Buying a woodworking business

[dirk martin]

I'm not sure where to post this, so moderators should feel free to move this thread, but I know many people up here will have sage advice.

I've got a few years of woodworking experience under my belt. I run 2 small family owned word working shops, and I do mostly custom work that focuses on thin wood, in the 1/4" and 1/8" thick realm. Business more than keeps us busy. My business comes 100% thru running 3 online store fronts.

In any event, I'd love to get bigger. Right now I'd classify what I'm doing as a "full time hobby gone mad". I have a shop less than a mile from me that is selling out. Owner wants to move out of state, to warmer climate. I've met him more than once, and he's a good, honest man, that runs a good business. He told me that 80% of his business is in trim and moulding. The rest being everything from making custom screen doors for $1,500, to building book cases, and trade show display units.

He has a large 3,000 foot shop, with a full line a machinery, including a 6 head moulder, 42" sander, and a huge flat bed CNC. All quality brands. He outsources all of his staining/finishing.

I spoke with him again today, and he shared with me that he wants someone to take over his operation that will maintain his current customer base. He doesn't want them left high and dry, as he's been building that base for 30 years. His primary source of revenue is from only 4 home builders.....so upward growth potential is certainly possible. He has access to the Chicago Land area....being based in the northern burbs.

He's asking $300K for his entire business. He has 2 full time employees. I asked him how much someone could expect to clear financially, and he said about $100K every 6 months. When I asked him if he'd consider staying on as a consultant for a month or two, to transition in a new owner, he said he expected to do exactly that...over a 6 month period.

I've stopped in to see him over the years, now and then, and he's always got huge orders of trim that are stacked up, ready to be picked up by his finishing guy. Today he had another huge lot on a cart, and I saw several quarter sawn book cases he was building.

If I was to get serious about taking over his business...where would I start?
He doesn't want to carry a loan himself, so do I start by finding an accountant that can look over his books, and determine what I could expect?
And then I'd take those findings to a bank, and see what they'd need for a down payment?

[Max Neu]

That sounds like a big risk in my opinion.Even if his business is in good shape,6 month's is not enough time in my opinion for him to groom you to take over.It would probably be a good deal if you had been apart of the business for a few years,and had a grasp on the whole situation.The only way I would consider it is if his employee's are capable of running the whole operation,and can continue to train you after the owner leaves,so you can focus on the business aspect of it.

[Mike Schuch]

I am not part of the woodworking industry but deal with buying/selling of medical/dental practices a fair bit. The worth of most small practices is tied up in the proprietor and once the proprietor is gone the residual value of the practice is very little.

His customer base knows and deals with him... once he is gone they will have very little loyalty if any to the business. Employees will likewise have very little loyalty to a new owner. "The books" are commonly manipulated depending on whether owners are talking to potential new owners or the IRS.

If the current owner has a full time job making his business successful can you devote yourself full time to carrying on the business? I.e. 60+ hours a week?

What is the machinery worth on the used market? That is where I would start dealing.

[Andrew Joiner]

He has a large 3,000 foot shop, with a full line a machinery, including a 6 head moulder, 42" sander, and a huge flat bed CNC. All quality brands. He outsources all of his staining/finishing.

I spoke with him again today, and he shared with me that he wants someone to take over his operation that will maintain his current customer base. He doesn't want them left high and dry, as he's been building that base for 30 years. His primary source of revenue is from only 4 home builders.....so upward growth potential is certainly possible. He has access to the Chicago Land area....being based in the northern burbs.

He's asking $300K for his entire business. He has 2 full time employees. I asked him how much someone could expect to clear financially, and he said about $100K every 6 months. When I asked him if he'd consider staying on as a consultant for a month or two, to transition in a new owner, he said he expected to do exactly that...over a 6 month period.





Does the $300K include the real estate and machines? Be sure you don't have any legal liability for his past jobs. However you might need to take on some if needed to keep customer good will.

[Peter Kelly]

He's asking $300K for his entire business. He has 2 full time employees. I asked him how much someone could expect to clear financially, and he said about $100K every 6 months. When I asked him if he'd consider staying on as a consultant for a month or two, to transition in a new owner, he said he expected to do exactly that...over a 6 month period.$100k gross or net?

I'd ask to do a full analysis of this guy's books, bank statements, taxes paid, etc. before getting too invested in this.

