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Buying custom cabinet shop: a good idea?9/14
I am considering buying a custom cabinet shop in town and would really love to hear a professional opinion. I have no prior experience as a woodworker myself but i do have numerous years of kitchen and bath design as a professional remodeler and a certified interior designer. The reason I am really interested in this opportunity, is because in my market that is saturated with all kinds of semi-custom cabinet shops and alike, there is a niche that I see and would like to carve out for myself. My question for you is this: does it sound like a bad idea to purchase the business with my sort of background, provided the employees will stay in place and the owner is willing to stay on to train? Just to preview: his numbers are very healthy and have been approved by my CPA; he carries no bad debt and pockets approximately $150/year in salary. I would have to carry a loan. The reason he's selling is the retirement, of course. Please be honest. Thank you.
I've grown to be a pessimist with old age, so I say don't buy it. to me, this economy is held together with bull puckey and duct tape. And the duct tape is fraying on the edges. Looks like the easier money is just buy the cabinets you've designed and mark them up. Ask the current owner how many hours a week he works. At a per hour basis, $150k may not be that great. I remember a lot of 80 hour weeks when I owned my business. What happens when the lead man in the shop moves to another shop? How long will the owner stay on? Suggest he sell his business to his employees, then you buy cabinets from them! Surely there are better ways to invest money that won't be affected by the economy as badly as the woodworking industry.
What Rich said.
If you make the mistake that the shop can produce your mistakes at your discretion, it would be terrible.
I own a custom shop and it can be very lucrative. However, there can be hell to pay with mistakes.
Honestly I would need a lot more information before saying yes or no. And number one would be do you have a burning desire to own and operate a cabinet shop? I just spent 10 months visiting and looking into buying a business similar to mine. It really was a sweet opportunity and to work it would have needed the owners to stay on. But if illness, change of plans, or death had of interfered it would have been a nightmare. Bottom line was at 61, I’m not that passionate about acquiring when I could more easily keep growing what I have. Good Luck with your decision, you can get good advise here on WOODWEB, but limited information doesn’t help. I’d suggest connecting with a SBA mentor and getting into to all the details, before deciding. It doesn’t cost you anything, and some of those guys can give you some very good advise.
I can't imagine that there are very many small custom cabinet shops so well organized that they could be run successfully by someone with no woodworking experience .
Thanks to all four of you guys; your opinions do make a lot of sense. Just to clarify: my CPA did look at the numbers and they add up. No bad debt, decent profit margins etc. The reason I have a burning desire to do this, is because I see a potential to do something that anyone hardly offers around here. It is "the look", that I as a designer see trending on the horizon and do believe will become rather large in the nearest future so I want to be ahead of the curve. With that being said, don't think that I didn't do my market research. Our market CAN support what I am after but since we are not a major cosmopolitan city, majority of cabinet shops (custom and semi-custom alike) keep selling the same ol' thing. My hope was, that if i display what I can do - the word will eventually get out. Right now, the owner does no advertising of any kind (which is typical I understand for smaller shops) and has no store front.
My other idea was to commission few displays thru a local shop and open a small showroom to sell my product thru. Tempting as it may be not having to deal with the production, I am not so sure it is just as lucrative as owning the actual shop. My markups will have to be pretty high to cover my overhead expenses. Besides, there is a small matter of future responsibility in case something needs fixing down the road: is it on me as a retailer or the shop?? So my train of thought was: if I continue doing exactly what the previous owner did: I should at least do as good. If i find a way to boost sales, I should do better. Thoughts?
I would fall in the Rich/Cabmaker camp as well but a lot of the feedback you may get from people who own or have owned shops may be skewed heavily by the well seared memory of how hard it can be as well as a seemingly ever increasing speed of change in the consumer mindset that makes it continually harder and harder on a small scale.
The bonus in your information is of course, established sales, seemingly decent compensation for the owner, which would seem to point to at least a decently operating machine. The owner staying on for a period would surely help bringing you from zero to something more. More so to me would be him working with you extensively to make sure you, or any possible personality or transition issues are as smooth as possible and dont derail you. Nothing worse than the staff rejecting you for any number of reasons of yours or their own and crippling your capacity.
I too am very cynical about the current climate and more specifically the consumer mindset that has been created by corporatization, outsourcing/importing, and feeding even high end consumers with ultra low quality import goods for the last 20 years and its just a difficult market for small anything for the most part. And by small Im talking perhaps a million a year in sales and under.
