a GM is the entry fee, not an expense. Two declined interviews are the tell.
Step 3 - Sequence.
- Months 0–2: Written objectives and quantified gap (his $14M vs. a realistic $9–10M today). Personal financial baseline so he knows his number. Explicit, documented decision on the GM role.
- Months 2–8: Hire a GM with real quoting and pricing authority; Ray moves to a defined technical/engineering role at market comp. Joint calls to introduce the GM to the top three accounts; convert them to agreements with assignment language.
- Months 6–12: Controller or outsourced accounting so the financials are audit/QoE-ready without the annual CPA rebuild; document pricing and estimating.
- Only then go to market - 12–24 months out.
Judgment call: if Ray refuses the GM within 90 days, stop selling the 7x path. The honest alternatives are a lower price to a buyer who wants Ray as an employee (key-man-dependent deal, heavy earnout), or an internal/ESOP path. Continuing to prep him for a 7x third-party sale he won't qualify for is a fee-generating fiction.
2. Ray says: "Stop the consulting talk. Just tell me the multiple." How do you answer without lying to him or demoralizing him?
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Give him a number, but attach the conditions to it - a multiple is an output, not an input.
The framing:
"Today's number is 4–5x on defensible EBITDA, call it $9–10M. The number you want, 7x, is what buyers pay for a business that runs without the owner. Here is the exact list that moves you from one to the other."
Then decompose the multiple so he can see the levers:
| Driver | Ray's position | Effect on multiple |
|---|---|---|
| Size | ~$2.3M EBITDA | Caps the buyer universe |
| Customer concentration | 44% in owner's hands | −2 to −3 turns, or earnout |
| Management depth | None | Key-man discount |
| Financial quality | Tax-basis, CPA-adjusted | Diligence friction, price chip |
| Growth | Flat | No premium |
Then make the gap concrete in dollars, not turns. One turn of multiple on $2.3M is $2.3M. The distance between 5x and 7x is roughly $4.6M - more than most owners will earn in a decade of dividends. That reframes the GM hire as a $260K investment with an eight-figure payoff, which is a language he already speaks.
What not to do: don't quote 7x to keep the relationship warm, and don't quote 4x without the roadmap. Both are failures of nerve dressed up as professionalism.
3. Among the fixes available, which single change produces the most enterprise value per unit of execution risk? Defend the pick against at least one plausible alternative.
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Pick: install a GM with quoting authority and transfer the top three accounts.
Why it dominates:
- It attacks two discounts at once. It converts the $190K comp add-back from an unsupported adjustment into real, bankable EBITDA, and it removes the concentration discount that buyers apply when relationships are personal to the seller.
- The math is favorable: a single recovered turn on ~$2.3M of defensible EBITDA is worth roughly $2.3M. The intervention costs ~$260K per year plus Ray's ego.
- Risk is low and reversible. If the GM doesn't work out, you've lost a salary and a year - not capital.
- It removes the buyer's structural defenses: no earnout demanded for account retention, no escrow hostage, no three-year consulting requirement at a depressed salary.
Against the alternative of acquiring a competitor for growth: that adds revenue and possibly a second management team, but it consumes capital and management attention, integrates two cultures, and does nothing about the fact that Ray personally holds 44% of the revenue. It increases the multiple only if scale crosses a threshold - an expensive way to buy a turn.
Against rebranding/marketing spend: this typically moves top-line perception, not transferable earnings, and buyers discount marketing-driven growth that isn't yet recurring.
Caveat to flag: the value of this fix is contingent on Ray actually ceding pricing authority. A GM with the title and no signature authority is worse than no GM, because it tells a buyer the owner won't let go.