Buying the shop I work for

tay2daizzo8 · Oct 18, 2021

Hi All,

Hoping to start a running thread for advice throughout my journey.

As the title says, I have been offered the opportunity to purchase the shop i work for.
Currently My position is GM/Director of operations
I have been here for 11 years and started at the bottom.
I know the shop/machines/customers very well and the expectations and limitations of our capabilities.

The reason for the sale is the current owner is looking forward to retirement.

the shop is profitable, has around 10 employees and sales range from 1.4-2.0 mil

Im sure i will have a ton of questions and not enough answers, but was hoping to see what others have done before me in this situation, what to look out for, what questions to ask etc.

The owner is very willing and motivated to sell to me, as he is providing financial guidance in the form of a third party financial advisor(also the people who manage the 401K), as well as support and guidance along the way.
now i know there could be a conflict of interest in the future, but for now we are 3-5 years away from finalizing the sale.

the owner will be staying on in a more and more limited role as things go forward.

any thoughts on this are greatly appreciated. i wont get butt hurt if you tell me all the reasons not to do it

thanks again

cnctoolcat · Oct 18, 2021

It sounds like you might have a great opportunity, if owning a shop is really what you want to do?

Owning a shop is a lot of work, it requires a lot of hours, and you will always be dealing with stuff at the edge of your comfort zone.

In your specific case, it boils down to a couple things:

1.) How much does the owner want for the business? (It has to make sense for YOU financially...)

2.) How are you going to pay him? (Hopefully to include owner financing of part or all the note...)

ToolCat

tay2daizzo8 · Oct 19, 2021

cnctoolcat said:
It sounds like you might have a great opportunity, if owning a shop is really what you want to do?

Owning a shop is a lot of work, it requires a lot of hours, and you will always be dealing with stuff at the edge of your comfort zone.

In your specific case, it boils down to a couple things:

1.) How much does the owner want for the business? (It has to make sense for YOU financially...)

not sure on this one yet, still trying to figure out how to value a shop

2.) How are you going to pay him? (Hopefully to include owner financing of part or all the note...)

some owner financing, some cash down, and a bank loan

ToolCat

long hours and edge of my comfort zone is where i am accustomed to working

the hardest part is going to be replacing me as a GM. I know i certainly cant run the business and take on my responsibilities now...nothing will get done.
i will have to find someone to do at least some of what i do now(programming troubleshooting setting up when needed and being able to )

adh2000 · Oct 19, 2021

I’ve seen a few deals like this work. Usually a business like this, assuming it’s profitable, is worth about one times annual sales. In this case $1,500,000. If the business generates between $150,000 and $200,000 in profit each year that seems like a good return. An outside investor might buy it. Next question then is where are you going to get $1.5M? You could ask the seller to carry a note for it and pay him $100K per year out of the profits for 15 years. 16 if there’s interest. That doesn’t leave you much to live on for the next 15 years. How old are you? Can you wait that long?, and can you grow the business so you take home more? Those are the questions only you can answer.

tay2daizzo8 · Oct 19, 2021

i will probably need to do some more research on how to value a business...right now i am a big cog in the wheel..if i wasnt here would it still be worth the same given the current exit plan?

I will be around 36 when this deal goes thru, so i do have some time on my side...i hope

im currently getting my personal finances together and taking care of a few things(like moving in the short term, plan on listing my house in the spring)

once all that is settled i will be looking for a lawyer and a business advisor? to help determine the sale value.

Owner isnt looking for top of the market value, he has an ethical interest in seeing the business continue and the current employees and customers stay happy

BoxcarPete · Oct 19, 2021

tay2daizzo8 said:
i will probably need to do some more research on how to value a business...right now i am a big cog in the wheel..if i wasnt here would it still be worth the same given the current exit plan?

I will be around 36 when this deal goes thru, so i do have some time on my side...i hope

im currently getting my personal finances together and taking care of a few things(like moving in the short term, plan on listing my house in the spring)

once all that is settled i will be looking for a lawyer and a business advisor? to help determine the sale value.

