Buying a shop?

[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.

 

[Clive603]

Bottom line is it's not a real business. Current shop owner effectively bought himself a job!

A real business can viably carry on if the owner drops dead "right now". That one can't.

From your perspective its only value is if it can be used to springboard into a more viable business, whether "real"or "I bought a job" type by buying newer, faster machinery able to generate the income to employ at least a sales man / girl and back office person. Which probably needs at least one other guy on the floor.

Can't see that flying even if you sell both yours and the existing shop machines to fund better equipment.

Don't be confused by the many uber small one-two-three person shops of the type run by many of the posters here. These generally grew out of personal contacts able to supply the work. Up to a point it's less really difficult to get going when you have folk able to hand you work and access to their talk network. Panic time then is about 6 months down the line when you realise that you will be caught up with their backlog next Wednesday with nowt booked until Thursday of the second week month after next!

You don't appear to have contacts and a network so that route isn't open.

Clive

 

[Garwood]

Bottom line is it's not a real business. Current shop owner effectively bought himself a job!

A real business can viably carry on if the owner drops dead "right now". That one can't.

From your perspective its only value is if it can be used to springboard into a more viable business, whether "real"or "I bought a job" type by buying newer, faster machinery able to generate the income to employ at least a sales man / girl and back office person. Which probably needs at least one other guy on the floor.

Can't see that flying even if you sell both yours and the existing shop machines to fund better equipment.

Don't be confused by the many uber small one-two-three person shops of the type run by many of the posters here. These generally grew out of personal contacts able to supply the work. Up to a point it's less really difficult to get going when you have folk able to hand you work and access to their talk network. Panic time then is about 6 months down the line when you realise that you will be caught up with their backlog next Wednesday with nowt booked until Thursday of the second week month after next!

You don't appear to have contacts and a network so that route isn't open.

Clive

No. You are incorrect. The owner does have a business, not a great one, but it is a mostly complete business.

However, the OP cannot step away from his position into the owner's shoes because he wouldn't be running the shop anymore.

Someone else could buy the business, retain the OP as an employee and make not very much money casually selling machinework while the OP makes the parts.

 

[HuskyNut]

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.

+1 on this response. Question: What is the seller's NET profit for those years? Remember when calculating this to rip out any "company cars/expense accounts" as well...

 

[cnctoolcat]

Sounds like the owner is like a lot of business owners, and has a highly inflated value of the business they've worked hard to build.
Without long-term contracts, or a successful ongoing product line, contract machine shops are worth the value of the equipment and real estate, that's it.
The typical job shop works on distinct purchase orders, and those can dry up anytime....

 

[tjd10684]

You guys gave me a lot to think about today. Whoever said do I really want to own the shop really got to the crux of the issue. Like I said about 10 years ago I did have my little side shop making parts working 100+ hrs a week and the lesson I learned from that was its not for me. So do I really want to try that again? After thinking about it all day I think the answer is no. I don't really even like doing that kind of stuff. I don't mind doing quoting and programming or figuring out how to make things more efficient. I did do that by the way if you figured out how many dollars per man hour the shop was brining in while the owner was here it was around $50 per hr. Now that I have been in charge for 2 years that number is up to $67 per hr. Still not making much of a profit at the end of the year but the owner always insisted that profit stays low to reduce the tax burden. This usually meant buying some extra tooling or replacing a piece of equipment so at the end of the day actual profit was under 10k. Anyhow point is I would rather be the lead man or supervisor or programmer rather then being the actual owner.

So I think I know the answer and what I want to do. I think I'm going to let him know that I do not in fact want to buy in. But I would be interested in getting a title change (for resumes) and trying to build up the bushiness to a point that it could actually be interesting to a potential buyer. At that time I would like to re evaluate and have first crack at buying again but at least if it is sold staying on as chief production officer or some other c suite title. If he dosn't want to go that route then I can start looking for another place in earnest. Either way at least I have a direction that I can act on now so thanks for all your comments you all much more eloquently described a bunch of issues that were kinda wriggling around the back of my head but had not really coalesced into good questions.

 

[mjr6550]

I did not read all of the responses. My take is that you are basically buying your own job and some machines that are not worth buying.

If you have your own shop (probably with much less overhead) and could pick up some of the existing customers (which don't seem great, but would help you hit the ground running) it is not a good deal.

I left a small business years ago and the owner who initially was mad at me for leaving ended up selling me some equipment for a reasonable price as long as I agreed not to poach customers.

 

[BarnFab]

If it was a solid business requiring little effort the owner wouldn't be selling it ... His offer at $50k buy in is just to make you think its a good idea. $50k buy in on a business turning over not much more than over head under the idea he wants to keep profit low to mimise tax is complete BS he is looking to get you on the hook to keep him afloat while he goes off and plays ... just sayin read the book not the cover

 

[jccaclimber]

Reinvesting to keep profits low is putting a $100k machine on the floor to increase efficiency.
Then, you do it again with the $110k you have the next year because you’re making more off that investment than what you’d get dumping it into the market.
Restocking empty tool drawers you should have restocked earlier is surviving, not avoiding profits.

