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Prospective owner for advice

inpogress

Plastic
Joined
Jun 27, 2017
Hello everyone and thank you for taking the time to look at my post. I am new to this forum, and am here seeking advice from any and all available minds.

To start off, I'll give a brief introduction. I am a CNC programmer, currently working for a small business in a particularly niche sector of the manufacturing industry. There have been an increasing number of "red flags" appearing in this shop over the past few years. It has reached a point, that myself and a coworker have found ourselves having many off-the-clock chats about things that need to change. Without going into too much detail, the company I work for has lost a lot of respect with our current customer base, which has resulted in the growth of our main competition, and the slowest "busy season" of my tenure. My prospective partner and I have decided it is time to branch out.

Between the two of us, we have just over 20 years of experience in our current sector, and nearly 40 years of total manufacturing experience. We are not "green" when it comes to our business plan. We also have two key employees that will join our team from day one. As individuals, we each have good name recognition with the customer base, as well as connections to other types of machine work. I myself am the type of person, that I will put a cot in the office and sleep there to ensure that machines are running as much as possible to push parts out the door. I have gotten up at 2 AM to come to the shop, just to rotate a part and start the next long running program.

This leads me to why I'm here. Neither of us have experience setting up a business. So my thought is, rather than blindly trudging through the mud alone, why not reach out to people who have "been there done that" for advice?

So here is the good stuff:

I am in the process of developing our business plan. I am pricing every item needed at startup --from desk chairs, to toilet paper, to 3-axis VMCs-- at new, knowing that the used machine market will be available when we reach that point. Currently, my total cost, minus building and overheard, sits at $240,000. This includes two HAAS VF4's, which together total approximately $150,000. Due to the type of parts we make, 2 machines of that size are required.

Question 1) What are the recommendations on seeking a larger loan ($200,00 - $250,000+) to pay for all costs, vs a smaller loan ($100,000) and then financing/leasing new equipment? Or seek a loan in the $150,000 range to buy all used equipment?

Question 2) Business type. Right now I'm leaning towards LLC. We will be 50/50 partners. I'm a little fuzzy on tax law and would love to hear pros and cons on LLC/partnership/S-corp or other.

Question 3) What is the correct path to take as far as establishing the business itself? Specifically I'm referring to registering the business, tax ID, all of the intricacies that go along with the formation of the company name.

Question 4) Buy land and build a new building, buy an existing building, or lease an existing space?

Question 5) Are there small business grants or programs that I'm unaware of that I should look into, to assist in financing?

Bottom line is, I'm looking for knowledge. Any advice or suggestions are absolutely welcome, and again, I appreciate the time to read and hopefully respond to this post!
 
can either of you sell?

Do either have any business experience?


Advice:

- no mention of working capital - critical. I have way more tied up in WC than liquidation value of plant and equipment
- have you accounted for the burn - negative cash flow until you get the business?
- don't even think about a payroll (for you or your partner) or employees until you get the business in the door.
- have you done monthly cashflows that include everything?
- while I don't advocate used toilet paper - most everything, used to make do. Used cheap chair or stand. My office window is broken....been that way since I launched 4 years ago and will be for a while yet. And you do everything yourselves in the beginning, no hiring out....it'll put you in the poor house. lean and mean
- buy a building - are you kidding? if you have enough capital that this is a serious question, go buy a business with IP and earnings - ie with a product and fee cash flow
- take the money. #1 rule in SME corporate finance. If someone is offering, take the money.

if you can get equipment financing, pay attention to its real cost. Some leases are very expensive if you do a DCF on it. As for commercial lending, may be different in your area, but here its just going to be on the strength of your personal guarantee and assets. Don't spend the equity in your house buying new office furniture.

*** Think long and hard about having a partner. If you still want to, think long and hard again. repeat until you don't ***
 
Question 2) Business type. Right now I'm leaning towards LLC. We will be 50/50 partners. I'm a little fuzzy on tax law and would love to hear pros and cons on LLC/partnership/S-corp or other.

