Purchasing CNC Business - Specific Industry Questions

[alek95]

Reading other threads on this forum there are a lot of posts pretty much like this. It really makes it sound like there's no such thing as a successful machine shop that isn't just the owner doing everything themselves.

I've yet to come across a small machine shop without a "main guy". Either the owner, or someone knowledgeable about machining that is the manager.

 

[BarnFab]

I'm not really trying to talk myself into anything. The opportunity and numbers, if I were to find it, would do that. I'm mainly asking if there are major unforeseen pitfalls or it's entirely unrealistic.

Reading other threads on this forum there are a lot of posts pretty much like this. It really makes it sound like there's no such thing as a successful machine shop that isn't just the owner doing everything themselves.

Businesses are bought and sold all over the world in all kinds of industries every day. I guess it really depends on your definition of "easy," but a small business owner can only get so "hands off." What's not realistic is that someone can run a small business and never do anything other than get checks from their mailbox. And even if that were the case, there's still absolutely no way to completely remove the risk associated with running a business.

There are people and entire companies who make a living in M&A and they're not all just buying the real estate of failing businesses.

It all comes down to your definition of "Small" and what you call numbers "working" are.

I will be very interested to see what you come up with as like a lot of people I don't know of any Machine shops under 10 people who are not very vulnerable to the lose of one person and have minimal if any sold work process or work instructions that would allow them to continue on without that one person.

10 - 15 years ago the world was a different place as when Social Media wasn't such a huge part of peoples life people where less transient and seemed to be more stable and didn't drink as much internet cool aide.

 

[dannyandthejets]

I'm typically not looking at anything under 10 employees. If the business is too small it will have no redundancy and if it is relying on too few people to do too many things it's not really a viable business model that can be sold. They may sell, sure, but they likely won't survive. Three people out of 20 leaving is vastly different than three people out of 6.

I wouldn't think that even a pretty small office could operate with fewer than 3-4 people without running them absolutely ragged, and that's just front office. For only ten employees on the production side that doesn't really leave many people, and with too few people there's no great way to establish a management structure and standardized processes.

The bonus incentives mentioned are a good idea. I was tinkering with shares ideas in my head, which I think I would still want to offer if possible, but I think to make that work it would probably be too long of a time horizon to really increase retention. I think smaller bonuses on shorter timelines would probably be much more effective for someone to think "hey I'll stick around for 6 weeks for $1000," and hopefully by that time people would feel comfortable with the direction.

 

[john.k]

An unforseen is happening right now.....the USD has appreciated 15-25% against most currencies in six months........a very rapid rise .....and if your products compete in foreign markets -or against imports -then thats an issue............this is just an example of how quickly things can change..................i would also comment that bonuses on shorter timelines are simply pay increases.....and will be permanent to the workforce.

 

[hanermo]

Another business line my wife is a manager in ..
has bought about 100 businesses in the past few years.
And will buy another 10-20 in the next year here in Spain.

All of them are profitable with ebitda around 10%.
LOTS of businesses are sold all the time, being profitable.
Profitable businesses just cost more, thats all.

 

[martinberryman]

Definitely working on that. It's a little ways out, but on a fairly short horizon at this point.

Do you have experience with bonus or incentive structures that have worked for you or others? That's something that businesses such as my current regularly do, and the plan is to implement similar plans here in the coming years as well. But those may not quite work the same way as with a machine shop just depending on the details.

I don't consider myself a naysayer, but I'm also not naiive enough to think that buying a small manufacturing business will automatically become a goldmine. You are asking great questions, which will help set you up for success.
We have had profit sharing in place for 25 years, but honestly, our model is not doing a good enough job of incentivizing the newer workers who were not here in the boom from 2003 - 2009 when the profit sharing regularly equalled a thirteenth month of pay (we are near Vancouver BC and the preparations for the 2010 Winter Olympics kept the boom going during the first part of the 2008-2011 recession. The day of the opening ceremonies in Feb 2010, the construction industry, which spins off a ton of economic activity in BC, stopped.). We are essentially a job shop in the custom commercial woodwork environment (office spaces, high-end car dealerships, museums etc). Everything we build is based on somebody else's vision / design. We provide detailed cost reports to the employees for every job that goes through the shop. Even if we don't get paid (which is thankfully very rare, we still pay profit sharing, as the workers have no control over who we enter into contracts with) We base a yearly profit sharing payment just ahead of Christmas on the success of all of the jobs. I think for today's workers, that is too infrequent, and a quarterly payment may be a better idea. For reference, many of our employees have been with us a long time (a couple over 30 years) - an average of about 12 years.
Since the 'great recession', commercial property values near our shop have increased 6X and so lease / rent and property taxes have gone up accordingly. Similarly, the cost of a home or rental unit within driving distance of our shop has gone up 3X. It's hard to keep pace with costs, pay our people well, re-invest in equipment, and still have profit to share. It all boils down to being a sales problem, which I have always found to be the toughest part of the business.
If you can buy a business that comes with a rainmaker, keep that person engaged, fat (metaphorically) and happy, and keep the rain coming. Don't be afraid to share your success with them via an ownership plan, profit sharing and flexibility around working hours and vacations.

