Buying the shop I work for

[Jashley73]

I completely understand your point...BUT I will not be ready to buy in 3-5 months.

5 years is probably at the max...im getting the feeling 2-3 based on some of the conversations we have had...in this time i need to clean up some of my own finance stuff and learn more about the financial side of the business.

i was looking at maybe some online classes, but wasn't sure what would really apply to my situation. maybe business finance?

I don't think you're ready, at today's date. Will you be in the aforementioned 3-5 years?


My advise... Go sell something. If you have no experience with sales, you want to gain this before you have a huge financial obligation to meet every month which depends on your driving of sales to the business.

Sell anything. Cell phones, Essential Oils, whatever...

My personal advise - And this comes from years on reading on PM, and dealing with the yearning for my own business - Come up with a product that you'd like to exist, and sell. If it could be manufactured within your own current employer's business, all the better. Doesn't have to be a full-time gig, but you should make a run of it and see what it takes to turn enough profit to earn a living...

If you can make that product succeed with or without your current owner's business, then you can succeed at THAT business too, with or without the owner. That'll give you some more perspective on weather to buy his shop or not. And if so, for how much...

 

[Fadriver]

Hi All,

Hoping to start a running thread for advice throughout my journey.

As the title says, I have been offered the opportunity to purchase the shop i work for.
Currently My position is GM/Director of operations
I have been here for 11 years and started at the bottom.
I know the shop/machines/customers very well and the expectations and limitations of our capabilities.

The reason for the sale is the current owner is looking forward to retirement.

the shop is profitable, has around 10 employees and sales range from 1.4-2.0 mil

Im sure i will have a ton of questions and not enough answers, but was hoping to see what others have done before me in this situation, what to look out for, what questions to ask etc.


The owner is very willing and motivated to sell to me, as he is providing financial guidance in the form of a third party financial advisor(also the people who manage the 401K), as well as support and guidance along the way.
now i know there could be a conflict of interest in the future, but for now we are 3-5 years away from finalizing the sale.

the owner will be staying on in a more and more limited role as things go forward.


any thoughts on this are greatly appreciated. i wont get butt hurt if you tell me all the reasons not to do it


thanks again

Im sure i will have a ton of questions and not enough answers, but was hoping to see what others have done before me in this situation, what to look out for, what questions to ask etc.

200k profit per worker, not even oil companies make the
much per worker, if so why he wants to sell.
tired of making money, something weird here, 2 sets of books maybe
I know a machine shop owner 86yrs old and is not retiring yet, because making
money to afford the good life, vacations, nice cars and clothes
good restaurants.

 

[Garwood]

Im sure i will have a ton of questions and not enough answers, but was hoping to see what others have done before me in this situation, what to look out for, what questions to ask etc.

200k profit per worker, not even oil companies make the
much per worker, if so why he wants to sell.

He says nothing about making that much money. That is the gross, not the net income.

It's easy to gross huge numbers, the trick is hanging onto some of it.

 

[Mcgyver]

I don't think you're ready, at today's date. Will you be in the aforementioned 3-5 years?


My advise... Go sell something. .

I like this idea. It all starts with a customer - being good at machining is just a part of success running a machining business and second its a bit of a litmus test on ones make up and readiness - how serious are you? What are you willing to do?

the budding entrepreneur, well, all of us....you don't know what you don't know.....but for success going into the unknown, you need that attitude of damn it, I can run through walls if I just get going fast enough. That's the attitude needed to switch careers and succeed in sales....I've done it a four times in my life. My head hurts like hell from hitting walls, but I haven't given up

 

[martinberryman]

It does sound like the opportunity has potential - congrats on earning the owner's respect.

Price...
Understand the valuation metrics before you start taking valuation advice on the web... mine included.
A $2MM/yr contract manufacturing business making 10% profit (using the EBITDA, or earnings before interest, taxes, depreciation, and amortization view of profit) is worth maybe a 4X mulitple, IF the current owner is not the key contact for the relationships the business has with it's customers and suppliers. The means that a purchase price of $800,000 would only be supported if the company is actually spinning off that kind of profit AND the current owner is not the face of the business.