 

[tjd10684]

I don't want to dunk on the guy since he has mostly done right by me but he always says that he thinks investing in computer hardware and software was a waste since all he needs is the schedule list and and a note pad. He also re wrote conversational programs every time he ran them since the machines only had floppy drives that were not reliable enough to save work to. Plus then you would have to remember the numbers. You could write them down but then you would need a traveler, but to make a travelers you would need some computer organization but why would you need that when we have a file cabinet with all our drawings in it. No matter that they are the same drawings from 10 years ago with stains all over them and half the numbers illegible. He has made this part hundeds of times no need question if that's a 9 or an 8. Don't get him started on how un necessary g code is when you can just do it conversationally. Honestly he must be a fantastic salesman since the quality and efficiency was total shit to be honest. Not saying my systems are perfect or that I never get rejections for a dumb mistake I'm just saying we at least have a qc inspection form now.

 

[john.k]

A general rule is machine shops are worth what the auction valuation of the machines and tools is,........There is no freehold real estate ,so basically ,you are buying some old machines ,newest being 13 years old...........No bank would finance you on that security.

 

[john.k]

My other point is that buying a small shop is a sentence.....you must be there 5days a week minimum,you cannot have a holiday at any other time than end of year,and if you are paying off loans ,machines ,vehicles etc ,you cant just close down without major losses ,maybe lose everything. .

 

[reggie_obe]

Not mentioned yet. You buy the business, the building owner either raises the rent in the lease made with you or declines to rent to you. Now you got to: find new space; business insurance, build out costs; permits; get everything moved, all expenses and all downtime.

 

[john.k]

landlord I had claimed he was a big buddy of all the tennants.....he was saving us all money by raising the rent every month at one stage..........that was back in the 90s ,when interest rates hit 21%............at about that time ,everyone with an industrial premises was hit with a greenie inspired 'mitigation of polluted initial storm runoff".........this meant you had to reslope all concrete yards to flow into a catch basin,not the street,as was standard practice for 100 years.......lots of small shops couldnt afford it.

 

[jccaclimber]

landlord I had claimed he was a big buddy of all the tennants.....he was saving us all money by raising the rent every month at one stage..........that was back in the 90s ,when interest rates hit 21%............at about that time ,everyone with an industrial premises was hit with a greenie inspired 'mitigation of polluted initial storm runoff".........this meant you had to reslope all concrete yards to flow into a catch basin,not the street,as was standard practice for 100 years.......lots of small shops couldnt afford it.

We dumped human waste on the ground outside the house for a lot more than 100 years. Doesn’t make it a good idea.

 

[kustomizer]

We dumped human waste on the ground outside the house for a lot more than 100 years. Doesn’t make it a good idea.

Caused the black ages as I recall

 

[david n]

Lotsa owners over value...........some maliciously others unknowingly.................

A fella I know was gonna sell to an employee(friend of mine)..............small profitable shop(4-5 guys). Owner wanted way, way too much. My buddy passed................

Owner was approached by the regular UPS guy. UPS guy knew nothing about machining or owning a biz, but bought it anyway. Not for the original asking price, but still way too much.

Not that this has much to do with the OPs situation, but............... my friend(very straight shooter) is the go to guy in the shop, foreman, programmer, maintenance, sales, purchaser, etc....he runs the place...............he could see where this was heading with the neophyte owner. So to keep his job(which he loves) and keep the biz afloat, he laid out his demands.............he gets to run the shop unimpeded and the new owner just signs the checks. He gets $XX/hr(big money), bennies, vaca, flexible hours or he walks. He figured if he has to do it all, he's gonna make it worth his while. New owner didn't really like the terms, but what could he do? So far the agreement is going well.

 

[Ox]

I kan't imagine buying a business that I wasn't able to doo most anything at.


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

Think Snow Eh!
Ox

 

[Kadlec10]

I am at a loss as to the $250k valuation. You are not getting the real estate- so you will perpetually have a lease payment- likely triple net- and easily $5k/month. The machines you have might auction at $10K in total. They're barely above scrap price- even if they are making money today. Additionally, they may be functional now, but one cooked ball screw and you're looking at a $5-10K repair and the machine being down for a period. So for $250k you're buying a 2-line client list with a small assortment of regular production and generally flat sales data. No real prospects on new work, though possibly good brand reputation.

I'm currently going through a restructure and working on a solid valuation- which I admittedly am not versed in; and I'll be surprised if we hit $150k: we have 20 (aging) cnc machines, a dozen clients, a hundred regular parts, 4 decades of reputation, and sales about +250% of where they were in 2018. If mine actually hits $150k, this business you're considering might be $50K...

I think you're on the right track about letting this ship sink and picking up the customers in your garage at that point. Or offer your current boss a percentage premium on sales from the client list for a prescribed period, and let him handle the shutdown.

Story time: I friend closed his shop 4 yrs ago. Prior five years on the books sales were about 1.2m/yr with 5 total employees. Purchased for roughly $1M (with bldg) with large performance bonus offered for 2yrs of sales work following the sale. The buyer immediately sold everything (including a gorgeous 2yr-old Okuma Millturn) but the client list and my friend could not hit the sales goals. So all in they paid around $250k for a client list likely worth 1+m/yr.

 

[ontariocanuck]

Considering what you can do in a machine shop, I'd find another job.
You are worth a lot more than what this owner is promising you.

2 wonky clients??