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Running a commercial Cabinet shop (Takeover)12/1
Commercial cabinet shop is located in North Texas if that is relevant.
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.
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?
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.
I have no problem taking on some risk.
Its like a reverse business. Is it not the best time to have a steady business when all of your debt is paid off?
Now I would have no problem trying to buy into the company but i am not sure how to value it.
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.
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.
Next guy up,
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.
Who is doing the selling? What are gross revenues for this business, and the total number of employees?
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?
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.
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.
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.
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 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!
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.
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.
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
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.
"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.
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.
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.
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.
I had forgotten about that one. Good one.