[Erik Loza]

....His customer base knows and deals with him... once he is gone they will have very little loyalty if any to the business. Employees will likewise have very little loyalty to a new owner. "The books" are commonly manipulated depending on whether owners are talking to potential new owners or the IRS....

+1 to all of this ^^^

In a former life, I worked in retail management as part of a special "transition team" for existing outlets that my company acquired. Without exception, there was always an exodus of employees once we took over and also, business just dropped off for a variety of reasons. It was never tha case that the transition was seamless or smooth. Also, and I am not suggesting this is necessarily the case here, but more often than not, we would find out that the books had indeed been cooked before we bought that shop.

It's not for any of us to tell you whether or not to follow your dream but tread lightly and carefully and get a business lawyer involved from the get-go, should you decide to move forward. Best of luck, whatever you decide to do.

Erik

[Val Kosmider]

There is a lot of good advice above. Take it to heart. Here is a link to an article http://www.woodweb.com/knowledge_base/Buying_a_Woodworking_Business.html which might give you a sense of what you are getting into, and what the operation (does it include the real estate/building or just the business?) might be worth. Do you want to be a woodworker, or a businessman? Valuing the biz can take many forms: bottom up: Machines plus buildings plus inventory, etc., or it might be top down: three guys doing $100,000 gross each (he's NOT clearing $200,000 a year with THAT operation---sorry), 15% net, valued at about 3-5 times net, means the biz might be worth $135-250,000 "depending". Have an accountant go over the books, but he can't tell you much about valuation; that is an investment bankers job, or with your knowledge of the industry, and the accountants knowledge of the books, you can sort of figure it out. Don't be generous. It is not worth what the owner thinks, for certain, because he is emotionally invested.

Four customers= warning sign. One pulls out, and you are in trouble. Key Man retiring....who is going to do the selling? You already have a couple of businesses; do you have tome to work and manage?

Financing: YOU better have a Rock Solid business plan prepared and hope the banker is having a good day. You need CASH up front, a mortgage, and working capital. Banks are VERY leery to lend to your sort of operation, but having some experience is going to be helpful.

One last thing: do not trust anyone or anything you don't see with your own eyes. Good guys lie just as much as bad guys. Perhaps not intentionally, but is his mind, the seller is selling a gold mine--but it isn't a gold mine. It's a biz doing a couple hundred grand a year which might net you $50,000. Look at it objectively. Not a good time to have the rose colored glasses on. Sure, you can build it (maybe) into something a LOT bigger, but that is not what you are buying. You are buying what is there. Now.

And the risk of ruin? What if it doesn't work out. One employee quits, the other saws off his arm and sues you for $5 million because the saw had no guard. Two customers go out of business, and your sales drop by 50%. And you owe the bank $200,000. Can you handle that financially, emotionally, maritally?

I am a firm believer in taking on risk; leap and the wings will appear. But don't be blind, or stupid, or over enthusiastic because "he's a nice old guy" (who just took $300,000 of your money and left you with a woodworking business).

Many here are in the biz. They can chime in more reasonably than me. I'm a businessman who can tell you to go slow, go smart, take nothing for granted, and run if anything looks "out of the ordinary".

[Kent Adams]

I'm not sure where to post this, so moderators should feel free to move this thread, but I know many people up here will have sage advice.

I've got a few years of woodworking experience under my belt. I run 2 small family owned word working shops, and I do mostly custom work that focuses on thin wood, in the 1/4" and 1/8" thick realm. Business more than keeps us busy. My business comes 100% thru running 3 online store fronts.

In any event, I'd love to get bigger. Right now I'd classify what I'm doing as a "full time hobby gone mad". I have a shop less than a mile from me that is selling out. Owner wants to move out of state, to warmer climate. I've met him more than once, and he's a good, honest man, that runs a good business. He told me that 80% of his business is in trim and moulding. The rest being everything from making custom screen doors for $1,500, to building book cases, and trade show display units.

He has a large 3,000 foot shop, with a full line a machinery, including a 6 head moulder, 42" sander, and a huge flat bed CNC. All quality brands. He outsources all of his staining/finishing.

I spoke with him again today, and he shared with me that he wants someone to take over his operation that will maintain his current customer base. He doesn't want them left high and dry, as he's been building that base for 30 years. His primary source of revenue is from only 4 home builders.....so upward growth potential is certainly possible. He has access to the Chicago Land area....being based in the northern burbs.

