Question
I have the opportunity to buy a typical mom and pop shop (400-500k a year in sales) who cut everything by hand. And by mom and pop I mean still ironing on edging! I would love to buy a small CNC and edgebander and take the business to next level. The price is around 400k with all the assets (land, tools, stock, wip). This works out to only roughly 60k for goodwill. What I am wondering is should I just set up our shop with all those things, and then work into it slowly?
Forum Responses
(Business and Management Forum)
From contributor R:
It would certainly be a whole lot less trouble to buy one. You had better make sure that the numbers add up though. That is usually what makes guys start up new shops. Most small shops really don't have much goodwill value. Most small shop owners think their businesses are worth more than they actually are. You need to get an outside appraisal.
1. Your customer base has already been started for you, including all the leg work, not to mention the time it takes to actually have steady repeat customers in place you can count on to pay the monthly bills while you decide which market you want to pursue with you new machines.
2. You should get a well thought out supplier list that will save you a bunch of money and time it takes to set this stuff up for a profitable business.
3. I know in my situation I would be setting the price based on the property buildings etc., larger machines in the shop, customer base and experience. I have to teach to the new owner, but the amount of small stuff, say less than $100.00 items that would go with a working business are huge. There are almost too many items floating around a shop to keep track of, or seem to not raise the final asking price. That kind of stuff adds up very quickly if you have a ground floor startup.
4. All your city, county and state permits have already been taken care of did I mention all the cost of setting your machines in place and getting them ready to go. That has to be worth a small fortune.
I feel like buying a profitable working established business is a great move if you are talking about pennies on the dollar or close to the start up cost for a new business, machines, buildings, permits, customers, etc. To have these things already in place is great. The new owners usually have a fresh outlook on an old business that will carry them through to the next level.
An existing shop is not always the right answer because their maybe many things that are not efficient and have to be re-done but setting up a shop from scratch is hard, expensive and time consuming. I would not buy a shop if it did not come with the building. I would also not buy a shop that wasn't making money.
So my thinking (input is valuable here) is that with him only cutting one kitchen a week on average, with a flat bed, edgebander and outsourcing all the doors we could double production within six months. All the local millwork shops are behind an average of six weeks right now. Now I know highs and lows don't last, but it seems like a great entry point into the market, for not a lot of goodwill.
You say the goodwill is worth 60k. 60k in marketing dollars will go a long way in creating your own loyal customer base. No matter how well you do, you will lose a set percentage of customer base. How is their pricing? If it is too low you will lose most if not all of the accounts if you need to raise pricing. Any unnecessary overstock inventory or machinery that needs to be upgrades has zero value. In fact it may bring the price down considering what labor and costs are involved is needed to get rid of it. How much of their operational procedures are documented? Is it tribal knowledge or will you be able to bring your own people in and have them be able to run independent working within a system? How long will the owner stay on? Are they going to transition you over to meet all their new customers and learn how everything works?
Do you have a business plan?
I agree that there are a lot of costs to starting a business that is over looked and will nickel and dime you while getting started from scratch. But I can tell you from experience the used tools might get you started but will need to be replaced or repaired over time. I think there are allot of pro’s and con’s. Machines are just that machines, new or used you have to have them to do the job. You can do what I did and shop the internet and auctions for fair market value for each one. I took pictures of the whole shop in closets, tool boxes, corners, attic, offices, everywhere you can imagine. Then I started writing down everything in the pictures. I recommend you put a value to replace each item (i.e. dolly’s, brooms, carts, inventory, etc…). In my case I found the owner under estimated the value of the shop equipment. There was literally hundreds of hours fabricating shop benches, jigs and specialty items. Most of us get caught up looking at the big items (beam saw, bander, cnc, vehicles, trailers, etc…) but not the small things like heaters, copier, office supplies and computers. Our company was under producing and had stressed the clients and vendors. Noticed I said “stressed” not “burnt the bridge” with that in mind I felt this could be repaired.
If you haven’t worked for the company prior to purchasing I would highly recommend contacting the vendors and past clients. This may be the best insight you will get of how the company has done and is doing. Be sure vendors will extend you the same terms and credit limits. Don’t expect that all clients will stay around after you take over sometimes they had special relationships with the previous owner and choose to go elsewhere. I experienced that new and old clients where really interested in the new ownership and have stuck around. Don’t let these opportunities past you by it might be your only chance you get to keep them coming back. Expect to raise the bar when you take over. You have to get everyone on board early explain to them what you expect from them and what your vision for the company is and so on. You will have to create addition sales to cover the additional cost of purchasing the company (unless you already have deep pockets) but you still have to pay yourself back with interest. Keep in mind the previous owner has already paid their dues and his cost to operate will not be the same as yours.
This leads me to the accounting. I choose to do an asset purchase and created a new corporation with a similar name. This separated the legal stuff (taxes) but cost me a little more to setup. I found a good accountant and lawyer to help me set everything up. This was well worth the cost and freed me up to focus on other items. Be careful though because the company you’re buying may already have established good work comp and insurance. You will have to determine what the value of this is worth to you. About goodwill this is a tough thing to put a value on particularly if you did not work for the company or know their prior history. I was fortunate to have worked for the company to help me determine this.
Look at the current back log (actual contracts) this will help you establish how much work you will be taking on when you take over. Does the company have a product? How many units are sold per month? Is it seasonal product or sold year round? Does the company have any national or corporate accounts? What employees will stay? What is there value the company? Who does the estimating and will the stay? This is important! I studied the estimating practice we used prior to me taking over and I aggressively redeveloped new pricing and proposal standards. Because we are a commercial shop I knew it was important to turn around proposals rapidly I focused on developing a stream lined and automated way to produce and track all proposals. This also allowed us to be more consistent with our pricing and the customers noticed. This is just the beginning and there are numerous things to consider. Wright it down and stay organized thought the process. If you have a bad feeling, find out the facts before making the commitment.
Finally, if you can come to a fare purchase agreement and you’re aggressive it is possible to get the company going strong within two years. Otherwise, plan on five years starting from the ground up. Most of all have enough capital at least 20% of projected revenue after all other purchase cost and this will be higher if starting from scratch with no clients or contracts. Also, be sure to collect all contact info including the rolodexes in every office this is something very valuable but easily overlooked.
