Consider selling turn key shop. Need advice.
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  1. #1
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    Default Consider selling turn key shop. Need advice.

    Hi,

    I have been lurking on here for years and find a lot of knowledgeable tips from skilled people here but now I need some guidance from anyone who has gone through this. I have a shop which has been in business for 3.4 yrs. It's in Los Angeles California in case geographically it helps. I have 2 partners who are at the age of retirement. I'm in my mid 30's and have been approached on selling. Our machines are fairly new.

    We primarily specialize in quick turn around R&D short run prototypes. As owners our work week consists of 12-20 hrs daily Monday thru Saturday and if necessary Sundays. I have never sold a turnkey cnc machining company before so I'm not quite sure if there is a formula to determine that. I've read on forum a couple people here who have but could not figure out how they came up with a number.

    We are not a big shop but grew at a reasonable rate. Seems like 15-20% yearly growth. Total employees are 9 from which includes myself and 2 partners. We average about 1.4 mil in sales. Machinery should all be paid off in 2-3 yrs approximately if we keep going at the pace we are now.

    Machinery consists of 2 cnc mills 4 axis 2015 & 2017, 2 cnc 5 axis mills 2015 & 2016, 1 cnc lathe with automatic bar feeder 2016, We have a older cnc lathe which we only use for quick second ops but not much at all. EDM as well which never gets used. As well as support machinery 2 manual lathes 1 toolroom lathe, 3 manual mills. All in good functioning condition. Same thing with CNC machines all get PM"d yearly so are always in very good shape. I forgot about Quality Dept. We have 1 CMM with indexing head (5 axis) 2015 also touch probe arm with scanning capability 2017.

    I love this place but my partners seem to be leaning towards retirement which I totally understand. I put my all into this place so it feels good knowing we have potential buyers except that they are asking for a price and I'm not sure what is a fair an honest price. Considering the info I provided any ballpark idea would be appreciated. Any info from someone who has dealt with this would be much appreciated.

    Thank You
    OAG

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    Do you want to sell? Or are you being "forced" into this because the other partners want out, and you can't afford to purchase their shares of the business? What is the breakdown in ownership - even thirds, or no?

    That sounds like an impressive list of (new) equipment for only a couple years in business. Do you want out? I'm 32, and if I were involved in a company such as that, that I helped build no less, I'd want to hang around and keep it going. Provided I could keep the sales up, keep the place managed, and not end up divorced that is...

    What do you want here?

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    so your question is on an asking price. What's the liquidation value of all assets, current and fixed, net of liabilities and whats the normalized cash flow?

    Why aren't you working out a deal to buy it from your partners?

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    Are you selling out (get a check, leave the business) or are you selling in (get a check, then you and the owners are supposed to keep doing the same hours and effort)?

    If you're selling out, what do you have that's proprietary other than your customer list (which isn't really valuable in a quick turn/proto business)

    If you're selling in, how much are they paying you to carry on and how much are they expecting out of you for that?

    Quick rule of thumb would be something like four to five times annual pretax profits, after (and this is important) paying the owners like they were employees. So if you did 1.4 million in sales and had expenses of $600k, then figure three owner-level employees working 100 hours a week would have to be paid at least 100k a year on the open market, then you're looking at $300k pretax. That'd put the value of the business at about 1.2 -1.5 million.

    The other way would be book value. What's the sum of all the equity in the company? Basically the current auction value of the machines minus what you still owe on them. Same for the building if you own it.

    You're worth, essentially, whichever of those two is higher. If you have something particularly special about the company (branding, patents, proprietary processes, etc) then the multiple would be higher than 4-5, but the procedure would be the same.

    You can't not account for the owners' fair market pay in the first method, because once you sell the owners won't be owners anymore and they're not gonna work for someone else for free.

    If the business can't run without the owner's personal presence (for example, if this is the studio of a famous artist) then you can't use the first valuation, and it's only worth the liquidation value. That's more common than you'd expect with small businesses.

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    South'

    Are your numbers correct? The three owners work 12-20 hours a day, 6 days a week. That's about equivalent to 6 workers at 40 hours a week. So, you really have 12 twelve workers with sales of $1.4M? That doesn't sound quite right?

    Could the shop continue its current growth rate without the knowledge, skills and expertise of you three owners?

