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Valuation of machine shop purchase.

I have never seen or would sign an agreement that last for "years". Locking in a price can be very dangerous, there are many factors to consider.

As to the ownership of the real estate where a business resides, does that make your business better? Do potential corporations care? the fact is it doesn't and they don't. For those that think so, good for them. They are now in the real estate business as well.

Really what happens if you have a machine shop full of large manual equipment that does repair work and it sits in the center of a half dozen oil fields and the next shop that does the same type work is 100 miles away? Who is going to get all that business. You obviously cannot think outside what you have been exposed to. Even a purchase order for a weeks worth of work is a type of contract, help yourself to a dictionary.
 
To anyone that is looking to buy an existing manufacturing business, I will give you a simple analogy;

Business "A" has lot's of new equipment and they even own their own building. Business "A" even has lot's of customers, but no "Blue Chip"

Business "B" has older, working equipment. they also lease their space. Business "B" only has 1 real long term customer; A "Blue Chip" NYSE Listed Corporation.


The million dollar question? which company is worth more? What purchase carries the most potential?


you decide yourself, this ends my free advise.
 
I simply purchased all the equipment, inventory, intellectual property and offered to accept employment application's from the employees. I moved all the equipment to my facility.
If you have a contract with someone you can't unilaterally transfer that contract unless it is allowed in the original contract and I have never seen one that allows it. Other wise when a problem arises you could just go find a homeless person and say here you now have a contract with XYZ Corp, and when they came after you for not performing you would just say I am no longer part of the contract I have no liabilities I sold it. It doesn't work that way.
As council has explained it to me every tax ID number is a new entity under contract law. With a new owner they have to get a new eid number. So at that point no old contracts transfer to the new entity unless both old and the new entity all agree.
 
I simply purchased all the equipment, inventory, intellectual property and offered to accept employment application's from the employees. I moved all the equipment to my facility.
If you have a contract with someone you can't unilaterally transfer that contract unless it is allowed in the original contract.

Makes sense. What you did is referred to as an asset deal (nothing to do with asset valuation I droned on about early) and of course unless you got an agreement to assign them you can't. Lots of contracts have that provision, I put it right in the offer that I can assign it, but yeah its not going to be on a PO and if it was its not going to be for your assignment.

When you buy though its not a given you don't get the contracts. If you structure the purchase by buying the shares from the owner all contracts stay in force uninterrupted unless there's a provision in them trigger something if there is a substantial change in ownership (that happens a fair bit). Mostly purchasers want assets deals and vendors want share deals but its probably fair to say the bigger the business gets the more likely its going to be a share deal. Buyers want asset deals so you not buying unknown liabilities such as future law suits etc, sellers usually want a share deal for tax reasons.

The importance of things depends on the business of course. If your making or fixing a one of due next week it seems moot. Not so much so if its a long term contract to supply some big project for three years with progress payments etc, there are very long contracts that deal all kinds of stuff like this. If weren't able to get an assignment clause, you'd do a share deal just to keep the contracts intact.

I have never seen or would sign an agreement that last for "years". Locking in a price can be very dangerous, there are many factors to consider.

Contracts? what's that? Never in 40 years of working in this business have I heard of a "contract".

Not meaning to be rude, but that's a view that's stuck in a paradigm. There are endless business dynamics other than the one you're in. Can't imagine a multi year contract? I've got one right now we've just bid. Huge equipment for a global mining firm, equipment due in 2021. (It'll be big for me and but will have monthly progress payments so it is doable). Forget the technical part, (that'd kill a regular man but my team is good), the commercial contract alone is 186 pages. You wouldn't believe the stuff that is in it, but you have to deal with it if you want the job. I shouldn't believe this is real because someone else has never encountered it? As for danger, there's risk, but there are ways to manage it.
 
Makes sense. What you did is referred to as an asset deal (nothing to do with asset valuation I droned on about early) and of course unless you got an agreement to assign them you can't. Lots of contracts have that provision, I put it right in the offer that I can assign it, but yeah its not going to be on a PO and if it was its not going to be for your assignment.

