Buying a Woodworking Business
Here's a long thread full of thoughtful advice on how to assessn the value and prospects of a cabinet business that is for sale. June 8, 2008
Question
I may have the opportunity to buy a well-established (40 years) custom cabinet/woodworking businesses. I am a woodworking instructor for 10 years, have a good side business of custom woodworking, and have been involved in construction and remodeling over 10 years. The company is 40 years old and doing well. They have 10 employees, do both commercial and residential. They don't do only custom, but they are 1 of 2 shops that can step outside the box for woodworking. They are family owned and want to keep the name and legacy. I don't have a problem with that at all, as their name is very well known in the area. I have good connections in the town and could work with family and friends in other trades for more connections. I don't know the cost yet, but I assume 1/4 to 1/2 mil. What questions should I be asking the owner and the professional that looks at the books to see if I can keep it profitable? My dream has been to own my own business and this may be the opportunity. The company is in the Midwest, by the way.
Forum Responses
(Business and Management Forum)
From contributor T:
There are plenty of questions for you to be asking. I would suggest the following as a few to begin with:
- Why are you selling the business?
- How many family members are in the company? How many will stay? How many will leave?
- Who is responsible for sales and will this person stay?
- How is the sales process working today?
- Have there been any major changes within the business in the past six months?
- How much money are you making? Last year? Comparison?
- Is the business in growth or decline mode?
There are tons more, but this will get you started.
From the original questioner:
Thanks. I can already answer some of those.
- Why are you selling the business?
She wants to move back to Hawaii. She took it over 10 years ago to keep it in the family.
- How many family members are in the company? How many will stay? How many will leave?
No family interested or staying.
- Who is responsible for sales and will this person stay?
All personnel tight group and staying, as far as I know.
- How is the sales process working today?
Good question; I'll make a note.
- Have there been any major changes within the business in the past six months?
None to my knowledge; will make a note.
- How much money are you making? Last year? Comparison?
Definitely.
- Is the business in growth or decline mode?
Good question; make a note.
Any advice on percentages? Sales to salary, overhead, etc? This is where I am really lost.
From contributor T:
Well, these depend a lot on the type of business, etc. It would be good to see the net profits at around 10-15% of sales. I would also suggest that you see if they have at least $100k in sales per employee. This is always a good indicator of how things are going.
From contributor W:
Contributor T, would you suggest paying an accountant to analyze the financials if all other factors look good?
From contributor T:
I think that once you have satisfied your own interests and general business interests, that it would make good sense to hire an accountant (one that you will want to work with for the long term) to look over the books.
From the original questioner:
The 100k per employee is pretty standard? What would be a minimum for profitability?
From contributor T:
The 100k would be a general thing to ask about. In terms of profitability, you would want to be at around 10-15% of total revenue.
From contributor H:
Important note: Their profitability will not assure yours. You will have the same overhead they have had plus the amount you pay for the business. Having been around 40+ years, I doubt they have the debt load you will have. 250k-500k (that's a big price range)... For 500k, start your own place. Is their name really worth paying for? Iron is iron and lumber is just lumber. Go slow.
From contributor J:
Lots of good advice getting passed your way. I'd suggest you take it. The business itself is worth something, but if you have the contacts and wherewithal to start fresh, I'd tend to agree with contributor H. You can make great things happen with $500K.
I had the chance to do what you're talking about one year ago this month. $490K to buy the business. Great shop, great location, great reputation... so we all thought. The wise old owner had built this place from the ground up and when he passed away left it to his daughter. She talked a good game.
I started asking questions. The shop closed suddenly too. They'd taken deposits on over thirty jobs that they couldn't deliver. Door manufacturer hadn't been paid in months. Sales tax and employee withholding hadn't been paid in months. Hardware, lumber... This kind of thing went on and on. By the time this old girl was done, the business was worth less than nothing.
By the way, the most valuable information that I got while looking at this business came from vendors. For them you can't make it an exercise at looking good in the shower; you either pay your bills or you don't.
I wouldn't have bought into any of those problems, but my fear was that this place would be radioactive for years. I thought long and hard about making a lowball offer, but decided against it. Sometimes it's hard to get the stink off of a location. Be careful and look at this from every angle.
From the original questioner:
Thanks for the comments. If the price is 250,000 - 300,000, that is maybe possible. But if over that, it's out of my range.
From contributor W:
The best thing to do is buy an under-performing business, and fix it. Can you increase sales and production by 20%, and raise prices by 14% in 2 years? That is what a business person would do.
From contributor M:
The question you need to ask is, do you want to be a businessman or woodworker? Do you like your paycheck or do you like to gamble? I have bought and sold many businesses and I can tell you, buyers are liars and sellers are worse.
If you want to be a businessman, get a copy of the last five years' P&Ls and tax returns. Find three other businesses that do about the same thing and get P&Ls from them. Then have an accountant look at them all so he knows what is questionable. Without comps. You might believe the seller's, "it's for tax reasons."