You(and your partner) NEED to have a sit down with a lawyer. A GOOD lawyer. Not the cheapest
lawyer, a GOOD lawyer.. Ask around, check the SOS of your state and see who represents local companies
that you feel are reputable... If you decide to start cold calling, one of the things I've heard of to
do is to call lawyers that you KNOW DO NOT do what you are looking for.. When they say they "don't do that"
ask them who they would recommend.

As for setting up the business, the lawyer will advise you on what is going to work best for your situation.
And then they can do the leg work, and they will do it right... And they can point you to a qualified, competent
accountant to help you get your shit set up the right way.

While you are there, write up a partnership agreement.. I know, you don't need that, he's your buddy, blah blah blah.

You Are WRONG!! you NEED a partnership agreement, a nice legal one, it won't just protect you, it will also protect your
partner if you are the one that turns out to be the scum bag thief, and odds are that one of you will turn out to be a
piece of shit.


We also have two key employees that will join our team from day one.

So you don't have a building (leased or bought), you don't have any machines, you obviously
don't HAVE the money to go buy the machines (never mind the support equipment), you don't even
actually have a business, but you have 2 employees that you are going to pay starting on day 1...

Think that over VERY VERY VERY carefully...


I'm going to throw a little tid bit out there for you... When I started out, I had to order a 6 inch long
piece of 1x2inch 1018 to make a fixture.. That threw me for a loop, were I used to work there was material drops
all over the goddamn place..

That shit takes time to accumulate, and its VERY easy to underestimate the cost of support equipment.. For some time
EVERY FUCKING JOB you get, you will have to buy tools... Don't have that drill, don't have that reamer, don't have
that insert (don't even have a holder, or a lathe)..

I'm not saying these things to discourage you, just pointing out some things that you may not have thought of.
 
Find an accountant(CPA) you can trust. Discuss the pros and cons of each way to set up the business. I believe an s-corp was the only way to go for me personally. I started with a home equity line of credit, and spent the bare minimum on everything for the first 5 years. Proper accounting is a must from day one. A business eats capitol at alarming rates. With 4 employees, equipment payments, building lease, insurance, taxes, etc. you will spend 20k a month. Prepare to work more hours for less pay than you ever have. Check with the SBA for small business loan info.
 
Not to discourage you, I did it and you can too.
But...
I had a lot of contacts and thought I was pretty well regarded by my employers customers. When it comes down to it, nobody wants to take a chance on a startup.
You're going to have to go into this with the mindset of starting at zero.

Oh yeah and...
I had a partner. I wish I didn't.
 
Are you planning to target your current employer's customers if/when you start up?

That was going to be my question.

If you think you are just going to waltz in to your current employers customer (who you have already stated knows exactly who you are).
And steal that work? You should just burn your business plan. It will not work. Guaranteed 100%
And, ohh-yea, partnerships fail I would guess over 90% of the time. I personally do not know of one single partnership that succeeded.
But, I know of literally 100's that failed.
 
My two cents? Go to work for that competitor who's eating your lunch. If you've been getting a paycheck for twenty years the last thing you need is to be the one writing the paychecks. Just the federal and state withholdings, plus that unexpected FICA match, will eat up what profit you expect to make. And then the vig on a quarter mil note? Oh, lord. Keep in mind also that your friendly bank loan officer will keep a spreadsheet on your enterprise and if you make any strategic decisions that scare him you might learn something unpleasant about fine print...
In a struggling partnership it will eventually come down to whose time is worth the most, and it's always the other guy. If you have a wife and kids, don't do this.
 
I appreciate all of these replies. I would like to take a second to clarify a few points that have been brought up.

First off, I can't go into great deal about what we do, due to the fact that I am still currently employed there. But, the product we make, is essentially the same for each and every customer. Our customers are making a product to go on store shelves, and we are making a product for them that helps them to produce their product. Our processes are nailed down, and margins are very lucrative. Everything that we make is essentially "one off", being that it is customer specific, but it is always the same "type" of product. What we make, is worldwide. There is only one competing company in the United States that does what we do.