 

[john.k]

Other side of the coin..........engineering shops are notoriously difficult to sell for more than machine value............so that puts you in the box seat as a buyer not needing finance.

 

[hanermo]

Lots of engineering -- like construction -- companies are sold all the time for about 1-2-3 times their billing.
This is because about 1/20 construction and engineering companies know what they are doing and make great to excellent profits.
Just like machine tool dealers.
Here in spain there were 54 in 2012, and only 3-4 made reasonable profits, and only one did really well.

When I built up HAAS Spain, 11x the turnover in 10 months, and the second most profitable in the world, everyone thought it would not be possible.
The business was then later sold a few years ago - to new french owners.
They simply paid enough.

The few good people especially in management are the key.
And in engineering or machining the top people making it happen, efficiently and well are important.
If You cannot pay the top people upto 2x the avg salary You are doing bad and need to refocus.

 

[dannyandthejets]

An unforseen is happening right now.....the USD has appreciated 15-25% against most currencies in six months........a very rapid rise .....and if your products compete in foreign markets -or against imports -then thats an issue............this is just an example of how quickly things can change..................i would also comment that bonuses on shorter timelines are simply pay increases.....and will be permanent to the workforce.

Is anyone here in the US really competitive in any foreign markets? I genuinely would not have imagined that to be possible in this day and age, except maybe on a very small, local scale (like a shop right near the border selling to a local customer across), but even then I wouldn't think likely.

 

[dannyandthejets]

Lots of engineering -- like construction -- companies are sold all the time for about 1-2-3 times their billing.
This is because about 1/20 construction and engineering companies know what they are doing and make great to excellent profits.
Just like machine tool dealers.
Here in spain there were 54 in 2012, and only 3-4 made reasonable profits, and only one did really well.

When I built up HAAS Spain, 11x the turnover in 10 months, and the second most profitable in the world, everyone thought it would not be possible.
The business was then later sold a few years ago - to new french owners.
They simply paid enough.

The few good people especially in management are the key.
And in engineering or machining the top people making it happen, efficiently and well are important.
If You cannot pay the top people upto 2x the avg salary You are doing bad and need to refocus.

There is always a price. Doesn't matter how much money your business is making or how little work the owner has to do. That price might make it not worth the investment, but I know there's a whole market.

One of the other things I've seen a few cases of in the past couple years is divorce. If you're going to have to give your soon to be ex-spouse (or ex-business partner in other divorce-like instances) half the value the lawyer convinces a judge your business is worth, often people don't have a way to do that other than to sell and split.

But at any rate, it's silly to think that the only businesses sold as profitable are fraudulent and all the buyers are suckers is just silly. I have to imagine Instagram was making plenty of money, but when they got an offer of $1,000,000,000 I guess it's hard to say no.

 

[William Payne]

Excuse my silly question but am I seeing a bit of a miscommunication here between what type of business the original poster is looking for. Reading the original posters post it sounds like he is looking for a more corporate type shop where you have layers of staffing and management to where the person running the business may not be the owner and can be sold as a running entity with staff and all that comes with it.

I think people may be miss reading his post thinking he is meaning more smaller mom and pop type shop where its more building and equipment sale rather than running business when they sell.

I could be completely wrong here.

 

[dannyandthejets]

Excuse my silly question but am I seeing a bit of a miscommunication here between what type of business the original poster is looking for. Reading the original posters post it sounds like he is looking for a more corporate type shop where you have layers of staffing and management to where the person running the business may not be the owner and can be sold as a running entity with staff and all that comes with it.

I think people may be miss reading his post thinking he is meaning more smaller mom and pop type shop where its more building and equipment sale rather than running business when they sell.

I could be completely wrong here.

You are correct, but I think that most people default to more what they know. I wouldn't be in the position to afford to take on anything that's not still considered a small business, but like I mentioned to someone else it can still be classified as small business up to several hundred employees.

I wouldn't be interested in anything with staffing shortages where multiple people are pulling more than their expected weight, no redundancies so if someone is sick for a week things just don't get done, etc. That can be rather small still just depending on the business size, but I would think that there would need to be a separate office staff of a handful and several handfuls of machinists and helpers and a few managers to run it all. I know it's semantics, but I would only be interested in purchasing if there's a business to sell, not just a shop.

And I agree that until a company has grown to that point that it's fairly self sustaining (but again I don't think it would be entirely hands off) that it's rarely worth more than its assets. And I see now that's probably even more true for a business organized around the principles of a job shop, because the last job being profitable makes no promises that there will ever be another job.

All this rambling leads me to a broader question that I've only started to wonder, especially in light of recent comments re: international competition, but I'm starting to wonder if there's really any domestic market for anything other than a job shop these days. I imagine that there has to be products that are made domestically, but that would either be a small band of factors that makes it not make sense to ship overseas, or companies that just want to advertise that their products are made in the USA (and pay extra for that accordingly).

