From First Questions to First Deals: Navigating Machine Shop Acquisitions, Ep #28

when we build out our systems, our processes, and our people because of the options that we've chosen to go with, like approach up, or whatever. A lot of those things could be done from a beach in Mexico. (upbeat music) - Welcome to Buy the Numbers. Each week, we'll explore the numbers that drive your business, from accounting and finance to operations and the exciting realm of mergers and acquisitions. Whether you're a seasoned veteran or just starting out, our discussions will equip you with the insights and strategies you need to rate in the power of data, to elevate your manufacturing company. Let's crutch some numbers. (upbeat music) - Jeff, welcome to Buy the Numbers. - Thanks Mike, very excited to be here. - I'll give a little bit of a precursor to this and I want you to introduce yourself, but you've listened to Buy the Numbers and making chips and machine-shot mastery. I think you've listened to a lot of our shows and probably a lot of other shows. And you had reached out with questions like I always encourage people to do. Really, the quality of your questions were great. And when I read through them all, I thought, you know what, this might just be a better episode 'cause if you have those questions and I bet a lot of other people do. So thanks for hopping on here with me and to do this 'cause I think it'll probably be helpful to a lot of people out there listening. - Absolutely. And specifically was machine-shot mastery episodes 24 and 80. - Okay. - Where you spoke about acquisitions. - Yeah. - And that's where I just started writing down a whole lot of questions. And I think at the end of episode 80, you said if you have any follow-up questions, just reach out and then I reached out half expecting you wouldn't come back and then you came back and you're very responsible and very helpful. So that got me even more excited. - And I have to apologize 'cause I know it took couple weeks for us to get to this point, but you caught me. I think when you first reached out, I was traveling and then yeah, it's just been kind of crazy. But I'm glad we finally got on this. So why don't you tell the listeners a little bit about who you are and kind of where you're at and why you had a bunch of questions. - Yeah, absolutely. So I'm currently the operations manager at Hair Engineering. So Hair Engineering is a machine-shot based in Singapore. So we do oil and gas, specifically down-old tools. And it was started by my father-in-law about 30 years ago. And I got involved quite recently about two years back. Originally I'm from the US, but long story that my current wife in the US had then moved to Singapore and then got involved in this business. And as I started learning about the business, we started seeing opportunities to potentially acquire other machine shops in Singapore and in the region. And this has been, we've been exploring for about a year now. And it's been a lot of trial and error where we just speak to people that we know in the industry through our network, read things online, watch YouTube videos, listen to podcasts like yours and try to piece things together. And we've evaluated about five or six machine shops, so we haven't acquired anything yet. And I think this is fantastic, the content that you and your team are putting out because it's really encouraging. Because I think a lot of people also feel this, it can be quite lonely when you're going through these evaluating these machine shops. And a lot of time you're questioning yourself, not really sure, you're kind of learning on the fly. So I'm really glad we got to connect. And some of these questions that I wrote down, we go through them. And then hopefully other people also get a lot of value out of it. - Yeah, well, and you make such a good point there where it can kind of feel lonely. And one thing I've talked about before on some shows and anytime I'm helping someone buy or sell, this topic always comes up. And I think this maybe this will make you feel better, but also you know, you might be listening that thinks acquisition is in their growth plans. I've closed, I guess over 150 transactions throughout my career, which means you've not closed a whole bunch more and you've evaluated 10, 15, 20 times that amount, right? So and you haven't, right? This is your first go at doing some acquisitions. - Exactly. - You know, a lot of people have a feeling either as a buyer or a seller, they're like, oh my gosh, I'm so stupid, like I can't do this. I'm not smart enough to do this. I don't know what I'm doing. That's a very natural feeling. Like you should feel that way, right? I mean, 'cause like the point I always make to people, if you look across the world, if you're super lucky in your life, you might do this one time, right? Well, you can't be an expert at something doing it one time very often, right? - Yeah. - So, you know, I've done it lots of times and wouldn't consider myself an expert at it, but I've just had a lot of experience at it. And so yeah, no, I understand where you're coming from where you're just kind of sitting this like lost, like I don't know what's next. - Yeah. - But that's natural and it shouldn't let you not do it, right? Like you have seek out resources like you're doing and hopefully what we talk about today will be helpful. So let's get into some of your questions. Like let's just see what we can do to answer them. - Yeah, so I roughly broke it down. So my questions I think you can break it down into roughly four areas. So one is evaluation, transactions, integration, and then additional acquisitions. So I think we can just start off with the evaluation part. So in the beginning, the first question I had was, what are the certain characteristics you look for or what are the things you avoid when you look at machine chups? - Yeah, so let me preface this with the answer to probably everyone in your questions I need to preface with. You know, I have my ways of doing things and my strategies and opinions and someone else is gonna be different, right? So I'm gonna answer what I look at and where I can, I'll try to give some guidance around other options. So I have a very specific target type of machine shop that I'm looking for. I have a good infrastructure of a machine