I do feel strongly that we have a good plan in place to attract potential customers, and the reasoning behind that, comes from direct quotes from others customers. They are very unhappy with some things that have been going on, and they have every right to be. Again without going into great detail, the issues are above my head, but they are also very glaring.

I realize I may sound like a disgruntled employee, but I do have business experience, and the stones to not give up until I'm profitable. The only thing I don't have, is experience starting a business. What I'm looking to do is take an existing, proven business, in an area with light competition, and improve upon it.

Also, I do not have capital. Unfortunately, I went through a divorce, and was left with very little equity that I can turn into capital. But, as I said before, the margins on this product are very high, especially with me doing the majority of the work myself. What I need, is an investor or even a loan with enough margin that I can get the business going, and I can become self sustaining in a relatively short period of time.
 
I appreciate all of these replies. I would like to take a second to clarify a few points that have been brought up.

First off, I can't go into great deal about what we do, due to the fact that I am still currently employed there. But, the product we make, is essentially the same for each and every customer. Our customers are making a product to go on store shelves, and we are making a product for them that helps them to produce their product. Our processes are nailed down, and margins are very lucrative. Everything that we make is essentially "one off", being that it is customer specific, but it is always the same "type" of product. What we make, is worldwide. There is only one competing company in the United States that does what we do.

I do feel strongly that we have a good plan in place to attract potential customers, and the reasoning behind that, comes from direct quotes from others customers. They are very unhappy with some things that have been going on, and they have every right to be. Again without going into great detail, the issues are above my head, but they are also very glaring.

I realize I may sound like a disgruntled employee, but I do have business experience, and the stones to not give up until I'm profitable. The only thing I don't have, is experience starting a business. What I'm looking to do is take an existing, proven business, in an area with light competition, and improve upon it.

Also, I do not have capital. Unfortunately, I went through a divorce, and was left with very little equity that I can turn into capital. But, as I said before, the margins on this product are very high, especially with me doing the majority of the work myself. What I need, is an investor or even a loan with enough margin that I can get the business going, and I can become self sustaining in a relatively short period of time.

If you insist on making a go of this. Do it by yourself.
If you are single (divorce and all), have the balls you say you do, and are willing to put in the hours you say you are?
You do not need a partner. A partner is the last thing you need.
 
I realize I may sound like a disgruntled employee, but I do have business experience, and the stones to not give up until I'm profitable. The only thing I don't have, is experience starting a business. What I'm looking to do is take an existing, proven business, in an area with light competition, and improve upon it.

Also, I do not have capital. Unfortunately, I went through a divorce, and was left with very little equity that I can turn into capital. But, as I said before, the margins on this product are very high, especially with me doing the majority of the work myself. What I need, is an investor or even a loan with enough margin that I can get the business going, and I can become self sustaining in a relatively short period of time.

So Why the fuck do you want a business partner and 2 employees?????? Your poop chute didn't
get torn up enough in your divorce?? You like turmoil, conflict and legal proceedings???

Nothing wrong with being a disgruntled employee.. I think a valid business plan should be
"I worked for XXXX and I will do EVERYTHING exactly opposite".

CHEAP machines that can be bought on a credit card... Subbing stuff out... You aren't trying to
start a machine shop, you are basically trying to start a "brand".. "come here to get your
bits and pieces to do YYYYY and ZZZZZZ".

I can make dildos, nipple clamps and butt plugs all day long, but I don't have a clue how
to sell 'em..

You know how to sell 'em.. Why bother making them.. Get some other poor sucker to do that.
Sub it out, for now... Get some money, and then get some machines, and then bring it in
house, or subbing it out might just be easier and its not worth trying to do the manufacturing
yourself.
 
Cold turkey start-up,, overhead and payroll, rent and utilities, one top guy of two out knocking on doors..
Two owners and two workers who need steady dollars now and hope the small talk proves some work.... Might you and your partner each put up 20 or 30K.. rent space and find enough work to support the business plan.

We have 100k into the blind shop and may break even by year end..we hope.Yes and two of four ( some times three of four)are not yet drawing a pay check.
 