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    Of any kind of shop I would think a short run R & D shop would be one of the least attractive for a prospective buyer. That type of shop is highly dependent upon dedicated highly skilled labor if it is to be profitable. Especially true from your description, it seems to only be doing well because of 3 owners putting in extremely long hours. Looks like without the 3 likely dedicated and skilled owners the place would fail quickly. The place is really only worth assets minus liabilities and nothing more.

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    Quote Originally Posted by Dualkit View Post
    Of any kind of shop I would think a short run R & D shop would be one of the least attractive for a prospective buyer. That type of shop is highly dependent upon dedicated highly skilled labor if it is to be profitable. Especially true from your description, it seems to only be doing well because of 3 owners putting in extremely long hours. Looks like without the 3 likely dedicated and skilled owners the place would fail quickly. The place is really only worth assets minus liabilities and nothing more.

    So instead of trying (at the very least, maybe training??) to get skilled workers, just cash out?

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    Quote Originally Posted by Dualkit View Post
    Of any kind of shop I would think a short run R & D shop would be one of the least attractive for a prospective buyer. That type of shop is highly dependent upon dedicated highly skilled labor if it is to be profitable. Especially true from your description, it seems to only be doing well because of 3 owners putting in extremely long hours. Looks like without the 3 likely dedicated and skilled owners the place would fail quickly. The place is really only worth assets minus liabilities and nothing more.
    Quote Originally Posted by Mike1974 View Post
    So instead of trying (at the very least, maybe training??) to get skilled workers, just cash out?
    Not sure of the question you are asking. My post was just a take on the value of the business for the purposes of selling. From the OP's post it appears the other 2 owners have an unrealistic value of the business. From all the hours they put in and the sales figure posted they aren't making any more money or maybe less than if they were punching a time clock and getting paid hourly + overtime for all hours worked. They really just bought themselves a job, their is nothing wrong with that, but it adds no value over and above the value of the business equipment and any other commercial property.

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    You need to consult with a business broker, offering a fee for his (her) advise. Familiarity with local values, any real estate involved, and no personal interest, will get you an honest value to think about.

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    Quote Originally Posted by Mike1974 View Post
    So instead of trying (at the very least, maybe training??) to get skilled workers, just cash out?
    Training takes time, and you don't know until you've invested some (maybe) considerable time and $'s whether their either any good, or will stick around after all the effort you've invested in them.

    I worked at a place in Huntington Beach that only did prototype hardware, they reckoned only 1 in 10 people they hired to fill conventional/cnc vacancies would be capable of getting thru the first day, let alone the first week before their lack of capabilities was evident. There's plenty of machinists out there, but not many who can do prototype r&d work.

    Unless the existing owners are willing to be retained for the first 1-2 years, and their core workers stay there, the shop is worth exactly what Dualkit suggested.

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    Quote Originally Posted by Jashley73 View Post
    Do you want to sell? Or are you being "forced" into this because the other partners want out, and you can't afford to purchase their shares of the business? What is the breakdown in ownership - even thirds, or no?

    That sounds like an impressive list of (new) equipment for only a couple years in business. Do you want out? I'm 32, and if I were involved in a company such as that, that I helped build no less, I'd want to hang around and keep it going. Provided I could keep the sales up, keep the place managed, and not end up divorced that is...

    What do you want here?
    Gladly I'm not being forced to sell. We have been asked if it was an option, what it would take or cost. But from what it seems potential buyers may want us board for a few months just to ensure we transition potential owners. At that point my partners would prefer to retire and enjoy their remaining years with their families. Which to me seems like a good idea. As for me it seems that part of deal would require myself to stay on the longest amount. Potentially becoming a full time executive employee which at my age seems fine. As for ownership of company I own 40%

    I believe we are very fortunate to have equipment we got in such a short time. It's nice walking into the shop and seeing the modern equipment reliably taking on everything we can throw at it. I would definitely hang on till the end if that was the case. Luckily the divorce option has already presented itself so no need to worry about that option.

    All I want is to sell if someone wants the company more than us and is serious about it. Or not sell and keep growing gradually. Most likely at some point my partners will want out because they want to retire. I'll have to eventually buy them out which I'll be happy to do if that's what they want. But if they want to stay on then that's ok as well.

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    When all is said and done, everyone and every bill paid, is there any profit? you need to have that exact number.
    Buyers would be looking at ROI.

