Purchasing CNC Business - Specific Industry Questions

[dannyandthejets]

Long time listener, first time caller... (the main questions are in italics, I've never won awards for being succinct).

I'm looking as some CNC machine businesses listed for sale and exploring the idea of trying to acquire that business. I'm an engineer, plenty of design experience, very small amount of machine experience (enough, I think, to know what I don't know), a good deal of manufacturing experience (both in large, MTS product manufacturing and small MTO job manufacturing), and several years of business management experience. Yes, I have read the threads and understand based on prevailing forum sentiment that there is no such thing as a profitable machine shop. Yes, I have considered a hot dog stand. Problem is a I have a "hot dog stand," and I'm working on trying to move past the "slinging hot dogs" phase of my career into the "managing hot dog slinging" phase of my career.

I had a few questions regarding the businesses and industry that I hadn't seen discussed specifically. Mainly wanting to check some assumptions and impressions to see if what is in my head is somewhat accurate, as that could make a pretty large difference.

1) I am assuming that machinists are somewhat more reliable and intentional regarding their work than most laborers in other manufacturing or construction trades. Is this the case? One of the biggest headaches in my everyday life is staffing. I can run through ten hires to get one that will show up 75% of the time and do a half-ass job. (For reference I'm in a LCOL area and our starting pay is more than double minimum wage, and just by showing up and putting in effort an employee can be pushing $20 within a year without any relevant experience to our operation.) Based on the perfectionist attitude of any machinist I've met, combined with the pay being 50%-100% higher, (and it doesn't hurt that the work is likely much less physically demanding than my current hot dog stand) I would have to imagine that it wouldn't be as difficult to keep a shop staffed. Is this the experience or am I completely off?

2) Most listings I've seen which should some rough, basic numbers are looking at somewhere around 15%-30% profit margins. Average leaning towards the higher end in the upper 20s by my impression. That seems very impressive. While I realize sellers would want their numbers to look as good as possible, I also have to assume that if they're marketing something that's not true they (and their brokers) have to understand that no one is going to buy their business based on false data. Or at least most of them would understand this. Are profit margins in the 25%-30% range reasonable?

I thought I had one more question, but apparently I typed too slow and forgot it. I'll add that later if I think of it or put it in a follow-up comment.

FWIW, what I'm looking for is not just a shop, but a fully functioning business, so that it's not entirely reliant on owner experience and expertise. Again, I realize listings often give the wrong impression, but I've seen several that are are doing a few million in revenue, have impressive cash flows, and 10-20 employees, which give the idea that they are a full functioning business and not entirely reliant on the single owner (like a hot dog stand).

Ah, yes, the "impressive cash flows" reminded me of my other question, because cash flows can be more impressive by not upgrading equipment and deferring maintenance. I had assumed that equipment valuations in these times could be done by a third party specialized company, or possibly by an auction house type company that handles those equipment types. Coupled that with all the information on the internet these days by which to cross reference (yes, I know google won't tell me everything in five minutes) and I believe could get a pretty accurate idea of what I'm dealing with.
Is that asinine or is there a better way, different way, worse way that's good enough, etc.?

Roast away, I like my hot dogs a little burnt anyway. (And thank you in advance.)

 

[Hebrewhammer8]

1) I am assuming that machinists are somewhat more reliable and intentional regarding their work than most laborers in other manufacturing or construction trades. Is this the case? One of the biggest headaches in my everyday life is staffing. I can run through ten hires to get one that will show up 75% of the time and do a half-ass job. (For reference I'm in a LCOL area and our starting pay is more than double minimum wage, and just by showing up and putting in effort an employee can be pushing $20 within a year without any relevant experience to our operation.) Based on the perfectionist attitude of any machinist I've met, combined with the pay being 50%-100% higher, (and it doesn't hurt that the work is likely much less physically demanding than my current hot dog stand) I would have to imagine that it wouldn't be as difficult to keep a shop staffed. Is this the experience or am I completely off?

LOL!

This business is built on extremely skilled labor that is harder to find everyday. All business is a people business and finding good people is harder and harder everyday.

 

[dannyandthejets]

LOL!

This business is built on extremely skilled labor that is harder to find everyday. All business is a people business and finding good people is harder and harder everyday.

