How Equipment Value Contributes to Overall Business Valuation with Tim Roy
Ed does a fair amount of equipment appraisal. With this pandemic, lots of companies are likely going to be forced to sell their companies, which is simply the assemblage of assets and lots of the goodwill has evaporated with this pandemic. Ed thought it would be a good idea that they talk about equipment value, and that’s where his friend in the business Tim Roy, from Capitale Analytics comes in. He’s a machinery and equipment appraiser. He works with business owners, lenders and investors and he evaluates equipment of all kinds. Ed asked Tim what kind of equipment is best in this pandemic. What other industries might be able to absorb equipment? How do you value it? How can you do it yourself? How do you know when you need another professional? Ed enjoyed the interview with Tim and says he was certainly generous with his information and certainly a resource for all of you here on the podcast.
Enjoy this conversation with Tim Roy!
2:52 – Can you talk a little bit about the work that you’re doing and how you’re serving business owners?
4:12 – How do you possibly know the value of so many different types of equipments for so many different types of industries?
6:34 – How do you know you have enough experience to know when you need another expert?
8:50 – Are you doing a lot of work in a lot of different industries now that machinery and equipment community is a diverse community?
10:53 – Do you call the auctioneer and get the value from him or her if your clients are in dire need to know the value of liquidation especially with this Corona Virus mess?
14:37 – Between an equipment appraiser and an auctioneer, who tells me the number I need for the market I now serve when selling tangible assets?
17:44 – What is the difference between fair market value, orderly liquidation and forced liquidation?
20:26 – What is the term, the length of time to sell something under those different levels of value?
22:34 – What should I anticipate if I’m the seller where the buyer is going to squeeze when we talk about the assemblage of assets or clean up the assets?
26:09 – Is it better to just offer a warranty on the equipment, or go ahead and fix it?
27:33 – Can you sign a service contract from the manufacturer for a 15 year old piece of equipment?
28:26 – What are the industries that have a good secondary market that are looking at absorbing equipment?
30:45 – How are you making the adjustment on your valuation due to the circumstances surrounding this appraisal?
35:33 – Were you an auctioneer since you were in the auction industry?
35:42 – How do you learn the auctioneer chant?
36:34 – Do auctioneers print money through the unbelievable businesses they do?
37:27 – Can you talk a little bit about just the appraisal process?
39:10 – What are the different levels of reporting after all that?
41:07 – Do you believe that you can Google your asset and what you find on the internet is your value?
42:54 – What is the one piece of advice that you could give our listeners that would have the most immediate impact on their business?
Can you talk a little bit about the work that you’re doing and how you’re serving business owners?
In our firm, we do machinery and equipment appraisals and business valuations. We’re focused on small businesses. We really do assignments for any professional associated with any small business acquisition or liquidation. It could be the business owner, their controllers, the lenders, accountants, attorneys, business brokers, any sort of small business advisor or professional could be our client. On the equipment side, our business is mostly driven by acquisitions, liquidations, if you think about it, when a business is operating successfully; the value of the equipment is really only the revenue it produces for you. You’re not really concerned with the market value of the equipment because you don’t intend to sell it. But when you’re buying a business or selling a business or selling or buying assets, now suddenly the market value matters to a lot of different people for a lot of different reasons.
How do you possibly know the value of so many different types of equipments for so many different types of industries?
We admit that we know what we don’t know. There are industries that support specialist appraisers. There’s so much action in say construction equipment, farm equipment, trucks and trailers. There’s mega data for these, they’re sold at such great rates. There are appraisers who only work in those industries. We work in those industries as well, partially because they’re sort of easy to appraise. There’s so much information. It’s like using a Kelley Blue Book, but you’re looking up equipment instead. And then there are specialist industries, aircraft, trains, boats, the appraisal kind of bridges with certification and worthiness. You’re going to want a professional that specializes in those fields. Everything else falls into what we sort of call the generalist category. It can be anything from food processing, to printing, to manufacturing, really any sort of business where you have a heavy equipment component to it, and where your equipment can be one of the most valuable pieces of your business, there will be appraisers that work in that field.
We will never know as much about your equipment as you do, and we will never know as much as the dealer does who sold it to you, or the maintenance guy who works on it. But what we can do is interpret market data in such a way that gives a professional a reasonable estimate of market value. We’re a disinterested party. So we learn everything we have to learn to be the experts on the value of that type of equipment. It doesn’t mean we’re the premier expert on that type of equipment, it means we are the experts on the value of that type of equipment.
