Looking at buying shop

[metal-ica]

I have customers that I am grandfathered into. It would be a pain in the ass for a new guy to acquire these customers without connections.

I feel like that has value. From the posts that said once the shop has sold they lost the grandfathered customers - I'm wondering if the deal was structured as an asset sale where the new owner bought the assets from the prior owner and started a separate legal entity. I would imagine this would trigger questions by the customer because they'll need to enter the shop as a new vendor with new taxpayer id's, checking accounts, etc.

That is something to think hard about for sure. An asset sale my be a cleaner transaction, and have tax benefits (not a cpa) but if it requires your customers to enter a new vendor into their bureaucratic systems it could be very consequential.

 

[Joe Miranda]

My thoughts are different than many here. I believe it is usually better to start with something rather than nothing. An existing business has already crossed many hurdles. The start up phase of a new business is grueling and can suck the life out of the most testosterone charged men who have a good support system (an understanding wife).

Anyone who has actually purchased a used machine knows the amount of labor involved in the transaction. You begin the search, then the research (or the other way around - but not always), then you start running around to check out the list of candidates and narrow down the field, then you inspect the likely winner, then you contact riggers and trucking companies and schedule transport, then you wiggle it in place, then you wire it up, then you go find out all the little things that wiggled loose on during the trip and get it to finally make it through the boot up sequence. And now you have one machine. Repeat as necessary.

And that does not include the other "business aspects"; attorney fees to set up the company and the back and forth with the sec'y of state etc.

This is coming from someone who has actually been down that road. It is not for the faint of heart.

 

[Garwood]

My thoughts are different than many here. I believe it is usually better to start with something rather than nothing. An existing business has already crossed many hurdles. The start up phase of a new business is grueling and can suck the life out of the most testosterone charged men who have a good support system (an understanding wife).

Anyone who has actually purchased a used machine knows the amount of labor involved in the transaction. You begin the search, then the research (or the other way around - but not always), then you start running around to check out the list of candidates and narrow down the field, then you inspect the likely winner, then you contact riggers and trucking companies and schedule transport, then you wiggle it in place, then you wire it up, then you go find out all the little things that wiggled loose on during the trip and get it to finally make it through the boot up sequence. And now you have one machine. Repeat as necessary.

And that does not include the other "business aspects"; attorney fees to set up the company and the back and forth with the sec'y of state etc.

This is coming from someone who has actually been down that road. It is not for the faint of heart.

I've started from nothing, bought an existing product based business and weathered a bad period period followed by a restructure/restart.

I think starting over with experience was the easiest.

I would expect anyone who has not owned a business and who decides to buy something that already exists is going to overlook and minimize many important things.

I do also believe that starting into business later in life has not only the advantage of life experience, but you probably have much greater spending power. When you don't have a house and established credit and lots of assets a surprise $10k bill can decimate your plans.

 

[Ox]

On the flip side, when starting later in life, you don't have the recovery time from bad experiences / choices / Schidt happens.


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

No free lunch!
Ox

 

[otrlt]

So you can sell that customer to somebody else for money?

If you have products and develop a recognizable brand then, in a way, you can sell your customer base.

Otherwise I think the opposite of your statement is mostly true for manufacturing businesses- Take away the owner and the only value is the property and equipment.

Hello Garwood,
For an example; Machineshop buyer has 2 choices. Machineshop #1 has good paying steady clients, Machineshop #2 does not (good reason to sell).

Guess what shop has a higher valuation?

To further make my point, Machineshop #1's clients are large corporations, how much more does this effect the valuation of machineshop #1?

The most important task that any shop needs to nail down, is to be recognized buy a large corporation.

 

[Garwood]

Hello Garwood,
For an example; Machineshop buyer has 2 choices. Machineshop #1 has good paying steady clients, Machineshop #2 does not (good reason to sell).

Guess what shop has a higher valuation?

To further make my point, Machineshop #1's clients are large corporations, how much more does this effect the valuation of machineshop #1?

The most important task that any shop needs to nail down, is to be recognized buy a large corporation.

Interestingly enough I know a guy that owns a manufacturing business with just one customer (The US government). It's a cool business, interesting product, lots of fascinating processes involved. Lucrative contracts going out 10+ years.

The business is for sale. Has been for awhile. Basically buy it for a couple years net (guaranteed) plus proprietary machinery required for the work. Nobody seems to want to buy it and the owner's getting up there in age.

I can say from my inside knowledge of what's involved I would buy it for one years net plus the required machines, but no more. One customer, regardless of size, does not mean they can't change how they do things.

I have seen this first hand with a close friend's business. 50 years of making a niche product for government agencies that should have been relevant forever. Except technology happened that leapfrogged right past his stuff and made his entire industry obsolete overnight. Nobody could have foreseen it. He could have sold his product lines alone in the early 2000's for several million. Today they are worthless.

Preaching the infallibility of a single large customer does overlook this small detail called CHANGE.

 

[chuckg7442]

So you can sell that customer to somebody else for money?

If you have products and develop a recognizable brand then, in a way, you can sell your customer base.

Otherwise I think the opposite of your statement is mostly true for manufacturing businesses- Take away the owner and the only value is the property and equipment.

Not exactly. One has to sell a product or service to somebody, just like they need to have something to sell. If the customers don't continue to do business under a new owner, that business has to find new customers, or a new product to attract new customers or they go under. A business that is already establish has both equipment and customers. I think both are needed.

 

[chuckg7442]

Interestingly enough I know a guy that owns a manufacturing business with just one customer (The US government). It's a cool business, interesting product, lots of fascinating processes involved. Lucrative contracts going out 10+ years.

