Buying a shop?

[tjd10684]

I work at this small machine shop and recently the owner has let me know that he is thinking of selling the whole shop to me. I have pretty much been running the manufacturing side, I do all the quoting, CNC programming, about 90% of setups and on most days feed at least 2 machines. I also do most of the other small jobs that the shop has such as local IT and machine maintenance / trouble shooting. Really everything except balancing the books and tax stuff. I have access to it but we have a person that comes in part time to get into the nitty gritty on that stuff.
We have 2 major customers for the business one of them uses us for the source for their replacement parts for a line of machines that they have been supporting for 20+ years. These machines are slowly being phased out so we know that this part of the business is slowly getting smaller and can potentially drop off a cliff. The other customer is pretty steady and growing in their industry with a good product line. The issue there is that the industry they serve is SLOW to adopt new tech so each new client is years in the making not something they can push for adoption and get a rush for overnight.
So the owner is looking to make me a partner with a buy in on the company and then over the next 5 years buy the whole thing. The company now looks like it would be worth ~250K and he is asking for a 50K buy in. The issue is customer 1 with its slowly declining sales. 250k looks reasonable right now but the trend that I'm seeing continues 250k would be barely reasonable in 5 years and in 10 I'm not sure at all. Revenue numbers look something like this: 2019-332k 2020-265k 2021-280k 2022-275k
I think that the main problem with this whole thing is lack of advertising. Like I said I run the shop the owner is the salesmen or at least was supposed to be. He is actually running a prototype shop for another guy. This guy he is working for basically is a business incubator. He foots the bill letting young engineers get stuff made and if their stuff takes off he gets a stake. Anyhow the idea was my shop owner would go run this guys prototype shop and farm out "production" stuff back to us. This was all agreed to and above board. The problem is in 3 years we have quoted 2 jobs from them and got 1. The other one had funding cut before it got out of the quote stage. So really I have no sales rep and like I know that I'm good at making parts I am not gifted with the bs needed to be sales. Even if I was I'm not sure I could, someone has to make the damn parts right?
So right now I'm not sure what to tell him. While I would like to own the shop honestly its not looking like a wise investment right now with no advertising and just a hand full of odds and ends coming in it really just doesn't look promising if nothing changes. The last wrench to throw into this whole word soup is I have my own machines at home and have mostly capability parity with the work shop. So I'm also looking at if his business were to go away he sells it or decides to close it up I can easily drive down to customer 2 who I know personally and pick up that business tomorrow. I can also pull at least 1 other small customer with me. It would be enough to keep money coming in and probably hire someone again to do the tax and accounting. So thank for reading this wall of text if you have any insight or suggestions I'd love to hear them because right now I'm in analysis paralysis.

 

[Mebfab]

Way to many shops. Rapidly automating to reduce costs and customer pricing.

 

[Rob F.]

How much are the machines and shop tools worth? $300k?
You said: Revenue numbers look something like this: 2019-332k 2020-265k 2021-280k 2022-275k
I take it that is total money in before expenses? Or is that the profit, after expenses?

 

[tjd10684]

How much are the machines and shop tools worth? $300k?
You said: Revenue numbers look something like this: 2019-332k 2020-265k 2021-280k 2022-275k
I take it that is total money in before expenses? Or is that the profit, after expenses?

That is before expenses. As for the machines my newest one is a 2010 southwestern LPM it was 75K new. I got a 2001 Hass mini mill (all of customer 2's parts are run on here) 2x Tack DPM mills one with a floppy drive and the other with the upgraded KMX control. Lastly a Southwestern lathe 1640. I know they are in good shape mechanically since I fix them but they LOOK like crap. I would have to do some digging on similar machine on the used market. I think 300k would be a stretch though.

 

[tjd10684]

Way to many shops. Rapidly automating to reduce costs and customer pricing.

So your saying find someone who will pay better then 25/h for someone who can program and run just about any part you can lift by hand and let him figure it out? That is an option.

 

[DavidScott]

What exactly eould you be buying?

 

[tjd10684]

What exactly eould you be buying?

The idea would be buy all of the machine tools, the customer list (as long as it is), everything in the shop except for the building itself.

 

[DavidScott]

If all the machines described in post #4 are it $250k sounds way too high. Especially considering you already have some, and what he has don't sound desireable.

 

[ducesrwld]

bottom line here is this small shop is not very desirable from a buyers stand point and the fact you mention the owner has most of his eggs in one basket this is not a healthy business model to be thinking about buying especially for that chunk of change. with the economic outlook as it is right now this one is a hard pass doesn't sound like you are gaining much of anything with what you are going to fork out. business models like this are a perfect example when the economy goes south these are the first places to close up shop. buy the place up for auction rates when it does.

 

[Orange Vise]

So really I have no sales rep and like I know that I'm good at making parts I am not gifted with the bs needed to be sales.

Without sales, this is a dead end.

It's not BS. It's what will make or break the entire business. I would not proceed until figuring this one out.

Even if I was I'm not sure I could, someone has to make the damn parts right?

Sell during the day, make parts at night. 100 hour work weeks should not faze you.

Automate sooner than later.

Physical labor -> robots.
Clerical work -> AI.

So the owner is looking to make me a partner with a buy in on the company and then over the next 5 years buy the whole thing.

