Looking into buying a commercial millwork / cabinetry shop in a growing major city.

This shop primarily does new build / remodel cabinetry and install for healthcare, gov, commercial offices. No GC is more than 10% of their work. Today they say they get more bid requests than they can respond to.

Back of the napkin I could survive a 20%-30% slowdown in work. 40% slowdown or more and things start to look bad.

Architectural Billings Index is starting to show some weakness nationally.

How bad do you guys think it will get in commercial millwork? For those of you that were around in 2008 - Is a 40% drop in demand for more than a year possible?

Everyone I have spoken with is in the same boat right now, too much work, too many bid requests (my guess we pass on 70% now) and we are all expecting a slow down at some point. I haven't seen any signs yet around here of a slowdown, but it has to happen, this can't be sustainable.

As far as buying another shop, after 40 years doing this...my only advice is if you don't have any ties to the industry or haven't worked in the business, it's a huge risk. Anything under 50 employees is going to require enormous input and experience from an experienced hands on manager. If you don't have someone in there now, it has to be you. I have never seen an investor successfully buy and operate another shop for anything more than a few years. Not saying it can't be done, but it's a handful running a millwork shop. Things can go south very quickly, one bad job, one bad gc or client, which is why you need the experienced hands on all the time.

My biggest concern would be the switch in business to allow work from home. Many commercial office spaces are running at lower occupancy rates with fewer workers in cubicles. Have a really good accountant look at their last 5 years.

Thanks for the replies.

I have been looking at a lot of different industries, and every single one of them gives the same advice you do: unless you've worked in that industry all your life you can't work there now. So I have to take that with a grain of salt! Obviously people start and buy businesses in all sorts of industries every day.

If there is something unique about millwork that doesn't exist in other industries I'd love to hear about it. Customer service, returning phone calls, delivering product on time, fixing problems, hiring the right people - the core skills should transfer.

This business does have a shop foreman who has been in the industry a long time, and a business manager who has worked at that company for a long time. The owner has also offered to stay involved for the first year.

About 15 employees, 15k sqft shop, new(er) machinery.

We're all millworkers here and we all think we are unique! But seriously, if you are comfortable you have good people there, that is a major start.

I have found that there is just not a lot of room in our business for extra fluff in the G & A costs.....in other words, you have to keep the number of folks in the office to a minimum and they have to have a vested interest. Profits may look good on paper and they certainly do with what I have now, but it is just me and my son running the office, doing all sales, estimating, pm work, shop management. We have a part time bookkeeper and sub out all drafting (which is really a plant cost). We'll do $4.5m this year and are running just over 10% net after paying ourselves well for the year and depreciation etc. And yet I am constantly on tenterhooks worrying about where things can go south.

My advice is talk to some folks who have worked at companies that had outside owners and find out why they failed. There is a long list of them.

There are a lot of moving parts, from the sales estimating...it's never numbers but more about relationships and those take time to develop, to drafting, in house guys will eat away all of your money very quickly, but subs can be a disaster as well (too many guys in India who know everything or claim to), purchasing might be the easiest thing we do, managing the shop....we have about 45 projects going on and good luck getting decent schedules from the GC's these days, so a lot of juggling there, do you have in house installers or are you subbing that out....there's tons of potential issues with the installations.

You can make some good money but it is one heck of a lot of work to get there and stay there. I suppose that is true in most small businesses.

Good luck, feel free to email me directly if you want. But hopefully some other guys will chime in here.

Thanks. I will email you.

I just sold my downsized company to my #1 man. It was down from 10 employees in 2008 to the two of us since then.
We have a great reputation for the best quality and service, and see little or no competition.
When you look at it, you just need enough sales to cover your rear end, and that is not too hard to do.

Hi David,

It’s a little different when you buy an existing business!

I’ll have a lease with rent + NNN of about $240k and debt service of about $170k. I’ll need to keep rev above $1.5m to service that and still pay myself.

Shops in my area seem to be doing $1.7m-$4m (similar sized footprint and employees).

15 employees. $1.5 million in revenue. That's $100,000 a person per year, which is on the low end. $150,000 per person per year is where businesses like yours start to be sustainable. Tell us which of these things is true:

• Some of the workers are part time. Rev/person calculations need to use FTE numbers (Full time equivalent)

• You are paying very low wages, which may well be fine for your area, but will be a challenge if you need to replace workers.

