Potential buyer not interested in customer base...

[damnfasteddie]

Hi All,

First time poster but had a question from some of you more experienced shop owners and possibly those who have sold their business. We have a potential buyer for our shop and in meeting with them they are not really assigning any value in the purchase to the customer base we currently have. My question is then can/should we take those customers with us so to speak? If the owner here were to choose to act more as salesperson and outsource the work we currently do to other shops and collect a commission or percentage of each order would that be reasonable?

 

[reggie_obe]

Those were your loyal customers, no reason for the buyer to believe that these customers won't look for a competitive price elsewhere. Your customers owe the new owner of the company nothing, same as the employees.

 

[Phil in Montana]

The buyer is smart, the old customers have no value in a machine shop, after the shop sells its all water under the bridge. Everything changes

 

[Kingbob]

I concur with the group, unless your shop has IP that those customers can't get elsewhere the relationships are non transferable. You may be required to sign a non compete but nothing stopping your nephew from reopening your shop under a new name with a little "advise" from dear old uncle Eddie.

 

[Digital Factory]

My question is then can/should we take those customers with us so to speak?

Only if it's explicitly stated in the contract.

Intentions should be made clear now, not later. Any ambiguity in the contract will likely favor the buyer in the context of customer lists.

 

[damnfasteddie]

The buyer is smart, the old customers have no value in a machine shop, after the shop sells its all water under the bridge. Everything changes

Got it.

If our customer is asking us to refer them to another shop than is it reasonable to do so. We've had some customers and parts that we've processed for over 30 years here that they've tried moving around a few times in the past and always end up back with us.

My concern is where a non-compete would factor into all of this and if it would be off putting to the buyer if this was even brought up. I'm not well versed in any of these subjects, but my common sense (or stupidity) is that if we don't get anything for it why would we include it in the sale? Would be it be out of line to work in a % of sales from the new buyer on orders from these customers if they intend to keep doing work with them?

 

[DanASM]

A job shop is only worth what the companies assets are worth at auction.

The customer list means nothing. Customers have no rquirement to stay with the company when its sold. Its a perfect time for them to start shopping around and making sure there own parts have reliable vendors to keep them coming in.

Its usually a good reason to break a contract when a new owner comes in, citing uncertainty in the new ownership.

 

[damnfasteddie]

I concur with the group, unless your shop has IP that those customers can't get elsewhere the relationships are non transferable. You may be required to sign a non compete but nothing stopping your nephew from reopening your shop under a new name with a little "advise" from dear old uncle Eddie.

lol, we're trying to be upfront as possible so not trying to do any dealings behind peoples back just work out what we feel would be fair to both parties. If they truly decide that they do not intend to pursue these customers in any way, it wouldn't make much sense not to do the above but in maybe a less "shady" way

 

[Clive603]

Unless the buyer already has enough confirmed work on hand to utilise the majority of the shop capability pretty much full time ignoring any existing customer base is silly. It always costs more and takes longer to bring a new customer on board than it does to hold onto an existing one. Generating new leads from scratch costs more and takes longer than reaching out to an existing customer who, presumably, knows that your shop has appropriate equipment to do what they want done.

Under new management or not the important thing for a customer is knowing that the folk and equipment on the shop floor can bring their jobs in tolerance, on time and on cost. Some may follow you, some may take the opportunities to explore new suppliers and some may say "See if the new guy can keep things going to the old standard, or better." before deciding to stick or twist.

Even if the intent is to pivot away into different work at least some element of doing the same old thing for the same old folk is good for cashflow and new management shakedown.

Getting the buyer to actually pay for access to the existing customers is a whole n'other thing of course.

Clive

 

[the average Joe]

Is it typical for long time customers to seek out other shops if their current one switches ownership? I'm going to be in this situation soon(taking over ownership), and figured I'd hope for the best but prepare for the worst.

 

[metal-ica]

I have to push back a little bit. The customer list has a lot of value. Anyone can drop some machines in a rented space but getting high end customers that feed repeat work year after year is the hard part. I'm not talking about Joe-farmer down the street needing a $2,000 repair job. I have a couple customers that would be damn near impossible to get into right now....that has a ton of value

 

[Rob F.]

If the new buyer is not interested in the existing customers what is he interested in? The machines, or the employees, or the building/land, or?? Do they have an existing facility and need to expand its capabilities?