He's asking $300K for his entire business. He has 2 full time employees. I asked him how much someone could expect to clear financially, and he said about $100K every 6 months. When I asked him if he'd consider staying on as a consultant for a month or two, to transition in a new owner, he said he expected to do exactly that...over a 6 month period.

I've stopped in to see him over the years, now and then, and he's always got huge orders of trim that are stacked up, ready to be picked up by his finishing guy. Today he had another huge lot on a cart, and I saw several quarter sawn book cases he was building.

If I was to get serious about taking over his business...where would I start?
He doesn't want to carry a loan himself, so do I start by finding an accountant that can look over his books, and determine what I could expect?
And then I'd take those findings to a bank, and see what they'd need for a down payment?

Dirk, I'm a commercial banker and I finance business for a living. My biggest concern here is the A/R concentration with only 4 customers. In analyzing the financials, I'm going to give a lot of weight to that concentration. Banks will typically discount A/R concentrations when its over 20%. Its doubtful you'll be able to get a line of credit just collateralized by that A/R, especially if he is in the residential home business, though you may with an SBA loan or a credit union.

Another red flag, if I were the buyer is the amount of free cash flow he's quoting you. Is this over his current 12 months or does this go back 3 years? He's selling less than 1.5 x EBITDA. If my EBITDA is $200k a year, I would sell for not less than $1 million or 5x EBITDA.

Going back to this A/R concentration, what is the financial health of those customers? What is his terms he gives them and what are the terms his supplier gives him? Do his customers pay him within terms? Call his vendors and ask them if he pays them on time. A lot of times with business this small, you get a lot of handshake kind of deals which works fine if you've worked for/with someone for 30 years, but not so great if you don't have those relationships. A Moody's spread of 3 years of his financials will tell you what his A/R and A/P turn is. If you have a banker, get him to spread those in his Moody's software and take a look at the trend lines.

Too many questions for this board. Here is where I would start. Ask him who his current banker is and ask for the last 3 years of financials. That's where the rubber meets the road, so to speak. If he is reluctant to give them to you, walk away because you've lost nothing. If he does give them to you, take them to his banker and ask him if he would lend to you to buy the business. Tell the banker to assume your credit is great and you have enough liquidity to pay down the loan because ultimately, with that concentration, your personal net worth and earning power outside that business is what they are going to base their decision on. You don't need an accountant, I say this and my wife is a CPA. What you need at this point is a banker familiar with this business or this industry.

One last thing, unless you are collateralizing the loan with real estate, don't expect to get more than 5 years to repay it. I'll offer a strong opinion, based on 25 years financing businesses, this guy is either a liar (about his free cash flow) or is a moron if he's selling it that cheap. My bet is he's a liar and is probably only making $75k tops if I'm being generous, more likely $30-$50k a YEAR.

[Steve Peterson]

A business that actually clears 100K every 6 months and is being sold for 300K sounds too good to be true. You could borrow the money and have the loan paid off within about 2 years.

I wonder why one of the existing employees doesn't step up to buy it.

Steve

[Malcolm McLeod]

... source of revenue is from only 4 home builders...

In addition to the AR concentration mentioned, please don't forget our recent recession, which from my reading, we were 'led' into by the downturn in the housing sector. Home building is a cyclical industry. Today's construction manager is tomorrow's framer (if they can find work at all). And then 1 year later they're a "Custom Home Builder". Right now Texas can't build fast enough, but I promise it will change. Fast.

I am great admirer of those who can stand the risks of small or medium business ownership. Always expect the best, but plan for the worst.

[David Kumm]

Find an accountant and a banker. I've run a CPA firm for 40 years and you need advice specific to the circumstances. The accountant will ask for the guys tax returns. From there he will determine if there is any " goodwill " value over and above the fixed asset value. Remember, you can only afford to cash flow with the excess earnings over what you expect to live on or what you could earn in the outside world. A business may be worth several times excess earnings, but not total profit if filed as a Schedule C sole proprietor or single member LLC. A bank isn't likely to finance much here so a bunch of cash in savings will be needed. Dave

[Kent Adams]

The accountant will ask for the guys tax returns. From there he will determine if there is any " goodwill " value over and above the fixed asset value.