Not ideal. Based on what you're saying, this guy is checked out and is focused on other things. You don't want him as a partner.

Do some research on seller financing. Seems like the best case would be the owner hands over the keys and takes a hike. He is no longer involved in the business but may take it back if you default. All this is up for negotiation though.

Here's a start:

 

[tjd10684]

Without sales, this is a dead end.

It's not BS. It's what will make or break the entire business. I would not proceed until figuring this one out.

This is exactly what I mean. That is not the right words. Gift of gab is maybe a better term. I realize that I'm not the kind of person that is going to take a customer out to a nice lunch and come back with a deal. I have also been down this road before trying to be everything and do it all. What I learned is do what your good at and hire people who are good at doing what your not.

 

[Garwood]

Sounds like the whole shop is worth maybe $50k to me. Probably wouldn't net $20k at auction.

If you cannot sell do not try to own a shop.

 

[jaguar36]

The machines don't sound like they are worth much of anything to you if you've got similar capabilities (and wouldn't be worth a ton at auction either). So the only value you'd get out of the deal is the customer list, which hardly seems worth the price. Something to keep in mind though is the value of the business, both from a paperwork standpoint (the time and costs of setting up a new business are not insignificant) as well as from a marketing standpoint. While you may only have two significant customers, if the business has a good reputation it would be alot easier to get more work than just trying to start from scratch. Of course the opposite is also true, it could have a bad reputation.

Lastly, if you leave, you might very well be able to take the customers with you for free. Its a dick move to steal customers, but thats how it goes sometimes.

 

[Rob F.]

You should think about asking the owner what kind of money he thinks everything would bring in from an auction. As Jaguar said above all the paperwork and established reputation is worth something, just probably not $250k.
How much profit does the business bring in now? How fast would the owner expect to get the balance of the payments? I was not clear if he wanted $250k +$50k now, or $250 total, or if you guys were just spitballing to get a starting point of value and you may agree on a cheaper price.
Is there enough profit in the income to 1. pay your living expenses, 2. pay off the owner, and 3. have left over for your own profit?
Does the owner own the building or rent/lease it? Does the landlord have future plans for the bldg that dont include a machine shop?
At any rate if the owner really has checked out of this shop it sounds like it will be a slow ride down. You might talk to owner about that and it mention you are considering moving on before hitting bottom.
I guess a very polite way of saying "sell to me for a low but fair price or I will have to quit "
But your not a salesman so how long can the shop survive on word of mouth? As you know, that also needs to be worked into this.

 

[guythatbrews]

You've got it figured out.

At the asking price you are just buying good will. And diminishing good will at that. The value of the old machines barely figure into this equation, so you are really buying 100% good with a very small customer base. Not good.

I agree you don't want this guy as a partner.

Strike out on your own in the evenings. Improve your salesmanship on the way. When the numbers are right make the break.

 

[Comatose]

Do you even want to run a shop? It sounds like you'd be perfectly happy being the lead man at some other, less circling the toilet shop.

If you do want to own a shop, there will be plenty for sale at auction rates in the next couple years. His asking price is absolutely dreaming.

 

[ernieflash]

Does your deal include real estate? if not what are lease terms, triple net ?
taxes
insurance
maintenance /

 

[dkmc]

OP you answered your own question. You currently have the capability AND the contact 'fuzzies' with the current customer to go there and take that work away when or if you wanted to. The end of your post you express your doubts about the idea of buying the shop. It doesn't feel right because it's not a great deal. Sounds like you're in a great position to play a waiting game and step in as your own boss when the time is right, or whenever you feel like it. At some point after you did that your boss would probably be lowering his asking price on his machinery considerably. It might not be a good idea to tell him 'no' until you feel you could pick up the pace on your own if needed.

This sort of thing happened locally some years back. Owner left town on a 2 week selling mission. When he returned, his two employees were gone, toolboxes gone, job they were running.......gone and being done at their (the former employees) newly set up shop. Underhanded? For sure, but it happens. Not suggesting you follow same path.

 

[Garwood]

OP you answered your own question. You currently have the capability AND the contact 'fuzzies' with the current customer to go there and take that work away when or if you wanted to. The end of your post you express your doubts about the idea of buying the shop. It doesn't feel right because it's not a great deal. Sounds like you're in a great position to play a waiting game and step in as your own boss when the time is right, or whenever you feel like it. At some point after you did that your boss would probably be lowering his asking price on his machinery considerably. It might not be a good idea to tell him 'no' until you feel you could pick up the pace on your own if needed.

This sort of thing happened locally some years back. Owner left town on a 2 week selling mission. When he returned, his two employees were gone, toolboxes gone, job they were running.......gone and being done at their (the former employees) newly set up shop. Underhanded? For sure, but it happens. Not suggesting you follow same path.

On the flip side aging owners often use a buy-in or partnership scenario to try to stabilize their business as it declines. I've seen this scenario locally a half dozen times, even fell for it once. Shop owner wins every time.

If I was in the OP's shoes and actually wanted to buy the business from the current owner I would ask for first right of refusal to buy the business for the same price anyone else was offering.

 

[Doug]

To own and operate a small business you have to be a jack of all trades. And one of the most important trades is salesmanship. By his own admission the OP doesn't have it.

Salesmanship takes a gift of gab along with a touch of BS thrown in. Without it I don't see the OP being successful.