If the current owner is the reason the customers call, then the multiple might more realistically be 1X, or a $200,000 value.
Even that assumes that the company IS profitable. Banks don't finance losses, and there's a great reason for that. Reversing the trajectory of a business requires changing the culture in that business. Changing culture is incredibly difficult and takes strong leadership. I'm not saying it isn't, but if your leadership is not already producing success, why would it produce success next year?

Sales...
You have to ask yourself, how are you going to get business? The advice given by other posters about selling is not to be taken lightly. Also, selling a cell phone is a one-time transaction. A contract manufacturing business will need relationships if you don't want to be leading in the race to the bottom. Selling on price only sucks. You need customers who phone your business (not specifically you or the current owner) because your business has proven itself as more capable than the competition at solving the customer's problems.

It sounds like you have a few years to become the rainmaker and you plan to get there. My advice: Don't wait another minute. Go make it rain today. If you immediately find yourself making excuses about why you can't do it today, you'll still be making those same excuses in 5 years.
Business success is driven by sales. The right sales. To the right customers. For the right price. Some dogs can hunt, and some can't.
If you don't see yourself as a salesperson, then I suggest you think long and hard about where this path is taking you.

Best of luck figuring out the next chapter in your career.
Martin

 

[standardparts]

From the OP----"I have been here for 11 years and started at the bottom.
I know the shop/machines/customers very well and the expectations and limitations of our capabilities."

And this from someone else----"It sounds like you have a few years to become the rainmaker and you plan to get there. My advice: Don't wait another minute. Go make it rain today. If you immediately find yourself making excuses about why you can't do it today, you'll still be making those same excuses in 5 years."

11 years. You should know every nook and cranny of the business. Only downside is you only know THAT particular business. Can't see how another 3 or 4 years is going to make a difference in being ready. Sounds like your skills should be worth 100-150K a year. Maybe time to make a change and see how the competition runs.

 

[treetopguy2028]

Take heed. Mcgyver's reply has the greatest merit.

Mcgyver's wisdom is rock solid. You need the advice of a CP:A experienced in mergers and acquisitions. The fees you pay now may be the best part of the future investment for you. I worked as a management consultant in a nationwide
CPA firm for 30 months until we ran out of work in 1979.

probably a waste of time.

If you really want to buy a business, tell him you looking for a 3-5 month timeline or you have to move on. Then get down to brass tacks, valuation methodology and how much of it he's going to finance.

Learn some finance yourself so you're conversant.

I'm serious about it wasting time. I have a corporate finance background so always get drawn into these by friends for advice. I've seen this so many times......while he might be the nicest guy in world and really mean it, you have no way knowing what the tune will be 5 years from.

Its the myopic thinking trap. To many entrepreneurs end up with their sense of self (ego) too tied up in the business and in end the can't sell...but a little bit of feel good discussion/promise around selling doesn't confront today, its a whopping five years out. They won't tell you they can 't sell, but the price will get so stupid it'll be impossible, or some other excuse manifests itself and roadblocks to a deal emerge. It's a cheap and easy way for him to keep you committed...the myopic part is he gets what he wants today (your loyalty, feeling like he's resolved things etc) but what he has to give in return is a soft fuzzy promise 5 year out...might as well be 25

The IF is emphasized because that's the real issue. If you want to own a business, press for firm resolution now (a deal that closes not promises) while he's feeling exposed or whatever prompted the discussion, or move on. If you don't have a burning desire to own a business (and all the stress and crap that comes with it) don't buy it now, or five years.

 

[Insert]

3-5 Years ?
You could start a business from scratch and know the ins and outs by that time.
I know you say the owner is a nice guy and you are close with him, but with such an extended timeframe, be careful this isn't a plan to keep you from leaving and also putting in more work cause your thinking its yours one day, then he pulls the rug out from under you and sells it to someone else and all you did was help him make it worth more.

 

[Plane Parts]

long hours and edge of my comfort zone is where i am accustomed to working

the hardest part is going to be replacing me as a GM. I know i certainly cant run the business and take on my responsibilities now...nothing will get done.
i will have to find someone to do at least some of what i do now(programming troubleshooting setting up when needed and being able to )

You don't have to replace yourself as GM if you buy the shop. Hire someone to do what the owner does. No sense in promoting yourself to a position you're not good at.

