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Running a commercial Cabinet shop (Takeover)

12/1/17       
NTXGUY Member

Commercial cabinet shop is located in North Texas if that is relevant.
I have a personal relationship with both owners.
Both the owners are talking about leaving in the near future for retirement. The company is doing well and I dont see why stop something that is working since they are planning to completely shut the doors and sell all the equipment. They own all the equipment and property the business is on. I threw the idea out that i could take over and manage the business if they compensated for my time for running the place. They like the idea.
As of now we are not set up on a CNC machine but the goal is If I can manage
the company we would get a CNC and i would run the program/cabinet drawing side of it and set it all up.
Both are not wanting to set up a CNC or program for cabinet but like the idea of me taking over, setting up the new process, and managing everything so they will not ever have to come back. All of these things would help speed things up and replace their positions in the company.

The question is what is a fair negotiation for this situation? I feel like if I revamp there business and it makes a better profit than before then i should get some kind of benefit from it. Either from a portion of profits every year or a higher salary to run it.
I currently work at the company and i have seen the potential for taking over and managing it but not sure how a situation like this would work out.
Any and all advice is appreciated.

12/1/17       #2: Running a commercial Cabinet shop ( ...
Phil

Evolving a business and taking advantage of technology is always worth considering. You questioned how to begin negotiations if you’re able to increase profit by implementing your ideas and how you should be compensated.

You very may well be correct that implementing your ideas will increase profit, but what if it doesn’t? If the sole financial responsibility for these changes is on the owners then they will bear the brunt of any losses as well. If you have no skin in the game and assume non of the risk why then should you be compensated for potential rewards?

12/1/17       #3: Running a commercial Cabinet shop ( ...
David Waldmann Member

Website: vermonthardwoods.com

Have you considered buying into the business, say at a 25% ownership level, and then eventually buying them out?

If you don't have the cash, they may consider loaning you the money, which could be paid back out of the profits.

Assuming it's a healthy, moderately successful business, it's worth a LOT more as an operating business than the property and equipment value. If they were happy with the prospect of what they could get for the tangible assets I would imagine they might well consider offering you a stake for a reasonable price.

That's the approach I'd take.

12/1/17       #4: Running a commercial Cabinet shop ( ...
NTXGUY Member

I have no problem taking on some risk.
If I mess up and cost the company money I will take that risk. I would even buy the CNC machine. I would set everything up and if it does not work then i do not need to be paid a penny. Now if it does work i think i should get some kind of kickback since they would have never made/saved money with out the new system. Plus they can have the luxury of not having to run the business and still make money from a running business.

Its like a reverse business. Is it not the best time to have a steady business when all of your debt is paid off?

David correct.
The business is worth a lot more running than it is not running. The building can rent out for around 72,000 a year and they were okay with that.
But they cant retire/leave till the 100,000 yearly debt is paid off. If right now they are paying the 100,000 + there wages and still making a profit. That means when that 100,000 debt is gone they will add that to there profit. (if business is steady)

Now I would have no problem trying to buy into the company but i am not sure how to value it.
Right now it is not a turn key business. Has a good clientele base but if the owners leave plus me. No one is going to run it.

Unrelated example.
If they leave and only get 70000 from rent.
Would it not be better for them to have someone else run the company and make them 200,000 Profit? This is all with the assumption that both parties are not trying to rip the other one off.

If yall have an idea on how I could price the worth of the companies name for this situation i would buy them out.

I could even just wait till they close. Open my own shop and go find there clientele.
They worked hard to have this business running for so long i dont see why close down while its going good. I do want to take advantage of a good situation but also be fair with them.

12/1/17       #5: Running a commercial Cabinet shop ( ...
Puzzleman Member

Just a thought about your situation.

If the current owners were happy just selling the machines and renting out the property, why don't you buy them and rent it?

You could work out an arrangement where you pay off the machines at so much per month. Then they have what they want which is out of the business. You have what you want which is continuing the business.

Just a thought.

12/1/17       #6: Running a commercial Cabinet shop ( ...
Michael Flynn Sr

Next guy up,
I was in your shoes 10 years ago and pulled the trigger... right before the economy collapsed and the sales of the company I just bought plummeted. It's been a journey.

It's actually quite easy to put a value on what you're buying. Deals like this get done every day. Bottom line is that you want to buy them out completely and run things your own way. Otherwise, what's the point? You put in a ton of effort and pass all the profit on to someone else?

The value of the company is simply whatever is on the balance sheet, plus goodwill. Most balance sheets aren't super accurate, so you'll want to do your own assessment. The tricky part is goodwill. If these guys are looking to shut down and auction off equipment, then they are basically saying their goodwill is close to zero.

Don't overpay for goodwill. Just to give you some ballpark numbers, goodwill should be no more than $75,000 per $1M in sales.

If I were you, I would offer them face value for the balance sheet plus $50,000 per $1M of gross sales in goodwill. And see if you can work out a self-finance arrangement with the owners. That will be cheaper than going through a bank.