shop. You've got one that's been in business for a long time. So I have, you know, what I call my secret sauce, right? I've got my tech stack. I mean, essentially I've got my people, my processes and my systems. I'm looking for ones that my people, processes, and systems bring value to. Right, so I don't wanna go buy a perfect shop. I want to buy a shop that is good and has a good legacy business, but that if I put my people, processes, and systems on top of that will be better. Does that make sense? - Yeah. - And then beyond that, I am, I'm looking for, does it give me industry diversification? Does it give me customer diversification? Does it give me new capabilities? I mean, it's naturally gonna give me new capacity, right? Unless they're already complete capacity, but the best example I can give you on, on maybe new capability, the shop I just bought a few months ago, I would venture to say that my existing shop, we probably would know, quote, about 80% of the work they do. - Mm-hmm. - And they would probably know, quote, 60% of the work we do. So it's kind of weird and it's wild. And we have a lot of the same machines. We have the same types of equipment, but just the type of work we would not take in my existing shop, and we've no bit a lot of that work over the years. Well, bolting on that capability, now I know I don't have to no, quote, that work anymore, I can run it there. And we've already seen that happen quite a bit in the last couple months. We've had jobs come in to quote, now turned into POs because we're like, oh, we can run these over at QMI instead of Hill. So those are kind of my things. I look for a shop that I can bring value to beyond just buying. Ideally gives me something that I don't already have, right? So again, whether that's a customer or an industry capability, something like that. (dramatic music) Hey guys, it's Mike. Are you thinking about upgrading some old equipment or expanding your business? You need to talk to my friends at Vernon commercial capital. When we needed some new equipment, they made the financing process fast, smooth, and actually very enjoyable. What impressed me the most was how well they understood our industry. Vernon offers flexible terms, quick approval, and they were just great to work with. If you want a true partner of your corner, check out Vernon commercial capital. Go to Vernoncc.com/numbers, v-e-r-d-a-n-t-c-c.com/numbers or find them on LinkedIn. (dramatic music) Like when you're evaluating these shops, do you have a specific, 'cause now that you have a portfolio of shops, are you looking more on the vertical or horizontal? So what I mean by that is, do you really go after shops diversifying a way into different industries and different customers? Or do you acquire a shop and say, okay, here's some additional capabilities, like wirecut EDM, heat treatment, coding, which I can bolt on. Or is it just kind of, you take it as it comes, as you evaluate different shops, you just see what's good, what works, and then go from there. Really in my mind, you address two of the things that I'm looking for. So in one of the ways, you're addressing that capability, right? So does this expand my capabilities? Does it have wireity EDM? Does it have a coding, something like that? And then my industry diversification. When I bought Hill, we were 90 something percent oil and gas. We're now 60, because we have focused on growing other industries. We love oil and gas. I mean, you know how good it is when it's good. The problem is, it's not good when it's not. So yeah, we're absolutely looking for industry diversification. Now I will tell you, like here regionally to me, it's hard to get outside of oil and gas. So even where maybe I make an acquisition that's still mostly in that oil and gas space, now I'm looking for the customer diversification. Right, dude. Is it the same customers I already have? Because if it is and that shop goes out of business, I'm gonna get a portion of that work anyway, right? Or is it a brand new customer? So the last two acquisitions I've made, each of them's biggest customer. was still in the oil gas space. There were massive customers here regionally, but neither one of them had I had any success getting into prior to buying that shop and then and there are massive organizations. But in both cases, we've been able to take what they were doing and because of our increased capabilities and capacity, in most part double the revenue coming out of those those customers that prior we couldn't even get a phone call returned. Yeah. So it's it's kind of staged, right? Yeah. I'm looking for industry diversification. I'm looking for capabilities. If I don't get both, what am I getting? And that seems like a big plus point when you're evaluating these machine shops is can you get your foot in the door with some of these customers? Because I mean, you know, just as well as I do to get just knocking on the door, it can take years, right? To get in the door, get their trust, you get audited, you get on their AVL. Yeah. It can take years. If you can get to that point, right? So it's just yeah, it can take years to get to RFQ. Yeah. Right. And then Lord knows how long it'll take to actually get a PO. Yeah. This is another question I had because you mentioned that for a lot of shops, you prefer buying the assets rather than the stock or the equity. Right. I'm wondering because if you buy the assets, if that shop was on a customer AVL or they are audited or they have certain licensing like ISO or what have you, does that not transfer over? So if you get the assets, just the assets, aren't you leaving that behind and you're at a disadvantage? So the answer will be it depends. So far out of all the deals we've done in this space, we've had one customer that we couldn't move over. So okay, so let's break that up. So we've always been able to transfer the ISO certs that has never been an issue. Basically, and I think one time we had to do like a recertification type thing, but it wasn't. It wasn't even like a full audit. It was just kind of a we want to come in and make sure you didn't change the way they're doing things or at least didn't change them for the worst. That's not been a big deal. I have done one asset transaction or one equity transaction of a machine shop. And that was because we