Buying another company???

[deweyc9]

As some may know I own a mobile welding and fabrication business in a coastal area of southeastern NC, been steadily increasing my business over the last 2 years. Some weeks are very good others are dead but i have benefited by having almost Zero overhead, everything is paid for so just consumables and insurance is out of pocket. Havent been satisfied with that so I am constantly cold calling and talking to everyone I can think of that may possibly need some welding work done when I came across a fellow welder that wants to sell out.So while nothing has happened yet other than me expressing an interest, I may have an opportunity to buy a welding company in a nearby town. This company does general welding work out of a shop and also manufactures trailers. The largest they currently build is a 14k equipment trailer, so nothing to complicated as I did work in a shop building and fixing trailers for a few years. The purchase price would include all tools and equipment, all parts and materials in stock, 5 trailers ready to be sold and apparently 30 existing orders for trailers to be built. Really the whole thing sounds a little too good to be true, I looked up the company on google and they have a pretty bad reputation. So I guess what Im curious about is what red flags should I look for? I want to see the shop and equipment obviously, and I want proof of any existing orders they may have, I also want to see proof that the rent for the shop is what they say it is. They claim it is under $1k a month if it is I want to ensure that price transfers to me lol. So just curious what those of you who are much smarter and wiser than I think i should look for? What are some things I need to verify before even talking to the bank? any advise is welcomed

[leightrepairs]

Do they have any debt and or judgements against them.

[deweyc9]

Unsure at this stage, will find out before I go much further though! Thanks!

[Lis2323]

I would say the first red flag is that "pretty bad reputation".


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[Lis2323]

And you will need to see a copy of his financials.

Did he take deposits on orders for those supposed "thirty trailers"?

Will you be on the hook for supplying the finished product by a certain date?


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[deweyc9]

yeah Im concerned about the deposit thing already lol, as far as the reputation thing.....no situation is perfect, my reputation is growing and i would hate to see it take a hit. But the price is right, or right enough to make me think long and hard lol

[psacustomcreations]

You would need a serious look at his financial statements, contracts, any other due outs or liabilities. Property, vehicle, and equipment leases or rentals.
How many employees and are they full or part time? Have you talked to them? Are they staying on and if so, at what rate? Any former employees you can talk to?
Talked to any recipients of the trailers or other work?
Talked to his metal suppliers about how timely he was with payments?
Talked to his welding suppliers or other supply companies?
How about visiting competitors and ask them for an opinion on the company you are buying.
Did you take pictures of the shop, equipment, tools, vehicles, etc for a complete inventory?
Investigate the bad reputation. Is it online reviews, or just word of mouth?
Edit:
Do you have an accountant, lawyer, etc lined up for the purchase?

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[VaughnT]

My first question would be .... do you want it bad enough to spend $10,000 right at the outset in lawyer and accountant fees?

While you can do a lot on your own, you really need to bring in some professionals to dig deep into the situation to see what the legal and financial truth is. You're good at welding, but you need to remember that you're not a lawyer or accountant. Just as you wouldn't want Larry Law or Nancy Numbers telling you how to lay a bead, you shouldn't be trying to cipher out contracts, billing history, employee situations, etc.

The guy has a bad reputation, yet has orders for 30 trailers? He's got 5 trailers on the lot ready to be sold? Why'd he make 5 trailers just to have them sitting around when he has orders for 30 trailers.... and those 5 aren't the right specs for those orders? Why haven't those 5 already sold to other people?

And now he wants to sell?

Smells fishy to me. Seems like he's wanting to get out before everything crumbles around his ears.

[deweyc9]

Yes I have an accountant, I know a lawyer so I may get a bit of a break there. And I agree, it does seem like he is trying to get out before it crumbles, as far as the 30 on order, Im not sure they are all trailers, he just told me he has 30 work orders in line at the moment. Sorry for the confusion on that, As it stands I told him I would think about things over the weekend then probably come to his shop to have a first look around next week. Its not as if I NEED to buy this business but, for the price he stated I would be silly not to at least do some due diligence. Regarding the bad reputation, at this point to my knowledge it is all online, and the reviews are rough lol. Seems, he had trouble delivering on time and had a habit of keeping deposits for extended periods. (Why take a deposit if you arent gonna start on something for 10 months?) Also his reputation cant be great because his shop is less than 30 miles from me, in an area where I do work 2-3 times a month and I have never heard of him or his company. I also made a note about the employee situation. It was presented to me as a one man show, but I didnt ask outright so....we shall see I guess

[Denis G]

If you want to manufacture trailers, I would first talk to a product liability lawyer and see what you would need to protect the business that you are getting into.

[scsmith42]

If you buy the business, you become liable for their previous work. So that means that 6 months from now you can be sued for some bad work that they did last year.

A much better approach is to buy their assets and form a new business with them. That can include buying their contracts for new trailers.

[SweetMK]

People come to have certain expectations of specific companies,, there is no way you could duplicate what the previous owner did.

It might be little things,, pastries next to the coffee when a big customer comes to visit,, it was something HE did,, you would not know about it.

make a clean break,, start fresh and start your OWN business,, with your own quirks,,,
I started a business in the year 2000,, my "quirk" was that all orders had to ship within 4 days,, (we produced totally custom orders)
Since we were shipping custom stuff,, the customer did not expect fast delivery,, I would go to the shop some days at 3am in the morning,, the orders had to go out.