How do you know you have enough experience to know when you need another expert?
That’s the value of the professional associations. We’re in the ASA, the American Society of Appraisers and the AMEA, the Association of Machinery and Equipment Appraisers, and there are specialists in just about everything. You get a lot of free information from them, and then you share deals with them; you refer deals back and forth. And there’s a saying in a lot of different businesses that the best deal you ever took was the deal you turned down or the deal you gave away. And it’s the same thing here. You’re very glad when you’ve turned to a customer that you trust, and that trusts you over to an expert, and they get a quality product and you maintain a positive relationship even if you lost the fee on that deal.
Are you doing a lot of work in a lot of different industries now that machinery and equipment community is a diverse community?
It’s a diverse crowd and every client wants a different thing. Let’s say we’re looking at a farm and you have all the heavy equipment, the machinery, the tractors, the combine, the planters and so on and so on. And you’ve got hundreds of thousands of dollars in each major asset, even a lot of supporting stuff that costs you 10 to $50,000 a piece. On a big farm, you might have millions of dollars even at use value and equip. So who is actually ordering the appraisal and what do they want? If the farmer wants to know what he’s going to get at liquidation, there’s no reason to pay a guy in a suit and tie, you just call the auctioneer up and say, “What are you going to get if you sell this?” And Joe walks by and says, “Well, I’ve sold 10 of these, here’s what they’re going to get it this county on this day, out here in rural Nebraska or wherever you’re at.” And that’s all you need.
Now, let’s say you’re an accountant, and you need that same opinion, but you need it reconciled to a tax list, and you also need someone to argue your case for you before say some tax board. Or you need someone to write a long detailed report just to find some sort of a rental value because you’re renting the equipment back to your son who’s also a farmer. Joe, the local auctioneer might not have the professional skills to put that together. So a judge might want one thing and attorney wants something else. Let’s say the farmer is getting divorced, and his wife thinks that tractors worth a lot more than he does, now it becomes about which appraiser can present the best argument in front of an arbitrator. So the end result might be the same but the skill sets of all the appraisers are different. Everyone has their strengths and weaknesses based on what clients they’re working for.
Do you call the auctioneer and get the value from him or her if your clients are in dire need to know the value of liquidation especially with this Corona Virus mess?
The first thing is, is what do you actually want to know and who needs to know it? If you’re a business owner, you’ve already decided that you have to close your doors and you can’t sell your business as a going concern. Or you’re a workout banker that’s already decided you have to go to liquidation because this loans in default, and it’s become clear that you’re never going to see your cash back and a loan. And yeah, you might as well call two or three auctioneers and get bids. You don’t need to get an appraiser in the middle of it. If you feel comfortable about the auctioneers, you know the liquidity issue, we do some services with workout bankers where we might help them with their RFP, we might help review the auction bids that come in and the contracts, but at the end of the day, there’s no use getting an appraisal when you know you’re going to liquidate already, because what good does it do for us to tell you what might happen. If you have to liquidate, liquidate, but let’s say you’re on the verge and you have to make your decisions. You’re a workout banker, and you have a borrower who’s struggling and they can offer you some cash flow, some debt service, but it’s less than they agreed to.
If you’re the workout banker you need to know, do I forced them into liquidation? Because if I sell these assets, and I found out they’re not worth anything, I would have been better taking some payments in the meantime. For a business owner, it may be, I’m getting some low value offers from my business that I thought was worth something. I need to know what my alternatives are. Am I better off doing an asset sale? What could I sell my real estate, my equipment, maybe you estimate tangible assets? You need to know in order to make those decisions before you just call up the local auctioneer?
And the second half of that, it’s a bit of a loaded question, but you have to remember the liquidator, the dealer, these are interested parties, they’re trying to win your business. They’re not independent and they’re not motivated to give you independent answers. A good appraiser should be independent of the deal being done. So you as a business broker certainly see a lot of business brokers who do valuation as you do, and certainly there’s pressure from the buyers representative and from a seller’s representative to present things in a certain light. So you really have to hold yourself to a standard I would assume to be independent of the deal or you’re not giving good advice.
Between an equipment appraiser and an auctioneer, who tells me the number I need for the market I now serve when selling tangible assets?