Owner isnt looking for top of the market value, he has an ethical interest in seeing the business continue and the current employees and customers stay happy

This is good. In that case he may be interested in owner financing as others have mentioned. If set up correctly, the transition would be as smooth as possible if you take over and start paying the majority of the profits out to him for the first 10-15 years. He may even wish to do as my grandfather did and keep 10% at first so he can swing by and putz around a bit. Papa had a little trouble leaving it all behind, that was his way of dealing with it. Just don't forget if it's an S-corp that you pay taxes on all those payments (as if they are your personal income) to the old owner!

michiganbuck · Oct 19, 2021

QT: I know the shop/machines/customers very well and the expectations and limitations of our capabilities.
Good that because having a customer satisfying personality is important.

You should make an additional $20per after all figuring costs, with owning the outfit.

In a higher interest rate economy, I would say figure what your money could make with less risk.

Are you buying a building or leasing?

I knew a fellow who gave a good business to the manager with a retirement agreement.
Business is still thriving about 20 years after.
Yes if that manager hicked the bucket I don't know where that agreement would have gone.

Jashley73 · Oct 19, 2021

I remember reading an article several years ago in Modern Machine Shop's taxes column, about gradual transfer of ownership. From memory, the buyer bought more & more share of the business over time, until x number of year later, they had purchased all of the business.

I'd say go pay an accountant for a few hours' time, and get their perspective.

Another thing that struck me - Why is the "General Manager" writing programs for the machines? Why is your job not far closer to the owner's responsibilities, in actually running the BUSINESS.

Last shop I worked, the GM basically ran the business. The owner(s) kept up with payroll, and even shared financials with the GM, then got out of the way. If you aren't at this level now, then you may want to re-think buying the business, until you have more experience running said business. Maybe I just read that statement incorrectly, am only seeing part of the picture, etc. But that's what came to mind anyway.

If you really are the one writing programs, doing setups on the machines etc, then that needs to change ASAP if you're going to be buying the business. If the owner is serious about selling/retiring, then you all need to hire a good programmer etc, and his salary needs to come from... Where? Y'all need to discuss it...

huleo · Oct 19, 2021

Share more about the business. Building size, lot size, owned or leased, machines, types of work you do specifically. The reason I ask is I have seen too many times where businesses are sold at the 'top of their game' and people buy based on current status, and do not plan for the rough roads. The owner 'owns' it (god, I hope) so he could ride it out. You being on the hook on a big payment is another factor.

tay2daizzo8 · Oct 20, 2021

Jashley73 said:
I remember reading an article several years ago in Modern Machine Shop's taxes column, about gradual transfer of ownership. From memory, the buyer bought more & more share of the business over time, until x number of year later, they had purchased all of the business.

I'd say go pay an accountant for a few hours' time, and get their perspective.

Another thing that struck me - Why is the "General Manager" writing programs for the machines? Why is your job not far closer to the owner's responsibilities, in actually running the BUSINESS.

Last shop I worked, the GM basically ran the business. The owner(s) kept up with payroll, and even shared financials with the GM, then got out of the way. If you aren't at this level now, then you may want to re-think buying the business, until you have more experience running said business. Maybe I just read that statement incorrectly, am only seeing part of the picture, etc. But that's what came to mind anyway.

If you really are the one writing programs, doing setups on the machines etc, then that needs to change ASAP if you're going to be buying the business. If the owner is serious about selling/retiring, then you all need to hire a good programmer etc, and his salary needs to come from... Where? Y'all need to discuss it...

We have discussed earning equity in the business over the next 3 years, just have to do more research on how it would be handled.