When you buy though its not a given you don't get the contracts. If you structure the purchase by buying the shares from the owner all contracts stay in force uninterrupted unless there's a provision in them trigger something if there is a substantial change in ownership (that happens a fair bit). Mostly purchasers want assets deals and vendors want share deals but its probably fair to say the bigger the business gets the more likely its going to be a share deal. Buyers want asset deals so you not buying unknown liabilities such as future law suits etc, sellers usually want a share deal for tax reasons.

The importance of things depends on the business of course. If your making or fixing a one of due next week it seems moot. Not so much so if its a long term contract to supply some big project for three years with progress payments etc, there are very long contracts that deal all kinds of stuff like this. If weren't able to get an assignment clause, you'd do a share deal just to keep the contracts intact.





Not meaning to be rude, but that's a view that's stuck in a paradigm. There are endless business dynamics other than the one you're in. Can't imagine a multi year contract? I've got one right now we've just bid. Huge equipment for a global mining firm, equipment due in 2021. (It'll be big for me and but will have monthly progress payments so it is doable). Forget the technical part, (that'd kill a regular man but my team is good), the commercial contract alone is 186 pages. You wouldn't believe the stuff that is in it, but you have to deal with it if you want the job. I shouldn't believe this is real because someone else has never encountered it? As for danger, there's risk, but there are ways to manage it.

You are correct in what you are saying about a contract transferring in the contract of sale.. but like the poor guy I bought the shop from found out the hard way. Just because the prior owner had a multi year deal with Lockheed once ownership changed Lockheed was not obligated to continue the contract. He lost 75% of what he paid the prior owner.
You can put what ever you want in a contract but if it doesn't comply with the law it's worthless when it comes to valuing a business.
Again my advice for anyone trying to buy a new business is get a lawyer and CPA who specializes in the type business you are looking at.
 
You can put what ever you want in a contract but if it doesn't comply with the law it's worthless ...
Besides that, in the US there is the small matter of the cost to enforce a contract. At $500/hr it's pretty easy to cost yourself more than the contract is worth by going to court. So the reality is, unless you are a Big Shot, a contract is about as good as a roll of toilet paper.

Another good thing to remember is, no matter what the facts are, when you step into a courtroom both sides have about a 75% chance of losing.
 
OT a lot.
Mcgyver I have a fellow who lives 4 hours north of Toronto interested in a class. Do you have room? Or do you know a shop up there who would like to host a class? If we can't get enough to do a Canadian class would you mentor this guy? PM me if you can. Rich
 
2019 "Lion or Gazelle" -- Keep Running

My input is as an Inventor, Funder of small to medium sized businesses, and someone who spent 2-years in machine shops working on his project "HANDS ON THE LATHE" but NOT as a Professional Machinist. CAVEAT EMPTOR.

Machine shops need to go after inventors with great ideas and help them build prototypes in exchange for a part of their business. I read a lot of discouraging comments that add up to; "Customers have zero loyalty." My humble recommendation is that you guys take your skill and invest into NEW businesses and become an owner of the business that drives work to your shops.

My shop did that and they helped me in the shop on 1 particular invention to build 5 different versions before we got a working Proof of Concept. They have my business. End of story.

Apologize if I am speaking out of line. Blessings, Kurt

I have been contact to assist someone or otherwise provide a casual opinion of the valuation and health of a shop he is interested in purchasing. I am in no way an expert on some of these matters and my opinion is only that, being provided as requested to help someone 'not' get hung.

I will be reviewing active contracts, the relationship with the customers, how efficiently the company is being operated, and the inspection and review of the machinery. This won't be a fancy in writing detailed report, I am doing this as a favor as an experienced person in the business.

I am just curious if there are any here that have went through this process and how the valuation was obtained? From what I gather, the legal beagles are in there but as I have mentioned, they know squat about machines, programming, parts, etc. From what little I gathered, this sounds like a shop that was riding it out because the owner was preparing to retire. Due to this, I am not expecting to see newer machines, and a few have already been flagged as pointless to own.