• Owner is not making much income. Owner should be targeting 10% of revenues going into his or her pocket.

If the operation was larger, and the owner was mostly overseeing employees doing all of the actual work (including design and selling) then lack of experience may not be as important. If the owner has to design and sell, then your lack of experience will give you a lot of difficulty. How are you planning on pricing your work? What systems are in place to run the operation?

Hi Paul,

Maybe my last reply wasn't clear, the business I am looking at buying is doing about $2.1M annually now, so $140k/employee. Stated profit margin for the current owners is about 30% - but they own all the equipment and the building outright. I'll have a loan and a lease.

The $1.5M is my "breakeven" with fixed costs (lease, debt svc, etc.). Below $1.5M rev I am going to be dipping into savings to stay afloat.

I am concerned about commercial millwork demand in a future recession; will I be able to keep $1.5M coming in the door? What kind of a % drop did folks see 2008-2011 era?

[To answer your other question: Business has a shop foreman, estimator, engineer/business manager in place. Only job functions the owner will hand over to me are HR, books and accounting. I could take over some of those other front of house roles in a recession to cut costs. I am comfortable doing B2B sales/relationship management and estimating & contracts.]

You asked in an ‘08 situation is a 30% downturn possible for a year. Easy. That was the best case for most shops in ‘08. For the majority it was more like 50-70%. And it lasted for more than a year.

FM, for residential I 100% believe that 2008 was like that for years.

For commercial it seems a little pessimistic. Commercial projects are planned/funded 5-10 years in advance, and aren’t as boom and bust as residential.

Curious if other commercial shops would say the same here?

No doubt residential tries to get into commercial if there is a lull in residential, though.

Lou, every shop owner who has offered hard earned wisdom that lived through 08 you’ve refuted and shot down their thoughts. You seem to already know what you asked and are just looking for people that will confirm it. Report back in a couple years and let me know how that turned out for you.

FM:

I can see your other posts where you clearly appear to be in residential, hence why I asked for clarification if you are talking about residential or commercial. Were you doing 100% commercial prior to 2008? Commercial and residential are rather different markets.

I'm not arguing with anyone, just asking clarifying questions and clearing up assumptions about my own questions.

Lou, yes I am heavy residential. But do both and more importantly have studied both and keep a pulse on both. Check the stats on how many offices are empty, or how many warehouses and office tower builds Amazon is pulling out of, or how college enrollment is down or brick & mortar stores are getting crushed. How many restaurants have closed.

It’s your money, do with it what you please.

140k per FTE is somewhat low. Up until a couple years ago the 150k benchmark per employee was pretty good. We were doing great a few years ago when we ended up at 143k per FTE.

In the last two years my cost of goods has gone up by at least 20%. A few things have come back down, but many seem to be here to stay.

We've also had to increase pay across the board just for us to all be able to keep up with increased living costs.

We'll finish this year at about 170k per FTE. I'd like to be at 175-180.

Its not all doom and gloom though. This past quarter was our best yet, and Q1 for next year is fully booked, along with some other large projects already committed to later in the year.

We had 6 people in the company most of the year, and just added two more. Were on pace to keep up with at least 165 per FTE.

We do 95 percent commercial/multifamily work, and I haven't seen any sign of things slowing down. We aren't seeing as many bid requests for offices (aside from secure offices for military contractors, we're in a high military area), but restaurants, medical, retail and multifamily bid requests are coming in faster than we can handle.

I don't fully agree that you need years of millwork/cabinetry experience to effectively run a 15 person company. At that size there's no need for you to be in the shop or on site getting your hands dirty. Take good care of the people, get them what they need to do their jobs and you'll be fine.

The Revs/employee number is interesting. Yes, 150k per head is a reasonable number. But there's not always a one to one correlation between a higher revs/employee and profits. This is something I didn't use to believe but my experience this year changed my mind.

My revs/employee this year and last year are both very similar, 182k/employee. My profits this year are triple what they were last year. We've had more sales, so we added employees, which increased production. The side effect was that with a sufficient number of workers, we had some ability to absorb months when labor wasn't available, particularly in the summer. In the past, we'd make money in the first 5 months of the year, lose it during the next 4 months, then get back in the black in the last quarter. People taking vacation cut our output enough to put us in the red, every summer. When everyone got back in the fall, we'd make money again. This year, I had enough warm bodies that we were able to maintain output throughout the year, even though a lot of the new workers weren't all that efficient.

The math suggests that increasing revs/employee is always a win. My experience suggests that a very high revs/employee number leaves you vulnerable when one of those productive workers isn't available. This will be more pronounced when the total number of employees is lower. I have 26 workers now. Losing one is 4% of my available labor. If I had 10 workers, losing one is 10%. 4 workers, 25%. This is one of the traps of trying to scale a business. The bigger you are, the more resilient you are. But how to get from small to big? You need to be able to grow sales and also grow production, at the same time. Not an easy task, as they require different skill sets. Finding labor, in particular, is a tricky proposition.

I'm going to giving a talk about how I find and keep skilled workers at the Cabinetmakers Association convention in Nashville next year. I hope you all have a chance to attend.

Seems like a bizarre idea for someone with no millwork experience to invest a ton of money into a cabinet shop of any size. Why not just take that money and buy real estate or an index fund, rake in the dividends and then go enjoy your life?

I've run a small shop for 12 years now. Every job entails hundreds of decisions, any which of one made wrong can destroy the profit margin. In the same time period I watched a company 3 suites down that imports products from China and resells them. He recently bought his own building. The only decision he needs to make is how much to mark up his products.

How about a car wash business? There have to be hundreds of choices that would make more sense that a custom job shop of any type.

Matt, you hit the nail on the head....it's every job and every day there are decisions made in a split second that have enormous impact on the bottom line. Even the best employees don't always have the mindset that it takes to understand this. Making a profit is a big motivator, but losing money is a lot scarier motivator and who loses money...the owners, not the employees.

"who loses money...the owners, not the employees."

Why don't the employees lose money? I'm certainly not paying for their screw ups.

Karl—
If you’re sharing the risk, you’re sharing the profits too, right?

“ Seems like a bizarre idea for someone with no millwork experience to invest a ton of money into a cabinet shop of any size. Why not just take that money and buy real estate or an index fund, rake in the dividends and then go enjoy your life?”

Already own equities and RE. They don’t hedge inflation well. Diversifying via business ownership.

SBA makes buying a business very attractive in the US. Returns are good, multiples are attractive. CRE is typically 20x NOI at 20% down, whereas a small business is 2-3x NOI at 10% down.

Re: car wash; Banks don’t like to lend on certain industries - car washes are one. Not to say you can’t ever get a car wash loan, but it’s much harder and there are no attractive ones for sale near me.

"Karl—
If you’re sharing the risk, you’re sharing the profits too, right?"

I have one problem with this question. The use of the absolute "the".
No, I do not share THE risk. But I do share some, as we all do as proprietors.
Consequently, I share part of the profit. Employees are not slaves. They are a resource. As are we as employers to the employee. We have a mutual and symbiotic relationship where one needs the other to achieve our goals. It is also a very dynamic and complicated calculus.

A few years ago out of desperation I hired some white trash douche bag. I could not reach him. The ideas of being efficient in movement, conserving steps, and being productive was completely lost on him. Typical white trash victim attitude about virtually everything. Nothing was his fault, no ownership. Simple tasks, feeding a machine parts. Something that requires no real thought involved, just shoving parts in and letting the machine do the work. He would waste mountains of time by not focusing on the task at hand or thinking about his next step. Machines would be spinning, dust collection sucking, payroll being expelled, but no return on the expense.
I had a small epiphany while he was working with me, and that was to ask him;
"who do you work for?"
He, of course, responded "you".
I told him he is a fool if he works for me, and who he actually works for is himself. He works to feed his family, he works to pay his mortgage. None of that is for me. I am nothing more than a means to his end.

So, what do I mean, when I say I don't pay for mistakes? I mean that I have a finite amount of dollars to distribute amongst the four employees of my company. Of which I am one of those employees. I'm paid hourly by the corporation.
Pretending that all employees work a typical 2080 hour work year for semi easy math, if somebody make a $200 mistake. That is $.025 per hour, that I do not have as funds to distribute as payroll to each employee.
If a $10,000 mistake is made, now that is $1.25 per hour that can not be distributed.
See where I'm going here?
If the money isn't there, it can not be given to the employee.
If somebody makes a $1,500,000.00 mistake, none of us have jobs any longer. Sure, we can all get different jobs, but that comes with risk too, and that is always an option for everyone. Me included.

I will not reward incompetence. The competent employee will be brought up in pay to the level that they achieve, and will be encouraged and coached to be even more. If you do not bring value to the table, your employment will be terminated. It is up to everyone in the shop to hold everyone accountable for their actions. If somebody leaves a mess for another employee to pick up or deal with, the person that left that is stealing productivity and potential compensation from the one who has to deal with it. If something goes wrong, we all take a bite of that craptastic sandwich. We are a fighting unit. One that has standards in quality, production expectations, how tools, equipment and the facilities are to be treated, and how we treat each other. Stuff happens, we all screw up, but nobody is immune from their faults. We sink or swim together. We pump and we grind, or the ship sinks.

Imagine what you could pay the unicorn flawless employee. The one that is at all times without fault 1000 steps ahead of where he stands. Wastes no time, wastes no material. It is impossible, but fun to think about. The CNC is a printing press for money, it can't even make that claim.

Of the four people on the payroll, two make more than I do per hour. I personally make less per hour than I would if I went to work for another shop. I take home more at the end of the year, because I work 3000 hours per year. It is the only way that I pull cash from the business. But, I take wealth in other forms. I personally own the building and the corporation pays rent.
I don't look at the account at the end of the year and go, "Great! I'm yanking $80k out for fun" Because it's not there, it's been ear marked for equipment, taxes, improvements in production, or already has been distributed through payroll.

Boy, this threads has more turns than a mountain road. First off if someone wants to purchase a millwork shop and try to make a go out of it than that is his choice. If you think that running a millwork shop is much more difficult than running any other business (it really isn't) then I would suggest looking in the mirror and get honest with yourself. How many really good chef's try to open resturants and fail miserably? How many really talented cabinet makers try to open shops and also fail? There is much more to running a business than just making the product. Large companies have many different departments, sales, Accounting, production, finance, HR etc. A small business owner has to be be able to juggle a lot (not neccessary all) different positions himself in order to be profitable. I have said many times what is the most important thing you do in any business? MAKE A PROFIT! cause if you don't you will not be in business very long. Sharing profits and loses with employees? That all sound fine but in the end you and who ever puts up the money and personally accepts the risks is/are the ones ultimately responsible. You can say what you want about "I did it my way" and I don't answer to anyone" but if you don't make enough money to put a roof over your head, food on the table, and shoes on your children's feet than you will not be in business very long and you won't be married or have a family very long! I have seen people come in cold to this industry buy a business and although they make quite a few "rookie " mistakes they learn form them and are eventually successful. I have also seen people with plenty of experience in this industry fail miserably. They fail because they never truly master one or more of the key roles of running a business. It does not matter wether it is commercial of residential, they have different business models. If your are unsuccessful at finance then you may be able to get by in residential but you will fail in commercial.

But lets be real here someone who can successfully run any business and is thinking of getting into the millwork business and is asking advice on this forum about it, well that sends up a red flag right away. Anyone getting into a new business knows that he has a lot of research and home work to do. Trying to get it from this forum is not the way to go.

My hats is off to those who are making a living at this profession, it truly does not matter exactly how they are doing it, just as long as they are. There are many ways to skin a cat but at the end of the day the only thing that matters is if the cat is skinned and did you make any money doing it!

dconti, I think you miss the point. It's true that anyone with good business and managerial skills can run any type of business. However, OP is planning to be a hands off investor. Much different dynamic.

That's news to me, Matt Brady.

I would be working in the shop daily, or else be out meeting with GCs at the customer site.

This business does have a full time GM and full time estimator. The owner only "needs" to work on back end tasks like HR, payroll, accounting, and GC relationships.

Thanks Karl, this is what I hoped you meant. There are some blockheads who think they get to deduct that $100 mistake from wages earned. That may be the end result, but there’s reasonable (and legal) ways of going about it like this.