Sizing Up a Shop That's For Sale

Another worker ponders whether to buy a shop that's up and running, or set up his own from scratch. Lots of good angles considered in this long thread. July 2, 2008

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.

From contributor B:
It'd be hard pressed to buy an old technology shop as you'd have to upgrade it anyway. Used hand tools aren't worth much, 60k for blue sky? You said you wanted a CNC then get a flat bed, edge bander and a hinge machine. You would be in business in leaps and bounds and in hock for less money.

From contributor J:
I've been in business since 1981 there's lots of blue sky here (if it's not raining). I would take Contributor B's advice about a flatbed router, edgebander and hinge machine. To that I would add some decent new design software, a business plan and a website. An old woodworking shop will wear out your body in a few years. Go frameless and develop a marketing strategy.

From contributor Y:
I have a few ideas to throw at you. I currently own a smaller lumber and moulding business, which I started from the ground up including the buildings. I now have a very dedicated customer base which includes wholesale to the big box stores as well as retail to the small furniture DIY customer. I am considering putting my established business on the market as a turn-key operation, a total sell out. I am getting bored and my thinking is with a business already running you have a huge advantage in several areas.

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.

From contributor W:
If you wanted to own your own shop this sounds like it could be the right opportunity. Buying a shop that is set up is much easier than buying all the tools and setting one up. It is not just the tools that you are buying, it's wiring and designing the shop and buying things like work benches and lumber racks and plug ends for tools and brooms and a place to put them. It's also dust collection and desks and all the things that don't really even impress you when you walk through the shop but take a lot of time and a lot of money to get up and running.

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.

From the original questioner:
Thanks for all the responses, I guess i should give you more background. My father had a cabinet shop when I was young and I spent many free hours in there with him as a kid ironing on edging, and drilling holes. My father sold out in the late 80's went to work for another fellow. He is retiring from a big millwork shop and has expressed an interest in doing it again with me. That’s what makes this offer seem more likely. All his accounts are set; he has an inventory system, just no production controls. This person’s shop is only 2300 square feet. All this being said he grosses about 500K and keeps a little over a hundred. Not great, but not horrible either after witnessing his technology.
So this is why I am inclined to believe that with new equipment, a couple new customers (which I am currently servicing through my renovation business) and a bigger shop it seems to make sense to me. I love the devil's advocate side, but I know how hard it was when I first started out, with no accounts, cash on the barrelhead, and everyone saying who are you with?

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.

From contributor S:
I would hire an independent business evaluator plus have your accountant take a look at the books. Well worth the few grand it will take to do. Could be the best deal ever or horribly overpriced or anywhere in between. Once you work out the numbers get a lawyer familiar with industrial business requirements in your area. There are lots of little things to consider.

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?

From contributor M:
I purchased an existing shop after working for the owner for two years. I was involved with all aspects of the business. When the owner decided to sell out I was made an offer to buy him out. I already had inside knowledge which was a major factor in my discussion. It has been two years since I officially took ownership and will try to give you my two cents worth.

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.

From contributor T:
One of the big advantages of going with an existing business is presence in the marketplace and ongoing sales. I would ask a lot of questions about who does the sales and how they come in now. If the owner has a buddy that gives him/her all the business, then it may go away when he/she does. Make sure that they have more than one customer. For this reason, I would also try to get the owner to stay on for a reasonable amount of time after the sale.