The banker will do the same thing, but it will be free to the OP :). Also, the internals will have more detail than the tax return so its best to ask for both. I assume there is no "blue-sky", aka goodwill at the valuation and machinery being quoted by the seller. Blue sky won't really matter though if he can't get financing. If there is goodwill, then his quoted free cash flow, on a selling price of $300k at a 1.5 multiple, means that he isn't really making $200k, or 66% net free cash flow from the multiple.

I agree though that a CPA should be consulted if the banker gives the green light because we need to know the tax consequences of the sale.



A business may be worth several times excess earnings, but not total profit if filed as a Schedule C sole proprietor or single member LLC.

Determining net free cash flow and the multiple (including any goodwill) isn't contingent on the legal status of the company, unless inventory, real estate etc. is included where you get into some tax consequences and inventory impairment. Doubtful its a C, but if it is, then he definitely needs to engage a CPA on the tax consequences of a purchase if he chose to move forward. He shouldn't buy the A/R or take on the existing A/P in any event, unless its for a job that has already been completed.

[dirk martin]

Wow...you guys are great. Lots of good info here for me to digest.
His 2 employees are being paid $50K/yr, and $30K/yr. Like most folks, neither of them has any savings. Both speak little English....but they are very hard workers, that know what they are doing.

When I asked him why the business hasn't sold yet, he said he hasn't really listed it with a realtor yet, plus "nobody has any cash. Everyone's in debt, and nobody has any cash to put down", is his reply.

He says his primary business is 4 builders, because he can't handle any more than that. As it is, they give him all the business he can handle.
The selling price includes all machinery, but not the building.
As I glanced around, a huge jointer, SLR, 6 bag DC, Martin sliding table saw, big sander, 6 side moulder, router tables, shapers, 8 foot CNC, bandsaws, radial arm, big planer, and more.
Everything that can have, has Tersa heads.
Everything appears well maintained.
Hundreds of BF of lumber.

He said his biggest expense is easily lumber.
Personally, I deal a lot with the Amish in upper Wisconsin, and I pay less than 1/2 of what he pays for lumber, so that's a big savings I can bring to the table, too.
It's hard finding Amish that can deliver the quality of lumber, needed, but I've spent years dealing with them, and now have solid contacts. As an example, I'm getting clear, wide QSawn WO for $2.30/BF, kiln dry.

In any event, you folks have given me lots to read, and think about.

[Kent Adams]

Wow...you guys are great. Lots of good info here for me to digest.
His 2 employees are being paid $50K/yr, and $30K/yr. Like most folks, neither of them has any savings. Both speak little English....but they are very hard workers, that know what they are doing.

When I asked him why the business hasn't sold yet, he said he hasn't really listed it with a realtor yet, plus "nobody has any cash. Everyone's in debt, and nobody has any cash to put down", is his reply.

He says his primary business is 4 builders, because he can't handle any more than that. As it is, they give him all the business he can handle.
The selling price includes all machinery, but not the building.
As I glanced around, a huge jointer, SLR, 6 bag DC, Martin sliding table saw, big sander, 6 side moulder, router tables, shapers, 8 foot CNC, bandsaws, radial arm, big planer, and more.
Everything that can have, has Tersa heads.
Everything appears well maintained.
Hundreds of BF of lumber.

He said his biggest expense is easily lumber.
Personally, I deal a lot with the Amish in upper Wisconsin, and I pay less than 1/2 of what he pays for lumber, so that's a big savings I can bring to the table, too.
It's hard finding Amish that can deliver the quality of lumber, needed, but I've spent years dealing with them, and now have solid contacts. As an example, I'm getting clear, wide QSawn WO for $2.30/BF, kiln dry.

In any event, you folks have given me lots to read, and think about.


He says his primary business is 4 builders, because he can't handle any more than that.

Less risk with 40 tiny customers than 4 large ones.


When I asked him why the business hasn't sold yet, he said he hasn't really listed it with a realtor yet, plus "nobody has any cash. Everyone's in debt, and nobody has any cash to put down", is his reply.

There is always cash available for a business that makes money. Also, without real estate, he doesn't need a realtor, he needs a business broker.

I like your angle there with the Amish and lumber, as long as you can get enough of it. The next step is to get tax returns and internal statements for the last 3 years at least.

