CNC Machine shop

November 26, 2021

by a searcher in San Francisco, CA, USA

A machine shop opportunity came knocking on my door and would like to give serious thought to it. But I do not have prior machining experience, am willing to learn but am not sure how long it will take.

Would like to check with this community if anyone who have been in similar situation , what advice would you have for me ?

I have operations management background mostly in tech world and some in hardware.

From financial standpoint , what are the EBITDA % are healthy ? any resources / tips to help me evaluate this deal would be helpful.

thanks

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Reply by an intermediary
from New York University in Menlo Park, CA, USA

I agree with Neel. I worked with a machine shop here in Santa Clara, CA about 2 years ago. Out here in Silicon Valley, the market is split into 3 levels. Only the top level is profitable enough to be professionally managed. The top level firms offer engineering services work in addition to providing machining capabilities. Very high value added services for very technical clients (think Tesla, Apple and medical device companies). If you have experience and success working with customers of this caliber, this can be a very lucrative business.

The second tier does limited production runs and will earn a return for the owners, but it is a tough business. Constant capex requirements and maintaining an unstable labor force due to the very high cost of living and long commutes. I met a few of these firms with very strong customer relationships and highly automated machines which are able to thrive. Most appear to be barely hanging on and when the owner retires will likely be wound down.

The third level are just machinists operating their own machines. This is where the race to the bottom is plain for all to see. The owners work 60+ hours/week and are barely making a living working on the floor themselves. They are so busy working on the floor, that they don't have the time to go out and try to find new clients.

This is just my characterization of what is going on here in the SF Bay market. Down in LA, things are very different. I do know of machine shops in the Midwest and East Coast which are highly profitable and would be great businesses to own. Understanding the specific market and customer base would be important to evaluating any specific acquisition opportunity.

Reply by a searcher
from National University of Ireland, Galway in Seattle, WA, USA

You are highly unlikely to replace the owner in terms of becoming a CNC expert. This is a craft, not something you can pick up with book study. So the first critical factor is to lock in all necessary CNC operations and service selling expertise. If either is exiting the business is worth the resale value of the capital assets. That aside, consider if this could be in a sector that will benefit form the Build Back Better investments. Also consider if it will benefit from correcting the horrible COVID off shore supply chain exposure. A solid operation with sustainable cashflow could be well positioned to rise on this tide with the other boats. Another factor is these businesses are often asymmetric in terms of business management vs technology management expertise. If you personally add the former then it coud be an upgrade. This would manifest as strategic targeting of underserved niches, superior systems, superior service and superior brand building relative to the usual mon and pop CNC shop. And don't underestimate those either. They learned in a different school..

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