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Buying a Precision Machine Shop

Everyone is commenting on this scenario and we all know it would be foolish for someone like the OP to buy a shop like this............Invest elsewhere........It's hard enough for someone who has a really solid manufacturing background or an employee with first hand knowledge of the business...............hard pass.
The real and fair truth I’m looking for!
 
My $.02 on buying a business (I haven't bought one but I have been part of a acquisition)
Business' being sold are really in my opinion just 4 numbers added together

1 Assets- Liabilities, machines, real estate, materials, all minus liabilities. Think if you sold everything at auction and paid every debit what's that number? Super simple but easy to be miss led on, no that 10 year old mill isn't worth 70% of a new one, its worth whatever similar ones are going for at auction, that brand new mill with a 7 year lease may not be worth what's owed on it. you have to be brutal on this point, if it goes out of business day one of your ownership what's left after the auction the end.

2 Customer List, in most cases with small companies you buying the contacts not necessarily the business what's that worth to you. Just because customer X has always ordered $Y dollars a month isn't a guarantee its just a very good sales lead.

3 Contracts, are there long term contracts with customers for business that's guaranteed? If so those are worth some portion of the expected net profit, on those contracts. be careful to make sure your not calculating based on overall profitability of the company it may be a winner or looser you need to know to value it..

4 Employees, this one gets overlooked a lot, think if you were to start from scratch what would it cost you to build up to the tallanet that exists there now? This is the real had one to quantify and the one with the most risk. As mentioned earlier is there a key player that may not stay? Is there a bad seed who will cost you to get rid of? 15 is a small number your likely not getting a shop full of A players, there are very likely a only one or two people making the whole thing work, if one of them moves on what are you left with? spend some time putting a value to this.


Small companies are much riskier than large ones, when GM buys a shop with 2000 workers they are really buying a system and there is enough depth that the individual employees don't matter. when your buying a shop with 15, two people could if not end it over night at the very least could put you in a world of hurt.
Thank you for your time and this thoughtful response!
 
It would be a bit different if it was a manufacturing business with it's own products, somewhat easier to value and less risk of that work walking away. Ideally it should manufacture a product you're passionate about, car parts, guns, furniture, whatever.

Investing in any business that you aren't passionate about will usually not yield nearly as good as result/return as if you invest in something you are passionate about.
 
Its going to be brutal for you. What is your source of funds? What do you need for your living expenses? Where are you if it craters?

The information you have given us is to skimpy for any evaluation. Either you are playing it to close to the vest, or you don't have the experience necessary to ask the right questions.

When a man with money meets a man with experience, the man with money gets experience, and the man with experience gets the money.
 
I'm currently I the process of developing a product to leverage a market where a business has gone to shit. Business could sell more than it could make, high value, high risk item but very simple product.

Here's where it has a bearing on what you want to try. Family member was the technical expert and suffered a health issue. Next technical guy down walked. Remember that we are like rats on a sinking ship and see the reef before the captain so if there's a whiff of trouble your foreman disappears followed by those with portable skills. What I am saying is you are at the mercy of your staff and if you stuff up even if it's not your fault they will disappear. You can do a search on this site and see how difficult it is to hire good staff. So tread very warily and do your due diligence.
 
Quick and dirty math is it's worth between 1.5 and 3m
Very much disagree. If the owner wants to retire, he can either try to find a buyer or just auction off the equipment. Most end up going with the auctioneer. If I were buying a contract machining business, I would pay the current value of the equipment less 20% plus 1x net yearly profit. That would probably come out to about a million bucks for this deal depending on the equipment. The deal would be contingent on seller financing over 5 years at 0% interest and the owner staying on nominally as an advisor for at least 2 years. If he is retiring, it is better for him to get the money over several years anyway to avoid higher taxes. This is a very generous offer since the alternative is trying his luck at the auction block.
 
I have seen new management cut costs with changes that killed the business.

One a highly successful special line of products. The kids taking over for the retiring owner decided to cut all overtime.

Product that no other company produced became on shortage, and other companies filled the gap.

The original outfit went near belly up.

Lesson: You have to be darn sharp to improve a successful business.
 