I have concerns his inexperience will lead down a road of getting sub par equipment and probably decent contracts but are being ran very inefficiently. All things that can be fixed, but that valuation should reflect that. The company is decades old and I have been in several shops where they still live in the 70s, complete with fax machine. I don't want to see him buying crap, then have to fix it all. There is no value in that.

Now, these are firm contracts, but I know customers can and do pull them. There is usually cancellation costs but that is about it.

In all ways, I have grave concern about anyone just buying a shop without experience. Sure, expertise can be brought in, but I rarely see these small companies do very well if the owner is not savvy to the biz. This is someone that has never made a part.
 
Machine shops need to go after inventors with great ideas and help them build prototypes in exchange for a part of their business.

Kurt, I'm also an entrepreneur rather than a machinist but the thing that comes up all the time here is that every inventor thinks they're only a few prototypes away from raking in the dough. 99% of people who walk in the door with an idea will never do anything except consume precious time. The challenge for the shop owner/manager is how to be open to people with genuinely good ideas and ability to execute without attracting every dip$#@! who wants you to make a gun/knife/vape part.
 
You want shops to buy into your perpetual motion machine? I get pitches like that all the time. Share of the profits and all that.

Not to say that partnering up with someone that has an idea can't work. I've done it twice, once very successfully and once entirely unsuccessfully. The product was fine in both cases, but in the unsuccessful one the guy couldn't sell to save his life. We hear people beat the "have a product" drum all the time here. Partnering is just an expensive way to get a product.
 
It's called an earn-out

A job shop is essentially a service business, and a service business with no proprietary value (e.g. unique and replicable methods of providing services more profitably than the competition) or long-term contracts is fortunate to be valued at anything more than auction value.

Generally speaking the only way I would pay a seller for the value of existing customers would be via an earn-out. You could basically say that for a period of 12-18 months, the seller would earn X% of any orders from a given list of customers who had placed orders in the prior 12 months. Typically the premium on an earnout is higher since there's risk on the seller's part as well that you're an idiot and fail to pick up the phone when customers call or botch a job and lose a good client.

Valuation multiples on smaller businesses are often very low because transaction costs represent such a large proportion of the value. If I was doing an equity purchase, I'd want to review every contract, customers and suppliers, possibly sending many to lawyers. At some point it stops making sense to take the time and you just say, "$300k or call the auction house," assuming you can do the same if it all turns out to be BS.
 
Value of a Gouge or Trade Secret?

..... 5 cent cost sell for $2 parts. He always raved how my prices were great said:
Gouging your customer does not raise the value of your business whether the money goes in your pocket or into kickbacks. Sooner or later it will be discovered and either way it hurts your customer's competitive position. Real trade secrets are a different matter. But they must be well protected, especially if your customers are big enough to have scientists and patent attorneys on their payrolls or manufacturing/procurement engineers using the latest interactive cost engineering/estimating software. These guys will spot something out of line and rally their other departments into investigations.

Bottom line here is the buyer of a fabrication business must be able to distiguish how well the current owners and managers know the detailed breakdowns of their real costs of making each part/product they sell; especially the allocation of of overhead/indirect costs to each manufacturing operation. This is what enables the business to keep their margins under control, neither dangerously high, like the the quoted example nor low for the business to be healthy.
 
My input is as an Inventor, Funder of small to medium sized businesses, and someone who spent 2-years in machine shops working on his project "HANDS ON THE LATHE" but NOT as a Professional Machinist. CAVEAT EMPTOR.

Machine shops need to go after inventors with great ideas and help them build prototypes in exchange for a part of their business. I read a lot of discouraging comments that add up to; "Customers have zero loyalty." My humble recommendation is that you guys take your skill and invest into NEW businesses and become an owner of the business that drives work to your shops.

My shop did that and they helped me in the shop on 1 particular invention to build 5 different versions before we got a working Proof of Concept. They have my business. End of story.

