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Buying a machine shop/Valueing a shop

Dank1011

Plastic
Joined
Nov 4, 2015
I have been lurking around the forum for a long time but was in sales previously. I never wanted to post while doing sales. I quit my sales job and I have been thinking about buying a shop.

Does anyone know some one who values machine shop on a daily basis?

Any tips on purchasing a shop?

I have one that I have an interest in. It is a fully manual shop that does repair and new fab.

Thank you all in advance for your help.

Danny
 
Valuating a small shop isn't something I have ever seen done very well. My valuation would be if its a manual shop, doesn't come with employees or any contracts then its worth operating machine, inventory..ect value only. Contractual obligations are the only guaranty your going to get from buying a machine shop. In the 80s I was at a couple of shops that got sold only to have the old owner or quote or guys on the floor steal the customers. You should be aware of that.

I would be very hesitant to buy a manual shop. If it isn't your sole source of income then its a hobby and its fine. If it is your only sole source of income and it comes with no employees be prepared to work your absolute ass off for little return. (my humble advice)
 
Most of my experience is in business (vs machining itself).

I would not hesitate to buy anything, including a machine shop.

Acceptable value is 0.6-1.5 x yearly free cash flow + currently valuabel assets.
Most cases I would pay with 1 year escrow etc. or from free cashflow.

This avoids the case of customers getting "stolen" - if you did not own them they were not yours, but if the agreement is not-to-compete then you cannot recommend they leave, either.
 
Advice #1: Hire an expert (which you're trying to do). You might at least start with someone from SCORE (Google it) who can help you with the initial valuation.

Advice #2: Basically, think of this business as a "black box" (take all the emotion out of it). You put things in (labor and materials) and things come out (parts and money). You're basically trying to make sure that the investment has a good return (unless you're just buying it for assets). If all you get out of it is that you're basically covering yours and others salaries and wages, then that's not a good investment. You also have to see the business grow (in terms of net worth) so that it either pays you a dividend or it's reinvested back into the company (or both). Otherwise, why make the investment (unless working for yourself is the only goal and that's the only way you can do it).

Advice #3. Make sure you really know what you're getting and can keep. As others have implied, the customer list is a huge issue. Will the previous owner non-compete? If you have to start from scratch, it would be rough for a while.

Good luck!
The Dude
 
"Acceptable value is 0.6-1.5 x yearly free cash flow + currently valuabel assets."

What the hell does that mean?
 
It means, if you are trying to sell a business that turns $500,000 in yearly income, less $400,000 of outstanding loans, plus $100,000 book value of equipment, that the business is worth between $160,000 to $250,000 max. One of the reasons I haven't sold, and will work until I'm 70 at least.

The people who want to invest want to invest "hands off", just doesn't work with a small shop.

Dennis
 
Thank you everyone for the information. That shop fell through. The owner had his accountant put a number on it and then decided to keep it. It might be the best thing at this time. After hearing some of his numbers it seemed like the only way they will continue till the owner retires.

I did plan to hire someone to value the company but this industry is different then most as we all know. So I thought it would be a good idea to check here.

I came to find out the shop was going to have to be relocated in 18 months.
It did come with 1 ft and 2 pt machinist. 1 ft office personnel.

I think I will keep my eye out for a small shop in NJ. After this I have a dream now of buying a shop.

I have my engineering degree so one that has some design work involved would be great.

Anyone have one for sale? Haha
 
I don't understand the question. Do you want to buy a shop or a business?

If you don't know how to evaluate what you are buying yourself, it might be a bad idea to buy whatever that thing is.
 
I wanted to buy a business. Sorry for not being clear. I had a value in my head. Which seemed fair. I am new to valuing businesses. It can't hurt to get feedback. Isn't that what forums are for?

Less stress in other businesses..yes.

I love the manufacturing environment though and design.
 
I wanted to buy a business. Sorry for not being clear. I had a value in my head. Which seemed fair. I am new to valuing businesses. It can't hurt to get feedback. Isn't that what forums are for?

Less stress in other businesses..yes.

I love the manufacturing environment though and design.

Valuing a manual machine shop is not that hard... Penny a pound. Just weigh it, and multiply times a penny.

If you want to design and make your own stuff, why buy somebody else's boat anchor. Design it, sub it out, market it,
sell it, and then expand from there.
 
I wasn't looking for my own product line. The business I was looking at does consulting and designing already. As well as reverse engineering. It seemed like a good fit.
 
Valuing a manual machine shop is not that hard... Penny a pound. Just weigh it, and multiply times a penny.

If you want to design and make your own stuff, why buy somebody else's boat anchor. Design it, sub it out, market it,
sell it, and then expand from there.

Bob I'm surprised to hear you say that. So a 20,000lb machining center is only worth $200?

I can understand wanting the equipment to make the stuff... After seeing a lot of quotes for somewhat simple RFQ's I couldn't afford to have someone else make my stuff...
 
By now you may have noticed that many if not most of the owners here, myself included, advise people against starting or owning a shop. If you want to buy yourself a job, go ahead. That is what I did without intending to. I could have sat on my ass for 8 years for what I sunk into the equipment and building. But then again I am one step removed from a failure.

Don't be like me. I think God's purpose for me these days is to serve as a warning to others. Consider yourself warned.