talked to the primary customer. They were actually also a customer of mine already. And their preference was to keep that vendor number separate. So in that one instance, we did do an equity transaction. So that I mean, I now have two vendor numbers with that customer. So they order from each separately. And there's a whole lot. That's a whole probably a whole podcast into the self. But everything else, I mean, we have not had trouble. Now the only thing I would tell you there is if there's a high amount of customer concentration. So like any one customer makes up, I mean, pick your number. But I would say definitely if a customer starts pushing 20% of revenue, something like that, I would almost require and I typically have required during the due diligence stage that we go together and talk to the customer. And we find out what hurdles is this going to cause? Is this going to be a problem that I'm, I current owner, I'm selling to this person buyer and we need to maintain this customer relationship for the deal to make sense. Those can be delicate conversations. As a seller, you'd be fearful that your customer would be like, oh man, we got to find a new supplier. Like what's going on? Yeah. Right. But again, in my case, since I'm typically buying a shop that I can bring value to, when I'm able to sit down with their customer and say, hey, I know they've done a great job for you. Here's how we do things. Here's my ERP system and how I guarantee my quality and you know, I've got these certifications and all that type of stuff. Typically, we walk out of that meeting with the customer very excited that things are not, they will only improve. Yeah. Right. They, they will not get worse. They may or may not get better, but they will not get worse. And we're bringing more capability to the table. Yeah. On the question of customer concentration, because there are a few machine shops we looked at and some of them are way more concentrated than what you mentioned, 20, 25%. Some are over 50%. Yeah. Some even pushing 60, 70%. And I'm wondering because a lot of people, they're fearful of that. But if you have a portfolio of machine shops like yourself, couldn't you actually absorb that risk because this machine shop might be 60, 70%, but then you have other machine shops to kind of bounce it out. So rather than breaking up the concentration of this one machine shop, you kind of spread it out across your other shops. Yeah. So two of the shops I bought, one shop I bought had about 90% customer concentration in one client. Another one had about 90% in two. And of course, again, that's an instance where you have to go talk to that customer. Right. Yeah. Because if that customer is going away, there's no value in that shop. Right. So so you have to go talk to them. And you know, I mean, quite frankly, in both, in both of those conversations, I distinctly remember that the customers was scared to do more with that company because they knew they were 90% of their business. Right. And I mean, that you're, I found, I mean, you're sophisticated customers. They don't want to be your 90% and that's it. Because if anything glitches, you're gone. Yeah. Right. And so I think your point is excellent. Most of those have been thrilled that, okay, great. You know, the we're going to come in still going to be a big customer to this new vendor, but we're not going to be the only customer that means that really puts a lot of risk on their supply chain. Yeah. So I guess building on that, some of these machine shops, they might have very high customer concentration. Other ones that I've looked at, they're, they seem to have, they have stagnant, if not declining revenue and also declining margins. Yep. And how do you evaluate if this is purely from owner neglect? Like the owner's just kind of checked out. There's just an cruise control or is it broader existential issues or market forces or competition? That's affecting the shop. How do you navigate that? That's a great question. And I would encourage anybody that really kind of wants to take a little bit deeper dive in that. If you'll go back all van Mir and I recorded an episode maybe back in January, February this year, where we talk about this $2 million cap. You know, why can't shops break through that? Yeah. And part of that and we cover some of this in there, but I think a lot of that, this industry, I think is very ripe for that declining revenue. You know, if you look at a lot of shops across the industry, a lot of them can get grouped into a category that you could call like a lifestyle business, right? Like, yeah. I've grown it up to a point where like, I'm happy, I'm making plenty of money. I've got these great employees that are making plenty of money. And you just start coasting. I think that's very, very common across this industry. In my effect, I think every shop I have bought falls into that category, including Hill Manufacturing when I first bought it. I think one of the things that you can, you can look at to have clear evidence of that or not is if you look at their capital expenditures over the last five to 10 years as that revenue has declined, whatever that is, however, whatever that time period is. I mean, as everybody knows, this industry is incredibly capital intensive. Yeah. And to stay on top and to continue to grow and get better, you have to invest, right? You, I mean, you've got to invest in automation, you've got to invest in tooling and workholding. I mean, all sorts of things to need you to grow and be efficient and profitable and so forth. And so, I think if you see a declining revenue stream say over the last five or six years, that's a very, I think a five to six year window is just about right for that because that's usually in my experience in that three to five year window when owners start to shut down and just be content. It's three to five years in that they start to go, maybe I'm just ready to be done. Yeah. And another clear sign will be the age of the owner. I mean, if they're in that latter part of their career, then that's more likely that's the case. I mean, if I met a 55 year old owner or a 60 or whatever and I saw that versus a 30 year old, right? I mean, I can make some assumptions that, okay, this person has just started shutting down. Yeah. I think another clear indication