Do you feel like you're losing skilled employees to competitors, or where is it going?

Right now the issue I face is typically that in the unskilled labor market there are other options, even if I'm trying to be competitive. My industry is not very high margin, and it's very labor intensive, which is a combination that's... well what's the opposite of perfect? So most of the people working here, even if we're trying to be more than competitive, know that there are other options out there for them. (Construction is a big drain on labor pool right now because it seems like pockets are nearly bottomless.)

I guess my thinking is that offering higher pay and skills through experience would open up a different labor pool, and if I ran through 50 potentials I would be more likely to have a handful of decent employees. Once that employee starting gaining skills that paid well and aren't widely transferable they would be a more stable employee. This is not the case? How many shops out there have 10 experienced machinists on staff and on any given day 2-3 have a "really good reason" to just not show up to work?

 

[Hebrewhammer8]

Do you feel like you're losing skilled employees to competitors, or where is it going?

Its going to other industries. Why work in a shop when I can work from home and make double sitting on my ass doing IT work.

Pay way over market rate, offer a great work environment, buy the best equipment and you *might* find some good people. Good luck!

 

[dannyandthejets]

Its going to other industries. Why work in a shop when I can work from home and make double sitting on my ass doing IT work.

Pay way over market rate, offer a great work environment, buy the best equipment and you *might* find some good people. Good luck!

So it sounds like a lot of machinists are going back to school or for other training these days to change career fields?

That's definitely something I wouldn't have envisioned, so I guess that's a whole different thing I need to keep a heads up for.

 

[triumph406]

So it sounds like a lot of machinists are going back to school or for other training these days to change career fields?

That's definitely something I wouldn't have envisioned, so I guess that's a whole different thing I need to keep a heads up for.

Of the hundreds of machinists I've worked, I can only think of one who went back to school and succesfully improved his career, he's now running the machine shop of one of SoCals most prestigous universities.

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I've always worked in aerospace R&D until recently, were the work is more interesting and better paid then most shops. So turnover is minimal, and the job interesting.

If there is career progression for a CNC machinist, at places I've worked it's into programming, or into shop management.

 

[triumph406]

Its going to other industries. Why work in a shop when I can work from home and make double sitting on my ass doing IT work.

Citing IT work maybe a poor choice. All of the IT guys I know have been told they need to be back in the office. No more sitting on their asses at home for them.

 

[dannyandthejets]

Of the hundreds of machinists I've worked, I can only think of one who went back to school and succesfully improved his career, he's now running the machine shop of one of SoCals most prestigous universities.

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I've always worked in aerospace R&D until recently, were the work is more interesting and better paid then most shops. So turnover is minimal, and the job interesting.

If there is career progression for a CNC machinist, at places I've worked it's into programming, or into shop management.

This is more along the lines of what I wast thinking. Leaving the machine shop setting seems like a hard pivot and would require experience outside, which seems good for the machine shop. Hard to complain if a valued employee becomes a more valuable employee.

If this is way off though I sure would like to find out now, because that's maybe half or more of the reason that a business like this is appealing to me.

 

[john.k]

You have to be able to "see" a good employee......bosses Ive worked for couldnt even "see" a bad employee when the business was suffering ......maybe Ive just worked for idiots .....there are plenty out there.............which is why "head hunting" is popular....but expensive.

 

[triumph406]

This is more along the lines of what I wast thinking. Leaving the machine shop setting seems like a hard pivot and would require experience outside, which seems good for the machine shop. Hard to complain if a valued employee becomes a more valuable employee.

If this is way off though I sure would like to find out now, because that's maybe half or more of the reason that a business like this is appealing to me.

The place i worked 10 years ago would cycle thru 10 people to maybe find `1 competant person who showed promise. Most lasted maybe a few days, some a day, some not even to lunch. The gulf between what they could do and what they claimed in the interview was huge typically. They were good getting rid quickly people who weren't going to work out. Some companies aren't very good at determining whether an employee is going to work out or not. The supervisor is going to need a strong background in machining, and be willing to cut people quickly.

This is Orange Co So Cal where you would think there would be a surplus of good machinists, but there wasn't then, and I'm sure there isn't now.

