Buying a Precision Machine Shop

[ManufacturingInvestor]

Opportunity to buy a machine shop with consistent $4.0 M in revenue, over $600k in annual owners income / cash flow. Over 15 relatively long-time employees. Has been in business for over 50 years. Has a customer that accounts for 50% of sales that has been with the shop for over 30 years. Work completed in an over 15k sq ft facility. Several CNCs, many more boring, milling, grinding, leithe and inspection equipment. No marketing is completed at all, no salesperson or sales team, just referrals and word of mouth.

What do you guys think about this opportunity? How would you value it? What questions do we need to ask and think about before moving forward? Looking to understand both the positives and negatives, risks and rewards of owning a shop with this type of background.

Eager to hear any and all thoughts and reflections. These forums are great, really appreciate you taking the time to respond.

 

[Overland]

When I was an apprentice I was offered a job with small stampings company, with management prospects, etc.
Their main business, back in the '70's was telecommunications.
Not many relays and mechanical switches in that industry now.
So one customer for 50% of the work can cut both ways.
Bob.

 

[DouglasJRizzo]

@ManufacturingInvestor
Get your accountant involved.
Also, a shop with a single customer that big, could be a hand grenade.
If that customer is getting ready to bail, switch, or move in a different direction, do the other customers provide enough to keep the lights on?
Maybe have a talk with them about their future plans.
Key personnel? Do they know the shop is for sale? Or do they get an ice water shock when you roll in like Wyatt Earp at the O.K. Corral.
The reason I say this, is that if the owner had, at one point, promised a key employee the right of first refusal, and has since forgotten, or changed his mind, you bought yourself an instant enemy. Big time. Something else to discuss.

You're going to really have to be "Type A" on this.

 

[Seesecurity]

Opportunity to buy a machine shop with consistent $4.0 M in revenue, over $600k in annual owners income / cash flow. Over 15 relatively long-time employees. Has been in business for over 50 years. Has a customer that accounts for 50% of sales that has been with the shop for over 30 years. Work completed in an over 15k sq ft facility. Several CNCs, many more boring, milling, grinding, leithe and inspection equipment. No marketing is completed at all, no salesperson or sales team, just referrals and word of mouth.

What do you guys think about this opportunity? How would you value it? What questions do we need to ask and think about before moving forward? Looking to understand both the positives and negatives, risks and rewards of owning a shop with this type of background.

Eager to hear any and all thoughts and reflections. These forums are great, really appreciate you taking the time to respond.

4.0m in revenue for a shop with 15 employees seems a bit on the low side to me.

 

[john.k]

It seems you joined the PM forum rather recently......so do you have any interest /experience in machine shops/metals manufacturing /metals fabrication/plastic moulding etc?.........or will you be relying entirely on the expertise (and honesty) of a management team?

 

[ManufacturingInvestor]

It seems you joined the PM forum rather recently......so do you have any interest /experience in machine shops/metals manufacturing /metals fabrication/plastic moulding etc?.........or will you be relying entirely on the expertise (and honesty) of a management team?

Great point here and certainly more the latter. I have strong general corporate experience with finance, accounting, sales, marketing skills But do not have any machine shop, metals manufacturing experience. I’ve been reading like crazy here on PM to ramp as quickly as possible, of course reading only takes you so far, so there would need to be high trust in crew, management team, current owner for transition.

 

[ManufacturingInvestor]

4.0m in revenue for a shop with 15 employees seems a bit on the low side to me.

Helpful, thank you…do you think real opportunity then to increase sales and better utilize capacity given no marketing / sales effort?

 

[ManufacturingInvestor]

@ManufacturingInvestor
Get your accountant involved.
Also, a shop with a single customer that big, could be a hand grenade.
If that customer is getting ready to bail, switch, or move in a different direction, do the other customers provide enough to keep the lights on?
Maybe have a talk with them about their future plans.
Key personnel? Do they know the shop is for sale? Or do they get an ice water shock when you roll in like Wyatt Earp at the O.K. Corral.
The reason I say this, is that if the owner had, at one point, promised a key employee the right of first refusal, and has since forgotten, or changed his mind, you bought yourself an instant enemy. Big time. Something else to discuss.

You're going to really have to be "Type A" on this.

Very helpful points and perspective!

 

[ManufacturingInvestor]

When I was an apprentice I was offered a job with small stampings company, with management prospects, etc.
Their main business, back in the '70's was telecommunications.
Not many relays and mechanical switches in that industry now.
So one customer for 50% of the work can cut both ways.
Bob.