Thank you Clive for the taking the time out for such a thoughtful response. The owner has management responsibilities except design (customers design) and no sales/marketing, which the business just doesn’t do. I’m actually dispassionate about precision machining and most interested in business and investing, particularly niche, seemingly stable, long-time enduringly profitable businesses. Of course very hard to fine and all types of risks. Wondering if they exist in machining and if this could be one of them, where my skills (albeit no technical experience) could be additive for the business to 1) de-lever and 2) grow over the very long-term


I will put this out there:

As of the quoted post above (#21) from the info given thus far, I would consider the purchase if I was you.
There ARE many pitfalls, but any business has them. The future is a bit foggy, and I got my crystal ball at a bankruptcy sale, so ....

Personally, I would think that $600K return on a $4M gross seems OK, as does $4M with 15 souls on payroll.
I am sure that those who balked at that doo much better, but for the rest of us mere mortals, those numbers seem reasonable.

I would NOT expect to grow the business tho! Finding help these days is a lesson in futility unless you are the top dog, and even then ..... So - I would recommend that you not bank on expansion at this time, and just hope to hold the status quo for 5 years.

You would also want to have an idea if the only reason that the owner was able to skim $600 off the top is b/c he has not reinvested in equipment - that WILL need to be updated soon to continue, and gobble up your 600. Was he pulling out 600 from '13- to '18 as well? When were the newest 4-5 machines purchased.

However, my typical answer to this is:
"Why would you not re-invest into the place that you made the $ to begin with?"


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I am Ox and I approve this post!
 
like others have said you didn't give too many details about said shop. what region are we talking about? what industries do they serve? what equipment and services do they focus on? what's the average age of the team? Without really diving into these fine details your post doesn't paint much of a picture and everyone is kind of speculating on opinions. most shops that are available are old/outdated and not worth much and the few that are still making good money seem to want a premium price tag on the place. if this is another job shop the real question is how hard is it for that customer base to find another shop to do their parts as machining can be a commodity service. With the upcoming outlook not looking bright there will be many other oppportunities on the horizon. Downturns in the economy accelerate the shops that get wiped out as there are many a shops just slowly dying by sucking equity out of the company til there is nothing left.
 
like others have said you didn't give too many details about said shop. what region are we talking about? what industries do they serve? what equipment and services do they focus on? what's the average age of the team? Without really diving into these fine details your post doesn't paint much of a picture and everyone is kind of speculating on opinions. most shops that are available are old/outdated and not worth much and the few that are still making good money seem to want a premium price tag on the place. if this is another job shop the real question is how hard is it for that customer base to find another shop to do their parts as machining can be a commodity service. With the upcoming outlook not looking bright there will be many other oppportunities on the horizon. Downturns in the economy accelerate the shops that get wiped out as there are many a shops just slowly dying by sucking equity out of the company til there is nothing left.
Really appreciate thoughtful response, thank you! While there are tons of shops out there, have to respect confidentiality of this deal by keeping details limited for these purposes.
 
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@ManufacturingInvestor what other industries have you purchased businesses in?

One more question if you do not mind; What is your opinion of DEI scoring and ESG metrics being used by institutional investors to determine corporate investment credibility?
Have invested in and familiar with a variety of industries, particularly on the public equities side in the institutional investing world which you alluded to. I have a lot of views on DEI and ESG. DEI and ESG at the end of the day is just business. Right or wrong there’s a segment of the US population and especially Canadian and European populations that have liberal values and are saying they care more about DEI/ESG at companies than cash flow. The large institutional money managers have identified this interest, launched ESG funds which they charge massive fees on with the intent of investing in “good” companies and the show goes on. It’s just business and an approach to increasing assets under management at higher fees than passive funds, which are eating away at the large asset managers. It comes in waves, like other themes (years ago it was all about emerging market funds) but cash flow will always be timeless. Buy SPY or VOO bit by bit each month and let it compound or invest in yourself like we’re talking about here. Hope this is helpful. I could go on and on if any follow up questions.
 
I will put this out there:

As of the quoted post above (#21) from the info given thus far, I would consider the purchase if I was you.
There ARE many pitfalls, but any business has them. The future is a bit foggy, and I got my crystal ball at a bankruptcy sale, so ....