[Gerry Grzadzinski]

No way he's making $200K/year running mouldings with 2 employees, especially if he's paying double what he should be for his lumber. If anything, that's his salary for the 60 hour weeks he probably puts in.
I work in a shop with about 8 employees. We also have a moulder.
Running a business like this is a full time job, for someone with years of experience.

[Erik Loza]

Less risk with 40 tiny customers than 4 large ones.

This is my thought, as well.

Being in the business, I have seen/heard a lot. Let me float out there another scenario that I have seen happen a number of times. Employees leave and take all the accounts with them. Or worse, the guy who sold the business suddnenly "starts a new venture" and guess where those accounts go? Again, not saying this will happen. Just that I have seen it before.

Erik

[Kent Adams]

This is my thought, as well.

Being in the business, I have seen/heard a lot. Let me float out there another scenario that I have seen happen a number of times. Employees leave and take all the accounts with them. Or worse, the guy who sold the business suddnenly "starts a new venture" and guess where those accounts go? Again, not saying this will happen. Just that I have seen it before.

Erik

Very true about taking the accounts. When you invest in a business with primarily 4 large customers, you're really investing in those companies and if you don't know their financials, you're really blind on the investment. That's why the bank won't consider their A/R, the bank has no way of determining the credit worthiness of those vendors.

[Mike Schuch]

I'd ask to do a full analysis of this guy's books, bank statements, taxes paid, etc. before getting too invested in this.

I have studied many small business valuations (medical /dental practices) from accountants and lawyers. I have yet to see a single one worth the paper they were written on. A valuation is just ones persons opinion and that is all it is... just an opinion! Please don't make the mistake of believing a valuation just because it was done by an accountant or lawyer. Read the small print on every valuation that says you can't sue even though they just pulled all the numbers out of their butt!

[Larry Copas]

I went to a bank repo auction of a mouldng company last month. Weinig Unimat 30 EL moulder, Diehl SLR, Cemco 36” WB, and Goodspeed Intorex CNC lathe were the major machines. Enough other machines to fill I would guess a 15,000 or bigger square foot building. Machine condition ranged from fair to good. Buyers were other moulding companies and the scrappers. The equipment went for a few cents on the dollar. A guess on my part, but I think 30K would have bought every machine in the place along with a few thousand knives and a big parts inventory.

The first thing to be auctioned off was the building and grounds. No serious bids so the bank kept it.

[David Kumm]

The reason for asking for tax returns is that financials can say anything and few small businesses have a good double entry set of books at that size. What is reported to the IRS is what a buyer is willing to pay for. If the seller tells you he makes more than he reports, don't believe him or pay him for it. Businesses that small often utilize realtors to sell but they usually overprice and overpromise. Better to deal directly with a seller. My point regarding the schedule C is to understand that the seller's salary is included in the profit number. Often sellers think they should get paid a multiple of that profit rather than only the excess over an appropriate wage. If a corporation, it is seldom that a buyer is willing to buy the entity but rather buys the assets and forms a new entity. Usually LLC or maybe an S corp. Accountants get paid more for doing S corp work so beware if they recommend one. A corporation is usually the last option for businesses of that size. Dave

[Greg R Bradley]

.....Another red flag, if I were the buyer is the amount of free cash flow he's quoting you. Is this over his current 12 months or does this go back 3 years? He's selling less than 1.5 x EBITDA. If my EBITDA is $200k a year, I would sell for not less than $1 million or 5x EBITDA.

..... I'll offer a strong opinion, based on 25 years financing businesses, this guy is either a liar (about his free cash flow) or is a moron if he's selling it that cheap. My bet is he's a liar and is probably only making $75k tops if I'm being generous, more likely $30-$50k a YEAR.
Kent,
As an investment banker, can you find anything wrong in the following logic?

If he is making $75K per year then that is really only a reasonable SALARY for the work he is doing. The profit of the business is then zero. The value of the business should be based upon zero profit because a buyer that can't do that job would have to pay someone $75K to do it and even be lucky to find someone that would do it well. Nobody pays $300K to buy a JOB at $75K with the risk of making less or loosing it all and going broke.

[Kelby Van Patten]

If my EBITDA is $200k a year, I would sell for not less than $1 million or 5x EBITDA.

You lost credibility here.

Very few small businesses sell for a 5x multiplier. 2x-3x is the norm.

http://www.allbusiness.com/the-essence-of-business-valuations-part-iii-the-price-multiple-4967438-1.html

http://www.thebizseller.com/business-valuation-model.htm

There are plenty of other resources on the subject, but they all say the same thing.