You will also be money ahead starting your own business.

[tapwelder]

Right now, can you find workers, are you near a source of "trained" employees. Currently, that is a large reason for bad reputation.. Training, retraining, and retaining.

Is material on hand to complete those orders. Because, material cost is high possibly doubled since the orders were taken.

I have visited several large work sites in the last 2 months where work was jacked up or folk just cannot finish... Folk now want stuff fixed...

Good luck. I suspect you can make it work. Just try to start on level ground or higher not below.

[deweyc9]

scsmith42 may be right on, I was thinking about it this morning, I think my best bet may be to buy his assets and any existing contracts if possible but not the business itself. The shop space his business is in currently is a major selling point for me, so maybe I can work something out on that end as well, taking over his lease perhaps? Need to do some more research on that.

[Frenetic]

In addition to "will the lease transfer", can i suggest you consider the cost of insurance as you run the numbers. That sometimes gets overlooked.

DaveO

[Louie1961]

Look for his hidden liabilities..pending lawsuits, warranty claims, existing contracts both with suppliers and customers, collections, payments taken from customers for orders not yet started or completed, leases on any of the equipment he has, environmental liabilities if he dumped anything toxic on the property where the shop is, etc. Demand to see all third party contracts with anyone and everyone. If you buy the whole business, get an auditor to review the bank accounts to be sure he doesn't siphon off any cash. Due your due diligence on any inventory ( make sure the physical inventory matches what's on the books)

[Lis2323]

scsmith42 may be right on, I was thinking about it this morning, I think my best bet may be to buy his assets and any existing contracts if possible but not the business itself. The shop space his business is in currently is a major selling point for me, so maybe I can work something out on that end as well, taking over his lease perhaps? Need to do some more research on that.

If the seller is smart (or at least not totally dumb) you aren't paying anything for the "business" anyway. If it was me selling I would have it structured so that you are paying for all the things you mentioned and the business price is built in already whether you know it or not.

Generally speaking I would say his business is worth squat anyways. Value if any is in his assets and inventory. Nobody pays for good will these days.


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[user 9328330]

I agree with the lawyer and accountant comments. This sort of thing doesn't normally get settled in a weekend; negotiations etc can go on for weeks or months. If he or you are trying to rush it, that's a huge red flag. Find out what the WO's are, get the contact info, and find out if the customers are going to or already have bailed on the guy. See what if any continuing work they might have with him, and if they're willing to transfer to you.

Secondly, I don't think of trailer manufacturing in general as a profitable enterprise. I know guys that've gone out of business trying to break into that market. You're competing with people running regular factories. Also, the types of guys that end up welding in a trailer shop aren't often the best of the best....you can't afford to pay good rates doing that sort of work because if your jigs are designed right, it's a low-skill job. Squirt-gun MIG at it's finest. Everybody doing it is trying to carve out a niche for this reason; it's really a cutthroat business.

Be very dang sure you have a path to enough profit to justify your increased liability. Don't pay a second's attention to the gross numbers involved. Your accountant should help you out with that assuming they're the right type of accountant and familiar with this type of business.

You'll need to figure out materials on hand and look at the contracts, if any, to see if you're stepping right into a gigantic hole as soon as you sign the papers.

[Louie1961]

Business purchases are USUALLY not based on the value of the assets, but rather a multiple of his average revenues over the last 3-5 years. Alternatively it could be valued based on a multiple of the profits or cash flows. Its been a long time since I did any real business valuation work so I am not sure what those multiples currently would look like. The value of the assets is really a floor. If he has a track record of revenues or earnings, you should be paying for more than the assets. If not, then just buy the equipment you want and ignore the rest.

[Lis2323]

Seems, he had trouble delivering on time and had a habit of keeping deposits for extended periods. (Why take a deposit if you arent gonna start on something for 10 months?)

It's worries me that you as a business owner looking at buying another business is asking yourself this question.


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[deweyc9]

spent a few hours this morning with the accountant and talked to the lawyer, I think I am just gonna make him an offer on his equipment. While I can get financing, and the accountant wasnt totally against it, something about it just doesnt feel right. And Lis2323, it was sarcasm.

[Lis2323]

spent a few hours this morning with the accountant and talked to the lawyer, I think I am just gonna make him an offer on his equipment. While I can get financing, and the accountant wasnt totally against it, something about it just doesnt feel right. And Lis2323, it was sarcasm.

Just to clarify my position, IMO the owner was correct in securing deposits for the trailer orders even with a lengthy wait time. That is what you have to do.


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[Country Metals]

Around here in NJ, every trailer company is at least 10 weeks behind in getting trailers. I was quoted 28 weeks back in June for a 24' enclosed. So if they only have orders for 30, that isnt a good amount if everyone is way behind. Trailers also are so little profit as shipping takes a huge chunk anymore.

I also dont believe that 1k shop rent. Check the paint area and make sure that is up to par. Make sure there isnt a huge stock of rattle cans.

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[Sberry]

I wouldnt buy another small business, so many run in to the toilet before sale and you can never get out from under it. I told a bud to change the name and move befpre it dragged him down.. Had a good idea and the experience but the last owners ruined it and no one really cares it changed hands and the general public doesnt know this etc.

[Sberry]

A run down biz with old equipment and a bad rep, but promise of lots of work,,,, the last part sounds right.