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Does Buying a Machine Shop Work Out?

F35Machinist

Aluminum
Joined
Nov 3, 2021
Location
California
Today someone asked me if I would be interested in buying a shop down the road from me where the owner is retiring. 90% of their business is from one major customer which they have done work with for 20+ years. They make on average 500k/yr revenue and have 2 low skill employees aside from the owner. They mostly do turning and their machines are all 20+ years old. I'm not sure how much they are looking to sell for or how the buyout would be structured if I was interested. Has anyone here done a deal like this? I would be very curious to know how it worked out. Was it worth it? Were you able to keep or grow the customer?
 
Today someone asked me if I would be interested in buying a shop down the road

It could work out but totally depends on how sensible the retiring owner is. Realistically, the shop is worth scrap price on the machines less the rent for the time it would take to remove them.

If he wants to help for a while, which would be nice, then a commission on the gross from his old customers plus some payment for getting going over a set period of time, like six months or so, might be reasonable. Maybe offer what he pays the employees, like $20 an hour or so, see how he likes being "the help" :D

People are seldom that realistic tho. So instead it'll go to auction, he'll get close to nothing, customer will lose a supplier, probably have to go to china and that'll be that.
 
You can write it as $X plus Y% of the revenue from his existing customers for the first N years. This incentivizes him to have a good transition. Y can also decrease over time.
 
This isn't really a business in the proper sense of the word. More a case of the owner "buying himself a job" by either taking on a bunch of functions the major customer didn't want to do in house or by becoming the captive outsource contractor doing things they don't want to do themselves. With a little bit of work from other folk as and when it turns up.

Not only is it not actually going anywhere its is certainly cannibalising itself, consuming its capital, because there won't be a proper depreciation schedule for replacing the machines. At 20+ years old they will need upgrading soon if the business is to move on. No way is it making enough to buy new. Low skilled staff doesn't give a warm, fuzzy feel of viability either.

Realistically it's little different to the small time yard work guy why buys a truck for cash, runs it until it falls to bits and decides "Hey, time to retire." 'cos no way can he afford a new truck. On his mate round the corner who spends his weekends fixing up his latest cheap not quite wreck so he can go to work on Monday. I knew the endless fix-it-up guy! Worked hard and ought to have become rich but he never could understand business.

Effectively valueless unless it owns its own land and buildings. If the price is right and the customer could be kept for a few years maybe a hobby business to fill in before you retire. Still be consuming its capital and not properly viable if paying rent.

Theoretically it could be an income making springboard to underpin a new company growing how you want it to grow by bringing in new(er) machines and extra staff. In practice you still have to run "things as" they are which is likely to take all your time so the new business never happens. More millstone round your neck than underpinning.

As the Red Queen said to Alice "It takes all the running you can do to stay in the same place. To get anywhere you have to run twice as fast.". Savvy girl the Red Queen who understood business reality.

Clive
 
Clive

From what I understand, F35machinist already owns an established machine shop.

So it isn't really "buying a job"

More like buying a client.
 
"the owner is retiring"...."90% of their business is from one major customer which they have done work with for 20+ years."
Easiest would be to talk to guy who wants to retire and help hasten his end game.
With or without his help try and get the 90% account and help the guy find an auction house to clear out whatever assets you have no requirement for.
 
Having been witness to this a few times, I can tell you that if the shop owner is reasonable about what everything is worth, including the customer then"maybe" you can do business.

A few things I've seen:
1) Owner has an inflated view of his business and really can't let go. This leads to a wildly inflated business price and the owner constantly moving the goal posts during the sale. Walk away, if that happens.
2)Old equipment isn't necessarily bad, but, at 20+ years, depending how it's been treated, they may be near the end of their productive lives. How is the business' credit history? Can it buy new equipment? At $500k a year gross, it "should" be able to retire the oldest CNC and buy a new one.
3) One major customer? A little scary. If that customer farms out elsewhere, either for cheap or because he doesn't like the shirt you're wearing, you just bought yourself a machine tool museum with a low skill staff.You'll have to meet and greet with the customer, a few times, before you commit. They might be waiting for the old guy to retire so they can go elsewhere and not feel too guilty.

You might be better off having the customer come to you and paying the old guy a nice commission.
 
Clive

From what I understand, F35machinist already owns an established machine shop.

So it isn't really "buying a job"

More like buying a client.
Buying a job is pretty much what the current owner did when he started out, and it still continues in the same vein. So a lot of the back office and other stuff a more proper business needs to attract and service a (hopefully) steady stream of customers just isn't there.

In many ways it's not vastly dissimilar to what I did with the redundancy / consultancy / make odd bits machine shop set-up to tide me over until pension time. Money in my pocket yes, real business with a future no.

So purchasing it as a "new to me" business and starter for future plans is problematical.

If F35machinist already has a solvent and functioning machine shop then buying the business to get the client and $500 k pa of revenue may well make lots of financial sense.

Clive
 
Guess I would look at the current major customer and its possible future.
Decent older machines that look good to run for a time and an established work process are a huge plus.
An owner retiring due to his/her age is a good sign.
 
We've done this twice, although in both of our cases there was considerable product lines and client bases with the sale. The machines, inventory, and all the other assets were not the primary purchase (on paper), and IMO that's the best way to look at it when you are buying a business.

