My dad is retirement age, but making the transition to the next phase of his life is proving to be difficult. He owns and operates a machine shop with around 40-50 employees in the suburbs of Dallas. It has been in operation successfully since 1981 - it's a very good business. He has made strong income from it over the years. His business partner of 42 years died this year and they executed their end of life plan so I believe my dad now owns 100% of the business. His job is a mix of employee management (blue collar jobs, low skill and very high skill), supply chain management, accounting, HR, and engineering - he is a MechE by degree. The business in the right hands can earn the owner a very solid living, and there are hard assets as well (I believe he owns the building, he owns a lot of CNC machines like lathes, mills, even a large laser cutter) - so clearly it's a valuable business. But how does he find buyers? I'm not sure what the asking price would be, probably low 7 figures, so obviously it would need to be someone with access to capital - though he may be willing to owner finance it or something, I have no idea. Any ideas for how he could find buyers?
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Selling a small business - machine shop
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Last: 4 mo ago by aglaw01
One thought would be if he might have someone on board already that might be interested. Or two or three who would want to join together and consider it. Second thought is maybe a competitor might be interested in buying the business. Had both of these scenarios happen with clients of mine.
I would talk to his banker, property and casualty broker, suppliers etc.. They do business with other shops that are similar I'm sure. Someone in that network may be interested.
What is their primary industry?
Pricing can vary based on the age of the equipment, types of contracts and level of work.
Let me know if you have any more information
Pricing can vary based on the age of the equipment, types of contracts and level of work.
Let me know if you have any more information
Primary industry is industrial machinery - don't want to get too specific. They make parts for large machines in the logistics sector. Stuff like rollers, conveyors, and subassemblies for large automated machinery. They have made a lot of different things over the years though. They don't do super large stuff, I think their lathes can maybe handle up to 4 or 6 inch bar stock for instance. Not sure on that though.AggieTJ2007 said:
What is their primary industry?
Pricing can vary based on the age of the equipment, types of contracts and level of work.
Let me know if you have any more information
A lot of their equipment is older. I know in the past he has generally bought used machines, but I'm not sure what the service life for this industrial machinery is, I would guess on the order of decades.
I can certainly get more information.
He has considered if there is a current employee who would be a good fit but unfortunately the ones who have the skill and resources to potentially take it over are all old enough that they are getting ready to retire too.one safe place said:
One thought would be if he might have someone on board already that might be interested. Or two or three who would want to join together and consider it. Second thought is maybe a competitor might be interested in buying the business. Had both of these scenarios happen with clients of mine.
Talking to competitors could be a good idea, but a lot of the competitors in his segment have gone out of business. The past decade has been hard to compete with Chinese manufacturing, although I think the tide is possibly shifting on that front. Mexico and other parts of Asia are still a threat though.
What part of DFW?
GarlandRyan34 said:
What part of DFW?
Username check out
I knew a company in a similar circumstance and I believe they hired one of those business broker type firms. There might be other ways on that, but I'm not familiar with it.
Typically, owners like yours looking to sell expect WAY more money than what it likely would sell for. A good estimate would be "real" value of all assets if they were sold basically at fire-sale prices plus about 3 times the annual net profit.
Here's a random internet site I found on this:
Business Valuation Multiples by Industry: Revenue & Cash Flow (SDE) Multiples (bizbuysell.com)
To the owners, who've invested their whole life in the business, selling it and reaping only 3 years future profits seems like getting robbed, but you have to look at it from the buyer's perspective. They are investing a lot of money only to see their first returns 4 years from now. Who knows what could happen between then and now.
Also, it can be even more challenging to sell a small privately owned business, especially if the owners are key for bringing in business. That may not apply in your case. The company itself may sell itself by now, but you need to understand that. If the business owners are still the primary sales people, that makes it a bit harder.
I've seen a sale like this, where the buyer came on board incognito (ala undercover boss style), as a new salesman and paid in 1/3rd of the sales price each year as he was getting to know the customers, the staff and the process.
Hope things go well for you.
Typically, owners like yours looking to sell expect WAY more money than what it likely would sell for. A good estimate would be "real" value of all assets if they were sold basically at fire-sale prices plus about 3 times the annual net profit.
Here's a random internet site I found on this:
Business Valuation Multiples by Industry: Revenue & Cash Flow (SDE) Multiples (bizbuysell.com)
To the owners, who've invested their whole life in the business, selling it and reaping only 3 years future profits seems like getting robbed, but you have to look at it from the buyer's perspective. They are investing a lot of money only to see their first returns 4 years from now. Who knows what could happen between then and now.
Also, it can be even more challenging to sell a small privately owned business, especially if the owners are key for bringing in business. That may not apply in your case. The company itself may sell itself by now, but you need to understand that. If the business owners are still the primary sales people, that makes it a bit harder.
I've seen a sale like this, where the buyer came on board incognito (ala undercover boss style), as a new salesman and paid in 1/3rd of the sales price each year as he was getting to know the customers, the staff and the process.
