Potential buyer not interested in customer base...

[damnfasteddie]

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?

Everything in business is uncertain, machines break, employees quit and customers leave. If every aspect of the business were to be looked at like this then there would be nothing of any value for a buyer.

 

[DanASM]

Everything in business is uncertain, machines break, employees quit and customers leave. If every aspect of the business were to be looked at like this then there would be nothing of any value for a buyer.

The machinery, tooling and building are worth value. As well as any patents or trademarks they would have, if they make their own products.

 

[michiganbuck]

Understandable if the shop buyer has his own work.
Keeping your name or another and just being a jobs broker could be a good plan.

RE: are not really assigning any value in the purchase to the customer base...
But they may just say that to whittle down your asking price.

 

[MwTech Inc]

OP said: " is that if we don't get anything for it why would we include it in the sale? "
You don't "own " customers.........
So clarify please, you are selling the business, buyer does not want customers, you plan to "take" customers and be a broker outsourcing to other shops which you already mentioned could not do the work correctly?
So.......your customers are oK with this?
To much info missing here, sounds more like the buyer is "buying" you to get rid of you, done all the time.

 

[damnfasteddie]

OP said: " is that if we don't get anything for it why would we include it in the sale? "
You don't "own " customers.........
So clarify please, you are selling the business, buyer does not want customers, you plan to "take" customers and be a broker outsourcing to other shops which you already mentioned could not do the work correctly?
So.......your customers are oK with this?
To much info missing here, sounds more like the buyer is "buying" you to get rid of you, done all the time.

For some customers they do not have CAD models or even formal drawings for their parts, we've created and own those drawings and processes it would be fairly difficult for them to move parts around in this case easily without reinventing the wheel. As I said in my previous post there would likely be some that would ask our help in transitioning these elsewhere if the new owner does not plan on doing their work.

More or less, I feel it's just a common tactic to cut cost on the sale, buyer has their own customer base they may be targeting but, in the meantime, would in all likelihood continue doing whatever business they could with the existing ones. I understand the concept that you do not own your customers and there is no guarantee if we were to attempt to relocate that work elsewhere it would stay, or customer would be willing to allow it, but it doesn't necessarily mean it isn't plausible and IMO should be attempted to find some value in outside of our current prospective buyer if they do not.

 

[MwTech Inc]

one thing still not clear, if you are selling the business why does whomever there want to keep their fingers in it?
obviously, you shouldn't put to much information out on the net , but.........
There has to be some underlining thing going on we will never know.....so there
is no way to answer your question in the first post, you can do/try anything you want.

 

[damnfasteddie]

one thing still not clear, if you are selling the business why does whomever there want to keep their fingers in it?
obviously, you shouldn't put to much information out on the net , but.........
There has to be some underlining thing going on we will never know.....so there
is no way to answer your question in the first post, you can do/try anything you want.

Correct, I really don't want to go into too much detail online lol.

Referring to a shop (we know a few) for a small commission wouldn't seem like too much work to me. 3% - 5% of sales would yield a good 40k a year just on the items I'd feel the customer would request our help in sourcing. Really just wanted to get some ideas on if people thought the buyer would take this negatively. I figured if they truly don't care about the customers then they wouldn't have any problem with it and if they did have some interest, they would reconsider evaluating it's worth.

For the record I'm not the owner, there is nothing in this for me just my curing my curiosity of the whole ordeal.

 

[MwTech Inc]

"Really just wanted to get some ideas on if people thought the buyer would take this negatively"
I guess when they sit at the table you'll find out....lol.

 

[Doug]

My favorite customer's business was based on his loyal customer list. The business was a gold mine based on the customers. His machinery wasn't worth a whole lot, maybe $20K at auction.. His employees were a big part of the shop value. There were mostly a model making shop. I did most of their CNC'ing. According to accountant's audit of the business owner was taking home $200K+/year for a 5 man shop.

The buyer managed to offend most of the customer base especially those customers with women he had to deal with. The buyer had severe anger management issues. He got extremely angry with me when I asked him why he was a couple months late on paying a $200 invoice. That $200 was the total over 6 months, down from the usual $10K per month.

He soon began offending customers to the extent they went elsewhere. Several customers asked the former owner where to go to get their prototypes done. Former owner referred those customers to me. Then the shit hit the fan. Former owner and I were served with a lawsuit for conspiracy to violate the non-compete clause in the sales agreement. That lawsuit went nowhere based on depositions from former customers telling why they left the business.

Anyway, the business purchase had been financed by the buyer's wealthy uncle. Business was auctioned within a year or so and uncle lost his investment.

In this case i would say there was no doubt the customer base was the value in this situation.

 

[Modelman]

Of course the current customer list has value, the buyer just doesn't want to pay for it. And, of course the buyer will lock the seller into a non-compete agreement. Just make sure you are adequately compensated for signing it.

Dennis

 

[garyhlucas]

Guys, what existing customers are is CASH FLOW. You buy a business and have no cash flow you can't pay for the business. You buy a business with real customers and then work to make them happier than they were before then you make money. My brother and brother in law weren't getting along so my brother in law left and started a new business, taking some customers and getting 1/2 of all the company owned equipment, which was substantial. My brother kept all the vendor accounts and a lot more customers, and continued having fun with his toys, houses, and vacations. My brother in law was shocked when a supply house that would have shipped $500K of material to a jobsite with just a phone call actually asked him to pay cash for 5K of material and provide references to get credit in the future!