"Another thing that struck me - Why is the "General Manager" writing programs for the machines? Why is your job not far closer to the owner's responsibilities, in actually running the BUSINESS."

because it is that hard to find people and with mcdonalds paying $22 to start....but thats for a different thread

i go over the monthly financials every month with the owner and also look at cash flow on a weekly basis.
I am still learning the financials from him and will continue to going forward. i realize by the time this thing closes, i will need a programmer/lead to take my spot.

tay2daizzo8 · Oct 20, 2021

huleo said:
Share more about the business. Building size, lot size, owned or leased, machines, types of work you do specifically. The reason I ask is I have seen too many times where businesses are sold at the 'top of their game' and people buy based on current status, and do not plan for the rough roads. The owner 'owns' it (god, I hope) so he could ride it out. You being on the hook on a big payment is another factor.

we rent somewhere around 10K SQ feet in an industrial park, building connected to one other business .
7 mills, 10 lathes, all owned except for 2(plan is to have these paid off in the next 2 years)

we do Aerospace, medical and semiconductor with a few defense and small arms sub-tiers.

i will buy knowing the struggles the business has had in the past decade+ also i have a view of what can be done in the future for growth.

Joe Miranda · Oct 20, 2021

Sounds like an awesome opportunity. It seems to me like the things that have already been pointed out will give you very good footing moving forward. Best wishes!

CITIZEN F16 · Oct 20, 2021

Jashley73 said:
I remember reading an article several years ago in Modern Machine Shop's taxes column, about gradual transfer of ownership. From memory, the buyer bought more & more share of the business over time, until x number of year later, they had purchased all of the business.

I'd say go pay an accountant for a few hours' time, and get their perspective.

Another thing that struck me - Why is the "General Manager" writing programs for the machines? Why is your job not far closer to the owner's responsibilities, in actually running the BUSINESS.

Last shop I worked, the GM basically ran the business. The owner(s) kept up with payroll, and even shared financials with the GM, then got out of the way. If you aren't at this level now, then you may want to re-think buying the business, until you have more experience running said business. Maybe I just read that statement incorrectly, am only seeing part of the picture, etc. But that's what came to mind anyway.

If you really are the one writing programs, doing setups on the machines etc, then that needs to change ASAP if you're going to be buying the business. If the owner is serious about selling/retiring, then you all need to hire a good programmer etc, and his salary needs to come from... Where? Y'all need to discuss it...

I was thinking the same thing, he sounds more like a hands on foreman to me, running around putting out fires.

michiganbuck · Oct 20, 2021

Q: Another thing that struck me - Why is the "General Manager" writing programs for the machines?

I think if a shop runs smoothly and the GM has some free time then doing some work keeps him/her in tune with the work...a good thing.

tay2daizzo8 · Oct 20, 2021

michiganbuck said:
Q: Another thing that struck me - Why is the "General Manager" writing programs for the machines?

I think if a shop runs smoothly and the GM has some free time then doing some work keeps him/her in tune with the work...a good thing.

its good that I have my ear to the ground so to speak with the guys in the shop and how things are going.

I will not be able to continue doing all of it very much longer.
i am sending a younger guy we have to learn mastercam and i figure he can do 80% of the programing once he has a good base line
I can still do the harder more experienced stuff when needed.

we are not a 5 axis shop and we specialize in low QTY hard to machine alloys..not to say i wont take on higher QTy but that is what our niche is.

we do Titanium,Inco and stainless day in and day out

Mcgyver · Oct 22, 2021

tay2daizzo8 said:
now i know there could be a conflict of interest in the future, but for now we are 3-5 years away from finalizing the sale.

probably a waste of time.

If you really want to buy a business, tell him you looking for a 3-5 month timeline or you have to move on. Then get down to brass tacks, valuation methodology and how much of it he's going to finance.

Learn some finance yourself so you're conversant.

I'm serious about it wasting time. I have a corporate finance background so always get drawn into these by friends for advice. I've seen this so many times......while he might be the nicest guy in world and really mean it, you have no way knowing what the tune will be 5 years from.

Its the myopic thinking trap. To many entrepreneurs end up with their sense of self (ego) too tied up in the business and in end the can't sell...but a little bit of feel good discussion/promise around selling doesn't confront today, its a whopping five years out. They won't tell you they can 't sell, but the price will get so stupid it'll be impossible, or some other excuse manifests itself and roadblocks to a deal emerge. It's a cheap and easy way for him to keep you committed...the myopic part is he gets what he wants today (your loyalty, feeling like he's resolved things etc) but what he has to give in return is a soft fuzzy promise 5 year out...might as well be 25

The IF is emphasized because that's the real issue. If you want to own a business, press for firm resolution now (a deal that closes not promises) while he's feeling exposed or whatever prompted the discussion, or move on. If you don't have a burning desire to own a business (and all the stress and crap that comes with it) don't buy it now, or five years.

tay2daizzo8 · Oct 25, 2021

Mcgyver said:
probably a waste of time.