There are exceptions of course but on-mass it seems extremely challenging for virtually everyone I speak with. Even down to ridiculous little things like the maker movement, which puts the home woodshop revolution in the 50's, 60's, 70's, to shame. Annihilates the DIY movement. And now leaves you with pop-up shops, maker spaces, and home/hobby shops with full scale cnc. On the residential side it would seem to get very real, very fast, and Ive been hearing the same sentiment from the industrial machining shops in my area.
For me I constantly go back and forth in my head that there will be no one to build this work if there ever is concerted support to bring manufacturing back to the US in scale which directly contradicts telling someone that they are nuts to get into this business. It pretty much sets up a self fulfilling prophecy. I personally feel all this talk about bringing manufacturing back is beyond hollow because it will mean rebalancing the economy and the 1% is not going to settle for less.
Ive personally been trying to take a different tact in my small operation and start to realize that the philosophies embedded in my mindset simply dont fit with todays consumer so looking for new/fresh insight, as uncomfortable as that may be, is very wise. You may just be that guy for the business your considering buying and coupling a new set of eyes with the established sales may be a win-win.
The biggest red flag to me in your outline is a market that is saturated with semi-custom shops. A novel idea in a saturated market may be great. It would give me pause but then again they have established sales.
Hopefully you keep up with this thread. Often these questions are tossed out and never a response, or result. Its always interesting to hear everyones viewpoint.
You would need to hire someone who could manage the production and materials purchasing side, your strength is in the sales side.
What kind of multiplier of adjusted EBITA are you offering?
MarkB, thank you sincerely for taking time to write this. I am not as old and wise as some of you guys out there may be, but my thinking is rooted in one simple truth. As bad as things get for common folk when the economy tanks, they really don't seem to affect those with real money. And there is no lack of deep pockets around here. My goal is to position myself as top of the line, completely custom and unlike no other around. I don't see myself competing with the mom and pop or God forbid, big box stores for clients. So in other words, when everybody is tricking you in with "low, lower and the lowest" pricing available, I would do no such thing. As a matter of fact, I would do quite the opposite. Exclusive product comes with exclusive pricing. When they go low- we go high, to rephrase Mrs.Obama.
Alan F. You are absolutely correct. I would have most likely to hire ops manager. As to the EBITA, I am not really sure what to answer you, but my CPA thinks a healthy margin for construction trade should be between 15-20% after owner compensation and he called this opportunity "promising". Sorry if I didn't quite answer you; but you are right that sales is my strong suite (years of outside and in home selling under my belt) I leave accounting to professionals.
The owner is willing to train for at least 30 days but that is negotiable. There is also a great shop foreman in place willing to get licensed to be able to continue offering installations.
30 days seems extremely short to me but again. You've met the shop and presumably had conversations and have a first hand feel. I would think his time after sale would be much longer (or at least I would think I'd hope it would be if I were taking on something so new).
I dont think any/many in the small semi custom world especially on the residential side consider themselves competing with the home centers and if you read through the archives here I'd imagine perhaps 98% of post here come with the tag "high end" or some associated handle. Again, my cynicism is that being in even very high end homes now they are populated with goods from wayfair, amazon, walmart, and the like. Not exclusively by any means but around here at least "high end" people in your interior design profession are oftentimes almost wayfair exclusive. They less and less look to local shops for production. If they did it would be no different than competing with the home center and actually worse. To me it simply speaks to a mindset I mentioned before.
Without a doubt, always going to be a customer that wants the relationship, wants the provenance, and hopefully wants what you have. In my observation over the last 30 years that mindset is very different now that ever before and is on a continued trajectory.
As said. Bonus is you have, and hopefully will be able to maintain, the existing sales so at least your starting at a baseline which is better than from nothing.
I think you'd be far better served starting from scratch. Far cheaper than buying an existing business. Especially when you consider you are taking the shop in a whole new direction in design (which means different construction and finish techniques), sales and price point. Those existing clients will be gone shortly. The owner and foreman who do the "same ol thing" might be quite comfortable doing it that way and not want to change. To NOT quote Mr Obama after all, they actually built that.
You can believe whatever you want but I have enough Fortune 500 CEO's, sport stars and the type of people in government whose names you'd recognize and having lived through 2008 (and believe another and greater in on the way in day) they very much change their spending behavior when times are bad. They don't spend as much and when they do spend they will bleed you dry even if you are on of the last standing as they are masters at knowing when there is blood in the water & taking advantage of the times.
