Dream opportunity for a machine design engineer?
August 14, 2013 8:14 AM Subscribe
Help a business-illiterate engineer formulate an approach for evaluating an exciting business/career opportunity.
I'm a mechanical machine design engineer. I design and build custom machinery for factory production. My machines have been on How It's Made. It's what I do, it's what I love, and it's what I want to do with my life.
So there's this small OEM business owner out in Southern California (Inland Empire, near Ontario) who I've known for a couple of years now. He owns a machine shop and designs and builds his own machines and supplies some to my company. I've worked with him on some projects, and I just love the guy. I've had a blast hanging out with him and working together in his shop. I can tell you, having done my homework on him and his competition, that his machines are the very best in the business.
I'm young(ish) and at a point in my career where I want to figure out what's next. I currently work for an OEM and I'm feeling limited by it. From here I can go to a different OEM, a machine design consulting firm, or start my own business. I called the guy up last week to ask him what he could tell me about his experiences as an entrepreneur.
He related some war stories, some horror stories, and descriptions of how much fun the work is. Then he told me he's been looking to retire in the next 8 years, and that maybe I should consider going out there and learning from him, and in due time, take over the business. I could even lease part of his shop to develop my own products, or work together on developing some new ones. He said this is just a thought, don't quit my day job, but he really likes my approach to engineering and he's confident I could take it on. He suggested I visit soon and spend more time in his shop to talk it over. Suffice it to say I did a backflip upon hearing him say all this.
But I need your help, dear Green, to get a reality-check on this. I need to see any pitfalls I'm currently blind to.
1. What are the main questions I'd need to ask him about his company's financials? Aside from engineering economics engineering economics and project justification, I have no business or financial education. Could I learn everything I need to know from my potential mentor? 8 years would give me enough time to self-educate or take classes. MeMail me for some more specific data points if you can offer some expert advice in this area. Maybe I could work with a consultant to evaluate the viability of his business?
2. What do you think he means by "taking over the business"? Does he mean buy him out, or just manage the shop while he continues to own it during his retirement? Some people warn me not to get stuck in a situation I'm unable to get out of. What should I do to avoid getting in a bind?
I might fly to L.A. for Labor Day and do some more recon on whether I'd like to live there. If this all worked out, I suppose I'd live in Pasadena and commute to the IE. I'm a little torn because I'm uncertain about L.A. in general. For instance, I want to taste that 'dry heat' in L.A. and see if it fatigues me in the same way the steamy sauna of Atlanta currently does.
Then again, something tells me that if work were nearly indistinguishable from play, there's a great deal I could overlook. No place is perfect, but awesome jobs are very hard to come by.
Any other general advice? Thanks, Green!
I'm a mechanical machine design engineer. I design and build custom machinery for factory production. My machines have been on How It's Made. It's what I do, it's what I love, and it's what I want to do with my life.
So there's this small OEM business owner out in Southern California (Inland Empire, near Ontario) who I've known for a couple of years now. He owns a machine shop and designs and builds his own machines and supplies some to my company. I've worked with him on some projects, and I just love the guy. I've had a blast hanging out with him and working together in his shop. I can tell you, having done my homework on him and his competition, that his machines are the very best in the business.
I'm young(ish) and at a point in my career where I want to figure out what's next. I currently work for an OEM and I'm feeling limited by it. From here I can go to a different OEM, a machine design consulting firm, or start my own business. I called the guy up last week to ask him what he could tell me about his experiences as an entrepreneur.
He related some war stories, some horror stories, and descriptions of how much fun the work is. Then he told me he's been looking to retire in the next 8 years, and that maybe I should consider going out there and learning from him, and in due time, take over the business. I could even lease part of his shop to develop my own products, or work together on developing some new ones. He said this is just a thought, don't quit my day job, but he really likes my approach to engineering and he's confident I could take it on. He suggested I visit soon and spend more time in his shop to talk it over. Suffice it to say I did a backflip upon hearing him say all this.
But I need your help, dear Green, to get a reality-check on this. I need to see any pitfalls I'm currently blind to.
1. What are the main questions I'd need to ask him about his company's financials? Aside from engineering economics engineering economics and project justification, I have no business or financial education. Could I learn everything I need to know from my potential mentor? 8 years would give me enough time to self-educate or take classes. MeMail me for some more specific data points if you can offer some expert advice in this area. Maybe I could work with a consultant to evaluate the viability of his business?