If you really want to buy a business, tell him you looking for a 3-5 month timeline or you have to move on. Then get down to brass tacks, valuation methodology and how much of it he's going to finance.

Learn some finance yourself so you're conversant.

I'm serious about it wasting time. I have a corporate finance background so always get drawn into these by friends for advice. I've seen this so many times......while he might be the nicest guy in world and really mean it, you have no way knowing what the tune will be 5 years from.

Its the myopic thinking trap. To many entrepreneurs end up with their sense of self (ego) too tied up in the business and in end the can't sell...but a little bit of feel good discussion/promise around selling doesn't confront today, its a whopping five years out. They won't tell you they can 't sell, but the price will get so stupid it'll be impossible, or some other excuse manifests itself and roadblocks to a deal emerge. It's a cheap and easy way for him to keep you committed...the myopic part is he gets what he wants today (your loyalty, feeling like he's resolved things etc) but what he has to give in return is a soft fuzzy promise 5 year out...might as well be 25

The IF is emphasized because that's the real issue. If you want to own a business, press for firm resolution now (a deal that closes not promises) while he's feeling exposed or whatever prompted the discussion, or move on. If you don't have a burning desire to own a business (and all the stress and crap that comes with it) don't buy it now, or five years.

I completely understand your point...BUT I will not be ready to buy in 3-5 months.

5 years is probably at the max...im getting the feeling 2-3 based on some of the conversations we have had...in this time i need to clean up some of my own finance stuff and learn more about the financial side of the business.

i was looking at maybe some online classes, but wasn't sure what would really apply to my situation. maybe business finance?

MwTech Inc · Oct 25, 2021

I'm coming at this from a different angle.......

Can you live 24/7 with the business?? You will never be able to turn it off in your head. You will wake up in the night thinking about "something" Your stress level will rise.
You are now the one responsible for the entire thing, the buck stops with YOU.

If you can handle all this, then the rest is no big deal. But if you can't, you will have a miserable life.

You may think, well i'm GM already no big deal to tack on Owner.......you will have a wake up call thinking like that......

Some can, some can't. Not a flaw , just the way it is........

Garwood · Oct 25, 2021

Mcgyver said:
probably a waste of time.

If you really want to buy a business, tell him you looking for a 3-5 month timeline or you have to move on. Then get down to brass tacks, valuation methodology and how much of it he's going to finance.

Learn some finance yourself so you're conversant.

I'm serious about it wasting time. I have a corporate finance background so always get drawn into these by friends for advice. I've seen this so many times......while he might be the nicest guy in world and really mean it, you have no way knowing what the tune will be 5 years from.

Its the myopic thinking trap. To many entrepreneurs end up with their sense of self (ego) too tied up in the business and in end the can't sell...but a little bit of feel good discussion/promise around selling doesn't confront today, its a whopping five years out. They won't tell you they can 't sell, but the price will get so stupid it'll be impossible, or some other excuse manifests itself and roadblocks to a deal emerge. It's a cheap and easy way for him to keep you committed...the myopic part is he gets what he wants today (your loyalty, feeling like he's resolved things etc) but what he has to give in return is a soft fuzzy promise 5 year out...might as well be 25

The IF is emphasized because that's the real issue. If you want to own a business, press for firm resolution now (a deal that closes not promises) while he's feeling exposed or whatever prompted the discussion, or move on. If you don't have a burning desire to own a business (and all the stress and crap that comes with it) don't buy it now, or five years.

This times 1000!

Been here myself and seen same with another friend.

DouglasJRizzo · Oct 26, 2021

Get EVERYTHING on paper and use your own attorney.
This stuff can turn ugly.
Congratulations and I hope it works out.

Buying the shop I work for

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