You have to do some thorough vetting of your own to see if it works. Checking into these things are less about finding "red flags" that the prior owner was somehow hiding from you (though that's good to find if it's there), and more about determining how your time will need to be spent in the years to come to set things right, and if you really want to get into it. You may start out thinking you're buying a turn-key machine shop that you can sit at and make parts all day, but then find yourself at a desk all day fine tuning the product line to actually make you money, or dealing with non-stop income/expense issues.

Are the clients happy? Is there anything lacking in how their needs are being met? Does the product have unresolved issues, or IOW need innovation? Why haven't issues like these been resolved already? Are you comfortable being THE authority on the company on day-one? Nobody care's that it's your first day owning the business. They will still hold you to knowing the answers to their questions.

With the OP's scenario of buying a shop with one customer, I'd want to find out how long has that deal been in place and how and WHY does it work? What's keeping that one customer from going elseware if you get something wrong, and is that one customer really enough to stay in business? Do you need to find more clients, and are you prepared to promote the new business in that way? Just because it worked for the old owner, but now he wants to retire, doesn't mean it's financially viable to sell that "business" to someone else. It might be better for him to send the print's and fixtures back to the customer with a list of recommended new shops to work with and then just sell off his assets. If there is a contract between the two, is that a good thing or a bad thing for the guy who has to step into the shoes half-way through it's life-span?

In our case, we bought old companies that had loads of problems with products that needed work, poor organization, missing pieces (like non-existent prints, etc.), and the like, but the pro's of the established customer and vendor relationships, product lines, and our own desire to see it all work made up for the short-comings. We just had to be prepared to put in lots and lots of work to fill in the blanks, which in our case has taken years, if not decades, not to make a profit, but to sort out the problems that hold back the full potential. IMO fixing up an old company is a lot like fixing up an old machine. It rarely makes sense in the numbers/finances, and your time is guaranteed to never break even, but the end result is rewarding and there really isn't any other way to get it.
 
90% of business from one major customer for 20+ years....

A friend bought into that same situation. The shop he bought was "grandfathered" into the major customer. That relationship ended when he was treated as a new vendor by the major customer. The major customer had requirements of new vendors that the shop could not meet. That ended the small shop........
 
90% of business from one major customer for 20+ years....

A friend bought into that same situation. The shop he bought was "grandfathered" into the major customer. That relationship ended when he was treated as a new vendor by the major customer. The major customer had requirements of new vendors that the shop could not meet. That ended the small shop........
YUP ^^^
That and maybe the owner knows some insider information, where he is going to be dropped as a vendor for any number of reasons.
 
in the early stages of similar scenario only time will tell how it turns out if i were in your shoes and were interested i'd structure it with ties that are attached to the sale 1 being major customer stays on board for xxx time and current owner does as well to ease the transition. 1 thing is for sure people aren't lined up at the gate to buy a small machine shop that is a 1 trick pony. A lot of people are going to talk about being interested but when it comes down to it many of these shops end up being sold on the auction block. It could be a good opportunity for the right price.
 
90% of business from one major customer for 20+ years....

A friend bought into that same situation. The shop he bought was "grandfathered" into the major customer. That relationship ended when he was treated as a new vendor by the major customer. The major customer had requirements of new vendors that the shop could not meet. That ended the small shop........
That is an excellent point..the major customer may have a friendship relationship with the original company owner that would be broken to the new owner.
 
I think it's a 50/50 shot. I would be very hesitant myself and was when I was offered to buy a company.

I was offered to buy out a business about 15 years ago, multiple times over the years, machining related, but it was a sourcing company, very similar to Xometry. My mother in law started this company in the early 90's, she had, I'll say 1.5 customers mainly but did incredibly well. Well into the 7 figures just sourcing work to local machine shops. Her plan was always to buy out a machine shop that did a majority of her work but she was paying herself a very decent 6 figure salary faxing prints and quotes back and forth working a few hours a week, occasional meetings, so she moved away from the plan to buy out a shop.

She offered to sell it to me and even stay present in the customer eyes to transition them to working with me. She had a great relationship with this customer. I declined, she ended up selling it to one of the machine shops.....initially it was rocky for the machine shop owner, he has terrible communication skills and a couple years later the customer was bought out by a larger corporation and all the shops had to go through new vendor approvals and this machine shop dropped tiers and lost a lot of their repeat high production work.

With some customers the relationship can be everything.
 
Today someone asked me if I would be interested in buying a shop down the road from me where the owner is retiring. 90% of their business is from one major customer which they have done work with for 20+ years. They make on average 500k/yr revenue and have 2 low skill employees aside from the owner. They mostly do turning and their machines are all 20+ years old. I'm not sure how much they are looking to sell for or how the buyout would be structured if I was interested. Has anyone here done a deal like this? I would be very curious to know how it worked out. Was it worth it? Were you able to keep or grow the customer?
First of all, I think it is necessary to determine whether the customer loyalty is based on the friendship with the seller or the low price, or the seller's superb technology and good service, and then determine whether you have similar skills or conditions to continue to maintain the service contract with the customer, and then evaluate the value of fixed assets and whether it is necessary to update the equipment. Then the two existing low-skilled workers are also the main factor in measuring the value of the business, because you have to determine whether you can hire similar workers for similar wages.

I think taking over this kind of shop first requires the owner to have relevant experience and have enough mechanical skills to complete some urgent business alone in extreme cases, otherwise there will be some unexpected contradictions in the integration with workers.


Price is of course the most important determinant, and without a very familiar friend's shop, I don't think buyers can ever estimate business prices more accurately than sellers.


If there are no trade secrets and privacy issues, I would very much like to see detailed photos that you can refer to this store.
 








 
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