Apologize if I am speaking out of line. Blessings, Kurt

Kurt, as another fellow mentioned most inventors are just waisting our time.
Most of the people who have approach me with prototype projects, want to give me a few % of the items but want me to front them all the costs. With the proposals presented to me the only way I would touch it would be if I got 95% and they kept 5%.
My standard questions are have you completed a Patten search, can you get product liability insurance, do you have money for production and distribution.
If they don't have the above it's just a waste of my time as it probably will never make it to market.
 
Shop Value

I have been contact to assist someone or otherwise provide a casual opinion of the valuation and health of a shop he is interested in purchasing. I am in no way an expert on some of these matters and my opinion is only that, being provided as requested to help someone 'not' get hung.

I will be reviewing active contracts, the relationship with the customers, how efficiently the company is being operated, and the inspection and review of the machinery. This won't be a fancy in writing detailed report, I am doing this as a favor as an experienced person in the business.

I am just curious if there are any here that have went through this process and how the valuation was obtained? From what I gather, the legal beagles are in there but as I have mentioned, they know squat about machines, programming, parts, etc. From what little I gathered, this sounds like a shop that was riding it out because the owner was preparing to retire. Due to this, I am not expecting to see newer machines, and a few have already been flagged as pointless to own.

I have concerns his inexperience will lead down a road of getting sub par equipment and probably decent contracts but are being ran very inefficiently. All things that can be fixed, but that valuation should reflect that. The company is decades old and I have been in several shops where they still live in the 70s, complete with fax machine. I don't want to see him buying crap, then have to fix it all. There is no value in that.

Now, these are firm contracts, but I know customers can and do pull them. There is usually cancellation costs but that is about it.

In all ways, I have grave concern about anyone just buying a shop without experience. Sure, expertise can be brought in, but I rarely see these small companies do very well if the owner is not savvy to the biz. This is someone that has never made a part.[/QUOT

This is tough. I own a shop with old equipment and keep pretty busy.
First off, You can't sell what you don't own. Unless a contract for work exists and its transferable, is the only way it has value. No transferable contract = zero value in sales.
Old machinery isn't always bad if its in decent shape and capable of doing the job. When looking at the value of a machine, consideration must be given for the fact its already moved and hooked to power. If your not capable of understanding and doing some repairs forget about the whole thing.
If possible talk to previous machine operators. Access the alarm code archive and look for recent especially repetitive and similar alarms.
Evaluate from there. If the alarm code archive has been deleted, slice the value of the machine in half if its working. Definitely run and rerun a few programs that utilize most of its functions.At least a few hours worth. Above all, if the machine is running when you view it, shut it down for five minutes then watch the screen for discrepancies or warnings when it fires up. Make sure it homes.
Old machinery = some breakdowns. MANUALS FOR EVERYTHING! Including schematics. Talk to their repair companies. All of these things including not keeping files on machines and their repair are great ammo to chisel the price down.
Check with WCB and city licensing for any previous orders that may need to be finished.
Make sure you don't get nicked for polluted earth from oil under or around the real estate. Sometimes laws and areas exist where they may want to drill holes and take soil samples both inside and out when businesses change hands. Check it out.
Don't be scared of old machinery after checking it out. Lots of parts on ebay. Don't overpay, point to machinery sales sites and remind them these prices aren't firm.
Used machinery allows me to lay waste to my competition paying for new machinery when it comes to quotes. If your mechanically inclined and can think things through, old machines will be great. If you have used machinery and need to add any machines always try to buy an exact year and replica of one you have running already. First, you know how to repair, where to get parts and most of all, the cherry on the cake, when one breaks down you can trade parts until you find the bad one.
Sorry I can't help with price but Machinery stock and real estate is all thats there. The shop owner knows himself the kind of guy that will buy that shop. They are rare. His price will come down immensely. His only alternatives are auction or scrap.
 
Tell your friend to run, not walk, in any other direction then owning a machine shop. I took over my fathers shop 25 years ago. The worst mistake in my life. I'm still quoting at $65/hour and can't get any work. There is absolutely no loyalty in this business anymore. It all comes down to who will do it cheaper. Thank god I'm turning 62 next year. I'll be running out the door to the social security office!
My business isn't worth anything except for the building.
 