 

[john.k]

Last boss I had,if someone looked to be technically competnt,he would purposely pick arguments with them over his pet subjects,and fire them when they disagreed with him.............One new start asked me where the suggestion box was .......i just laughed and said last cubicle in the gents......he came back and said he couldnt find it............Anyone so bold as to have any ideas about Cols business better keep them to himself.

 

[dannyandthejets]

Are you guys managing shops now? What is your current experience with finding skilled labor or talent that can be taught?

As far as management goes, that's not really a worry of mine considering I would be the manager so it's not an unknown variable in the decision making process.

 

[metal-ica]

Danny,

You sound like a competent guy asking with right questions.

I can see a guy wanting to retire and selling his 10-20 man shop that he's spent his life building. If he has the proven people and processes in place this sounds like an infinitely better route than trying to build a shop from the ground up.

If the real estate can be thrown into the deal, even better. I would almost insist on it. If it's not, factor in a huge expense if you need to relocate in the future.

Look for shops that have niche and customers that other shops can't easily penetrate.

As far as employee's, if you offer the best work environment and pay in your area, you'll keep the best employees. As long as the business is profitable enough to float that.

 

[dannyandthejets]

Danny,

You sound like a competent guy asking with right questions.

I can see a guy wanting to retire and selling his 10-20 man shop that he's spent his life building. If he has the proven people and processes in place this sounds like an infinitely better route than trying to build a shop from the ground up.

If the real estate can be thrown into the deal, even better. I would almost insist on it. If it's not, factor in a huge expense if you need to relocate in the future.

Look for shops that have niche and customers that other shops can't easily penetrate.

As far as employee's, if you offer the best work environment and pay in your area, you'll keep the best employees. As long as the business is profitable enough to float that.

I appreciate the well info! I'd like to get the real estate if the deal were right, it would also help me collateralize the purchase if I were to use bank funding if it were included, but I would at least make sure I had a nice, long lease and a backup plan there.

I actually already have a large enough premises with another business that I could utilize that, but the real rub would be to ask employees to drive 35 minutes instead of 5, so the devil of those details will all have to be worked out in the future.

I know the difference is semantics, but I'm seeing differences in listing where some are essentially just "shops" and some are "businesses," and I wouldn't want to be the one to try to take them over that threshold. Funny that you mention that you wouldn't want to build this up because that's my exact thinking. I have a product in mind I think I could sell, and I think I already have a pretty decent marked for it, but not enough to sink a large amount of time, money, and energy into new equipment and new employees (especially not on to of everything else). I started down this road thinking if I found a business that could make these for me that would be great, but possibly only worthwhile if I actually had control of the production, so a business that already had work and just a tiny bit of spare capacity would be the ticket.

 

[Overland]

I've noticed several auctions of shops going out of business, or owners retiring.
Going out of business for reasons like overall economy, poor mgt, loosing key customer, etc; but I always wonder why a retiring owner couldn't sell the business as a going concern.
Bob

 

[dannyandthejets]

I've noticed several auctions of shops going out of business, or owners retiring.
Going out of business for reasons like overall economy, poor mgt, loosing key customer, etc; but I always wonder why a retiring owner couldn't sell the business as a going concern.
Bob

I'm sure there are hundreds if not thousands of variables so every situation is different, but I think it's fairly common for small business owners to reach retirement and not really have a business that's marketable. There's a pretty large leap in any business to take something that makes good money for the owner/operator and turn it into something that has value that can be sold. And it also takes years of foresight to get that business to that point and keep it there, so if the owner isn't trying to get to that point 10 years ahead of time they probably will never get there.

A few major things just off the top of my head:
- Books: no one will purchase a business without immaculate books. I would imagine that typically means that somewhere along the lines a small business owner will have to hire a full time employee who works closely with an outside CPA to get the books in better shape than small business owners usually keep them, and then they have to keep them that way for 5-10 years. That right there is something that will cost a shop probably half a million or more over a decade.
- Processes: if the owner is still working in the business and relying on information in their head to get stuff done then the business itself is not easily transferred. Someone will need to extract all that information from all the key personnel's heads before they can run the shop.
- Goodwill: at some point the business must reach a point where customer goodwill is in the business itself, not the owner of the business. Most small operations never get there, especially when the owner has been working in it 30 years. The owner is the operation and most of the customers would feel very differently if someone else picked up the phone and said "Joe is no longer with the company, I'm Dan and I took over everything and I can help you out."