Some of Small Shop's resonates with me. While we wont boast any widely known high dollar public figures (because we just dont have any) we have worked for many who have tens of millions of dollars of net worth and I would agree they are not wealthy because they go tossing money around with wreckless abandon. They are some of the most shrewd and ruthless individuals on the planet hence the fleet of cars in multi-bay garages.
I would never want to start from scratch though. An established facility, a building, a core array of tooling and support equipment, and even more so potential access to a crew that can, and is currently producing profitable work, is a colossal leg up. The most successful operations I know attribute the bulk of their success to maintaining a productive and reliable crew. A solid and commited crew can overcome numerous shortfalls from equipment issues, to lack of prime equipment, on and on.
There would of course be the fear that you inherit a crew that is not what you hope but thats the risk you take. This would tie in to a longer commitment from the current owner for me.
I appreciate your raw, honest truth Small Shop Owner. I need to hear the truth and so far, it sound that most of you guys that replied to my post are in unison agreement that this is a bad idea. As a remodeler for years, I used to deal with extremely hard to please people and fully expect that challenge. I do agree that they count their money even more so than people that put their kitchens on 6 different credit cards. My observations were simply that during the downturn, if ordinary people will postpone their remodels till better days, rich people will shop around and nickel and dime you to death. And I am fully prepared to handle it as well. As much as I would love to start anything from scratch, I don't think I have an expertise to pull something like that together, nor do I know the right people to hire (and in this market skilled staff is everything and is very hard to find and retain). The crewman has been in place with this shop for the lest 13 years and sounds like he's willing to stay. The other guys have worked a little less so I can't speak for everybody. I'll throw a wrench at you also, by telling you that I am a woman and fully anticipate to receive a cold treatment from the crew as such. All I have working for me is my intimate knowledge of remodeling kitchens, my very much above average selling skills and my eye for a good design.
In 2006, as the recession was brewing on the horizon, I was asked to help open a high end furniture showroom. To be honest, I thought the guy was absolutely insane doing this because there was not a chair on the floor that cost less than $800. The furnishings were shipped from Italy and were of the absolute highest quality, albeit, very taste specific. You could easily expect to pay high of 7-8K for a modest dining room room set. I was offered a sales position at the end of my term, but i politely declined and laughed all the way to the bank to deposit my check. I left town and never looked back. Few months ago, the store's name came up online in one of my searches and caught my attention. I googled their name and was absolutely blown away: not only did they not close their doors thru the recession, but they now have 2 locations and have expended their business into kitchens imported from Germany. Granted, I don't have all the details and it is very possible that he had to pour his life savings to sustain it, but the truth is in the pudding: he made it thru the hardships and was able to grow it substantially. This has been an inspirational example to me and I couldn't stop thinking about what is his secret for doing so well.
Not enough information here to even make a suggestion. Staying on for 30 days is not enough time. Two years would be more reasonable. As stated above, are you willing to put in 80 hours a week? Anyone who has owned a shop has done that.
How were his numbers in 2009, 2010, 2011? The economy appears to be roaring now, it was in the tank nine years ago. Lots of shops failed in those years. I had been in business for over twenty years and I had to be very creative and frugal to survive those years.
What equipment is included in the sale? How computerized is the shop with CNC? Robots are just a few years in front of the small shop. Most shop personal are of limited value when it comes to programming and running CNC.
You said the High End market is not affected by a down economy. That depends on how you classify High End. Billionaires are not so affected, but business owners and those in the 5 to 10 million range are. That was my market in 2009 and they pulled back and my market went away over night. And, there are not enough Billionaires to keep a shop going.
Finally, who is going to do what you do? And, where are you in your life? Do you have a family with children? Do you have a wife and if so, how would this decision affect your relationship if things went badly?
I would not do it. I can create a business for less than buying one.
I do custom work, truly. So if you are looking for custom designs, I can tell you that what you need to look for is tooling. If the shop you are looking at buying has both new tech and old school tools with the people to operate them, then you can make it work. In fact you can probably pull better numbers out of the business then the current owner because you don’t know all the details that went into the decisions that made the shop what it is. (A successful business owner is merely a good problem solver.)
If you are just after “a look” to your furniture or cabinets, then no, buying a shop is a bad idea. In that case I would find a shop to build unfinished pieces and a finish shop to put the coatings on them.