My input is as an Inventor, Funder of small to medium sized businesses, and someone who spent 2-years in machine shops working on his project "HANDS ON THE LATHE" but NOT as a Professional Machinist. CAVEAT EMPTOR.

Machine shops need to go after inventors with great ideas and help them build prototypes in exchange for a part of their business. I read a lot of discouraging comments that add up to; "Customers have zero loyalty." My humble recommendation is that you guys take your skill and invest into NEW businesses and become an owner of the business that drives work to your shops.

My shop did that and they helped me in the shop on 1 particular invention to build 5 different versions before we got a working Proof of Concept. They have my business. End of story.

Apologize if I am speaking out of line. Blessings, Kurt

This is straying a bit, but we've flogged the original horse pretty well.

A lot of guys, rightful so, are very negative toward supporting some character who shows up with no money, some crappy drawing but is brimming with hope. There is a very good probability this guy is a waste of time, as many attest to. As an accounting prof I had, the late Howard Teale, used to say "everyone in the country is a great strategist and has a great idea, but its execution that counts. If someone is so poor at execution their plan includes begging for machining work so that they can get a prototype, then yeah, flush it.

But.....The kernel of Kurt's idea is maybe a little different. Its one I've thought a lot about for years. I'm no closer to figuring it out, but it would be a lot of fun and have the potential for great riches (also something that could be a lot of fun lol). Basically is there a way to act as in incubator for inventors with good plan - with a very significant equity/subdebt stake. Like some CA venture capitalist you'd have to be good at vetting plans and people, cut away 95% of the chaff and figure only 10% of what remains is going to win. But the wins could be large. The other situation that could be gold and I always have the antennae up for is someone really experienced in an industry who has an idea to improve an existing product. Maybe thats the definition of an invention lol, but my point is it can be simple but his experience and domain knowledge adds a lot of credibility.

It comes from everyone wanting a product, some IP. However once a product gets going, you can't afford to buy the business. So that leaves partnering somehow to grow your own products.

Anyway, I'm not saying hug the next flake that darkens the doorstep, but the idea of being an incubator, and essentially a merchant banker to them (you get a significant amount of equity for putting them up, building and designing prototypes. mentoring and so on), holds possibilities.
 
As both an idea guy and shop owner, I don't think it is as much as ignoring the guy walking in as much as it is inevitable expectations that are sure to follow. Everyone has an idea but without understanding in manufacturing, that instantly throws guys like us into the "design and engineering" role, which customers then expect that to come free. Its a little different game investing 10's of thousands in machines, software, and real estate, vs drawing on a napkin.

They typically contact with a grand idea, and want us to get all involved and waste countless hours looking at their idea, and figuring it out for them, but cannot even afford an end mill. You better believe if a shop goes to work designing a part and figuring out how to make it, and ACTUALLY make it, they HAVE invested in that venture, and financially far more than the designer.

For that reason, I usually have a stiff talk with anyone with an idea way before I even see it because in most cases, they want "2" of them, but, but, they will need thousands down the road. They are convinced you just hit the green button and parts come flying out so it should be cheap.

I was contacted by a patent holder before. He had some grand idea. However, he wanted a ridiculous NDA just to see if we could make it. A patent is worthless unless it can be made practically and from the sound of it, it needed serious engineering to get there. I told him we might be willing to take on that challenge and qualified to do so, but I won't be signing anything not even knowing what we are talking about. He didn't like that at all because he was a "patent holder".

I really wish these idea people would get a grip and realize there are a LOT more steps getting something in the market than a napkin and they are either going to need to find investors or learn that getting a machine shop to "invest" is probably one of the smartest and cheapest options. Investors are going to take a huge chuck of the venture, but a machine shop I guess a shop does not have the same value to them.

I have had my hand in green energy tech for a long time now and lost count of how many people have great, functional ideas, build a functional proto, then investors step in, invest huge, control the entire company, and squash it dead because once you invest $100M, and have 5 investors in there, your ability to offer an economically feasible product left with the first big check.