is do they have a strong team around them? So, if the owner's been doing everything themselves, right? They're doing the quoting, they're doing the invoicing, like they're that's more likely that it's just burnout versus if they're 64 and they've got a an amazing team and it's burning down. That might be more indicative of a bigger problem. I see. But like for pure empirical evidence, I think if you look at CapEx spend over the previous three to five years, whatever that window looks like, I think you'll see that they had just quit reinvesting in themselves and trying to stay ahead. Okay. On the topic of like looking at capital expenditure, looking at financial statements, are there any specific things that you look out for? So say, whether it's like free cash flow, depreciation, the payables, receivables, inventory, etc. Anything that you look at where it's like an immediate red flag or something that looks really good to you that just pops out within these financial statements. Yeah, all the above. I mean, I wish I could pinpoint you like this certain ratio, you know, do buy this by this and times and times this. There's not one because everybody's a little bit different. I will tell you one of the things I've had really good success with is, you know, I just got kind of compare them to myself. So I take a lot of those metrics that you talk about, plus others, matter of fact, a lot of the KPIs I'll judge against actually come out of like the modern machine shop, top shop survey. - Oh, the top shop stench marks, yeah. - Yeah, you know, like where do they rank in revenue per machine or per FTE? What is their cap X spin? What is their profit margins? And like I mentioned early on, you know, to some degree I'm looking for ones that aren't performing perfectly. You know, again, those KPIs give me an idea of, okay, if I can improve these numbers, what does the business look like? Right, if I can get them run in the way I run, that's my indication of am I bringing value to this business? So it's all important, you know, I mean, you mentioned like receivables and so forth. I mean, yeah, absolutely, you need to look at what's the turn on receivable? I mean, there are other customers paying them a 30, 69 year, 150 days, right? I mean, there's a lot of aspects of the financials you have to really look at and understand, but I tend to look at them and get a better picture of what I'll be able to do with those more so than what they've been able to do with them. - Okay. - If that makes sense, I hope that makes sense. - Yeah, that makes sense. I think you mentioned earlier and also in your other episode, you have a very specific tech stack that you like to implement. And I think some of the tools you mentioned if I recall are like pro shop, economics, and I think there are a few others you like to implement. - Yeah. - Once you acquire a machine shop who actually goes in and implements this tech stack. Is it yourself, do you have an IT guy? Is it the GM that you install? And like what's the timeline in which you want to do this? - That's another great question. It varies kind of by technology. You know, like we're very proficient internally, like with our pro shop ERP system. So from a implementation of the software, it's more of a training issue than it is the actual putting it in there, right? It's not really a big deal. So again, I've got people, processes, and systems that I need to onboard this new company to our people, processes, and systems, right? So every part of our organization and our process is owned by somebody, right? So really the first step we'll take is identifying who's gonna own those processes in the new company. And it may be just ourselves, right? They may not have that infrastructure too. I mean, they don't have a scheduler and they don't have a purchasing person and all that type of stuff. Or maybe they do, right? But you still, every part of the process has to be owned, right? So yeah. And then it's just issue training. I mean, I think one of the beauties of the tech world we're in right now when we talk about a tech stack. So whether it's our pro shop or data,omics, whatever, you know, it's all sass, right? And the support is off-site, but available 24 hours a day almost, right? So it's, I don't have an internal IT team that goes out and does all that stuff. I have an IT group that knows my tech stack and they know that we like this brand of routers and Wi-Fi and access points and all that type of stuff and they know this is how we configure our PCs and this is, you know, our shop floor PCs and you know, we use this Microsoft 365 configuration, all those types of things. And you know, this is how we organize teams in one drive and all that. So, I mean, there is a hardware component to it and a software configuration component to it. But that part happens remarkably fast with just having the right people around. - Yeah. - Right? And having the right, like, I think that's gotta be part of choosing your tech stack is having people, especially if you have growth through acquisition in mind. It's choosing vendors and partners that can support that. (dramatic music) - Bella's, hey, why I got you both real quick. So, I'm really trying to drill in like our work holding options at Hill and all of our shops. Can you advice? - Mike, it's as simple as RazRam. (laughing) - As what? - RazRam, you've never heard of it? - I have not. - All? - What Nick is referring to is the seven habits of highly effective work holding. - That makes more sense. - Repeatability, accessibility, scalability, reliability, adaptability and modularity. If you wanna find all of these principles in one catalog, check out the SMW AutoBlock catalog. You can find it at SMW AutoBlock, ELOK.com. - Thanks, fellas. (dramatic music) - Yeah, like to implement the, I guess the Hill style of running a machine shop, like how long, what's the fastest you've done it and what's the longest it's taken? - The real answer probably is it's never ending, right? 