Good luck.

12/2/17       #7: Running a commercial Cabinet shop ( ...
Paul Downs

Who is doing the selling? What are gross revenues for this business, and the total number of employees?

12/2/17       #8: Running a commercial Cabinet shop ( ...
Larry

Hard to believe that a commercial shop of any size isn't running a router?? Your profit #s seem very high. I'd want an accountant to verify. Do they have a diversified client base? Will any of them go else where when ownership changes? Do you have contacts that you can exploit for additional business?
I'll assume that the work done by the two owners would need to be done by someone else to keep producing at the current rate. Who will that be?
Do you have the operating capital or do you need to finance that? We are just starting a job that has $164K in materials. A big job for a small shop but the production fit is good for our system. We are fairly deep into computerized equipment and CAD/CAM. This job is outside of my comfort zone! Where does your comfort zone lie?

12/2/17       #9: Running a commercial Cabinet shop ( ...
rich c.

How much business experience do you have? How many businesses have you managed? I'm always skeptical, because nearly everyone THINKS they can improve a business. How do you expect to run a business plus have the time to program/drafting side the CNC? It's not unusual for me to have about 4 hours in the shop, plus the 5-6 hours of running the business. Maybe you like a steady diet of 6/12 hour days, 72 hour weeks.

12/3/17       #10: Running a commercial Cabinet shop ( ...
NTXGUY Member

Thanks for all the input so far.

Puzzleman, that is now a option I am considering. Main reason for posting here is to get some input from different people from different places.

Michael, That is one reason why i was on the fence of buying vs managing it since next year the business could tank. Its always a possibility.
you are very correct about the balance sheet. It is WAY off from being correct.

Paul,
the owners of the cabinet shop would be doing the "selling". They are not interested in selling the company (up and running) or have anyone else run it except me. Lets say Gross revenues is 1M and around 6 people total.

Larry, Yes it is very hard to believe. Profits seem high since the "profit" number I gave was for of a exaggerated example of renting vs profit. The clientele base now loves working with me and its repeat work from these clientele. The company has not market any jobs everything is repeat work. So the opportunity to branch out to receive more work is a possibility.
The work that the 2 owners produce can be replaced and those details would all be worked out. I have the operating capital. That job size would be considered a big job for us. Thats the main reason for moving to a cnc machine. If i had that size job with my current clientele i would not worry at all. Now with a outside contractor/designer that is a different story.

Rich, I have been waiting for someone to ask these questions. The only business experience i have is working close with the owners of the company. I have seen the books, I know every and all expenses, I know the profits, who gets paid what, everything. No not much business experience but i have a lot of assets that can help if I need it. For example, one of the owners would be okay showing me something i dont know that the know.
I THINK I could make it better but nothing is true until it happens. Which is the reason I would want to implement my system before I completely take over. Over the years i have put many minor things in place that have saved the company thousands yearly. This company has lots of room for improvement. I am young and motivated to do whatever it takes if the reward is worth it. I can do everything in the company expect for the major book keeping. From bidding, drawings, cut out, installing, building, payroll, bills, I know how to run this company. This would be a differently story If i wanted to do another business.

12/3/17       #11: Running a commercial Cabinet shop ( ...
Charles

I have been following this thread with some interest. At this point I have three concerns that I would like to mention.

1) You said the current owners would be doing the "selling." Does this mean they will stay on for a while and sell product? If so, who will set the pricing? If they do, they potentially could kill the profit and the business. I am not saying that they would do this intentionally. I do not know. But, have they been pricing things profitably in the past? Will they set prices low just to "keep the doors open" without regard to profit? Maybe thinking that low/no profit work will help the business stay alive?

2) Regarding the bookkeeping, you can farm that out to a part-time bookkeeper. They can come in once a week, once a month, or whatever works for you. I would NOT let the old owners maintain the books. Look at them, maybe? Only if that is part of your arrangement in purchasing the business. But not control or modify them. You will also need to understand the books and the numbers. If you don't understand them, have your CPA explain them. Note that I said "your CPA" not necessarily the one they have been using for years.

I am not suggesting anything untoward, however, if there is a clean break in the financial control, including personnel, that may prevent any future finger-pointing and/or suspicions. Remember, this is not personal. This is business. Treat any changes professionally and move forward.

3) Regarding learning what you do not know, you stated "For example, one of the owners would be okay showing me something i don't know that they know."

That may be great for technical issues. However, you need to develop some outside source(s) for technical and business mentoring as well. Your past experience seems to be only with this one company. I am not saying they are doing anything wrong, but you may be served best by learning how others do it as well. And, it does not necessarily need to be in the same type of business as yours. Many different businesses often have the same types of issues.

Best of luck!

12/3/17       #12: Running a commercial Cabinet shop ( ...
rich c.