 

[Mcgyver]

I don't know why some of you guys are putting such a negative spin on this deal. .

Professional business sale/M&A experience and a lifetime study as a deal guy of human nature and its manifestations in business

vs. hope and a wish for it to be true.

It has zero to do with being negative or anyone trying to screw anyone. Its about not planning your life around 5 year wishful hope that is about as reliable as you promising to marry your 6th grade sweetheart. No reason that couldn't happen either, maybe it does occasionally. But in business you play the probabilities.

Think like a deal maker - the point is to get to closing - hows that work 5 years out? He gets five years of hope while the vendor has all his options open - auction, keep running it, sell to someone else, transition it to a relative, etc. Meanwhile the vendor has extra leverage on the OP's level of commitment and has satisfied whatever internal or external need he has to say "I have plan". How can someone suggest burning up five years when you have no clue if there is a deal there Will he sell? Is the value expectation reasonable? Is he going finance a large portion of it? Does that sound like a situation a savvy deal maker puts himself in?

You might as well randomly drive by buildings, point and say [FONT=&quot]"yup, I might be able to buy that business in five years" - if the owner wants to sell, price is reasonable, the vendor will support it with financing and so on. [/FONT] That's the OP's situation.

IF the OP wants to own a business, he can't afford to burn up five years of his life with nothing more than the hope that I'm wrong. He should call it into the near term and see what happens, or start looking for something more tangible

 

[paulvanmetre]

THIS advice!

It does sound like the opportunity has potential - congrats on earning the owner's respect.

Price...
Understand the valuation metrics before you start taking valuation advice on the web... mine included.
A $2MM/yr contract manufacturing business making 10% profit (using the EBITDA, or earnings before interest, taxes, depreciation, and amortization view of profit) is worth maybe a 4X mulitple, IF the current owner is not the key contact for the relationships the business has with it's customers and suppliers. The means that a purchase price of $800,000 would only be supported if the company is actually spinning off that kind of profit AND the current owner is not the face of the business.

If the current owner is the reason the customers call, then the multiple might more realistically be 1X, or a $200,000 value.
Even that assumes that the company IS profitable. Banks don't finance losses, and there's a great reason for that. Reversing the trajectory of a business requires changing the culture in that business. Changing culture is incredibly difficult and takes strong leadership. I'm not saying it isn't, but if your leadership is not already producing success, why would it produce success next year?

Sales...
You have to ask yourself, how are you going to get business? The advice given by other posters about selling is not to be taken lightly. Also, selling a cell phone is a one-time transaction. A contract manufacturing business will need relationships if you don't want to be leading in the race to the bottom. Selling on price only sucks. You need customers who phone your business (not specifically you or the current owner) because your business has proven itself as more capable than the competition at solving the customer's problems.

It sounds like you have a few years to become the rainmaker and you plan to get there. My advice: Don't wait another minute. Go make it rain today. If you immediately find yourself making excuses about why you can't do it today, you'll still be making those same excuses in 5 years.
Business success is driven by sales. The right sales. To the right customers. For the right price. Some dogs can hunt, and some can't.
If you don't see yourself as a salesperson, then I suggest you think long and hard about where this path is taking you.

Best of luck figuring out the next chapter in your career.
Martin

Great advice Martin! I hoped someone would discuss valuation more. The very early comment about 1x revenue is likely off base. Martin is far more realistic in his assessment. Most machine shop owners vastly over value their shops and they aren't worth that much, especially a small shop where everything revolves around the owner. Could he leave today for a month vacation? Are their great systems in place ensuring that things will continue running smoothly? If not, then it's not worth as much. That will be a hard thing to negotiate around. He'll talk about how expensive all the machines are that he's purchased. But asset value is likely even lower.

There is a bunch of really good information in this on-demand conference The Machine Shop Ownership Change Conference, It does cost $250 but you'll be hard pressed to get that information elsewhere. The shop buyers panel is likely the most relevant to you.

I was lucky to sell my shop for 5x EBIDTA but we had really strong software systems, a team running the company, and a well diversified client base of high-end clients. The company didn't really need me anymore so it was more saleable.