Hope things go well for you.
This one hits close to home! Born and raised in Garland …
I'd love to chat with you and your dad and answer any questions y'all have about the acquisition process, and see how I might be able to help …
I'd love to chat with you and your dad and answer any questions y'all have about the acquisition process, and see how I might be able to help …
jeremy@northstar-mergers.com
Sounds like a good business. If there are contracts in place, that will help a lot. Risk goes way up (and the pool of potential buyers goes way down) if the new owner would need to go find new business to maintain performance.
I definitely advise he talks to a good broker. The right person can help set his expectations. There are usually some factors that make deals like this one tougher.
- Messy financials. Just muddies the water and introduces a lot of uncertainty.
- Lack of clear processes. Companies like this often rely heavily on tribal knowledge which increases a buyer's reliance on people he/she doesn't know. Makes it riskier. Sounds like some of the key employees are approaching retirement which makes this one scarier for a potential buyer.
- Owner dependency. Kinda related to the above. In a situation like you described, you need to find someone who wants to buy a business AND wants a job as a shop supervisor/supply chain manager/HR/accountant/engineer AND can get the money to buy the business. They're out there but that's a rare bird. This limits the number of potential buyers by a lot and probably drive the price down. The fact that it doesn't sound like he's in charge of sales is a positive -- that's the biggest risk.
I think a conversation with a broker will help a ton. A broker could probably help him compare what he could get today vs. what he could get if he spent a year or two getting the business ready to sell.
I definitely advise he talks to a good broker. The right person can help set his expectations. There are usually some factors that make deals like this one tougher.
- Messy financials. Just muddies the water and introduces a lot of uncertainty.
- Lack of clear processes. Companies like this often rely heavily on tribal knowledge which increases a buyer's reliance on people he/she doesn't know. Makes it riskier. Sounds like some of the key employees are approaching retirement which makes this one scarier for a potential buyer.
- Owner dependency. Kinda related to the above. In a situation like you described, you need to find someone who wants to buy a business AND wants a job as a shop supervisor/supply chain manager/HR/accountant/engineer AND can get the money to buy the business. They're out there but that's a rare bird. This limits the number of potential buyers by a lot and probably drive the price down. The fact that it doesn't sound like he's in charge of sales is a positive -- that's the biggest risk.
I think a conversation with a broker will help a ton. A broker could probably help him compare what he could get today vs. what he could get if he spent a year or two getting the business ready to sell.
I don't know anything about this guide, but bizbuysell is legit. I figure this will probably have some good info if he wants a little education before he talks to someone.
Guide to Selling Your Small Business - BizBuySell.com
Guide to Selling Your Small Business - BizBuySell.com
Another potential buyer could be a large customer that is working on vertical intergration of their business.
Good point, I have seen that a couple of times.TxAg20 said:
Another potential buyer could be a large customer that is working on vertical intergration of their business.
I was in the metal fabrication business for over 30 years. During that time, we received several fabricating and machining trade publications that were mailed to us. Some were weekly, but most were monthly.GarlandAg2012 said:
Any ideas for how he could find buyers?
Anyway, those publications carried advertisements for (and sometimes articles about) brokerage companies that specialized in matching buyers with sellers in the fab/machining industries.
I suggest you get with your father and ask him what trade magazines he receives regularly. Then I would check out the ads (usually in the back; sometimes a 'business directory') for those type companies and then make contact with a few. In the specialized brokerage business, it's all about having good quality contacts, and also having someone who actually understands the metal/machinery industry specifically.
My limited experience with 'general purpose' business brokers left me unimpressed. Often they are little more than real estate guys who are really only interested in making a commission by selling the business real estate.
Good luck to you and to your dad. And one more thing -- be very cautious of taking a note back from the buyer in exchange for the company. The last thing a man wants at his latter stage of life is to dispose of his 'baby' and then have the buyer run it into the ground and be unable to pay him.
Get your money. If the new guy then runs it into the ground that's his problem, not yours.
Tons of great thoughts and advice in here - thanks to all. I'm out of town this weekend but will follow up next week.
As someone who bought an unrelated business, I took the assets included with the sale at salvage value (in my case it was zero), plus the weighted average of the past 3 years net profit and owners salary/compensation (previous year 90%, 2 years back 60%, 3 years back 30%).
I negotiated the final price between what they were asking and what that calculation ended up being.
I negotiated the final price between what they were asking and what that calculation ended up being.
Garland,
Will be praying for you and your family during this transition time. Couple of random bullet points from being generally in the same sector and working with a lot of machine shops:
If you were in Houston I'd be calling you up tomorrow to talk numbers, but sadly Garland is a bit out of my commute range.