It's not something that can be legitimately subbed out. The product is an assembly that requires the know how to make sure everything comes together and functions as needed. I wouldn't put my name on it after subbing it out because I would need to be there to ensure the quality of work that goes into it. If I'm doing that, I might as well be making it myself and keep all of the profit.

Essentially the sales pitch for a lot of customers will be "If you got this product from xxxxxxxxx, give us a shot at your business because you won't have to deal with those people that you request to not speak on the phone with".

Also, these are parts that will have 80+ hours in them when they go out the door. 60+ of those hours are "lights out" machining (which is the reasoning for needing 2 VMCs). But then the the customer writes a check that pays utilities for a month. Even on a slow month, we average 1 per week. We have in the past done 4 per week (more machines in current shop). I could do every ounce of the work myself, but that's not what I want. I want to build a profitable business that is the "go to" for this product. The business model is proven. It's all about getting the knowledge in how to go about starting up. I don't know whether I need to form my LLC before finding property, or if I need to have property lined up before register registering. Those are the biggest type things I thought I could come here and get an idea about.
 
Hi Mr. Banker Man..

My business plan is to steal my current employer's customers...

We, myself, my business partner and 2 employees right off the bat, plan to sell
ONE widget a week to support all 4 of us and pay you back. We have no means of
production, no actual corporate documents, no ACTUAL corporation, and have no
place to conduct business.... Can you please give me money?????
 
It's not something that can be legitimately subbed out. The product is an assembly that requires the know how to make sure everything comes together and functions as needed. I wouldn't put my name on it after subbing it out because I would need to be there to ensure the quality of work that goes into it. If I'm doing that, I might as well be making it myself and keep all of the profit.

At the start, I wouldn't get too attached to trying to squeeze every last bit of profit out the sale. The name of the game is getting sales well established before running out of start-up capital. In $$ terms, how much extra are you going to get by running it on your own machines vs. the massive overhead you'd be taking on right out the gate by buying not one, but two new VMC's, plus all the associated cutting tools, metrology, work holding, etc? Also, if the work is done on some standard HAAS 3 axis VMCs, then I suspect it more possible to sub out than you are letting on. You may WANT it to be in house (which I understand), but if you know machining, and you know what needs to be done, you should be able to get someone going to machine it for you.

Essentially the sales pitch for a lot of customers will be "If you got this product from xxxxxxxxx, give us a shot at your business because you won't have to deal with those people that you request to not speak on the phone with".

Which is also true of the competitor that is apparently cleaning up right now. Why you and not them? With the other competitor on the hunt for the same customers, what does you business plan look like if it takes a few months to warm the customers up to you instead of the established company?

Also, these are parts that will have 80+ hours in them when they go out the door. 60+ of those hours are "lights out" machining (which is the reasoning for needing 2 VMCs). But then the the customer writes a check that pays utilities for a month. Even on a slow month, we average 1 per week. We have in the past done 4 per week (more machines in current shop). I could do every ounce of the work myself, but that's not what I want. I want to build a profitable business that is the "go to" for this product. The business model is proven. It's all about getting the knowledge in how to go about starting up. I don't know whether I need to form my LLC before finding property, or if I need to have property lined up before register registering. Those are the biggest type things I thought I could come here and get an idea about.

Umm, utilities are a small portion of my overhead, and I don't have anywhere near what you're talking about with all that borrowed money and employees. If 80 hours of work only produces enough to cover utilities, you need to find the error in your business plan that makes you think you can float all those people and equipment. Also, when starting up, I'd figure on using less than the "slow month" numbers that your old (and apparently well established) employer uses. If the customers are still dealing with that business and haven't already jumped to the strong competitor, I wouldn't expect them all to jump ship to you immediately. They have some reason to stick with the company they know. You may win them over in time, but you have to survive long enough for that to happen.

(This is minor compared to the other challenges, but set up your company the way it will be (LLC or whatever) prior to signing the lease, or put a clause in the lease that allows your company to assume the lease from you personally when the business is legally formed. Either way, you'll likely have to personally guarantee they lease anyway since the company has no assets.)
 








 
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