Purchasing CNC Business - Specific Industry Questions

[jamscal]

If you buy one of these 2-3 million in revenue companies you shouldn't have to worry about hiring if it's a 'fully functioning' business. In fact, your new management team will be the ones worried about hiring, no? (lol).

There are a wide variety of ways to do business and certainly people want to sell for a variety of reasons.

I'm about to have to have 10 employees (from 8) and feel like business is the Wild West at this level....and I have stable customers and am always on the hunt. But I have no management team (I do have a good accountant) and no illusions that things have to continue at this pace.

Do some reading or youtubing on buying a business through a broker. There are some pitfalls and even after you get through the NDA the numbers are always a little too rosy.

Some say to never do it...just be out there constantly looking and make deals on your own. I found another business I wanted to buy with good numbers (Through a broker.) My accountant said it was ok, which was suprising, but it was the same story, the owner was everything, and I'd have to clone myself to make it work.

I know another problem recently is the brokers know that SBA money is relatively easy to get for people with good credit. Some even get the business pre-approved for a set amount...much more than the business is worth coincidently. So the owner will be willing to take back a certain amount of financing to sweeten the pot, but that is over and above what they really needed anyway, so if you fail it's really nothing to them, as that SBA money has already cleared.)

I agree with metal-ica's post above. You seem smart and asking the right questions. But you also say you're an engineer, which sometimes means too 'by the book' and rigid in thought . I've seen it.

What type business do you currently own?

 

[ducesrwld]

your questions are all good ones but finding a good/small couple mil outfit i feel is few and far between. like has been mentioned the talent pool is thinning and this is a demanding business model both people/talent and capital costs. and the only reason to sink a couple mil into a business is to grow it. a lot of the shops out there that are on cruise control have been maintaining a steady level for a long time on people and equipment so as soon as someone purchases that business the faucet needs to be opened up to continue pouring money into the operation to start making up lost ground. trying to find a stable shop with a seasoned crew that will stick around with new ownership that has continued to update equipment and has an owner that is willing to stick around for months to make sure the transition goes smoothly....that is the tough part of the recipe.

the upside is there is a lot of guys looking to get out from the boomers and there aren't many loonies out there looking to get into the show so you have that going for you!

 

[john.k]

The one factor to be careful not to be sucked in by is "cooking the books"......my old bosses did this using another business to subsidize the business they were selling for over 12 months prior to sale .........if the business vendor has a another similar business as well ,that would be a massive red flag to me.

 

[dannyandthejets]

I definitely fall into the engineer mindset sometimes, but I'm at least honest with myself. I find myself typically butting heads the most with other engineers. You get five of us in a room and you're going to have 7-8 opinions, all of which couldn't be wrong! It would be pretty pivotal to be able to meet the people in the business already, and reassure them that I'm not there to upend things/beg them to give me a shot and promise them a raise in return. It sounds like it would probably be difficult to find right now as well, but I don't think I would purchase if the seller weren't willing to do some financing or a VTB agreement so that I feel like they have enough skin in the game to make sure that they're handing over something that can succeed.

Duces, you're right as well that these seem like needle in a haystack, but I'm not impatient. It looks like there are probably 2-5 listings that look halfway decent in any geographical area of a few states at any given time, and fewer of those that the owner isn't the whole foundation, and fewer of those that aren't going gangbusters because of 3-4 customers that have more work than can be done right now. Eliminating all those and I would guess that an opportunity worth jumping on might come once a year in most states.

I'm currently in manufacturing of mostly construction materials, although our range sometimes falls outside of that market. Aside from the labor headaches I've already mentioned a large part of the issue is controlling (and understanding) costs because while there are some things that are easy to calculate, there are others that are absolutely not. (Not that the people who run the internet don't already know everything there is to know about me, but I don't like to get too personal online.)

Think like taking orders for cakes and cupcakes and pastries. I know how much batter each will need, and I know within some range how much icing should be used, but they're all mixed in the same bowl, baked in the same oven, and decorated by the same handful of people. Once it's all mixed together, my labor component is basically unknowable for any one product. I come from a much larger manufacturing background where costs are much more closely tracked, so sometimes this drives me basically insane with only knowing if we made money on several jobs after I pay the bills and run payroll. (Exaggerating slightly.)