Will be praying for you and your family during this transition time. Couple of random bullet points from being generally in the same sector and working with a lot of machine shops:
- There is someone at that shop that keeps everything running. Figure out who it is. Don't let him leave. It might not be the guy on the org chart, ask the guys on the floor when **** breaks who fixes it. He's probably older, and probably cusses at lot at the machines, but he's the machine whisperer. If that guy leaves everything is going to fall apart in 4-8 months. You give that man a bonus today and tell him to please don't leave.
- There also might be a guy internally who wants to buy the shop. Make sure they get a crack at it. That is your best bet if noone is going to pay cash and you need someone who is going to have to pay your dad out from their future profits.
- Sadly, machine shops are very hard to get high exit multiples. They have three main sources of value: the machines themselves, the customers purchasing the products, and the management/technician competencies. Customers usually are only disrupted by 6 months by a machine shop change. By a year, whomever your dad made parts for will have found another shop, have that shop qualified and be marginally happy with their products. Sorry, its just how business is.
- The most advanced equipment is going to have the best resale value (duh) but primarily because the lead times to get new stuff. For your top tier stuff, reach out to the equipment vendors and ask what new costs and the leadtimes. That'll help you gauge the used market.
- If your dad has a huge inventory of raw material, consider running a bit leaner to make the books look better. Don't do this to the point you hurt the business, kaizen stuff that has been sitting for a long time and will continue to sit.
- The land your dad's shop is on is probably going to be the biggest return on investment. Barring your dad didn't cut create any particulate dust that contaminates the ground. Ask your dad if they ever did any lead work, cut beryllium copper, and how they handled old coolant.
If you were in Houston I'd be calling you up tomorrow to talk numbers, but sadly Garland is a bit out of my commute range.
do M&A work for a living but very different industry....I'd say be very careful about talking with competitors...once they know you're for sale they might go after employees and customers eroding the success of the business.
Just revisiting this thread, and wanted to comment on this specific portion ...GarlandAg2012 said:
But how does he find buyers? I'm not sure what the asking price would be, probably low 7 figures, so obviously it would need to be someone with access to capital - though he may be willing to owner finance it or something, I have no idea. Any ideas for how he could find buyers?
Starting with the business valuation - never pay for a business valuation for the purpose of selling a company. I know that may sound counterintuitive, but when you are intent on selling a business, paid business valuations don't necessarily arm you with accurate market information you need. There are literally dozens of business valuation techniques that are "accurate," but these different methods will typically produce results all over the board. When you're considering selling, what you need is a market approach valuation - simply put, this is the value buyers will be willing to pay for a business when it's on the market.
The first thing I do for a prospective client that is interested in selling is to provide them with a comprehensive no cost, no obligation business market valuation. I not only tell them how much the business is worth and what market value buyers will be interested in paying, but also why it's worth what it is and what they can expect the process to look like if they decide to move forward and list it for sale. You don't need to pay for a valuation to get a quality analysis from a reputable firm.
As for buyers - finding buyers is actually the easiest part of selling a business! There are any number of places you can post a business for sale and get tons of response - several good suggestions have already been mentioned in this thread, and companies like mine should have databases of active buyers they regularly market to (we have about 6,000 ready, willing an able buyers in our database, for example).
The hard part of selling a business isn't finding interested buyers, it's qualifying those buyers, defending the valuation to buyers that want to negotiate the price, negotiating the terms of an LOI and the structure of the deal, managing the due diligence process, arranging financing, negotiating legal documents, and then actually getting to the closing table. Not to mention the inevitable emotional roller coaster most owners go through when selling - it's good to have a steady hand on the wheel in those situations.
I would highly encourage your father to talk to someone about professional representation - obviously I'd love to talk to him, because this business is right in my wheelhouse and backyard! But regardless of who he talks to, he will have a significantly better experience if he engages a quality M&A professional to represent him in this process.
Best of luck!
jeremy@northstar-mergers.com
I sent my dad this thread Wednesday, will follow up with him soon to see what his thoughts are. Thanks again for all the feedback!
Maybe see if the employees want to buy him out. This is common in construction companies when the original owners/founders want to get out. It would probably be dependent on the valuation of the business and if he'd be willing to be bought out over time. $4 million (you said low 7 figures, so just a guess) divided by 40 employees is $100k each. They probably don't all have that cash on hand, but if he was willing to be bought out over a few years it could be done, especially if there is a requirement that their share of profits be used to buy him out every year until he's fully bought out.
Curious if anything ever panned out for your dad here?
jeremy@northstar-mergers.com
Hey just checking in on this today, thanks for asking. The process of settling the estate of his business partner has been dragging along. I believe that will be settled in the near future and then hopefully my dad will be able to focus on making an exit. I believe he wants to retire, but is also apprehensive about being retired, and is worried about the welfare of his employees. I will provide him your information and maybe something can work out.BizBroker97 said:
Curious if anything ever panned out for your dad here?
Sell to an ESOP (ie the employees) and possibly get a tax break depending on the tax status of the entity (c corp vs s corp)? Hire an investment banker to market the company? I know several.
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