People have been working with wood for thousands of years so nobody can learn it all in a lifetime. By starting with a working shop you will know what aspects you will need to learn. But be aware that you will need to learn it fast. So if you are good at tracking down information and making decisions, you will be OK. If you need help finding information, you are sure to fail.
New Tools; CNC cutting, finishing and assembling machines.
Old School Tools; hand planes and saws, carving chisels and files, plus a spray booth.
We do custom furniture for interior designers both wood and upholstered. I was president of a marketing company my entire career then the company was bought out by venture capitalists. My main hobby was woodworking so I bought a custom furniture company at 52 years old. That was 17 years ago. I would keep the owner on for at least 6 months and maybe a year. The money he earns will be maximized prior to the sale. They cut expenses to make the books look good. I am now 70 and will either sell my business or just close it down. If the workers leave you are screwed. If they leverage you because you are in great need of them you are screwed. If the old customers all leave you then same deal.
If you want to talk send me your email or phone number.
Now you know net income before EBITA and can determine value based on profit.
You can also look at positive cash flow (minuses deposits if they are on cash basis). Some business go for low net income for tax purposes but have high cash flow.
Business are sold on either a multiplier of adjusted EBITA or a multiplier of sales.
Your accountant should be able to do this.
Making custom work is a risk reward calculation, different jobs have higher risk and require higher margins.
I don't think you can compare your business to contracting, maybe 15-20 % of your sales is actual contracting (installation, site management), the rest is custom manufacturing and that is the comparable you should be looking at.
So your thinking on buying a business, a custom woodworking business, and you know nothing about woodworking? Kitchen design, remodeler and interior designer just don't even compare. Sorry. You are relying on your employees to know how to fabricate every job that comes through that door with you having zero input. I just don't see it happening. Don't mean to offend.
I can only imagine large-ish companies with established production are purchased every day of the week by individuals who have zero comprehension of how to product the product themselves. More than likely purchaced by someone who has never changed their own oil. They are purchasing the capacity of the company which includes the staff knowledge.
I'd be scared to death with only a single layer of people in the operation and if any one of them bailed it may put me in a seriously bad spot if I werent able to transition straight to the floor to pick up slack. But again, she has the first hand knowledge of the situation.
Paul and Matt are right in my wheelhouse... WAY more time for the owner to stay on board and tech tooling. More time to gain knowledge, and more importantly to me, more time to allow a new owner to be woven in. Modern machinery would be a major plus.
Most sales agreements ask for owners and key personnel to stay on for some period of time.
I think some of you are missing the sales focus this person has, they need a matching production manager but those can be hired.
I guess without knowing the size of the business its hard to comment.
Our software company has had quite a few companies purchased over the years, some purchasers ask lots of question before hand, others don't.
We don't know if they are buying the company including assets and debts which includes all licenses, air quality permits, certifications that need a new qualified employee, existing workers comp mod rate. There are so many questions that are beyond do you know how to make a cabinet.
What it does sound like is they understand business and know how to market and make money, that is the skill that is most lacking in a a lot of threads on these boards.
Shops need constant sales and production for constant cash flow.
If one person handles sales and production one leg will suffer when production needs to get done, if you step in to solve the floor problems, sales stop.
We make a good margin here and I kept the old owner on for a long time. Is the equipment really worth what they say? Has he boosted his profits to sell it by cutting inventory or employees? I would be very careful in buying a cabinet business. I looked at one and was very close to buying it but just felt the owner was a little shifty. He sold it and it went bankrupt 2 years later. I think I will try to get a younger interior designer to take mine over and finance the purchase and stay on to work it for a year or two on a small salary. My employees have been here their entire lives and I want to make sure they continue to be secure. Also watch out for business brokers. I used one and they will tell you anything to get the sale.
I see this as a very risky adventure but do not have enough information. My business nearly failed in 2009/10 when sales fell to about 1/3. I tried to keep my employees and that was the killer. But had I not kept them it would have been like starting over when sales picked up.
Mark- not too old but they have been with us for 35 years and are from Romania. None of them like to interact with people much or have any desire to manage anything.
It sounds like this could go either way. Having bought an existing business myself ten years ago, my experience is that there are 2 keys to making it work: Sales and Organization.
She doesn't explicitly say it, but it sounds like the OP has sales channels via her current or former work as a designer. If she were to take the lead sales and design role for the shop, she could then hire a foreman to run production and installation.
The key then is to ensure that there is either an existing foreman in the business who is willing to work with her, or she would need to go hire the right person for that job.