The business dissection looks very difficult. Who does what and who keeps their enthusiasm with all the changes? Think they can teach you to be a good salesman? How will you know how the customer base will react to the changes. Loyalty carry over is not automatic. You have no experience managing people? That could be your biggest hurdle. It's not a natural skill, it takes experience.

12/4/17       #13: Running a commercial Cabinet shop ( ...
David Waldmann Member

Website: vermonthardwoods.com

I disagree Rich, I believe that managing people is a natural skill. If you don't have it, it can be very hard to learn, and you'll be constantly having to work on it to do even a passable job.

That said, it's not binary. So someone with well honed middling natural skills may be better at it than someone with very good natural skills that they've never had a chance to use.

12/4/17       #14: Running a commercial Cabinet shop ( ...
cabinetmaker

you are insane to operate without a router in the commercial sector

need to consider a new bander, and perhaps looking into the next ideas of assembly vs a doweller

good luck

12/7/17       #15: Running a commercial Cabinet shop ( ...
Jeff Finney

This is a great thread. I would address a point that I did not see discussed. You could consider regardless if you buy the business or start a new one, outsourcing. It can be a great way to fix your costs, lower your capital expense and let you focus on what you need to do which is work ON your business. If you look at the sales cycles that most small businesses go thru and the havoc they play on our cash flow it is hard not to look at the benefits outsourcing can provide. It is at least worth exploring rather than just jumping into a big lease on the heels of buying or taking over a company.

12/8/17       #16: Running a commercial Cabinet shop ( ...
Larry

"Profits seem high since the "profit" number I gave was for of a exaggerated example of renting vs profit."

Not sure I understand this?? Renting VS profit? Is the rent not considered an expense? Are they not paying themselves rent since they apparently own the building. I'm sure they will want rent from you. Around here commercial space rents for $4 to 5/sq.ft/year, cheap compared to some locations. That doesn't include heavy electrical service, sprinkler systems or permits for spray booths that are required. You can use that # to estimate what you will have to deduct from their method of figuring profit.

12/9/17       #17: Running a commercial Cabinet shop ( ...
cabmaker

Jeff,

We used to outsource our cabinet doors and our drawer boxes. This was the only way we could do it when we were first starting out.

As the economy improved we started selling more and projects but so did our competitors. The people we outsourced to got really busy. These companies advertised 7 day lead times but in the fine print what they meant was 7 business days. Depending on when they received the order 7 business days sometimes also included two weekends. Now one week became two weeks.

This works as long as everybody else in the loop agrees to participate. Customers have to give you decisions on a timely basis and they have to stick with these decisions. The contractor has to frame his buildings accurately and the designer has to be able to read a tape rule.

Outsourcing definitely makes some problems go away but it also creates some problems that never used to exist.

What would consistently happen in our shop is a job would come to a halt for lack of an outsourced component. As a consequence we chose to get good at producing drawer boxes and cabinet doors.

We used to have a Brandt edgebander. The problem was that the incense burning station kept crashing. It was hard to train guys in all the nuances of throwing chicken bones over your left shoulder so we deep-sixed the bander and outsourced the edge banding.

We now buy our pre-finished maple plywood ripped to 12 or 24 inch rips. This adds $3 to an 8 foot rip. We could not justify the footprint, maintenance or labor to do this ourselves.

12/9/17       #18: Running a commercial Cabinet shop ( ...
Larry

What equipment you need greatly depends on your product. We couldn't live W/O our banders. One is a heavy production bander (IDM58) that easily puts on 1500 bands a day, holding its tolerances well, the other is a light machine, HolzHerr, finicky, mainly used as a backup. We also have a beam saw, great machine but takes a lot of space. As long as we are stack cutting it is well worth it's cost but single sheet cutting isn't utilizing it very well. Working to a set system can reduce errors and increase through put. Having your material handling system setup to reinforce the need to reduce wasted motion helps a lot. Ask yourself if your customer is willing to pay for pushing carts loaded and empty around the shop. If not change.

12/14/17       #19: Running a commercial Cabinet shop ( ...
Pdub

Michael, same thing happened to me. I bought my business from my previous boss in 1/2008. Everything tanked shortly thereafter. However, it turned out to (eventually) be a great thing. It was my first business and I learned real quick how to run this place lean and efficient. Now, we do so much with less people than most shops and turn a healthy profit. But yeah, it was a journey.
Cabmaker, our Holzher bander is the same way. We put the wrong flavored incense in it once and it was awful. Then, our chicken bone supplier sent us frog bones instead and we din't notice. THAT was helluva day. My Eye of Newt station is going to kick it any time now, I just know it....

12/14/17       #20: Running a commercial Cabinet shop ( ...
Larry

I had forgotten about that one. Good one.
"Eye of newt, and toe of frog,
Wool of bat, and tongue of dog,
Adder's fork, and blind-worm's sting,
Lizard's leg, and howlet's wing,--
For a charm of powerful trouble,
Like a hell-broth boil and bubble."


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