Does anyone here have experience in finding a niche other than running a job shop that they were able to sustain? If it's a product that sells enough it would eventually get outsourced, and even now shipping costs haven't offset the difference in labor costs. I guess there are issues of size, weight, etc. that would affect shipping, but most products I imagine coming from a machine shop probably would not be affected enough by that to make a difference. Is it essentially job shop these days and lucky if some job shops turn into a little something else in addition or what?

 

[Garwood]

You are correct, but I think that most people default to more what they know. I wouldn't be in the position to afford to take on anything that's not still considered a small business, but like I mentioned to someone else it can still be classified as small business up to several hundred employees.

I wouldn't be interested in anything with staffing shortages where multiple people are pulling more than their expected weight, no redundancies so if someone is sick for a week things just don't get done, etc. That can be rather small still just depending on the business size, but I would think that there would need to be a separate office staff of a handful and several handfuls of machinists and helpers and a few managers to run it all. I know it's semantics, but I would only be interested in purchasing if there's a business to sell, not just a shop.

And I agree that until a company has grown to that point that it's fairly self sustaining (but again I don't think it would be entirely hands off) that it's rarely worth more than its assets. And I see now that's probably even more true for a business organized around the principles of a job shop, because the last job being profitable makes no promises that there will ever be another job.

All this rambling leads me to a broader question that I've only started to wonder, especially in light of recent comments re: international competition, but I'm starting to wonder if there's really any domestic market for anything other than a job shop these days. I imagine that there has to be products that are made domestically, but that would either be a small band of factors that makes it not make sense to ship overseas, or companies that just want to advertise that their products are made in the USA (and pay extra for that accordingly).

Does anyone here have experience in finding a niche other than running a job shop that they were able to sustain? If it's a product that sells enough it would eventually get outsourced, and even now shipping costs haven't offset the difference in labor costs. I guess there are issues of size, weight, etc. that would affect shipping, but most products I imagine coming from a machine shop probably would not be affected enough by that to make a difference. Is it essentially job shop these days and lucky if some job shops turn into a little something else in addition or what?

You're making some assumptions that just aren't accurate.

Sure, you're not going to make Mcdonalds happy meal toys here. There's a lot of established processes and products that just aren't competitively done here VS where labor is cheap, materials are subsidized and environmental effects aren't a consideration.

With products you often have to be the worlds foremost expert on what it is you are making/selling/supporting. This is often intimate knowledge of materials, heat treating, tolerances, electronics, software, pneumatics, hydraulics, coatings, fasteners and suppliers.

Then there's customer service and brand recognition.

The subject of China or even another domestic company ripping off a product comes up regularly. I have written about my experience with this a few times. My take is a little different.

Competition can take some of your market maybe. If the buyers of your product don't need any service because you're selling fidget spinners or measuring spoons then you will probably lose marketshare when others copy it.

If you sell coffee bean roasters or climbing gear or industrial welding positioners or vehicle driveshafts or balancing machines or specialty tools or any number of millions of things that need some customer service and are hard to rip off, often times a little competition is a good thing. It helps your customer base recognize your solution to their problem has merit.

If the only electric car company out there was Nissan and all you could buy was a new Leaf do you think Nissan would have sold Leafs to replace all the Tesla sales?

 

[LOTT]

It's a niche, but a several billion dollar niche- a lot of items the military buys have to be made in the US. Right or wrong, love or hate the military Industrial complex, it is work that is being done here.

That said about legal requirements, a lot of individuals buy our products out of pocket who are not bound to buy Made in the USA, which tells me we are meeting a need.

 

[LOTT]

OP- how much are you looking to spend/invest, ball park?

 

[jccaclimber]

Is anyone here in the US really competitive in any foreign markets? I genuinely would not have imagined that to be possible in this day and age, except maybe on a very small, local scale (like a shop right near the border selling to a local customer across), but even then I wouldn't think likely.

Not a ton, but they do exist. I know one guy who runs a 10-20 person swiss shop in the middle of a cornfield. He ships something like 5% of his products to a place in China because he makes them cheaper than anyone else at that can meet the quality requirements. Plenty of other bits he ships overseas.
I was surprised when touring a few shops in Germany a few years ago how many things the make for export to Asia and it isn't as if Germany has low labor costs.

I've yet to come across a small machine shop without a "main guy". Either the owner, or someone knowledgeable about machining that is the manager.

I don't know that many <50 person shops where the own, but I can think of two off hand. One the owner lives on the other side of the state, rarely if ever visits the shop. Sure there are a couple critical managers that run the day to day, but they are employees. Based on being there for a decade or two they are apparently being kept happy enough.

Another the owner (a relative of mine) sold his shop a couple years ago. He decided he wanted to ride off into the sunset in 5-10 years and the best way to do that was to sell now, and with an agreement that keeps him working for the next 3-7 years while his replacement is brought up. Nothing where he figured business would go down, just after 35+ years doing it the grand children and lake look a lot more interesting while he's able enough to enjoy both.

 

[reggie_obe]

You can buy a business, you can buy the land it sits on, but you can't buy the knowledge of the owner, it's employees or the customer base. And this, "..... and just by showing up and putting in effort an employee can be pushing $20 within a year without any relevant experience to our operation.", how very generous of you.