[David Kumm]

EBITDA is a favorite term now and used as a one size fits all approach. In an equipment heavy business, depreciation can be a reasonable estimate of normal replacement costs. If depreciation is disregarded in valuing a business, capital replacement cost must be substituted for it or plans for failure should be formed early. Dave

[dirk martin]

This is my thought, as well.

Being in the business, I have seen/heard a lot. Let me float out there another scenario that I have seen happen a number of times. Employees leave and take all the accounts with them. Or worse, the guy who sold the business suddnenly "starts a new venture" and guess where those accounts go? Again, not saying this will happen. Just that I have seen it before.

Erik

He's building a new house, and moving out of state.
His customer's are local.

[Kent Adams]

Very few small businesses sell for a 5x multiplier. 2x-3x is the norm.

http://www.allbusiness.com/the-essence-of-business-valuations-part-iii-the-price-multiple-4967438-1.html

http://www.thebizseller.com/business-valuation-model.htm


Kelby, I'm not familiar with those websites, neither of which appears to have any resources. However, my experience is in financing business acquisitions, not writing for blogs or websites. Multiples are industry dependent. Try to find a business to buy that is highly profitable at a 2x multiple. If those deals exist, they don't make it to my desk because there is no need for financing if the acquisition costs can be repaid in 24 months. BTW, I don't think they exist (highly profitable businesses selling at a 2 multiple). Your mileage may very and your certainly welcome to believe the opinions of the authors on those websites.

In our OP's scenario, the seller says he has $200k net free cash flow a year and is willing to sell at $300k. That's not a reasonable multiple under any circumstance I can think of, but its closer to the multiple pushed by that website than it is to mine.

[Kent Adams]

EBITDA is a favorite term now and used as a one size fits all approach. In an equipment heavy business, depreciation can be a reasonable estimate of normal replacement costs. If depreciation is disregarded in valuing a business, capital replacement cost must be substituted for it or plans for failure should be formed early. Dave

EBITDA multiples have been around as long as I can remember, but its not a one size fits all and the multiple has a lot to do with the industry. Some industries have higher multiples. Regardless of equipment, a buyer should be looking at future cash flow, and have the reserve required for capital expenditures when and if needed. Straight line depreciation is one way, a good one, to judge future capital requirements. The buyer should consult a CPA for that, because just looking at depreciation expense on equipment from the tax return may not yield an accurate value of the equipment because of accelerated depreciation that's been allowed over the last several years.

[Kent Adams]

Greg, there are rules around owner salaries and what can be declared reasonable by the IRS. W2 wages can be taxed at a higher rate than dividend distributions an owner might take. This is one reason why S Corps came into more favor after 1986 than C corps and its rare today to find a closely held business that is a C corp.

Salary without a net profit for future capital expenditures would not be a business I'd want to buy. There needs to be profit after the owner pays himself so he can reinvest that money into new equipment and keep up with increases in fixed costs.

[Robert Engel]

You've gotten some excellent FREE advice by a couple very knowledge sounding people.

First, I'm no Donald Trump, but I own a personal service type business where "I" am the business.
Second, don't think you don't have any competition. Clients will desert you in a heartbeat and go to the cheaper guy.

All I would say is:

1. Due diligence + Trust but verify. Don't try to do this yourself. Don't get awed by the machinery. You need a CPA, a banker and a lawyer.

2. Are you just looking at $$ signs or is there a fire in your belly about this venture? If you're just doing it for the money you will never be happy.

Would he be willing to lease the business to you for, say a year?

[David Kumm]

Kent, you and I are saying the same thing but you are much clearer. My point is to be beware of one size fits all approaches. Find good people with expertise to judge the particular situation. The key is finding good people as there are lots of bad accountants and advisors. Better to pay extra for a successful one. If an accountant is too dumb to know how to make money for himself, he is unlikely to make much for you. Dave

[Val Kosmider]

The selling price includes all machinery, but not the building.
.

So, there's another good piece of change...plus the cost to move everything and set up a new operation....downtime...gives customers a GREAT opportunity to bolt. Assume you are going to lose at least one due to changeover--guy who has stayed with the owner, even though his pricing or whatever was not as good as another offer....and now that the door is open, out he goes.

You will be fine...just be smart first.