 

[AARONT]

I have to push back a little bit. The customer list has a lot of value. Anyone can drop some machines in a rented space but getting high end customers that feed repeat work year after year is the hard part. I'm not talking about Joe-farmer down the street needing a $2,000 repair job. I have a couple customers that would be damn near impossible to get into right now....that has a ton of value

While that is true, how do you sell a customer list with no guarantee of customer retention? Now if you could get a transferrable contract from the customers, I could see that being of value.

 

[metal-ica]

While that is true, how do you sell a customer list with no guarantee of customer retention? Now if you could get a transferrable contract from the customers, I could see that being of value.

I think you'd sell the whole company, tax id and all. The customers would be none the wiser and the new owner would slide right in servicing them. The sales contract would have a non-compete clause for those specific customers or industry.

The original poster makes it sound like this is more of an asset sale and he's not giving any value to the customer list. If that's the case, i'd start a new shop next door and take my old customers with me. The buyer must have other motivations for purchasing the shop. Like Rob mentioned, land, equipment, employee's??? Sounds a little strange.

 

[cnctoolcat]

The only reason to pay more than a low fair-market value for the equipment, land, and building of a machine shop is to acquire the customer base!

Most shops that are sold as ongoing businesses are actually sold for the customer base. The other smaller to mid-size shops (majority I think) end up being sold off for the equipment and land once the owner passes (or the kids run it down), with the customers going other places, often desperately.

I think in today's America, precision machining isn't nearly as cut-throat and competitive as it use to be. With the exposing of supply-chain chaos, combined with few new shops opening-up (less than typical in decades past), there's plenty of work out there to feed what shops we have.

Of course as discussed in other threads the economy of America is really many regional economies, with some doing better than others at times.

ToolCat

 

[dkmc]

A job shop is only worth what the companies assets are worth at auction.

The customer list means nothing. Customers have no rquirement to stay with the company when its sold. Its a perfect time for them to start shopping around and making sure there own parts have reliable vendors to keep them coming in.

Its usually a good reason to break a contract when a new owner comes in, citing uncertainty in the new ownership.

As a shop owner it's in your best interest to sell the opposite (of every thing above) mindset to your buyer......I would think.

 

[David Ferguson]

I suggest what you sell is the "promise not to poach the existing customer base". If they don't think there is value in that, then contact the existing customers, and make sure they have your new contact info.

 

[damnfasteddie]

I have to agree that there has to be some sort of value. Determining that may be difficult but I dont think it should be disregarded completely. When buyers eventually become sellers themselves what exactly are you expecting out of your businesses? I feel most would asses some value to their customers at that time as well.

For context our buyer wouldn't likely be changing the company name or anything like that. I dont see customers jumping ship over an ownership change dependent on if said new owner can continue providing quality, cost effective parts to them.

Any recent buyers go through this? How did you view the value of the existing customer base?

 

[CarbideBob]

We have a potential buyer for our shop and in meeting with them they are not really assigning any value in the purchase to the customer base we currently have.

Weird, strange.
There is place in Michigan that buys up old tool grinding shops and then scraps 80-90 percent of the equipment. Clearly done for the customer list.
Have seen the other side when the land or building is wanted for pot growing but that land rush is over.

 

[DanASM]

I have to agree that there has to be some sort of value. Determining that may be difficult but I dont think it should be disregarded completely. When buyers eventually become sellers themselves what exactly are you expecting out of your businesses? I feel most would asses some value to their customers at that time as well.

For context our buyer wouldn't likely be changing the company name or anything like that. I dont see customers jumping ship over an ownership change dependent on if said new owner can continue providing quality, cost effective parts to them.

Any recent buyers go through this? How did you view the value of the existing customer base?

There are issues with valuation when the existing customer base starts to slowly leave and the business is not as profitable as it was on paper. That is why never sell the business as "Turnkey".

I have seen insurance policies get voided when ownership changes and the new owners have to be up to date with the customers insurance requirements. They cannot be grandfathered in on old terms from years ago because the owner was buddies with the customer at the time.

I have seen companies get sold and keep the name just for the customer list. It has worked, but can be very risky. Customers might not want to see a change in ownership and if you do it on the down low and dont tell them, they can get even more pissed off. This is not to say this happens to every business, there is always some level of risk involved. Especially when coming up with an evaluation on assets.

Are the customers an asset? Whats stopping them from going elsewhere now? Does the company make a certain product that cant be easily reproduced by someone else?