    So say you want $2mil for it and buyer decides he/she wants at least a minimum 10% return, well...

    Be really careful of "buyers" who have no money.

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    Quote Originally Posted by SouthCentral View Post
    Gladly I'm not being forced to sell. We have been asked if it was an option, what it would take or cost. But from what it seems potential buyers may want us board for a few months just to ensure we transition potential owners. At that point my partners would prefer to retire and enjoy their remaining years with their families. Which to me seems like a good idea. As for me it seems that part of deal would require myself to stay on the longest amount. Potentially becoming a full time executive employee which at my age seems fine. As for ownership of company I own 40%

    I believe we are very fortunate to have equipment we got in such a short time. It's nice walking into the shop and seeing the modern equipment reliably taking on everything we can throw at it. I would definitely hang on till the end if that was the case. Luckily the divorce option has already presented itself so no need to worry about that option.
    All I want is to sell if someone wants the company more than us and is serious about it. Or not sell and keep growing gradually. Most likely at some point my partners will want out because they want to retire. I'll have to eventually buy them out which I'll be happy to do if that's what they want. But if they want to stay on then that's ok as well.
    I am confused by your statement, if you have majority stock 40%,
    then you call the shots, and having a profitable job shop and being
    younger of the three, you should buy them out,but if your books say
    something else and have buyers willing to buy, go ahead and sell it.
    I am also in los angeles and see machining auctions at least 3 a week
    machines are worth crap if you don't have work, you say your shop is
    3 or 4 yr old is very rare to grow that much, maybe 34.
    You having the know how, and links, sell it and start your own 100%
    and reap the benefits and let the fools holding the bag.
    If they are holding auctions 3 a week in los angeles
    that alone tells me something about the state of aerospace work,and my friends they do aerospace and are slow, I also have a machine shop but not aerospace, i do automobile parts and also struggling big time
    why is that because people tendency have changed new generation does not have the money and want spend in customizing their rides.

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    Man, that's a lot of machines and people for $1.4M in sales. You're working hard for your money. The big question is what will your customers do? They're there because of what your shop is now, no guarantees that they will stay for whoever buys it. So really what you are selling is just the machines and all the stuff. As far as you staying working for new owners in my experience ex-owners make lousy employees. You aren't going to like the new owners telling you what to do in the shop you built. The best answer is that you buy the other owners out and stay where you are doing what you built.

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    Could be best to tough it out another 2-3yrs where it might finally start to make some real $ once machines start being paid off, assuming they're still on 5yr terms.


    Also worth keeping in mind that although things are good for many right now(and perhaps a good time to sell while there's buyers), the clock is ticking and when the next crash hits it'll hit hard and that won't be the time to sell anything, it'll be the time to have shops that are paid for and can survive on very little overhead. I'm hoping it's at least 5-6yrs away, but who knows.

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    Quote Originally Posted by SND View Post

    Be really careful of "buyers" who have no money.

    I guess I would like you to expand on that thought a bit?


    -----------------

    Think Snow Eh!
    Ox

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    Job shop............only worth the value of the iron and real estate(if owned)...............a person would be an idiot to buy a job shop and think the customer base has any value at all.............your partners will think the business will be worth much more than it is............

    $1.4M in sales for that many folks in the LA area? I'd go get a hot dog cart.........................

    Read this thread:
    Valuation of machine shop purchase.

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    Something here seems strange... My boss and I had this type of conversation a while back and he was downright mortified that his customer base wasn't worth a pile of money... I kinda just chuckled. Where is the pot of gold at the end of the imaginary rainbow?

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    Quote Originally Posted by Ox View Post
    I guess I would like you to expand on that thought a bit?


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    Well, you have the rare buyers that can bring a suitcase full of cash and have money in the bank to buy it outright VS. those who will have to finance their portion while at the same time expecting the ex-owners to hold much of the paper for years to come and a high risk of not seeing your money if new owners drive the place into the ground. I know of such a situation taking place, it'll be interesting to see the outcome when its all done.

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    Rarer still are ones with wheelbarrows full of cash who are looking to buy a job shop. Most small businesses have to at least partially finance the sale, they expect/are worth more than most can write a cheque for, but are too small for Consolidate Flange to get excited about because the accretive earnings are just oh so exciting.


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