Am I crazy to consider buying a machine shop?
Close
Login to Your Account
Page 1 of 7 123 ... LastLast
Results 1 to 20 of 125
  1. #1
    Join Date
    Dec 2019
    Country
    UNITED STATES
    State/Province
    Florida
    Posts
    7
    Post Thanks / Like
    Likes (Given)
    0
    Likes (Received)
    0

    Default Am I crazy to consider buying a machine shop?

    After spending some time on these forums I almost feel that everyone believes Machine shops are the worst type of business and no one should get into this business. If you take a step back, you could almost apply many of the negatives to any business.

    I've been in the corporate world for about 20 years, mostly in marketing and looking to move to a different state. A machine shop became available that I am intrigued with and happens to be where our family wants to move to.

    It's about 30 years old and real estate is available as well. They focus on more higher end machining.
    I have zero machining experience but have always been fascinated by the industry. I am the type that would immerse myself and learn a lot... learn CAD software, equipment, techniques, etc. I would focus on business operations, marketing (they don't even have a website), building up sales capabilities and possibly expanding into new industries. They have a highly skilled foreman and 3 operators/fabricators that would stay on.

    Here is a basic annual financial profile (consistent last 4 years based on tax returns):
    Revenue = $1 million
    Owner cash flow (net income + owner salary) = $250k
    Asking price $750k (3x cash flow)

    Top customer is 20% of revenue. Top 10 customers are 65% of revenue. Concentration is a bit high but not horrible.

    What I like:
    - long history of operations and reputation
    - lack of sales & marketing (I feel I can really add value here)
    - good team in place
    - location

    Concerns:
    - I know nothing about machining or even the industry.
    - Industry seems somewhat a commodity business (but so are restaurants, retail stores, etc.)

    Am I crazy even thinking about this business? I love the idea of machining and turning ideas into physical goods and making something tangible. I would never consider starting this from scratch but a stable 30 year business with good operators that would benefit from my marketing background might make sense.

    Thoughts? Any advice on what to look out for?

    Thanks.

  2. #2
    Join Date
    Sep 2007
    Country
    UNITED STATES
    State/Province
    Washington
    Posts
    5,235
    Post Thanks / Like
    Likes (Given)
    198
    Likes (Received)
    1578

    Default

    Quote Originally Posted by ideadirect View Post
    ... Concerns:
    - I know nothing about machining or even the industry.
    - Industry seems somewhat a commodity business (but so are restaurants, retail stores, etc.)...
    I think that given these two things, you probably are crazy to buy this machine shop. Just IMO. Machine shop owner needs to make tons of difficult decisions that require expertise and experience in the field. Machines for a "high end" machine shop cost like a quarter of a million $$'s, a couple bad decisions and you are in trouble.

    Regards.

    Mike

  3. Likes TDegenhart, Laurentian liked this post
  4. #3
    Join Date
    Jan 2019
    Country
    UNITED STATES
    State/Province
    California
    Posts
    65
    Post Thanks / Like
    Likes (Given)
    41
    Likes (Received)
    40

    Default

    My numbers are about the same and I'd sell it for $750k.

    Niche long term customers in sunny California. In business for 40 years.

    I own the building too that can be included...$1.5m

    PM me if anyone is serious.

  5. #4
    Join Date
    Jul 2008
    Location
    Milverton, Ontario, Canada
    Posts
    641
    Post Thanks / Like
    Likes (Given)
    175
    Likes (Received)
    285

    Default

    The last thing the employees of that business want, is someone that doesnt know the business.

  6. #5
    Join Date
    Jul 2008
    Country
    UNITED STATES
    State/Province
    South Carolina
    Posts
    665
    Post Thanks / Like
    Likes (Given)
    257
    Likes (Received)
    409

    Default

    If you had to ask, I think you already know the answer..... But hey, look on the bright side, you'll always be in good company here at pm......

  7. Likes as9100d, wheelieking71, Oldwrench liked this post
  8. #6
    Join Date
    May 2005
    Location
    Republic of Arizonia
    Posts
    1,598
    Post Thanks / Like
    Likes (Given)
    0
    Likes (Received)
    474

    Default

    Probably.......

  9. #7
    Join Date
    Aug 2010
    Country
    UNITED STATES
    State/Province
    Connecticut
    Posts
    1,912
    Post Thanks / Like
    Likes (Given)
    1479
    Likes (Received)
    2023

    Default

    I think you would be crazy to take most of the advise on this forum about buying a machine shop. Not the above posters in particular, but in general.

    It's a small % of shop owners here that are going to speak about this in a positive light. For context, you aren't the first person to make a post such as this.

    Point is, here I think you will receive much more comments like run run run, as opposed to buy buy buy.

    We are never going to be able to get into all the details regarding the heath of the business you are looking at purchasing, and without that info no one here can be of much help.