Good luck on your quest.
 
Most of my experience is in business (vs machining itself).

I would not hesitate to buy anything, including a machine shop.

Acceptable value is 0.6-1.5 x yearly free cash flow + currently valuabel assets.
Most cases I would pay with 1 year escrow etc. or from free cashflow.

This avoids the case of customers getting "stolen" - if you did not own them they were not yours, but if the agreement is not-to-compete then you cannot recommend they leave, either.

Well that's an insanely safe bet. I'd think you would not get may takers on a deal like this.
Really,........ people would do this at the ratios shown here?
Why? This is the kind of deal widows and orphans sign up for not someone running a business.
Move the decimal place over one. Then we can talk.
Bob
 
I'd say there are three basic tiers of valuation, depending on the degree of owner involvement.

Tier one is a one man band. Even shops with a few employees fall into this tier. The owner is quoting, programming, setting up, often operating, acting as quality control and everything else. You might have a few operators putting parts in and taking parts out. Without the owner, this shop is worth the value of the machines, minus any transferred debt. This is a collection of machines, not an investable business.

Tier two is run by the owner, but major functional blocks are systematize enough and independent enough that the owner isn't doing everything. This shop has a sales department, and a front office, and a foreman, and a few real machinists, and probably some operators. This shop can still only be purchased by someone with the specialized knowledge to run it, whether that someone is a machinist or an engineer or a sales guy or what have you. The question for an investor is "what value can I add to this shop?" Sales are probably between a million and ten million dollars per year. Here I'd say you're looking at the value of the machines, minus any debt, plus 2x-5x the shop's gross profits. I'd argue total turnover doesn't matter to valuation.

Tier three is a turn-key operation. The shop is run by someone who is not the owner, operates as a fully self-sufficient operation, has operated as such for a significant length of time and is in a stable area. There's a general manager, a sales manager, a production supervisor, several foremen, an office manager. This business owns its location or has a long term lease. Turnover is probably between ten and a hundred million dollars per year. Anybody with cash could buy this business and make money. This business is worth between five and ten times its annual gross profit, plus the value of machines, minus debt.

I'd argue that contracts NEVER matter. All a contract says is "this business will probably continue to do what it is doing." In tier one, that doesn't matter because there's no value in the continuing operations, just the machines. In tiers 2 and 3, continuing to make money is why you are paying for the continuing operations in the first place.

A company with a product line values just about the same way, they just should have a better profit margin in tiers 2 and 3. Same for patents and IP. If there's a protectable revenue stream, then that should be showing up in the bottom line. If it doesn't, then how is it worth paying for?

For what it's worth, by these metrics my company is in tier 2 and is worth between ten and 18 million dollars. We have 19 employees, seven CNC machines, 22 other automated machines and robots, one granted patent and four pending, two product lines, and we make about 700,000 parts per year. I wouldn't sell it for that, but I accept that that is what it is objectively worth.
 
It is also worth mentioning that prevailing business conditions at the time of offer for sale have a considerable effect on the valuation of a business. In a depression, many companies will be utterly unsalable and the owner's investment may be better protected by shuttering the plant for as long as it takes rather than disposing of all the assets on a fire-sale basis. This would be especially true in a case where the entire plant and equipment is owned and there is no debt. Meaning that, while you can't sell it advantageously at the moment, you also don't have to sell it. During periods where the pendulum swings over to business optimism, everybody and his kid brother wants to get into business, and existing businesses want to acquire other businesses (related or not). In those times, any viable enterprise can become wildly overvalued. There are no formulas for this approach, wherein nothing matters so much as TIMING: "Buy when everybody's selling, and sell when everybody's buying."
 
I think many here will agree with me that this is a better choice than buying a machine shop.

Heritage Hot Dog Cart

Way more money to make and less stress.

I found a new forum to read for my new venture. Street Vendor Forum - Index

Perhaps Milacron can start a new Forum Category "Hot Dog Carts" that we can refer those who want to start a new shop to.

I think I have found my calling if I can just develop a heavy accent and poor use of English.
 
By now you may have noticed that many if not most of the owners here, myself included, advise people against starting or owning a shop. If you want to buy yourself a job, go ahead. That is what I did without intending to. I could have sat on my ass for 8 years for what I sunk into the equipment and building. But then again I am one step removed from a failure.

Don't be like me. I think God's purpose for me these days is to serve as a warning to others. Consider yourself warned.

Good luck on your quest.


I don't if there is so many folks stating this all the time, or if it is just Techguy posting it time and aggin, but I just don't understand the difference, nor the problem here.

If you need a job anyhow - whether it be for paying your own way through life, or simply a good place to hide from the wife, then what is wrong with being self employed? Being born and raised on the farm, I simply can't imagine any other way... I certainly didn't start my shop with expectations to git rich, but rather to pay my own way. If it goes better than that - great!


Bob I'm surprised to hear you say that. So a 20,000lb machining center is only worth $200?

I can understand wanting the equipment to make the stuff... After seeing a lot of quotes for somewhat simple RFQ's I couldn't afford to have someone else make my stuff...

That 20,000# machining center is actually a clapped out 20,000# boring mill.


As for Dank, you know - you can start your own eh?
Buying a manual only shop at this point seems like a bad investment...


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