The machining industry seems like it runs on a fairly similar business model to what I'm currently in, so less learning curve there. Which is good because I know there are plenty of curves elsewhere. One major appeal though is being able to know/figure/control costs better. I might not know all the feeds and speeds, but I know they're knowable, so I'm figuring with the right team that will help with that curve as well.

I get the notion I would sleep better at night. Of course, if that's all a pipe dream please feel free to disabuse me now!

 

[Garwood]

Be cautious falling for the idea you can buy an existing machine shop business and apply those resources to your own product idea.

Job shops and product manufacturing is quite a bit different when you get deep into it.

It could be very expensive and wasteful to apply the wrong people and shop to developing/manufacturing a product.

It could work fine, but you need the right fit for it. Shops that make products have different, often highly varied skillsets and processes compared to job shops.

 

[Garwood]

One job shop has Y axis CNC lathes, VMC's an HMC or three, some welders.

Another job shop has Swiss machines and a couple small VMC's

Another job shop has CNC turret punches, press brakes, shears, a laser, a couple VMC's and maybe a CNC lathe or two.

Now you look at a product business. They have a patternmaking area filled with wood machines, a row of punch presses, a CNC mandrel bender, CNC lathes, VMC's with specialized fixtures, a gear shaper and some manual machines dedicated fixtures. There's an assembly area with mass hardware storage, Laser marking machines, A large climate controlled area for inventory and specialized packaging machines.

Think about how each one of those shops approaches a design problem- The job shops always look at everything in terms of if and how they can do it with the equipment they have. They tend to farm things out to other job shops that have equipment they don't have. They can be bad at trying out machines and processes they aren't familiar with. The work they have drives the equipment and skills they keep.

The product shop has a core more based around figuring out the best process for their parts and refining designs and processes for their specific needs. They can forecast what those needs are so an uncommon machine, like a gear making machine or stamping press, isn't a scary investment.

A screw machine shop won't tell you the design your working on is a punch press part.

The stamping company won't know when a formed assembly might just be better off milled from a solid chunk of aluminum on an HMC.

Job shops designing products really like to make everything from toolsteel, 4140HT, 8620, 7075, etc. You let a machinist design your product and your widget is going to weigh 3 times what it needs to and cost 12 times what it should to build.

Product shops make stuff from 1020, carburize it and give it some shiny plating. Product shops turn their drops into other products.

I probably made some generalizations that aren't always true, but hopefully it makes a little sense.

 

[ducesrwld]

what region of the country are you looking at? i'm from the same boat engineering background sucked into machining. you'll hear it time and time again stick with your strengths and find guys to pick up in areas of your weaknesses. in this case you have to find the right shop where the #2 guy is going to stay on board that knows the shop inside and out. be patient there are plenty of opportunities out there and i feel moving forward there will be even more opening up this sheet show we are just coming out of a lot of guys are ready to hang it up with no one to hand the biz off to.

you have to ask yourself what you are good at like mentioned above stay in your core competencies and make sure you have the right team to tackle the rest of the pie. there are opportunities out there that aren't out on the market was just talking to another associate recently and got wind another established shop in the area is going to be ready to sell out. there are a number of shop owners that are well past tired and this latest reality of life has pushed them over the edge that its time....

 

[ducesrwld]

Be cautious falling for the idea you can buy an existing machine shop business and apply those resources to your own product idea.

Job shops and product manufacturing is quite a bit different when you get deep into it.

It could be very expensive and wasteful to apply the wrong people and shop to developing/manufacturing a product.

It could work fine, but you need the right fit for it. Shops that make products have different, often highly varied skillsets and processes compared to job shops.

i'm sure many have seen it but ya buying the wrong business can be a disaster. an oem in the area wanted to pickup a machine shop to bring a lot in house the decision makers obviously thought a machine shop is a machine shop and went out and bought an established job shop that couldn't be farther from what they needed for equipment. not only was the equipment way off the business models and everything else was off....needless to say they took a good shop and put it out of business in less than a few years.

 

[dannyandthejets]

Be cautious falling for the idea you can buy an existing machine shop business and apply those resources to your own product idea.

Job shops and product manufacturing is quite a bit different when you get deep into it.

It could be very expensive and wasteful to apply the wrong people and shop to developing/manufacturing a product.

It could work fine, but you need the right fit for it. Shops that make products have different, often highly varied skillsets and processes compared to job shops.