[Steve Peterson]

Or worse, the guy who sold the business suddnenly "starts a new venture" and guess where those accounts go? Again, not saying this will happen. Just that I have seen it before.

Erik

If the guy is leaving the state, then he should have no problem writing a no-compete clause for 12 months into the contract. This would protect you from the situation that Erik mentions.

Steve

[Erik Loza]

If the guy is leaving the state, then he should have no problem writing a no-compete clause for 12 months into the contract. This would protect you from the situation that Erik mentions.

Steve

Or how about this? If, as the OP stated, the owner planned to stay on for six months as a consultant, then why not legally hire him as an employee for that period of time? Or, contractually obligate him as a "business consultant". In other words, make him keep some skin in the game?

Erik

[Bill Adamsen]

Dick:

It sounds like a great opportunity and one that would NOT have come your way if you weren't out there developing solid relationships through hard work and real participation in the community. Since the best deal is one that is a win-win ... make sure the gentleman considering selling has considered depreciation recapture in the structured deal. These deals are always complicated to structure. Good luck!

[Kent Adams]

make sure the gentleman considering selling has considered depreciation recapture in the structured deal

It's to the OP's advantage if the seller doesn't do a depreciation recapture because the OP will get the higher cost basis to offset his income in future years. There is already a certain amount of goodwill in this deal, if he can value the assets higher on the sale, the goodwill will go down and that's ok, because in the first couple of years, he wants to take advantage of accelerated depreciation to offset the taxable income so he can plow it back into the business. If the seller only sales it at book value, then the buyer won't have that tool to reduce his taxable income while he's trying to repay the loan he took out to buy the business.

[Allan Dozier]

Kent and David have given you great info. I'm no accountant but have sold three businesses over the years and in the initial stages of retiring and selling my current one. Mine sold for about 5X profit. There is a lot we don't know about the sellers business like has been said. I am especially curious about the building. Does he rent it or own it himself? If he owns it he needs to show rent to himself as expense. The company's profit is also after he pays himself a reasonable salary. If you end up buying the building it should be held in a separate entity like an LLC and then the business rent it from your LLC. If he owns it and will rent it to you be sure to get a long term favorable lease or lease with option. In my field a typical non-compete is 3 years. So I would figure an accurate rent, take out a salary figure, pay ACV for equipment and supplies, then try to get the business for 2X profit or less.

Then the issue of only 4 main customers is kinda scary. If like you said, that's all he can handle, then I would try to get some idea of how easy it would be to replace one of those customers. A lot can happen to those customers, retire, die, go through a nasty divorce, go to jail, or just decide to go somewhere else for their woodwork.

[Wade Lippman]

I agree with most of the advice, except the part about 6 months isn't enough to stay around.
He has 4 customers and makes routine stuff. Why would you need him around at all, let alone for 6 months?
Hey, if you get rid of him you can probably clear $300k a year and pay for it in one year!

But my real reason for posting is to ask what kind of business you have that uses 1/4 and 1/8" wood?

[peter Joseph]

To the OP, you mentioned that you already have 2 shops. Do you have any of the equipment needed to produce moulding already? This guys absence from the market will likely open up some opportunities for you. Were I you, I'd buy his machinery for a song and start from the ground up the way you want to.

I'm curious as well to learn what you currently make with 1/8 and 1/4 stock? Puzzles or crafts or something?

[Martin Wasner]

So I read this thread right after it was posted, and I've been trying to come up with a better response than "don't do it", with out much luck.

Reasons why I personally would not. I run a small cabinet shop that has one employee, and could use another. Badly. But there is nowhere to put another body in a 2500 sq/ft shop.

- You're going to be purchasing a lot of equipment that you wouldn't probably wouldn't purchase otherwise. Brand, usefulness, or just worn out, whatever.

- The used market for equipment is still in the tank, it's getting better, but if he were to auction of his equipment, he likely won't get $300k for it. As an example, I keep a spreadsheet of basically every tool in the shop. It lists when I bought it, whether it was new or used, and replacement value. I've got ~$294,560 in equipment in replacement value that I paid $176,784 for. Some was new, some was used. If I were to auction it off, I'd be very surprised if I got much over $100k for it all.