    In general terms..There are so many types of machine shops, with different business models and strategies. Some just stay a float, some fail, and some prosper.

    Can you make money? Yes

    Can you lose your shirt? Yes

    Asking about a "machine shop" doesn't really say much imo, it's just too broad a question. There's shops run by a smelly unshaven ding dong, all the way to huge international corps with head spinning revenue.

  10. Likes wheelieking71, Oldwrench liked this post
  11. #8
    Join Date
    Mar 2016
    Country
    UNITED STATES
    State/Province
    California
    Posts
    592
    Post Thanks / Like
    Likes (Given)
    135
    Likes (Received)
    220

    Default

    Hello idead,
    The main issue does not pertain to your sanity, but why would they sell the shop in the first place.

    No sane person sells a business that makes $.

  12. #9
    Join Date
    Aug 2005
    Location
    Toronto
    Posts
    4,823
    Post Thanks / Like
    Likes (Given)
    3267
    Likes (Received)
    3680

    Default

    Here is a basic annual financial profile (consistent last 4 years based on tax returns):
    Revenue = $1 million
    Owner cash flow (net income + owner salary) = $250k
    Asking price $750k (3x cash flow)

    when you value a business you don't add the owners salary to cash flow (if the salary was real, i.e. he was working in the business fulfilling some function). i.e. if his salary was 100 in the above example, cash flow would be 150 not 250. There's compensation you get for working in it, and compensation you get for investing in it....capitalizing the salary as cash flow is nuts, or rather a pie in the sky vendor dream.

    Besides there is no way imo you'd want to base value on a multiple for a job shop business, they're basically worth the liquidation value of assets. You only pay a multiple because you believe the cash flow is sustainable, and that just isn't the case in most machine shops (revenue is tied to the owners relationships, and profit is tied to his know how)

    Quote Originally Posted by ideadirect View Post
    After spending some time on these forums I almost feel that everyone believes Machine shops are the worst type of business and no one should get into this business. If you take a step back, you could almost apply many of the negatives to any business..
    Balony. What IP does your current company have, why do the customers go there? Business gets increasingly bloody difficult trending towards awful as the business has less and less IP and machine shop (most) have very limited IP. In a job shop the only IP you have is the know how on machining, and you don't even have that.

    If you got a bag of cash, find a product or brand based business....then when you buy it, you've a fighting chance of sustaining the income as in theory the customers come because of the product or brand not because of the owner who just exited
    Last edited by Mcgyver; 12-15-2019 at 08:36 AM.

  13. #10
    Join Date
    Jan 2014
    Country
    UNITED STATES
    State/Province
    Oregon
    Posts
    279
    Post Thanks / Like
    Likes (Given)
    50
    Likes (Received)
    139

    Default

    Not having inside knowledge is the big issue here.

    A shop could be posting your numbers with a million dollars in "new" equipment that has been recently paid off, or (more likely based on the age) could run a mix of manual equipment and old CNCs. There are a lot of shops that age running the same equipment they bought new 25+ years ago. Most of those owners know that if they don't sell, they are going to have to invest a ton in equipment in order to stay competitive.

  14. #11
    Join Date
    Dec 2006
    Country
    UNITED STATES
    State/Province
    California
    Posts
    130
    Post Thanks / Like
    Likes (Given)
    6
    Likes (Received)
    31

    Default

    Quote Originally Posted by ideadirect View Post
    Am I crazy even thinking about this business?

    Thanks.
    No, but you might be a carrier!

  15. Likes Mcgyver liked this post
  16. #12
    Join Date
    Jan 2002
    Location
    West Coast, USA
    Posts
    7,705
    Post Thanks / Like
    Likes (Given)
    478
    Likes (Received)
    5168

    Default

    If $750K is burning a hole in your pocket, could be the real estate would be the better investment? Buy it a bit below market and lease it back to the business if the owner wants to start cashing out. Then take your time learning about machining as a complement to a day job?

    Could be you buy in gradually with your part-time sales & marketing assistance and learn the business? Could be you buy it outright for the $100K (just guessing, probably high) auction value of the machines if it goes belly up (or the owner retires) and then learn the business?? Could be you've answered your own question by this time?

    FWIW, the assets and the debts are a bit harder to game than an unaudited year's income and expense statement. Big difference if the shop has $500K of paid-for modern CNC equipment or $500K of debt on clapped out equipment.

    Three things my Dad always wanted to own/run were a hardware store, a lumber yard / feed store, and a 1000 acre farm. When all was said and done the real estate ended up the saving grace in each instance.

    What's plan B, as a comparison, in moving to this new state?

  17. #13
    Join Date
    Mar 2011
    Location
    Geneva Illinois USA
    Posts
    6,209
    Post Thanks / Like
    Likes (Given)
    2659
    Likes (Received)
    2410

    Default

    Here is your biggest liability. A foreman. One person. He quits and what do you have? Not the other three, they are button pushers.