Really helpful and have been reading on PM how this could really cut both ways, some citing massive risk, others suggesting a positive if customer reliable and pays. Hear and understand your point on sustainability and trajectory of customer end market.

 

[ManualEd]

Opportunity to buy a machine shop with consistent $4.0 M in revenue, over $600k in annual owners income / cash flow. Over 15 relatively long-time employees. Has been in business for over 50 years. Has a customer that accounts for 50% of sales that has been with the shop for over 30 years. Work completed in an over 15k sq ft facility.

Do you mean that there is only $600k net on the $4M revenue?
I hope that means they re-invest a lot back into the equipment and building every year.

An equipment list would tell you a lot about how it has been run, and how much it might cost you to modernize as equipment starts to fail.

 

[Seesecurity]

Helpful, thank you…do you think real opportunity then to increase sales and better utilize capacity given no marketing / sales effort?

Just seems to me like the shop rate may be a little low, or they're not maximising charged man hours.

 

[Clive603]

Three questions
1) Management :-
What did the owner do and what will you do.
You are clearly finance, general management, company organisation et al guy. If the owner is technical guy delegating finance et al there will need to be a good deal of re-organisation because you can't step into his shoes.

2) What are you going to do with the business if you buy it? Silent partner or run it yourself?

3) Why do you want to buy the shop.
" Precision machining is cool business?"
"If I had a shop I could make things to exploit ...... business opportunity?"
"I just wanna be a boss."
"Gotta invest this money somewhere."

Not being up to speed with the technology and market before you take over means, as you say, you will be very reliant on the existing staff so you need to be very clear on you role and how you intend to drive the business forwards. Looks to me as if the business has been coasting on the back of the big customer so it's going to take careful work and politics to get it moving again.

As the Red Queen said to Alice "It takes all the running you can do to stay in the same place, if you want to get anywhere you have to run twice as fast." .

Once a business slows to a walk, usually because the owner is looking for an exit, it starts consuming its own capital. Doesn't take long before the re-investment needed to bring it back up to speed at what its doing becomes to great to be viable in that role so it's a "zombie business". Zombies can carry on for years but never go anywhere. Eventually either disappear up their own chuff, used as a starter for something different its being easier to modify a running business than start from zero, or sold fort he land value (which is what usually happens in the UK).

Clive

 

[SND]

How much of that $4M which I assume is gross sales, is material and outsourced services?
What's the equipment worth and condition? what needs to be replaced soon, building worth, etc.
How many or their customers can survive another recession?

 

[john.k]

Which is my point ......without any experience of a shop environment ,how can you assess whats going on ......before or after .

 

[alek95]

Honestly it's impossible for anyone on this site to give you applicable advice without knowing details on the situation.

What is the current role of the owner? Is he a technical expert who leads the daily operations of the company? If that's the case, you will definitely need to find an operations manager or someone who can provide technical expertise.

 

[SteveEx30]

@ManufacturingInvestor
Get your accountant involved.
Also, a shop with a single customer that big, could be a hand grenade.

My thoughts exactly. Trust me, been thru it.

 

[ManufacturingInvestor]

My thoughts exactly. Trust me, been thru it.

Thank you, helpful to have this point reaffirmed
Do you guys most often see key customers taking their business elsewhere? Going out of business? Both? Really appreciative of all input

 

[ManufacturingInvestor]

Honestly it's impossible for anyone on this site to give you applicable advice without knowing details on the situation.

What is the current role of the owner? Is he a technical expert who leads the daily operations of the company? If that's the case, you will definitely need to find an operations manager or someone who can provide technical expertise.

There is a foremen and he would effectively the leader, everything else seems to fall to owner, so seems would need to hire someone

 

[modelmakerblue]

Opportunity to buy a machine shop with consistent $4.0 M in revenue, over $600k in annual owners income / cash flow. Over 15 relatively long-time employees. Has been in business for over 50 years. Has a customer that accounts for 50% of sales that has been with the shop for over 30 years. Work completed in an over 15k sq ft facility. Several CNCs, many more boring, milling, grinding, leithe and inspection equipment. No marketing is completed at all, no salesperson or sales team, just referrals and word of mouth.

What do you guys think about this opportunity? How would you value it? What questions do we need to ask and think about before moving forward? Looking to understand both the positives and negatives, risks and rewards of owning a shop with this type of background.

Eager to hear any and all thoughts and reflections. These forums are great, really appreciate you taking the time to respond.

If you need to consult a forum such as this to make a decision I would suggest you have not got the skill set to take on this business. Just my opinion.
Tony

 

[ManufacturingInvestor]

Which is my point ......without any experience of a shop environment ,how can you assess whats going on ......before or after .

Very helpful, thank you