The business is for sale. Has been for awhile. Basically buy it for a couple years net (guaranteed) plus proprietary machinery required for the work. Nobody seems to want to buy it and the owner's getting up there in age.

I can say from my inside knowledge of what's involved I would buy it for one years net plus the required machines, but no more. One customer, regardless of size, does not mean they can't change how they do things.

I have seen this first hand with a close friend's business. 50 years of making a niche product for government agencies that should have been relevant forever. Except technology happened that leapfrogged right past his stuff and made his entire industry obsolete overnight. Nobody could have foreseen it. He could have sold his product lines alone in the early 2000's for several million. Today they are worthless.

Preaching the infallibility of a single large customer does overlook this small detail called CHANGE.

Government contracts can be volatile. New administration and "secure" work disappears. Not to mention that the govt makes manufacturing unnecessarily difficult with tolerances. I've seen them have a reamed hole that took the machinist hours to set up and make to print, for one of their guys to come in with a hand drill and completely destroy it, or have a product made to completion, for them to cut half of it off and trow it in the bin because that's how the process sheets say it needs to be done and they haven't updated it yet. Come to think of it, the govt is the last customer I would want in my shop. Too much BS, even for that kind of stupid money.

 

[otrlt]

Interestingly enough I know a guy that owns a manufacturing business with just one customer (The US government). It's a cool business, interesting product, lots of fascinating processes involved. Lucrative contracts going out 10+ years.

The business is for sale. Has been for awhile. Basically buy it for a couple years net (guaranteed) plus proprietary machinery required for the work. Nobody seems to want to buy it and the owner's getting up there in age.

I can say from my inside knowledge of what's involved I would buy it for one years net plus the required machines, but no more. One customer, regardless of size, does not mean they can't change how they do things.

I have seen this first hand with a close friend's business. 50 years of making a niche product for government agencies that should have been relevant forever. Except technology happened that leapfrogged right past his stuff and made his entire industry obsolete overnight. Nobody could have foreseen it. He could have sold his product lines alone in the early 2000's for several million. Today they are worthless.

Preaching the infallibility of a single large customer does overlook this small detail called CHANGE.

Hello Again Garwood,
For those business owners that think they know their true net worth; Go get a loan from your bank, you will then see the perhaps ugly truth of your business valuation.

Banks do not care how wonderful your machinetools are, they will value brand new machines @ .20 cents/per dollar. The same goes for property, but perhaps not extreme.

The hard truth is, without viable costumers you may have negative worth.

For those that are interested in selling or buying a business, don't take my word, talk to your lender/beancounter.

 

[Garwood]

Hello Again Garwood,
For those business owners that think they know their true net worth; Go get a loan from your bank, you will then see the perhaps ugly truth of your business valuation.

Banks do not care how wonderful your machinetools are, they will value brand new machines @ .20 cents/per dollar. The same goes for property, but perhaps not extreme.

The hard truth is, without viable costumers you may have negative worth.

For those that are interested in selling or buying a business, don't take my word, talk to your lender/beancounter.

Loan collateral is not the same thing is business value.

Equipment and property is worth what someone else will pay for it, that simple.

I think the point you and I strongly disagree on is you believe that a small shop with one large customer looks great on paper and makes for a high valuation.

I say regardless of cashflow that is not a low risk business plan worthy of a high valuation. It is a high risk regardless of how big your singular customer is and therefore is not a high value.

In addition, if your business is one in which your skills are vital to the daily operation and profitability of the operation then you don't have a salable business at all. You just own your own job.

A Bank won't care about that, but someone looking to purchase a profitable business sure will.

 

[discodan]

I didn't see it mentioned but can the owner stay on for a transition period?

 

[otrlt]

Preaching the infallibility of a single large customer does overlook this small detail called CHANGE.

Hello Garwwod,
I think we got off to a bad start. Let me clarify, at no point during this thread did I recommend that one Blue Chip customer was all that a shop needs to succeed. Does this strategy work for my small business? Yes, it does, but that is a clearly different subject.

The subject of this thread is; How does a buyer of a manufacturing business properly valuate it's worth?

As far as your above statement pertaining to "CHANGE", very little has changed in my business. We still produce the same toolroom machining fixtures and gages that I had seen in the late 70's.

I must admit, I'm quite surprised that more than 40 years later, my toolmaking skills are routinely called upon to manufacture gages and tools that were designed over 50 years ago.

 

[wheelieking71]

I really wish I was good at cleaning and organizing. But I'm just not. Or maybe
I am, and I just hate doing it.

Organizing? I'm a pro. Even enjoy it. Why?! IDFK
Cleaning? Hell no! Who has time for that? I haven't ridden my dirt bike in months. It is still wearing the dirt from the last ride.

 

[charlie gary]

I wonder what the OP decided.

 

[MwTech Inc]

William
reading your posts....I came up with this.

I would take your "disposable " income and put it in real estate....lot easier way to make money.
unless you just have to do this and take on all the stress of owning and running a business.

If you have never been self-employed you are in for a awakening ..........I am..... I know.

You will never be able to turn it off in your head....you sure you can handle that??? Any member on this forum that is self-employed will agree.

 

[BobM3]

Do you have any grinding experience? The centerless grinding shops in my neck of the woods are booked solid for months.

 

[WilliamSK]

I wonder what the OP decided.

Hi Charlie,

I walked from this for now. As many of you mentioned, it didn't make sense without a few basic conditions being met, which were not.

At the moment, I am looking at several other shops that are smaller, have more customers, and can be built upon. I believe the advise of starting off small and building around that, by Mr. Plasma, is bang on for my situation.

There seems to be a lot of guys retiring in my neck of the woods, and few people with the ability to buy. We shall see what comes of this.

William