'Cause hopefully you're always building and improving. But the reality is, by the time we, I'm just trying to think with this most recent acquisition, we were onboarding 35 people and 20 something machines. So there's a lot going on there. We had the employees onboarded within the first week. I think it was my, my, my, my, my, my, my 10 days. And that's, that's getting all the employees onboarded through our HR partner. We use a PEO that, you know, so they just kinda come in, they're like, boom, sign up here, but, you know, and now boom, we switch over payroll, right? - Yes. - And then we had ProShop installed to be able to start collecting, you know, if nothing else, you gotta start collecting clock in, clock out data, right? So that you can pay people. That takes all of the day to get that, at least there and all the, and all you've done at that point is train them on, here's out of clock in, here's out of clock out, right? - Yeah. - Now, from there, in this most recent one, then our next step is to like, get the IT infrastructure in place, right? So even the data coming in out of the building, right? So we had the upgrade our internet connection. We had to put in our routers and our access points. And with that, we go ahead and we use, I think it's called Unify. So they've got, you know, that, that now works with our camera systems and some access control and stuff like that. You know, that takes, you know, say a week to get in and get configured, all that, port over all your Microsoft stuff. You're, you know, I mean, it probably can be done in a month, but it's also never ending. - Yeah. - It's like constant upgrades, constant tweaks, you're finding, right? And I think you also mentioned you acquire shop and you learn new things from that shop too, right? And then you take it and apply it to other places. - Right. So some stuff you don't change, right? Yeah, you learn something great from the shop you bought and now you're trying, now you're reverse engineering that back into your existing portfolio, whether it's, I mean, it could be as simple as a handbook policy. You know, I've never bought a shop we didn't learn something from that we took something that they did that was better than the way we were doing it and pull it back in across the entire portfolio. - Yeah. How do you think about centralization versus decentralization? Like how much of, and specifically, a lot of these shops will have similar, like roles across that. Like for example, maintenance, IT, purchasing, customer relationship, like how much of that do you push it to each individual shop and how much of it you push it up to the group level or to the upper level and then have someone from HQ handling those things. - Right. Yeah, so again, I think this is one that clearly depends, right? So, you know, I may acquire a shop that has a better purchasing person than what I currently have. Well, now I need to loop them in to that purchasing process differently than if they, you know, if they just have someone that does it on the weekends, right? So, and a lot of it's also going to depend on what needs to be sites specific versus can be done from anywhere, right? So again, when we build out our systems, our processes and our people because of the options that we've chosen to go with, like approach up or, you know, whatever, a lot of those things could be done from a beach in Mexico. - Yeah. - That's going to help determine what you have to do locally versus not. Now, I mean, obviously I don't have work from home machinists, right? So at that level, obviously they're going to be where they're at. - Yeah. - To some degree, that's true of maintenance, but not entirely. I guess it depends on how spread out you are. You know, but as you work through that chain in each individual piece of the process, I just think you have to look at, do I have the capabilities to do this remotely or not? And, you know, so the one, the things you can't do remotely, you gotta have people on side everywhere you're at. The other processes, I mean, ideally, I mean, kind of the more you get into the office, ideally that can be done from anywhere, right? I mean, our accounting package is online, right? And I handle our finance and accounting since that's my background. I mean, I was in Europe for two weeks earlier this year. I still did my job every day, because I can. - Yeah. - Just having a laptop, I'd spend 30 minutes every morning or whatever. A lot of it's going to depend on the technology you have in place and how much you standardize that across everything. - Yeah. - You know, again, it's gonna depend on your current organization and the organization you're buying. But I think the key thing, and this is whether it's a process or even a part, what we look at when we do these acquisitions is everybody will understand this. I wanna run every part we run. I wanna run on the machine and, or machines, or machine-ists, that can be the most efficient, right? So, when we make an acquisition, there's oftentimes a shift in where things are made. - Mm-hmm. - Right? So, if I might be making a part at Hill that we've been making for 20 years, but I just made an acquisition that they can make it better because they have a different piece of equipment. Maybe I don't have enough bar feeders to always run this part on a bar fed lathe, and they've got five. Right? So, there's always capacity to run that on a bar fed lathe. That job's now gonna be run there, right? So, So think about it from a part level, you're going to want to run those parts wherever they run the best. And I would say the same thing about purchasing or sales or like you want to take your best resources and put them on that process. Yeah. Like taking that example, that customer relationship would have moved from that original shop to the new shop or like how would that work? I don't make my customer go through like setting up new vendors and do stuff. We just outsource it to the other shop. I see. CEO would still come to me, I issue a PO through the other shop. We have like an intercompany shop rate that we charge each other and then we just pay each other. And that way I still have a true financial picture of each shop. But yeah, you could also say, hey, well, we want to get this company set up with you, Mr. customer and there's nothing wrong with that. I just try to make it as seamless for the customers possible. Yeah. Say you have one shop, another shop and then they're both serving the same customer. Do you have those two salespeople still talking to that customer or do you concentrate the customer relationship to one person? It would be customer dependent, but I would tend