This (and your other comment) is probably some of the most underrated advice I've received so far in the thread, and you're right I definitely would need to consider that.

The industry I serve also uses some pretty simple parts made by 2-3 main manufacturers. Most of those don't require much expertise, and are likely better suited for most fab shops, but I shy away from that business (at least by itself), because I feel I would run into the same labor and other issues I currently have to deal with. Most of my customers probably don't actually order from the larger suppliers, they just find a local shop that can do it since it really doesn't take anything special.

So in essence I think that in the beginning it won't much matter what type of business I'm looking at, which is why I hadn't thought of it, but if those products were to take off and I didn't look far enough ahead for that possibility I may be looking at either giving that up entirely, having to make a hard pivot at the cost of other profits, or (the most likely case) be back to where I am now trying to figure out the best way to develop that pipeline.

I've considered finding a few secondhand machines on my own because mostly these aren't anything I don't already have the skills for, but then it's either do it myself (ugh, who has time to do any work these days?) or hire someone specifically for this, and then I would be faced with the issue of probably needing more than just the products I have in mind to pay for the machines and the labor so that they're not mostly sitting idle.

I've sold these products in the past as an accessory to my regular sales, but having to outsource them where I can't control costs, timelines, schedules, etc. just adds such an extra layer of hassle in there that makes the profits not worth the hassle.

Long winded way of saying that I definitely haven't considered long term projections enough and will need to be really careful to see if I think that would fit in were I to be successful.

 

[dannyandthejets]

what region of the country are you looking at? i'm from the same boat engineering background sucked into machining. you'll hear it time and time again stick with your strengths and find guys to pick up in areas of your weaknesses. in this case you have to find the right shop where the #2 guy is going to stay on board that knows the shop inside and out. be patient there are plenty of opportunities out there and i feel moving forward there will be even more opening up this sheet show we are just coming out of a lot of guys are ready to hang it up with no one to hand the biz off to.

you have to ask yourself what you are good at like mentioned above stay in your core competencies and make sure you have the right team to tackle the rest of the pie. there are opportunities out there that aren't out on the market was just talking to another associate recently and got wind another established shop in the area is going to be ready to sell out. there are a number of shop owners that are well past tired and this latest reality of life has pushed them over the edge that its time....

I'm currently southeast, but for the right opportunity I have in mind I would like for location to not be a huge factor if I could be maybe half remote and maybe a quarter absentee.

The #2 is the big ticket and you nailed it. Or maybe the #2 and #3 to make my life easier. I'm figuring that a good shop manager and a good sales or account manager will be 100% crucial to the business surviving a transition with someone like me that only knows enough to be dangerous newly at the helm. I wouldn't be coming in like some buyers do with their "improvement plans" and slashing costs, etc., but more along the lines of "you guys let me know how I can help and I'll keep my mouth shut for a few months and see if I can find a way to offer some value here."

 

[Booze Daily]

I think location is important if you’re going to buy a on-going business. Maybe shop in the area you want to be?

My wife had ideas of retiring to Alabama. (We live in Ohio). I guarantee I would lose 100% of my customers.

 

[Ox]

Just a bit of warning:

We have a well established engineering outfit here semi locally, and they decided to start their own machine shop rather than be at the mercy of others.

I believe that they tried pushing that uphill for 2 years or more and gave up.

This was a hand full of years ago, and at that time - they were not able to just simply hire the people that they needed for their application, and no-one at the engineering firm either knew their way around chip making machinery, or maybe simply didn't want to git dirty, IDK?

Whatever the case, they eventually closed the doors and sold off all their machinery.

Personally - I would have a hard time buying into an industry that I was 100% dependent on someone else and didn't know my own way around the processes myself. At least for the most part.

Trying to staff machinists today has got to be 3 times harder today than it was 5 years ago.


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Think Snow Eh!
Ox

 

[dannyandthejets]

Does anyone have thoughts on what the future holds as

Just a bit of warning:

We have a well established engineering outfit here semi locally, and they decided to start their own machine shop rather than be at the mercy of others.

I believe that they tried pushing that uphill for 2 years or more and gave up.

This was a hand full of years ago, and at that time - they were not able to just simply hire the people that they needed for their application, and no-one at the engineering firm either knew their way around chip making machinery, or maybe simply didn't want to git dirty, IDK?