Overall I think the most common cause of this is that the owner is so busy forging the path with the machete that they never take time to scale to the point that they're leading from above, not from the front. The whole difference of working "in" instead of "on" is huge. I'm currently at that point in another business where I need to make that jump, but it's very difficult to do that seamlessly. Typically you have to hire new employees and see reduced cash flow for a while until someone else can fill your roles (like 6-12 months I would imagine). For most people that's just never really what they set out to do.

I'm convinced that it's mostly circumstances (coincidence, luck, etc.) that allows companies to make the leap. Sometimes they're not even wanting to, but end up in circumstances their business is growing so much that they just can't afford not to do so. Sometimes it takes years of working at it intentionally, but even then it's usually circumstances of the planets lining up just right before they're finally able to get over that gap. Not that hard work doesn't pay off, just that all the hard work in the world can't make up for that one contract that gives you enough cash flow or stumbling on that one hire that does better than the owner ever did and has no interest in dealing with the stress of bootstrapping their own operation.

I'm hoping that if I buy my way into a business that already crossed that gap it will also help me cross that gap in my other businesses as well. Wouldn't that be lucky?!

 

[john.k]

I knew one business that had rusted on customers,a legendary name ,and when the owner died it was inherited by a brother and sister who hated each other,and fought like cat and dog over the business ..........yet the manager and ten workers kept it going against all the odds...........they offered to buy out the owners many times ,but they wouldnt sell for spite.......in the end ,the daughter went mad ,and would sit in the office screaming at non existant people ,and refusing to talk to customers ............You may have heard of the business......they made a set of solid silver drums for the US Navy.....and drums for many of the iconic pop groups of the 60s and 70s.

 

[mhajicek]

You mentioned $20/hr as if that were good pay. I've seen restaurants advertising a starting pay of $35/hr for waitstaff around here (midwest); why would someone wake up early to get their hands dirty for $20?

In the '08 recession about half the machining workforce got laid off, with management expecting they'd be able to rehire at will when things picked up again. Many retired, others changed careers. Most declined to encourage their progeny to enter the field. Good machinist have been hens teeth ever since. All good, experienced machinists have well paying jobs, or are running their own gig. You cannot hire one, you have to make one from someone less experienced, and that takes decades.

 

[dannyandthejets]

You mentioned $20/hr as if that were good pay. I've seen restaurants advertising a starting pay of $35/hr for waitstaff around here (midwest); why would someone wake up early to get their hands dirty for $20?

In the '08 recession about half the machining workforce got laid off, with management expecting they'd be able to rehire at will when things picked up again. Many retired, others changed careers. Most declined to encourage their progeny to enter the field. Good machinist have been hens teeth ever since. All good, experienced machinists have well paying jobs, or are running their own gig. You cannot hire one, you have to make one from someone less experienced, and that takes decades.

I mentioned $20/hr as if that were good pay for unskilled labor in a LCOL area with no related experience. Which it is.

I don't know the specifics, but if you're claiming that restaurants are hiring waitstaff (especially without experience) starting at $70,000+ per year base pay I think I would be pretty skeptical of such a job listing. Maybe if they were advertising that skilled servers could make up to $35 an hour on tips (on a good night with general diners), that would be a bit more believable.

I also have a hard time picturing machinists waiting tables at an upscale restaurant, let alone the unskilled labor I typically have to work with. I'm betting those restaurants have showering as a requirement.

I'm not particularly counting on a very deep labor pool to pull from, I'm curious about whether that particular layer of the labor pool is typically more reliable and stable once you find employees. The thing I would most like to avoid is having to hire 10 full time employees to ensure you have 6-7 at work on any given day. If it requires shelling out 10% more than competitors for that it's a lot cheaper than the 50% overstaffing costs of that previous scenario (which is absolutely not an exaggeration before anyone asks).

 

[john.k]

Yep,when your paying $20 an hour,its overgenerous for a bunch of button pushers.......when youre earning $20 an hour,its barely enough to get by ,and you jump at a better offer ,even if its flipping burgers.