Personally, I would think that $600K return on a $4M gross seems OK, as does $4M with 15 souls on payroll.
I am sure that those who balked at that doo much better, but for the rest of us mere mortals, those numbers seem reasonable.

I would NOT expect to grow the business tho! Finding help these days is a lesson in futility unless you are the top dog, and even then ..... So - I would recommend that you not bank on expansion at this time, and just hope to hold the status quo for 5 years.

You would also want to have an idea if the only reason that the owner was able to skim $600 off the top is b/c he has not reinvested in equipment - that WILL need to be updated soon to continue, and gobble up your 600. Was he pulling out 600 from '13- to '18 as well? When were the newest 4-5 machines purchased.

However, my typical answer to this is:
"Why would you not re-invest into the place that you made the $ to begin with?"


-----------------------

I am Ox and I approve this post!
Ox thanks for this and love this post as it helps balance and capture both sides of the debate here. Totally agree on not growing it at first for years, the initial focus for years needs to be on execution, cash flow and deleverage. Once de-levered a few years out could then focus on growth. All businesses have problems and risks, it comes down to being aware of and mitigating those risks - which this thread has been incredibly helpful for. Appreciate you taking the time to respond.
 
This is way outside my expertise, so half of this reply is just a lazy way to subscribe to the thread. Most of the transactions I've been around are closer to the VC side of things, and I'm signing the back of the check, not the front for my time at those jobs.

$600k, but what's it going to cost to replace the owner? Depending on what part of the country that's $100k to $300k burdened, so what you have is heading in the direction of what you make parking money in the stock market. I'm assuming you're taking this larger risk expecting a larger reward.

1. I've seen some of my suppliers change hands in the last couple years. They all have a very specific niche they fill which you can't just buy the equipment and start up. They also kept the owners around for a couple years with a sweetheart deal. One was bought by someone with expertise in the field.
2. The other was bought by a large group that knows nothing about machining, but they are very clearly trying to pour in a large investment in new capital (cost on top of the acquisition) to fix some holes the business had so that they can resell it in 3-5 years. That's a lot harder to do with a small shop unless there's something special about it.
3. What is your bar for success in this transaction? If 10% ROI is a success, maybe. If you want double that over several years to consider this a success given the risk then we'd need a lot more info, and you should know more about it than we (certainly I) do.
4. If you want to dude ranch in a machine shop because it seems easy I'd pick a different route.
 
I have seen new management cut costs with changes that killed the business.

One a highly successful special line of products. The kids taking over for the retiring owner decided to cut all overtime.

Product that no other company produced became on shortage, and other companies filled the gap.

The original outfit went near belly up.

Lesson: You have to be darn sharp to improve a successful business.
Helpful and hear you on this, cutting costs cannot be the answer - more demand, high capacity utilization strikes me as best opportunity. Great lesson, just keep it going, don’t mess it up.
 
This is way outside my expertise, so half of this reply is just a lazy way to subscribe to the thread. Most of the transactions I've been around are closer to the VC side of things, and I'm signing the back of the check, not the front for my time at those jobs.

$600k, but what's it going to cost to replace the owner? Depending on what part of the country that's $100k to $300k burdened, so what you have is heading in the direction of what you make parking money in the stock market. I'm assuming you're taking this larger risk expecting a larger reward.

1. I've seen some of my suppliers change hands in the last couple years. They all have a very specific niche they fill which you can't just buy the equipment and start up. They also kept the owners around for a couple years with a sweetheart deal. One was bought by someone with expertise in the field.
2. The other was bought by a large group that knows nothing about machining, but they are very clearly trying to pour in a large investment in new capital (cost on top of the acquisition) to fix some holes the business had so that they can resell it in 3-5 years. That's a lot harder to do with a small shop unless there's something special about it.
3. What is your bar for success in this transaction? If 10% ROI is a success, maybe. If you want double that over several years to consider this a success given the risk then we'd need a lot more info, and you should know more about it than we (certainly I) do.
4. If you want to dude ranch in a machine shop because it seems easy I'd pick a different route.
Appreciate this and agree with these points. Owner or senior manager would have to be retained for $100-$300k. This reduces cash flow and overall value of the business. However, if just status quo and historical results maintained, the returns / ROI would be very very high (even without growth) given debt financing / leverage behind the acquisition.
 








 
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