    Tom

  18. Likes charlie gary, Peter from Holland liked this post
  19. #14
    Join Date
    Mar 2005
    Location
    Kansas
    Posts
    7,573
    Post Thanks / Like
    Likes (Given)
    438
    Likes (Received)
    3493

    Default

    Its easy to make a small fortune owning a machine shop. You just start with a large one.

    Four guys making $1,000,000 in sales per year? That doesn't pass the smell test. Yea, its possible, but it will require far more in physical equipment than you can buy for $750,000, or very serious IP.

  20. Likes mc3608, Oldwrench, metlmunchr liked this post
  21. #15
    Join Date
    Apr 2019
    Country
    UNITED STATES
    State/Province
    Arkansas
    Posts
    858
    Post Thanks / Like
    Likes (Given)
    276
    Likes (Received)
    323

    Default

    Quote Originally Posted by gbent View Post
    Its easy to make a small fortune owning a machine shop. You just start with a large one.

    Four guys making $1,000,000 in sales per year? That doesn't pass the smell test. Yea, its possible, but it will require far more in physical equipment than you can buy for $750,000, or very serious IP.
    1 million in sales with 4 guys is possible.



    Sent from my Pixel 3 using Tapatalk

  22. Likes thunderskunk liked this post
  23. #16
    Join Date
    Jul 2008
    Location
    Milverton, Ontario, Canada
    Posts
    641
    Post Thanks / Like
    Likes (Given)
    175
    Likes (Received)
    285

    Default

    Quote Originally Posted by as9100d View Post
    1 million in sales with 4 guys is possible.



    Sent from my Pixel 3 using Tapatalk
    Absolutely.
    1/4 million in sales is possible with 1 guy.

    Problem is that its not a linear extension. You know that!

    There is a happy place for any business. Its up to the owner to discover where it is.
    I've seen 5 man shops do 10-12 million, same as I've seen 50 man shops do 15.

    The bigger shops were more stressful, and didnt rely as heavily on the "dude".
    That being said, Id never let "the dude" dictate my business.

    Still think youre nuts to get into manufacturing, its clear your an investor.
    If you decide to do it, make damned sure you maintain a very strong relationship with the guys that make the business.

  24. Likes as9100d, Mcgyver, Jashley73 liked this post
  25. #17
    Join Date
    Apr 2019
    Country
    UNITED STATES
    State/Province
    Arkansas
    Posts
    858
    Post Thanks / Like
    Likes (Given)
    276
    Likes (Received)
    323

    Default

    For sure. There is no "the dude" here at my shop, it's a team effort.

    One way to ensure its a team effort is to get the shop iso9001:2015 registered and set everything in policy that everyone follows.

    Probably have to hire a few people to make it happen smoothly but I feel it's worth it.

    Sent from my Pixel 3 using Tapatalk

  26. Likes Mcgyver, jobshopblog.com liked this post
  27. #18
    Join Date
    Feb 2013
    Location
    California, USA
    Posts
    79
    Post Thanks / Like
    Likes (Given)
    323
    Likes (Received)
    41

    Default

    If you could set it up to work at the place for one or two years and learn the ins and outs of that particular shop that would be ideal for you. You also could work at any shop for a while and pick up what you can. All shops are not the same and each has its quirks.
    there is a long standing joke on this site about being better off buying a hotdog stand and its not always a joke.

  28. Likes as9100d liked this post
  29. #19
    Join Date
    Apr 2015
    Country
    AUSTRALIA
    Posts
    611
    Post Thanks / Like
    Likes (Given)
    33
    Likes (Received)
    143

    Default

    I like the idea of buying the land as a investment, the business however will take some applied knowledge of the business and that's best learnt by being in the business for a while to see how it runs, following the boss everywhere and seeing why he make the decisions he makes.
    It would also help if you have a trade in the line of work, learning without a trade is really starting from square one.

    Yes clapped out equipment can be a real issue if your trying to make parts to spec and cannot due to the worn equipment...
    Possibly could be money to be made but you will have to work for it.

  30. #20
    Join Date
    Mar 2005
    Location
    Kansas
    Posts
    7,573
    Post Thanks / Like
    Likes (Given)
    438
    Likes (Received)
    3493

    Default

    I still say $250,000/man doesn't pass the smell test for a cheap machine shop. Thats 2,500 hours per year, billed at $100/hour. And thats just the productive time. Add 20% on to the hours thats non-productive. I'm not saying its impossible. I am saying it is pretty expensive machine time, and machine time that expensive usually needs a cadre of support personnel. And you aren't going to buy four of those machines and support equipment for $750,000.

    Yes, there could be other explanations. They could be doing modifications to purchased parts. We don't know if the cost of sales is $650,000. They could also have a valuable piece of IP they sell with every part.

    But who here grosses $250,000/man based only on machining output, or has value added of $250,000/man?


Tags for this Thread

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •