Acquiring a Business

A remodeler's considering buying out a one-man cabinet shop. Is it worth it? Owners consider the pros and cons, and offer advice. August 2, 2005

Question
I am looking into a 40 year old custom cabinet shop. All current business is referrals and the volume is around 200K per year. Current owner is near retirement and having health problems, and there are no employees to transfer. All estimating and design is done on paper and no software is used. The shop is well outfitted with equipment and a paint booth and there is no real estate to convey.

The owner would stay on as a consultant. I have an existing business that is three years old and mostly mid level remodeling projects. I have been focused on cabinetry and built-ins from the beginning and slowly building volume in that area.

The owner of the cabinet shop has valued his business at $150,000. I can run all the standard valuation formulas and compute a book value for the business. My question is, will I better off to continue building my own cabinet shop from scratch, or acquiring this existing business and learn from the retiring owner? Any advice is appreciated.

Forum Responses
(Business and Management Forum)
From contributor J:
This is a case where it's really hard to put a value on reputation. Since this guy is a one man show, I feel the business is only worth the liquidation value of the business assets. I would think long and hard before I forked over hard earned money for somebody else’s name.

Are you competing against this guy at the moment, or are you trying to expand into a different market? If you're always losing bids to this guy, then it's worth considering. If not, when he does get out of business you shouldn't have too much trouble expanding your own market. If I had $150,000 burning a hole in my pocket, I think I would buy some new machinery.


From the original questioner:
The reputation of the business and the phone number are what I see as possible value. I think the equipment could stand to be updated, and you don't want to put much value on it. I haven't competed with this shop on anything. My interest is to get to 100% cabinet volume sooner than later. Currently, cabinets are 20% of my sales volume. Acquiring this shop may not be my best route, but it is one option I'm considering.

From contributor E:
I can see why you would be tempted by this offer. Maybe the business would be worth more than just the value of the machines etc, but I’m not sure about $150,000.

From contributor T:
It appears that what you are really looking to buy is the owner. You need to think about how much value he can offer you if his stay on time is not very long. If you can work a deal where he stays on for two years, then perhaps it may be more worthwhile.

From contributor D:
Since you've already stated that the tools have little value to you, you are deciding whether to spend $150,000 for a client base that will bring in $200,000 in annual sales.

There is no guarantee that any of his former clients will work with you. At most, you'll receive one opportunity from each of his former clients, after which you will have created you own reputation, good or bad.

$150,000 will pay the salary of a good salesperson for two years. One good salesperson can generate $200,000 in sales in one month. I think you should look at other alternatives.


From contributor P:
His business is local, which means it's market has some kind of geographical boundary. You already have a foothold in the same market. He is exiting one way or the other, why do you want to give him a severance package?

A company with a niche and a larger market (regional or national) maybe, but a local shop does not command much. Also his sales are not that great. My call: pass it by. As your business grows it will have needs, hopefully you will be able to recognize these moments, and hopefully you will have the extra money. Spend the money on the identifiable needs of your business.


From contributor L:
What you would be buying is a chance to sell his customers, but I think a one man shop is selling his own capabilities. You aren't getting that, just a chance. I'd have to pass if it was me.

From contributor C:
When you buy a business like this, you are really buying future potential sales. Anything above the liquidation cost of the machines, and perhaps a favorable lease/location is goodwill - a hoped-for promise of sales with little acquisition cost. Will those sales materialize? Is the foundation of this business strong enough to pull in work based on its reputation, and not the personality of the current owner?

More importantly, what kind of sales (and how quickly) can you generate with a $150,000 marketing budget, or half that? Just remember, you are buying future potential sales. You must determine if getting that future business is less costly through buying an existing firm, or by spending on getting the sales up and running yourself. In this case, I'd opt for the latter.


From contributor R:
I would suggest that you offer him a percentage of profits of sales generated by his customer list and phone numbers over a specific time period. Other than the value in his equipment, he more than likely will not have anyone offer to pay the $150,000 for his clients and phone numbers. You may possibly be able to work out an arrangement where he would work part time and assist you once he retires. He may be looking for an alternative to running a shop on a day to day basis, and with his experience, he may be a short term asset.

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