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Buying a Precision Machine Shop

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.
Really helpful perspective, appreciate the reply and hearing both sides of this valuation debate
 
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.
This is helpful perspective on difference with products, thank you! Going to reflect on this but at moment nothing I’m particularly passionate about, just love to analyze, invest in and lead timeless and enduringly profitable businesses.
 
Do you mean that there is only $600k net on the $4M revenue?
I hope that means they re-invest a lot back into the equipment and building every year.

An equipment list would tell you a lot about how it has been run, and how much it might cost you to modernize as equipment starts to fail.
Thank you for this, good point on protecting downside risk.
 
Having one large customer (80%-95% of our sales for the last 13 years) has worked very well for us, but I think we're in the minority there. Well, it worked great right up until they are shut down in two weeks. Business acquisitions are done behind closed doors and you'll never see it coming. I'm living it currently.

As far as money goes, I would think with a username like yours, you'd be way better at this than lowly machinists are, but here are some comparisons to our last 3 years. My shop is 3 CNC mills, 4 total employees in 2400 sq ft:

- You are down 56% of revenue per square foot. Lots of opportunity to expand in the current building?

- You are up 7% of revenue per employee, but that will go down when you hire an operations manager. You also said "over 15 employees", so that's pretty ambiguous.

- You are down 34% on your profit margin (assuming that $600k is net income), and that's with us paying off two of our 3 machines last year. How is this company utilizing it's employees well, but still missing so much net income? Where's the overhead going?
Really helpful and appreciate you running through this Matt, thank you! Good luck with key customer transition, seems like a lot of support and wisdom by others here on PM to help get through it
 
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.
Real talk, thank you David, appreciate this!
 
We don't know the type of work that this shop does of course, so - if it is more of a tooling Onesey-Twosey plant, then there likely isn't going to be much fat to trim.

But if it is more of a production facility, then there may be room to invest in some automation to help make the numbers look better down the road.


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Think Snow Eh!
Ox
 
Type of work is very important. I wouldn't get involved in a 15+ employee job shop at this point and I KNOW the business. That is going to be like herding cats.

If it's specialty equipment or some niche production a business mind could do alright without having a super deep understanding of the equipment or process. The caveat is you need to have a trustworthy and skillful management team who know their business.

My company does zero advertising as we are as busy as can be and haven't been able to hire. The inter business personal relationships are crucial to my own business. My customer's are happy to do business with me because they know if there is an issue they talk to me and I see that it is handled. Is the customer that makes up 50% going to feel comfortable with you at the helm if you don't actually know the ins and outs? Again, if you have a stand in with your manager it could work.

If you could share some insights into how the business is operating you might get a clearer answer.

How much additional money are you willing to put in after the acquisition? Automation isn't cheap but it will pay itself off remarkably quickly if you have the right approach and application.
 
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.
We don't necessarily disagree too much. But your scenario....$1m for a company that nets the owner $600k and the owner stays on for 2 years would be a no brainer. At zero percent interest. The thing would be paid for by year 3 and basically free at that point.
 
We don't necessarily disagree too much. But your scenario....$1m for a company that nets the owner $600k and the owner stays on for 2 years would be a no brainer. At zero percent interest. The thing would be paid for by year 3 and basically free at that point.

Really surprised by all of the negative comments. Just looking at the limited date we have, this sounds like a pretty financially healthy business. Over 250k per employee and 600k/year net revenue is pretty solid for a shop that size. There are a ton of reasons the business might not be healthy, but I'd be pretty pleased to post numbers like that.

I will say though, from a pure investment standpoint, contract manufacturing has to be one of the worst industries to dump money into. You'd be much better off investing in an OEM, unless you're Warren Buffet, and you are trying to vertically integrate your portfolio.
 
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Really surprised by all of the negative comments. Just looking at the limited date we have, this sounds like a pretty financially healthy business. Over 250k per employee and 600k/year net revenue is pretty solid for a shop that size. There are a ton of reasons the business might not be healthy, but I'd be pretty pleased to post numbers like that.

I will say though, from a pure investment standpoint, contract manufacturing has to be one of the worst industries to dump money into. You'd be much better off investing in an OEM, unless you're Warren Buffet, and you are trying to vertically integrate your portfolio.
Where are you getting the 250k per employee number?
 
4m/year is revenue, got to take materials/shipping etc away from that which is usually a big percentage in our industry.

First post said 4m/ gross. 600k net.

I can't speak to other industries, but for a small job shop those are solid numbers.

And yes, some folks will net 600k all by themselves, but it scales totally differently with employees.
 
Net 600 by themselves?

:bowdown:


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I am Ox and I must be dooing sumpthing wrong here....
Back when I was an engineer, I saw some million dollar POs sent out for what amounted to maybe 3 months of work for one guy with a 60x30 mill and a cmm. I was blown away at the time and even told my boss we needed to get some better quotes on these things, but big companies just operate differently. In this business it is better to turn down a lot of work and spend your time searching for the unicorn customers with unicorn jobs instead of working yourself to death IMO.
 
Back when I was an engineer, I saw some million dollar POs sent out for what amounted to maybe 3 months of work for one guy with a 60x30 mill and a cmm. I was blown away at the time and even told my boss we needed to get some better quotes on these things, but big companies just operate differently. In this business it is better to turn down a lot of work and spend your time searching for the unicorn customers with unicorn jobs instead of working yourself to death IMO.
Unicorn rides are the best!
 








 
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