I am looking into a 40 year old custom cabinet shop. All current business is referrals and the volume is around 200K per year. Current owner is near retirement and having health problems, and there are no employees to transfer. All estimating and design is done on paper and no software is used. The shop is well outfitted with equipment and a paint booth and there is no real estate to convey.
The owner would stay on as a consultant. I have an existing business that is three years old and mostly mid level remodeling projects. I have been focused on cabinetry and built-ins from the beginning and slowly building volume in that area.
The owner of the cabinet shop has valued his business at $150,000. I can run all the standard valuation formulas and compute a book value for the business. My question is, will I better off to continue building my own cabinet shop from scratch, or acquiring this existing business and learn from the retiring owner? Any advice is appreciated.
(Business and Management Forum)
From contributor J:
This is a case where it's really hard to put a value on reputation. Since this guy is a one man show, I feel the business is only worth the liquidation value of the business assets. I would think long and hard before I forked over hard earned money for somebody else’s name.
Are you competing against this guy at the moment, or are you trying to expand into a different market? If you're always losing bids to this guy, then it's worth considering. If not, when he does get out of business you shouldn't have too much trouble expanding your own market. If I had $150,000 burning a hole in my pocket, I think I would buy some new machinery.
There is no guarantee that any of his former clients will work with you. At most, you'll receive one opportunity from each of his former clients, after which you will have created you own reputation, good or bad.
$150,000 will pay the salary of a good salesperson for two years. One good salesperson can generate $200,000 in sales in one month. I think you should look at other alternatives.
A company with a niche and a larger market (regional or national) maybe, but a local shop does not command much. Also his sales are not that great. My call: pass it by. As your business grows it will have needs, hopefully you will be able to recognize these moments, and hopefully you will have the extra money. Spend the money on the identifiable needs of your business.
More importantly, what kind of sales (and how quickly) can you generate with a $150,000 marketing budget, or half that? Just remember, you are buying future potential sales. You must determine if getting that future business is less costly through buying an existing firm, or by spending on getting the sales up and running yourself. In this case, I'd opt for the latter.