- To me, blue sky or branding has little to no value until you get to big brands. Marlboro, Coke, 3M, Mcdonald's, Chevrolete. Brands that people don't know and don't care who owns it, they'll still buy it. That is something that you can build yourself on a small scale like you're talking, and to be honest, it's something you have to build yourself. The seller doesn't have a strong enough brand to make it work for me when I can do that myself. His customers are loyal to him, and there's no guarantee that they will like you. His relationship with his customers may be professional, but it's also personal. They may not socialize together, but they are accustomed to working with one another. If one of his builders thinks you're an ass, or doesn't like how you carry yourself, they'll look elsewhere.

-"He has a large 3000 sq/ft shop" No, that's not large. That's barely adequate for three people, and I'd venture to say it's inadequate. You're going to have to move soon if you wish to grow. That costs a lot in down time, and setting up the new space. If nothing goes wrong, I will be putting up a new shop in the spring. I've purchased the land, and will be putting up a 60x120, (5500 sq/ft of production space 1700 sq/ft of staging area), building with about another 1800sq/ft of office and showroom bumping out from the main building. Basically what I have will fill it. All said and done it's going to cost me about $400k, and that's cheap. I'm doing a stick frame building in a small town in the middle of nowhere. Land prices, taxes, and lack of oversight are my reasons for building in the sticks. The same amount of space in the south metro 40 minutes away will cost me closer to $1m to build and about $30k a year in taxes.

-If he's actually paying himself $200k a year, he's killing it. Which sounds fishy to me. Possible, but fishy. My goal rate in my shop is $100/hr gross. That's about what it takes to pay for the space, keep the lights on, and pay an employee a decent wage and be constantly making upgrades in equipment. So three guys, should be doing about $600k a year with my numbers. I doesn't always happen that way though. Either from screw ups, our misjudging how long something will actually take. It's not uncommon to think something will take 20 hours to take 30 hours. It's just the way of the world when bidding strange things. You get better at that with time. Right now we are doing about $20-25K a month with two guys. I'm working sixty hour weeks mostly, my employee usually gets a solid forty. But, there's also stretches where you're running around stamping out fires and finishing up little stupid stuff where you aren't making much if anything. My last month or so has been that. You're just hoping things come out in the wash and you've got enough capital on hand to make it through the times when you're hemorrhaging capital. So I should be doing about $400k a year, and I'm doing about $300k a year gross at $25k month I had a really slow start to the year. The first four months didn't have much going on, I'm going to just barely break $200k in gross sales. I aggressively have been buying equipment this year, and I've spent $50-60K acquiring tools and paying down debt on a tool purchase from last year. I have not paid myself once this year.




I wouldn't fret so much about only having four main customers. Realistically that's about I've got. Buying his shop, you still won't have that until they earn your trust. You can start from scratch. I started on my own in 2004. I had all my hand tools, and install tools, but nothing for working in a shop. My initial investment was poorly appropriated $10k. If I had to do it again, I'm not sure I could. In 04' the housing industry was already on its way down and I didn't realize what a tough road I had ahead of me. Before deciding to start from scratch, I looked at buying a shop that I had previously worked for. He owned the building, had 6-7 employees, and did about $1m in sales. Granted, this is just one situation, but the tools were mostly all old Grizzly, and were worth little more than scrap value. The building had been added onto twice, so it was full of walls and had a 9' ceiling. The building was also in a small town in the middle of nowhere, so it to had little to no value. I figured the only thing I would be buying is a name, and I knew I could build that on my own. There is something to be said about immediately going to work, but there's no commitment on the customers part to stay with you and that's what makes me squeamish.


David Kumm is a sharp cookie, I'd listen to him on accounting advise. I'd listen to your own accountant and possibly hire someone who does business planning consulting. The seller should be transparent and open his books entirely to you. I'd want his person books, and the wife's as well if he's married, just to see where money is going.




Sorry for the book. (and likely the fist full of typos)

[mark mcfarlane]

Talking to the guy's current banker and asking him if he would loan you the money sounds like excellent advice. Having a beer with the current employees and 4 customers might also be revealing.

I'm not sure what Illinois' right-to-work laws are, but in some locations and industries you can get the previous owner to sign a non-compete contract, which would prevent him from opening a new shop in the same geographic area. He may or may not need to be compensated for the non-compete agreement.

The big flashing red light for me: he is only asking $300K for a business that he also claims does $200K/year in profit (excluding his salary) . That's a pretty unrealistic multiple .