Selling a Cabinet Shop as a Business
Does a successful cabinetmaking business have a market value above and beyond the value of machinery in the used market? Only in special cases. October 18, 2011
Question
Anyone have advice or experience with selling their business as a whole? I'm a one-man operation with about $150K in equipment and I'd like to explore selling it off as a turn-key operation. I know equipment is selling for quite a bit less on the used market right now and I wouldn’t expect to get half the money back. But I would like to see who has come across this situation and what I may need to make it work.
Forum Responses
(Business and Management Forum)
From contributor V:
At $150K, you've obviously got a well-equipped shop. There’s be a CNC in there somewhere, right? Regardless of how much or how little equipment, you are it. Without you, the shop has no going-concern value. It's only worth the value of the used equipment in a very rocky market, which is probably about $30-40K, tops.
From contributor K:
When selling your company, it has to have tangible assets besides machinery if you want to sell more than just the machinery. You would need to create a value for your business. For example, if you have a proven sales system in place, payroll system, employee handbooks, a building you own (although it can be done with a lease, just not as valuable), production systems in place, and the most important part, an established customer base that has recurring orders. Throw in your expertise in running the business during the transition for a set period of time, and you have the makings of a business package for a new owner to take advantage of.
What can you offer besides the machinery to a prospective buyer that they can buy anywhere? Otherwise, all they are buying is used machinery. If you own your machinery, a complete list of your assets and inventory might be more appealing to a small shop who is looking to move up from the simple table saw to a more established operation. Maybe a substantial down payment (if you owe on the machinery, enough to cover the remaining part of the lease), and payments to you after that at just above market interest. If they default, and are not able to recover, you repossess the assets and start again. If time is of the essence, your most prudent course might be to just sell the machinery.
From contributor S:
What was your last fiscal year sales and profit before paying yourself?
From contributor Z:
Without you the value of you shop is only the auction value of your hardware/machinery and supplies.
From contributor R:
There is another aspect: The machines are in place. They are hooked to power, air, and dust collection. That has some value. If someone wanted to get a set up equivalent to mine in the used machinery market, they easily could. But they are either going to put in a lot of sweat equity or a lot of cash getting things set up. Then there are the templates hanging on the walls, the tooling, the finish schedules, samples, displays, etc. So, if you can find someone who would appreciate the value of these things, then you could do a little better.
From the original questioner:
That's my thought too. The buyer comes in with his own clients and he's producing from day one - wired, air, heat, and light. It seems that would have some value just over the used machinery costs. I’m thinking someone like an experienced cabinetmaker, a builder or remodeler who just brings in his own people.
From contributor F:
You sell yourself as a part of the business. Include three weeks/months or whatever as part of the transaction. This allows you to pass on the information that has made you successful - processes, marketing, sales, etc.
From contributor G:
It is way easier finding guys to buy different pieces of used equipment than finding one guy with $150K he is willing to spend. Why do you think roving auction companies exist – it’s way easier selling the equipment off than finding that one in a million to buy the whole thing. You may get lucky but it may take a year or two.
From the original questioner:
No one is going to spend 150K, cost new, for used equipment. I realize I could break it up and sell it off, but that could take years too. My post is an exploratory question.
From contributor Y:
This question really boils down to the psychology, including the motivation, of a prospective buyer. The notion that a business is worth the resale value in the open market of the machinery sets a minimum, but this is usually irrelevant to the discussion. What you have to ask yourself is whether the business is a going concern and whether a buyer with cash would think that spending that much money was a good investment.
One way to do this is to ask how much it would cost to replace yourself with a manager so that business ran more-or-less without you. Calculate how much such a manager would cost and then ask if our P&L sheet for the last few years, plus the amount you paid yourself would show any money left over after this person was paid. If so, and if a ready buyer is demanding 10% for their investment, then you business is worth about ten times this profit.
If there's nothing left over after you've paid this manager then you have to wonder why any investor would buy your business. It's still possible. A new owner may just be trying to establish a good job for themselves where they can't get fired. But they have to be willing to accept less than you've been willing to accept. The best potential buyer in this sort of situation is your nearest competitor. By amalgamating two businesses into one, a competitor gets all of the business without a substantial increase in fixed expenses. This can be a very good deal.
Naturally the value of the machinery has to be added to this amount along with land or any other real property. But the idea that the goodwill and traffic you've built up over the years is worthless is incorrect. What is correct is that you need to be there in order to smooth the transition, to familiarize a new owner with the little secrets that are always a part of any business, and to help the new owner maintain the traffic and goodwill that you've built up over time.
From contributor A:
To the original questioner: Have you thought about owner financing? There have to be some up and comers who can take over ops. Maybe make more than auction prices?
From the original questioner:
Owner financing could work. Everything is very elastic and pliable. Who's to say what and if something comes up. Right now, I'd just like to sell the house, the business and ride off into the sunset - too many years of hard work. It's time for some younger guys to take over.
From contributor C:
To the original questioner: Why do you want out, or why are you considering it?
From the original questioner:
Well, I'm 65 years old, I worked my all of my life, did all I could to please every client (which can't be done), sweated the large and small, and lost sleep over it. There's a larger world out there and many other ways to grow, so much to do. I need to live on much simpler terms, with less of the clutter and more of the rewards that matter.
From contributor E:
Be very careful of any owner financing. Small businesses generally do not sell and transition to a new owner very well, and you may well wake up in three years and find the business is gone, and so is the possibility of collecting on the note due. I have seen this happen time and time again in several industries. Get enough up front that the note isn't all that important as you probably won't ever see the money.
From contributor M:
Good advice on the owner financing. My dad sold a business that way and had to pony up a fair amount of cash to foreclose one year later when the "buyer" quit paying. This was a good business at the time he sold.
I got a good laugh out of the mention of jigs on the wall having some value. I have hundreds of "one-off" jigs hanging everywhere that I'd love to give away as for some reason I can't bring myself to throw them in the dumpster where they probably belong. Most of the posters have it right. If you're lucky, you've got some tools that are worth some percentage of the dollar they cost. Surely you've not put all your eggs in this one basket.
From contributor Q:
I have a small shop in my garage as I do mostly high end installation. You can make a living at this but it’s a slippery slope right now. The large high end shop that I install for now has been a good business for the owner and has provided him with a retirement but it took 35 years and now the shop building is worth more than the equip. I would have to say that woodworking equipment is not a good investment in and of itself. You will make money on your cabinets and millwork but don't ever look to gain much back from the equipment.
Timing is very tough right now if you can hang at it for a few more years and if the economy comes back stronger you may be able to get much more for the business. In the mean time concentrate on a business model that will bring repeat business and track it to show the viability of your business. Good luck, woodworkers have to be very strong willed to not let the negative factors cloud our visions.
From contributor U:
Having bought a business recently, I have a buyer's perspective. As I see it, there is only one thing that matters: customers and their relationship with you, the potential buyer. To buy a turn-key custom cabinet shop, the buyer should work at that shop for at least a year and get to know the customers before making the decision to buy. Otherwise, it's a blind decision. The books won't even begin to tell the story.
In my particular situation, sales have dropped 50% to 60% since I bought the business. I didn't expect such a steep drop, but I knew going in that there were diverse clients with long-term relationships that helped establish a "floor" to how much sales could drop. I've hit that "floor" and I'm still standing, while many other shops have folded.
In this market, there are probably a lot of owners who would love to get out and sell "turnkey". I think there are probably a lot less potential buyers who have both the money and skill set to make it work. Those who do have the money and the skill set are probably better off going the garage shop route.