2. What do you think he means by "taking over the business"? Does he mean buy him out, or just manage the shop while he continues to own it during his retirement? Some people warn me not to get stuck in a situation I'm unable to get out of. What should I do to avoid getting in a bind?
I might fly to L.A. for Labor Day and do some more recon on whether I'd like to live there. If this all worked out, I suppose I'd live in Pasadena and commute to the IE. I'm a little torn because I'm uncertain about L.A. in general. For instance, I want to taste that 'dry heat' in L.A. and see if it fatigues me in the same way the steamy sauna of Atlanta currently does.
Then again, something tells me that if work were nearly indistinguishable from play, there's a great deal I could overlook. No place is perfect, but awesome jobs are very hard to come by.
Any other general advice? Thanks, Green!
Get copies of the financial reports from the last few years and go over them with an accountant who has some experience with similar businesses. Ask the accountant if they have any good questions for you to ask.
2. It doesn't matter what anyone else thinks he might mean, it could be any of those. He may not even know what exactly he means himself.
You'll want to find out if he's offering you a paid job, or an unpaid opportunity to learn from him.
posted by yohko at 10:19 AM on August 14, 2013
2. It doesn't matter what anyone else thinks he might mean, it could be any of those. He may not even know what exactly he means himself.
You'll want to find out if he's offering you a paid job, or an unpaid opportunity to learn from him.
posted by yohko at 10:19 AM on August 14, 2013
Ask him if you didn't exist, how was he planning on handling his retirement? What is his expectations? Does he have any other partners in the business? Including a wife, who may not be an official partner, but would inherit in the event of his death, or be due half in a divorce.
Are there employees who may be a problem? (ie. we can't fire Joe, he's my nephew)
If I were him, I would be expecting a large cash buyout, likely financed by a company loan. Servicing that loan would be a new factor in evaluating the viability of the company.
posted by Sophont at 10:49 AM on August 14, 2013
Are there employees who may be a problem? (ie. we can't fire Joe, he's my nephew)
If I were him, I would be expecting a large cash buyout, likely financed by a company loan. Servicing that loan would be a new factor in evaluating the viability of the company.
posted by Sophont at 10:49 AM on August 14, 2013
Best answer: Valuation of a business is not an exact science.
One main reason is a balance sheet line item called 'goodwill'. It's a valued intangible that hasn't much formal basis. It's kind of a measure of inertia that generally gets bigger as time goes on. A 50 year old business usually has more than a 5 year old business. Repeat customers, word of mouth advertising, industry reputation, walk-in business, a 20 year history in the yellow pages, former employees in management elsewhere.. how do you put an exact number on these things which undeniably influence enterprise value?
Folks make their livings coming up with justifiable numbers for this, not with exact numbers. Sometimes, you need a justifiable number for estate and tax purposes or a loan.
Don't feel stupid about finance. It's missing in most engineering curricula except in the sense of engineering economics, as you illustrate. It's not that hard to learn, though.
As far as sale... it's not like a car. Usually, it's pretty expensive and often, a purchase is paid for with the business income. You'll probably have debt service to deal with as well as down payment. Building a business happens over a long interval and a sale can happen the same way or with a single payment. Folks here will warn you to be all legal and such, and I am all for that, but it's also true that these kinds of transactions are successfully completed all the time. All the law in the world won't save you from a bad heart.
Doesn't sound like you are in a position to buy it outright. You also lack info as to what the seller considers it worth and what its NET worth is. I'd look at this as a job opportunity, with a long period to evaluate if you want to buy it, and to learn what you need to know to buy it. At some point, you'll have your own idea of its goodwill, its ability to service buy out debt, a clearer idea if you want to get in bed with this fellow. (I say frequently that I'd marry people I wouldn't go into business with. It's a special kind of relationship that requires a helluva lot of trust and reciprocal faith without the 'love' part. )
My advice is to leave the purchase logistics out of this for now. You'll need legal and accounting work, for sure. You are too inexperienced to interpret it and too ignorant of the business to waste time on that NOW. It's not about lawyers and its not about contracts and its not about promises. You need info, first hand and up close. You need character evaluation and judgment about this guy, from inside the trenches.
You didn't ask enough questions in this post. You asked the wrong ones, too. Which ones did you omit and which are incorrect?