to want to consolidate that to who has the best relationship. But if I felt like it was advantageous to have both those relationships, I would have both those relationships. Okay. Has there been anything like repeatedly where after you acquired a shop, you just got like bitten in the ass. Okay. This has happened like two or three times and like something you can just highlight to everyone where it's like, this is something that has like come up and like bitten me a few times. So just be careful. That's such a great question. I'm trying to think if there's any like commonalities. I will say I think one thing I pride myself on is learning from my mistakes. So I don't know that there's been anything that's got me multiple times. I think what I would probably say that's the most general statement that I can make across every time you do it is it comes down to people. And every time you're talking to a seller, of course you want to understand their people, right? And what everybody's roles are. And there's always opinions from the seller of like these people are gold, right? Like I couldn't do it without them. Oh, yeah. And then there's always a group of people that are like, yeah, you know, I haven't even been here a year. They show up and they're here for a paycheck. And I can tell you in every instance, like if I just took that as gospel, I would have a lot more stress because there's always those people that are critically important to the seller that don't float over to you. And there's a variety of reasons. They're so loyal to the seller. They don't like change. I mean, there's a lot of reasons that those there's a few of those or some percentage of those that that just can't make the leap. And then there's also always some of those that are at the bottom that the seller tells you. Yeah, you could get rid of these people. There's always a few of those too that maybe under new leadership, maybe under seeing change, like they thrive with change, you trigger some sort of excitement with them where they become some of your best. So most of the time I've been bitten in the ass has to do with people more so than anything else. I guess my most general statement I would make is get that feedback from the seller, but don't just bank on it and give people time to adjust to you. Don't go in and just say, okay, well, they said this person's not any good. So I'm going to lay off these two or three people because we have too many. Give them three months, six months a year, whatever, and see what they do with you. And then then vice versa on the good side because I have been fought by the people that were running the company have been some of my biggest hurdles to accept change and accept our people processes and system. That's probably the most generalized is by side give there. Do you have like a specific return target or like an IRR or I think in the private equity world is a lot of people they use this term, like MOIC and IRR as well. Like do you have a target in mind or is it just no target? I just go out and take what's good. Yeah, so I mean, you can go Google and get a whole list of IRRs and MOICs and all sorts of stuff. And there's value in all those calculations, especially to like bankers and financial executives and so forth. I tend to break it down a lot more practical. So remember when you asked me about, you know, are there some key metrics that I'm looking for? And I mentioned that there's benchmarks I'm looking for in a lot of ways. Some of it's financial, some of it's not. So when I do like a valuation very typical, I mean, I'm no different. I look at generally three years history, right, and calculate Nebada and apply multiple to it. The other thing I do though in my spreadsheet, so I've got the previous three years and then I've got another column sitting out here of what does the current year or the most previous year is my first column. What does it look like if I operate it my way? Right. I usually assume no revenue bump. But I operate it my way. So I have my efficiency numbers. I have my revenue per machine, FTE per machine, those types of things. Well, which does actually sometimes translate to a revenue bump. But if I operate their existing business, the way I operate my existing business, what does it look like? And I apply my, what I believe my multiple is, not what I'm buying them for, but what I would sell for. Right. And if it's not two and a half times the value, then I'm not all that interested. And it doesn't mean that I'm going to, I mean, I know that it's going to take me time to operate their business the way I operate my business. So it doesn't mean that on the day of close, I've doubled the value. But what it means is that in, you know, a six, 12, 18 month window, I believe I can get it there. Then I'm okay. And then you do have to look at, you know, like if you're doing bank financing on an acquisition, you do have to start then looking at, you know, the more detailed, like you asked about, does it start to break any bank covenants? Does it, if I do this and I'm getting bank financing that does now my combined balance sheet and income statement, am I, am I covering my fixed cover chart? Like the things like you're bringing up, am I still in good parameters? But typically you will be if what I said is true. I don't know if that helped, but that's how I do it. Okay. I think doubling and value it 12, 18 months is crazy. Well, it is. And I think it was, I'm assuming it was episode 80, whatever you said, a machine shot mastery where, you know, we talked about, you know, how does Mike 4x's money in a couple of years? And that's how, right? Because the typical scenario is I know that if I just operate their existing business, the way I operate my business, I've doubled the value. Now if I can grow it at all, right? If I can then grow that revenue with the existing customers or my existing customers or new customers, I'm going to start, you know, three times, four times X my valuation. Cool. So those are all the questions that I had. I think I know it was a very long list. So by glad we made it through. Well, I loved this. I think this was so good because I think it covers, you know, again, I'm sure a lot of people sit out there and listen, like go all the way back to what we talked about at the very beginning where I, and I