If they re devaluing your customer list they are either only looking for equipment and building as they already have the customers, or they are just trying to cheat you out of that value, or are stupid. I don't suspect stupid is the correct answer.

 

[CarbideBob]

Why buy you if the customer list of no value?
One can get a building , buy machines off E-bay and be up and running in 3-4 weeks.
What you do not get here is a trained workforce who knows how and what to do. That also has a value that is not easy to put a book number on.

 

[john.k]

Unfortunately ,a lot of business buyers are cheated on the value of customer rolls.

 

[kpotter]

The only reason to buy a company is to get the customer base. You can get financing on new machines you can buy new tooling. Customers are the business.

 

[Doug]

he only reason to buy a company is to get the customer base. You can get financing on new machines you can buy new tooling. Customers are the business.

I bought two companies.... the first one had been successful and the owner wanted to retire. An early Microsoft retiree bought it and ran it into the ground. I bought it for its machinery.

The second one was also a successful business in designing and building pre-flight equipment. They sold their intellectual property to a Canadian company who didn't want their shop equipment. I bought the remains which was shop equipment.

 

[Fadriver]

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?

In machine shop, customer base is worth nothing, only equipment and patents that you may have,
as soon i buy your shop, your customers leave they may not want to deal with me, because there
is not written contract, its why i can not sell my customers, are everybody customers , they always
looking from better terms pricing etc. IF you have a product line that sells then we are talking, a worked for a family that own big places, this guy had a line that made big money, was bought by a big corp. paying x10 times profit, he cashed 440 m. profit, a machining customer also sold x10 times, had a line for tesla cars, became rich almost overnight, 8 years span.
Product that generates profits have value machining shops, nothing, machines at auction values if
there is somebody in taking those.
Sad but is reality, if you own the property then you are ok. if rent then screw it , like me.
trying to unload and no takers.

 

[Fadriver]

For some customers they do not have CAD models or even formal drawings for their parts, we've created and own those drawings and processes it would be fairly difficult for them to move parts around in this case easily without reinventing the wheel. As I said in my previous post there would likely be some that would ask our help in transitioning these elsewhere if the new owner does not plan on doing their work.

More or less, I feel it's just a common tactic to cut cost on the sale, buyer has their own customer base they may be targeting but, in the meantime, would in all likelihood continue doing whatever business they could with the existing ones. I understand the concept that you do not own your customers and there is no guarantee if we were to attempt to relocate that work elsewhere it would stay, or customer would be willing to allow it, but it doesn't necessarily mean it isn't plausible and IMO should be attempted to find some value in outside of our current prospective buyer if they do not.

With new technology nothing is difficult, somebody get a hold of a sample and gets duplicated
a an heartbeat, I have surfaces created for customers and that has not prevented customers leaving
it gets duplicated, they after pricing and terms, if am at 15 days or 30, some shops do it at 60 just
to have work, its a dog eats dog out there

 

[eaglemike]

It depends on the business. If there is a lasting/continuing relationship with customers and they will continue to buy/order, then that is worth money. It's how the business was making money, selling stuff to the customers. There can be situations where the list is worth less, but if a decent team comes in with the buy, I would think they want to keep doing whatever is making money. Of course,if just buying machinery, that's different.
I would think the buyer might be trying to devalue the customer list value as a negotiating tactic.

 

[trevj]

I bought two companies.... the first one had been successful and the owner wanted to retire. An early Microsoft retiree bought it and ran it into the ground. I bought it for its machinery.

The second one was also a successful business in designing and building pre-flight equipment. They sold their intellectual property to a Canadian company who didn't want their shop equipment. I bought the remains which was shop equipment.

Ayup, but you were NOT looking at it as buying a Business, you were looking at buying the Business Assets for your own use. That would be a bit different than buying a running shop, with intent to keep it running!

Seems to me the smart money if buying the assets, is to wait for the auction sale, or damn near, and make a lowball offer for the whole lot.

If you wanted to buy a Business, turnkey, with employees, you probably want the customer list, as they (should) have been paying the bills over the last while, and, even if you wished to go in a completely different direction as the buyer, you have some income flow while you change directions, no?
Y'know, with employees that already know, more or less, the work that the customer base requires.

Provided you as buyer, do not have a personality that drives them away, they are essentially cash flow for the running business. If the business can change hands without the Customer base seeing a blip, then you are doing really well, and likely will retain them in the transition, but it doesn't hurt to have a list of known buyers of your services, that you can market to, does it?

 

[CarbideBob]

In machine shop, customer base is worth nothing, only equipment and patents that you may have,
as soon i buy your shop, your customers leave they may not want to deal with me,

Depends on a lot of things.
In my world:
Sandvik bought Valenite. I told the people there that this was the end.
"No, they have promised to keep us going as a brand name and all our plants".
Three years out .. poof. Machines scrapped, buildings sold. They converted a huge customer base to their own.

Ceratizit bought Newcomer and Duramet. Moved all the machines from Latrobe to here in Detroit.
Was about five years before all that went to the scrap yard.

The best example of wanting the customer list is a carbide round tool maker here in Michigan about 10-15 years back.
State of the art machines on their floor.
At this time there were many small 2 to 6 person round tool shops doing mostly resharps and small runs on very old machines.
The owner of the nice shop went on a buying spree. Offering top dollar to buy.
In many cases he did not even bother moving any machines. Scrap.
What he wanted was the customer list and to sort of corner the market.
They have done very well.

So I have seen where the customer base is the gold in the mine.
For sure other times it may be to get the equipment and or building.
Bob