Go do your visit. See if you can get some financials. Determine the lay of the land and the natives. Evaluate the JOB. Date it. Imagine it nekkid. You will be intimate with it and you must be sure it has no diseases and that its promise is backed up by reality.
Later, come back here with more info and you'll ask better questions and get good answers, though I suspect you won't need them. A lot of this sounds pretty promising, FWIW.
Note: I have considered several, bought none, started three, sold two. I've been involved trying to sell one of them several times and dealt with its succession issues. Oy.
posted by FauxScot at 12:06 PM on August 14, 2013 [1 favorite]
One main reason is a balance sheet line item called 'goodwill'. It's a valued intangible that hasn't much formal basis. It's kind of a measure of inertia that generally gets bigger as time goes on. A 50 year old business usually has more than a 5 year old business. Repeat customers, word of mouth advertising, industry reputation, walk-in business, a 20 year history in the yellow pages, former employees in management elsewhere.. how do you put an exact number on these things which undeniably influence enterprise value?
Folks make their livings coming up with justifiable numbers for this, not with exact numbers. Sometimes, you need a justifiable number for estate and tax purposes or a loan.
Don't feel stupid about finance. It's missing in most engineering curricula except in the sense of engineering economics, as you illustrate. It's not that hard to learn, though.
As far as sale... it's not like a car. Usually, it's pretty expensive and often, a purchase is paid for with the business income. You'll probably have debt service to deal with as well as down payment. Building a business happens over a long interval and a sale can happen the same way or with a single payment. Folks here will warn you to be all legal and such, and I am all for that, but it's also true that these kinds of transactions are successfully completed all the time. All the law in the world won't save you from a bad heart.
Doesn't sound like you are in a position to buy it outright. You also lack info as to what the seller considers it worth and what its NET worth is. I'd look at this as a job opportunity, with a long period to evaluate if you want to buy it, and to learn what you need to know to buy it. At some point, you'll have your own idea of its goodwill, its ability to service buy out debt, a clearer idea if you want to get in bed with this fellow. (I say frequently that I'd marry people I wouldn't go into business with. It's a special kind of relationship that requires a helluva lot of trust and reciprocal faith without the 'love' part. )
My advice is to leave the purchase logistics out of this for now. You'll need legal and accounting work, for sure. You are too inexperienced to interpret it and too ignorant of the business to waste time on that NOW. It's not about lawyers and its not about contracts and its not about promises. You need info, first hand and up close. You need character evaluation and judgment about this guy, from inside the trenches.
You didn't ask enough questions in this post. You asked the wrong ones, too. Which ones did you omit and which are incorrect?
Go do your visit. See if you can get some financials. Determine the lay of the land and the natives. Evaluate the JOB. Date it. Imagine it nekkid. You will be intimate with it and you must be sure it has no diseases and that its promise is backed up by reality.
Later, come back here with more info and you'll ask better questions and get good answers, though I suspect you won't need them. A lot of this sounds pretty promising, FWIW.
Note: I have considered several, bought none, started three, sold two. I've been involved trying to sell one of them several times and dealt with its succession issues. Oy.
posted by FauxScot at 12:06 PM on August 14, 2013 [1 favorite]
Response by poster: Thank you, Green. Clearly I have a lot of homework to do and now I know a few avenues to explore.
posted by myriad gantry at 7:47 AM on August 15, 2013
posted by myriad gantry at 7:47 AM on August 15, 2013
This thread is closed to new comments.
Eight years will be plenty of time, not only to learn, but to find out whether you like it. Take classes or somesuch separate from his mentorship -- he may be good at it, but he may not be right about it.
2. What do you think he means by "taking over the business"? Does he mean buy him out, or just manage the shop while he continues to own it during his retirement? Some people warn me not to get stuck in a situation I'm unable to get out of. What should I do to avoid getting in a bind?
Have a contract before you do anything permanent. A big contract full of words you don't understand that you've had his lawyer and your lawyer (who will not be the same person or work in the same firm) look over carefully that delineates exactly when he'll retire (with penalties for changing his mind (you can be nice when the time comes and give him a little flexibility, but that should be your choice, not his)), exactly what he expects from you until then, exactly what will happen when he retires, how you can get out after a year or two if you decide it ain't for you, etc., etc.
Even if he's a great businessman and a terrific person, transitions are not easy. There are a lot of people who make their money making sure they go (slightly more) smoothly, and they are worth every penny.
posted by Etrigan at 8:44 AM on August 14, 2013