You also need to know what inventory is included in the sale. If the seller depletes the inventory and the venders require C.O.D. for the first three months, you might be looking at a couple $100k on top of the sales price.
The low price would make me think that the building is rented. If so, will the landlord keep the rent the same? (Rarely.) How often does the rent increase, by how much? How will the sale be broken down? (You can't depreciate goodwill, trade name, etc.) Is this an asset sale or a cap sale? What is the normal price of these businesses?
When you know what you are buying, you can decide if and when you can get your money back. Don't think you can do better when running the numbers. Doing better is payment for the risk of doing worse. Don't buy if you don't think you can do better. There is always something just shy of a material fact that the seller will forget to tell you. There is a big difference between being an entrepreneur, a businessman, and a craftsman. Do you want to make your own problems, buy someone's problems, or make stuff?
From contributor V:
We just bought out a shop mid year. Here is a major consideration that will lead to several other points. Liability. What liability do you assume for past jobs? You should probably have a clause in the contract that leaves all liability to previous owner for previous work. Otherwise, in this sue-happy society, one minor thing could cost you more than your company. Same goes with any financial obligations. Don't forget to define the dividing line of takeover and financial change. You should definitely pay someone to look at the books.
From the original questioner:
Great question. I will make a note. Regarding adding 20%, I think this is a real possibility. There is only 1 other cab shop that does anything but boxes and the area is growing still. It has become a Mecca for doctors and high end homes, which has fueled the economy. I'm sure there will be a slow down, but so far it has not hit. I am confident that I can increase sales. How much liquid capital would you estimate to start up? Cash on hand?
From contributor A:
A closely held business may create lots of benefits to the owners that reduce profit. These can be higher profit sharing contributions, autos, higher year end bonuses... These numbers need to be reviewed to see what the true profit is. I would think that the business should sell in the 1-1.5 x sales ratio at a min.
From contributor K:
Would they be willing to owner finance? Even if you don't need it, that would tell if they are confident of the business to keep going.
From the original questioner:
I think they would possibly owner finance. I agree that that tells a lot about the security of the business. I will remember the 1 1.5x sales.
Contributor A, would that be net or gross sales?
From contributor O:
There is a bunch of great information here. I have looked at several woodworking businesses to purchase over the last 4 years. I feel there are a lot of good reasons to consider an existing business, like customers, employees, equipment set up and running, and receivables coming in the first month. My advisors tell me that businesses like these typically sell for 3-5 times pre-tax profits. There are likely some personal items in the income statements that could be added back to the profits to increase that number. I have been told by professionals that it is 3-5 times EBIDA (earning before income tax, depreciation and amortization). I would not look at one year for this number; I would use an average or weight average of the last 3-5 years.
Most of the businesses I have looked at are asking for more than that in price, but they don’t have buyers knocking down the door. Many of these businesses have good reputations and good equipment, but have no business systems in place and are very dependent on the owner. In many ways these owners have created a good or great paying job, but not a sustainable business without them or someone of similar talents. I have done a detailed financial analysis of each business (with the help of advisors). The key is to see if the cash flow works. It is possible to be making a good profit and have negative cash flow. You have to think to the future. With the growth, will you need different/new equipment, or additional overhead in the way of space or employees? How will these things will affect your plan? This work upfront will be the basis for your business plan.
From contributor A:
It would be gross sales. The 3-5 times profit is more accurate but harder to know going in. The problem is a self funded business may drive down profits by bonuses, etc. for tax reasons, where a business that is financed will have to show profits to stay financed. Either way, in a small business you need to see every dollar going to the owners to be able to evaluate what you are buying. It should boil down to ROI, not X times sales or profit. What could $300,000 do if it was invested at minimal risk? What's the cost of capital worth? What's the risk? Do you have the personality to deal with the problems that come up like nonpayment or slow payment or a job that goes bad? Do you or the people in the business have the ability to generate and/or increase sales? Are there good business systems in place? Is the paper flow documented? Will the existing employees stick around? Are there documented production and manufacturing systems that work in place? How long does it take to convert an order to production? What's involved? Are there good, willing potential employees in this area?
From contributor G:
I did it five years ago. I shopped a number of cabinet shops and closet companies for sale, then just stumbled into this 25 year old company with a sick owner. A great reputation and fantastic workers. I have taken the sales and pricing up enough to pay the business off and earn a very good income. Margins are high and taxes are low due to depreciation and other write-offs. The cabinet shops I looked at sold and the one I was very close to buying went out this year. Lots of outright lies in the numbers, so you need to not be trusting of anyone and do your homework. The main thing to consider is working capital. If you don't have two months of operating capital either on hand or in a credit line, you will run into trouble. It has scared the hell out of me a few times. Good luck and check the numbers carefully.