I watched as Aquion, a saltwater battery startup took a potentially great and patented idea, accepted I think $130M in investments, and never even got to commercialize it. It was said the product was going to be too expensive! For saltwater. The reason is the investors were looking for an ROI and after all that money was puked in, there was no way to climb out but charge $1000/kwh for a battery. Had he just grown the company organically with less funding, he might have a product that was viable in the market. You don't need 50,000sf in the Cali Valley to develop a battery.
 
As both an idea guy and shop owner,

I agree with most of that. Your point though seems to be there is a lot of chaff. No doubt. When I was in corporate finance, a key skill was to very quickly separate the unskilled dreamers from well thought out plans that were fanciable. All the business points you raise and more had to be quickly assessed, mistakes meant you spent time on the dogs and time was all you had. But there's also the kernels of wheat that occasionally are found.

Of course a good finance shop had lots of deal flow, lots of chances to the pick 1 in 100 winner from all the crap. A typical shop doesn't have that deal flow of course and just gets the flakes showing up. But I want the wheat and have long thought that applying my business vetting skills as gatekeeper to partnerships and incubation might be a way get into some great new stuff.

Barely more than a notion, I haven't figured out how to do it.....but I sense potential for those who do and I don't discard the idea when some wants a discussion (I do when its obvious they're in flake catagory lol)
 
I think age and experience can be key, or at least it has been for me. having carried several products from idea, to engineering, to production and retail, I have a little more salt than a typical machine shop that want to "make to print". But for that reason, I can see through the BS usually. One thing I don't buy is "everyone is making this and it sells, so I want to make one too"... I have an education in business and that is a piss poor model unless there is a specific strategy. Every product we have released was either a new product to market, or has advanced features over existing designs.

I agree with the "vetting middle man" but I might question which party will be willing to cut that check. I agree with it though! Locally there is a new "think tank" that is well funded by billionaires, that was setup for entrepreneurs to build prototypes and network. However, I don't see manufacturers in there at all!!

Around here, we have a long list of green horns that got educated running CAD, and make models, and know nothing about something I actually teach, which is called "design for manufacturing" and I am in no way an expert! The only way a part or assembly is optimized for mfg is with an experienced manufacture that knows how to get it done! This is where the business side needs to step up. How many? Costs? margins? forecast? All this needs careful thought WAY before you start.

In one product we are working on, we have to figure out if we use full color printing of membrane switches, or screen print. Each has its pros.

The one 3 axis mini mill mentioned in the CNC area recently is a great example of a not-so-well thought out plan. Guys with ZERO machining experience making a mill, with no machines, and no clue how. Have not even studied the market! People in that market whine about the cost of end mills at Harbor Freight!!! NO!!

In a similar area, I talked a family member out of some DIY beer making stuff. I LOVE beer, and we do DIY brewing in 30gal batches, BUT from a business perspective, people that buy that stuff want cheap and cheaper. They friggin make beer on the stove! You think that is cost effective? Thats why we do 30gal batches! We think in numbers here. I can probably be persuaded with the right market research but otherwise, I go with my own gut opinion.
 
Barely more than a notion, I haven't figured out how to do it.....but I sense potential for those who do and I don't discard the idea when some wants a discussion (I do when its obvious they're in flake catagory lol)
Don't most ... or many, anyhow ... shops do something like this ? I know I've given help to a few people who had good ideas that went on to become, not multi-billion dollar world beaters but at least decent products with a long lifespan. A couple of those people hung around and came back with the followon work, a couple took the production product elsewhere to save a nickel. I can see why many people refuse to give anyone a break but sometimes it works out. Not the wackos but the ones with half a clue.

(Altho I did make a part for a perpetual motion machine once. 3' diameter 32 dp aluminum gear. He covered the costs and I got to make something unusual :) )

I still wouldn't recommend buying a machine shop. Not if you want to do it to make money, anyhow.
 








 
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