Whatever the case, they eventually closed the doors and sold off all their machinery.

Personally - I would have a hard time buying into an industry that I was 100% dependent on someone else and didn't know my own way around the processes myself. At least for the most part.

Trying to staff machinists today has got to be 3 times harder today than it was 5 years ago.


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Think Snow Eh!
Ox

That example is the main reason that I don't really want to try to bootstrap anything. Really seems like the only way to do it successfully is to start small, only buying equipment when you have a customer that needs it, and grow from there. Trying to basically turnkey an operation from nothing seems about impossible.

Any thoughts from you or anyone else on the future of staffing? I have opinions regarding what's going on in my own industry, and I have some strong guesses based on historical events that if certain events occur then certain outcomes will likely be seen in my current labor market. Most of said events being fairly cyclical in nature and come around in some severity or another once or twice a decade.

A little harder to predict in these times because we're probably in uncharted waters now more than ever based on the state of the world and the state of technology, but still. Either things will get better or things will get worse depending on what you think might happen and how that will affect things.

Unless the machines just take over, and honestly I wish they would get their act together already because I could use a damn vacation.

 

[zSwiss]

Its going to other industries. Why work in a shop when I can work from home and make double sitting on my ass doing IT work.

Pay way over market rate, offer a great work environment, buy the best equipment and you *might* find some good people. Good luck!

Kinda funny, kinda not... I have been in "IT" for the last 22 years. And just opened up shop a few months ago. Oddly enough, it seems that a one-man-band machine shop is about the only thing I could come up with to replace the tech salary. That or become a drug dealer.

 

[dannyandthejets]

I do hear that drug dealers have a lot of recurring customers. And you don't need to save for retirement because the state will handle that. Three squares a day and a roof over your head. At all hours except for a little yard time here and there.

I know a one man shop can be incredibly profitable. Would just come at the expense of everything else I've got going on right now.

 

[ducesrwld]

like what was mentioned above you may want to wait things out to see what the flip happens here in the next year or so.....the worst thing a man could do in your boots is go out and pay a good buck for a shop and industry takes a tumble...now a smart lad would be the guy waiting around to buy a shop up that goes under for a small song to give it a shot with money to spare in the bank for all the unknowns. i was bit hard in both down turns in '08 and '15-'16 but neither of them i had a shop to sustain. i don't have the warmest of feelings if sheet starts hitting the fan at some point with the turmoil in the air.

 

[dannyandthejets]

After years in my youth of trying to time the market in my retirement portfolio I finally came to understand the experts that were telling me the whole time I couldn't do it. Similar stories in the housing market where sometimes I was lucky, sometimes I was unlucky, and the only time I've bought or sold and felt good about the timing was when I simply just needed to move.

I figure it's mostly the same here. I can wait and see and maybe get a deal, or maybe never see anything at all. Or I can not wait and go for the first good fit and maybe lose it all or maybe get rich. Just no way to time and it and no way to know until well after the fact.

Problem with buying a failing shop is essentially the same as just buying the assets at auction. I'd have to bootstrap the entire operation from the ground up including employees, processes, customers, everything. The machines are by far the easiest part to come by. It's everything else that really has the value I'm looking for.

 

[LOTT]

Can you start to work on your product idea now, with a job shop (or several shops)? That may be the best way to figure out if a particular shop is a good option. It took several year of making my own products to figure out what parts were better to outsource (laser cutting, for instance), and which I wanted to do (milling, turning, and welding mainly).

 

[ducesrwld]

what's your business model going to require capital equipment wise? having a good grasp on this is going to drastically narrow down your search. you wouldn't believe how many shops are closing up because a guy comes strolling in and offers the owner stupid money for their building and the next thing you know the rest of the shop is up on the auction block. my point is there is a lot of opportunity out there that you can't just simply search for online.

like i mentioned in one of my earlier posts there aren't too many loonies like us that want to get into this business. i'd be trying to talk to material suppliers, tooling suppliers, other guys that are out there making the rounds or have large networks and see if you can find any guys early in the selling process.

 

[john.k]

I think you would need to be incredibly specialized in one facet ........change is so rapid now ,that you need the latest tech ,replaced continuously..........id probably be looking at printing,sintering,etc ......which I know nothing about ......but basically you would need up to the minute capability in the field..