know I can be guilty of this. I'll talk about some of this, like it's super simple. Yeah. Because I've done it a lot of times and I really have and I've done it across multiple industries. I've done it. I've just done it a lot of times and it's super easy to sometimes talk about it. Like it's just no big deal. Like, surely everybody understands what I'm talking about. It's no different. I'm talking to, you know, I'm not a machinist. I didn't grow up on the shop floor. I don't know how to set up and run the machines. And when I sit in a meeting, you know, a playing session with on a new part or something like that, everybody in the room talks about stuff that sounds super simple to them and I don't know what the hell they're talking about. And I know when I get on these type of topics, you know, it just in your head, you just know it and you kind of lots of times skip over stuff and don't dive into the details, like the stuff you've asked about. So hopefully this is valuable information for a lot of people. Yeah. And I think especially in machining, a lot of people are really good operators. And like you mentioned, a lot of these, the founders and the owners, the people who are looking to acquire, they came from a machining background. So they're really good at machining. The technical knowledge is very strong, but not necessarily they don't have the investment banking, the investor, the private equity background, right? Right. And a lot of this financial stuff initially can be very intimidating. But I think it's like for myself, because I don't have that background either. It's, I found it just getting the reps in. So just looking at machine shops, just talking to them and doing it over and over and over again. You just get more and more comfortable, right? And that's such a great way of putting it is, I mean, yeah, just putting the reps in and I mentioned this early on too, where, you know, if I've closed 150, I've been in due diligence and not closed, probably that many again. But to even get to due diligence, that means, I mean, you've looked at probably 10 for everyone. Yeah. Right. So if I've been in due diligence a couple hundred times, and then it means I've talked to thousands. Right? So yeah, it's getting the reps in. It's seeing red flags. It's seeing green flags. And just, you know, as you practice that, you know, I mean, no different than my machinist can hear a drill going dull, right? Yeah. I can hear a deal going bad, right? It's, you just mentioned one thing that made me think of this too when we were talking about things you look for that I kind of left out. So I would also encourage people to draw on their strengths, right? So if your strength is that you were a machinist and now you're running a business and now you're looking to acquire What do you know best? Well, you probably know the shop floor piece a hell of a lot better than I know it right yeah, so Spend your time out there looking for that red flag You know where where I can hear a deal going bad you can hear a drill going bad You know listen for the drills going bad one of the things I always do and do diligence on a shop is I'll I'll pull 10 to 15 of their best jobs And that can be defined by a lot of things right things that run all the time that can be What they consider to be the most profitable? I mean there could be a lot of things that call it their best But I want to I want a representative cross section of the parts they run And then I don't tell my internal team that we're quoting this like we might be running it I generally get it to them's like hey, it was talking to a shop they're looking to outsource some parts Quote this right so that they just look at it just like any other customer and then you can start comparing okay How do I price jobs how versus how do they price jobs and again every shop does things a little bit differently They have different equipment. They have different capabilities and you'll get a picture of is this company making money on the jobs or not You know are they I mean because that you know so I didn't know that when I bought Hill And you know I quickly found out on two of our three biggest customers You know we had not job-costed We just knew they were good customers and we were and those two of the three probably made up 50% of the revenue at the time and I would venture to say 75% of the work we did for them was Pretty close to break even because some of the pricing at that point was you know Question 10 years old. It was that bread and butter work that you just know you're good at and no one ever looked at it again right But you didn't look at the fact that you've had labor increases and material change you know a lot of stuff And again go back to that is this a is this a natural decline in the owner stepping away or is it well those things happen right they quit Job-costing they quit re quoting jobs. They quit looking for ways to run something better And eventually you you know your your your margins it starts Getting closer and closer and closer or tighter and tighter, you know that first year the two that I owned Hill I mean You know taking 50% of your revenue and you're going hey mr. customer. I need to increase the price on this And they aren't loving you Right they're like like who are you? Yeah, like you just bought this company and came in and raised all my prices 20% like this is not a good relationship We worked through that and and you know through a lot of transparency, you know just showing them our job costs like Well, I can't keep making it for 2% margin, right? Like where are you comfortable right and we get it to 10 we get it to 12 and You know finally start getting back towards shop rates that that were sustainable But again the reason I bring that up is if if that's where your strength is lean on it right like My strengths on the financials so I certainly can dig in the financials and I can Measure against KPIs and I can reforcage performance That's where my strength is but but there's a lot to be said for Just knowing how to run parts and how a shop runs and also being able to just look at what they do and know if you can do it better or not So I mean everybody needs to take their own angle yeah and decide you know what's important to them But yeah at the end of the day, I mean if you combine all those things together And everything still feels good It's probably going to be a good acquisition. Yeah, guess one bonus question and this is just my curiosity is Where do you see machining or the the industry going over the next 10 20 years because you see a lot of these older folks starting to retire And it's quite alarming right because there's a lot of knowledge and know how that's just retiring Yeah, and if young people or people like yourself also go acquire these shops just gonna disappear So and the capacity disappears first of all I have to point out I love how you said young people or people as such yourself Yeah, I take the back you you're also you're also young no, I'm not young people like all of us No, just kidding aside you just address like all the issues we're facing right as an industry I think you're gonna see a lot of consolidation. There's gonna be less shops 10 years from now than there are today But I bet the average size goes up, right? I think there will be a fair amount of consolidation because of people that want to acquire and try to keep some shops alive But I think the bigger thing is You know with advancements in automation and AI and all those types of things and and and a good tech stack You know, I think I think those things can improve productivity and efficiency to a point where not only will shops be larger and have more spindles and more employees than the current average They're also I think will be much more efficient I think the advancements you're seeing in those things and and the investments in workholding and tooling technologies and all those types of things are gonna make everybody Half to be a lot more productive to be competitive So I think the average size of your machine shop if you base it off like number of spindles could nearly double And then I think with the efficiency gains that those types of people that are acquiring shops and looking to grow such as yourself I think you'll also be making a lot of capex investment in productivity tools Whether that's in the front office or on the shop floor So I think the average shop spindle size will grow employee size will shrink and output will double Triple maybe yeah because I think the market demands greater greater efficiency And I also think you're going to see more and more turnkey type shops that you know are doing everything from raw material to Install ready parts. Yeah, and to end. Yeah, yeah versus just cut it and send it back to the customer and they send it off for coatings and Everything else and they're buying O rings and bolts from yeah somebody else I think I think you're gonna see more and more just like I can I can provide you the entire value chain Yeah, let's just the one PO solution right here the one invoice solution That's certainly where we're trying to build our company what we're calling it internally is just install ready parts So we deliver our customer a part I mean with the bolts that they need to bolt it to the other thing right or whatever I do think there's going to be a major disruption too with the you know what you can call manufacturing as a service Market that's growing so I think you I think you're also going to have these absolute mega shops, you know These 100 million dollar shops You know like a send cut sends doing you know something like that. I think that's going to Commoditize a part of the market. I think it's also going to increase the value of Everybody else because there's there are there is a family of work out there that that model fits really really well for Which is just going to make the stuff that doesn't fit that model like the super high complex You know working with the engineering team dfm services much more valuable. So I think Yeah, I mean, I I think you have to invest to sort of compete with some of that and like have the automation and the And the services and the technology to provide a customer a better experience But I think the customers will also value that more than they currently do yeah Well cool anything else you know to add on mike the only thing I want to add is like I'm super Excited that you know someone such as yourself is exploring all this and I hope that there's thousands and thousands more of you because our industry needs it I'll say the same thing that caused you to reach out to me. I'll say it again, which is Seriously reach out to me. I mean, I I love these conversations. They give me energy. They give me excitement about where the industry is going And if I you know if there's anything I can do to help I want to help You know, I'm happy to talk valuation models. I'm happy to talk You know those KPIs I look at I'm happy to go through those things and share any of that information that someone might find valuable Yeah, and uh, how can people find you mike? What's the best place? Well right here on the podcast yeah for one but yeah, I linked in and yeah, I I tend linked in is probably the easiest thing I tend to be there the most but But I'm gonna reverse that question because I I suspect there's gonna be a bunch of people that want to talk to you after this So yeah, how do people get in touch with Jeff? uh, LinkedIn is probably best But if you search on LinkedIn search Jeff Jay Lee because they're gonna be 10,000 Jeff Lee's Jeff Lee's you know and I've got your contact information. So you know, assuming it's okay with you If any of the listeners want to reach out and talk about any of the things that That you heard Jeff say the day or reach out to me. I'll connect you. Yeah, absolutely But yeah Jeff, this was great. Thanks so much for for coming on and and you know, being willing to share where you're at in the journey and and ask your questions and I think this will be a really really valuable for a lot of people And uh, yeah, it's awesome Yeah, and thanks so much for inviting me on definitely learned a lot and I think I'll definitely have another set of follow-on I'll probably be sending you in the near future. Yeah, who knows maybe we'll need to do a part two a part two Yeah, yeah, that'd be fun definitely. So yeah with that listeners. Thanks for sticking through this and Yeah, reach out to me reach out to Jeff If you have any questions and we'll talk to you next time Manufacturers what is your biggest headache? 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