You’ve talked in your podcast before about how price and value are not the same thing. Price is the value of something to a certain person at a certain time, to a certain entity at a certain time. So your optimal price is dependent on your situation right now. So if you’re that business owner, and auctioneer gives you one possible outlet, which is I want to sell it all right now through an auctioneer in the next 30 days or whatever it is, and that’s one possible value point. Now you might have some other options. That’s what a lot of people refer to as forced liquidation value being an appraiser. A lot of liquidators offer what they would consider more of an orderly liquidation. Maybe you have a little more time for exposure, maybe the entire sales are not absolute, no reserve sales, maybe there’s an opportunity to withhold some pricing. And then you have your fair market value, which would be more you have time to sell it. You can sell at the retail level, you can find the right buyer at the right time, the assumption is this worth the wait and you can obtain a higher price.
It really comes down to what are your circumstances? What are your situations? How much time do you have? Do you have money to invest in these assets to clean them up? So for example, if you own construction equipment, and you sell through Ritchie brothers, they make you paint the equipment, fix the windshield. If you go to one of their big auctions or run it across the board, I don’t want to speak for them, maybe they don’t force you to, but they strongly encourage you. But we were told in a presentation from a Ritchie employee, because they believe that we’ll help everyone they obtain higher prices attract more bidders. An auctioneer represents one possible value outlet, a dealer might represent another, they’ll tell you, it’ll take x number of weeks at x price point, if you need to sell it faster, we have to discount the price more, and so on and so on.
So, I just don’t want to confuse price and value. If you’re a business owner, who’s getting an offer, and you as the business broker are trying to decide what’s appropriate and an asset sale, let’s look at what the equipment brings to the new buyer. So what would it cost the buyer to replace this? Let’s say your buyer wants to use the facility to do essentially the same thing is doing right now. So the value to the buyer is going to be what would it cost me to replace these assets? What would it cost me to reinstall them and by some factor, how much life is left in them and how well they’re running? That’s not the same as an auction value. You might have the money and installation, tooling, you have some integration factors, those sorts of things would all bring more value to a seller, assuming that the buyer wants to keep using the facility the same way. If the things are all standalone assets, and the buyer is not interested in using the facility, well my alternative is to liquidate them. And if I can get anything above after the buyer, that’s a good price.
What is the difference between fair market value, orderly liquidation and forced liquidation?
Some manufacturing facilities are set up in such a way that they’re intended sort of to be kept as that type of facility. Most foundries are always going to be a foundry, most scrap processors are always going to scrap processors, they’ve got the structures there, they’ve got the zoning there, is always going to be a quarry. So if the equipment’s in places staying in place, obviously, it’s going to have the highest possible value, because there’s no cost of removal cost of installation for the new buyer.
Fair market value would be more of a retail level. Let’s say you’re removing the assets, but you would expect that they’re being represented by a professional broker or dealer, buyers have the opportunity to come check things out, try them out, get all the asset information, you’re not necessarily buying them as is, maybe there’s some assurance that they’re going to work properly.
Orderly liquidation value is somewhere in the middle between auction and retail. Maybe you’re selling something yourself but you’re not in a huge rush to sell it. Or maybe you have a dealer, who’s selling it for you, but he’s selling it as is and he’s trying to get rid of it quickly, but not necessarily today.
An auction value is just that or forced liquidation value, it may not be an auction, it may just be pricing depressed to the point that you can sell the asset right now. And this is as is where is no guarantees, no assurances, no warranties, you usually would have a professional liquidator come in, present things in the best possible light, but nobody there is under any confusion as to what they’re getting. They’re taking all the risk. They’re paying cash or cash equivalent, and they’re out the door with it. And so those are the three levels of trade. Obviously, as you move down the levels of trade, you’re selling it usually faster and usually cheaper. So there’s an investment. If you want to get to the higher level of trade, you might have to put some money in your assets, you might have to wait months to sell it, but you may obtain a higher price. It just depends on the type of equipment.
What is the term, the length of time to sell something under those different levels of value?
A lot of our clients will ask for sort of a high and a low. So we will sort of lay out and any good appraisers should do this. And they do, we see a lot of people’s reports, and they do lay this out. And your appraiser should tell you, if you have X amount of time and you’re willing to put X amount of dollars into dressing these assets up a little, then you should be able to obtain this amount of money or some amount close to that. If you put zero money into it and you need to sell in 30 days, then you may get this amount of money in return. And then you as the business owner or the brokers can look at your carrying costs of the business and decide if it’s worth the investment. Maybe you already own your real estate and it’s not a hot seller, and it’s not costing you a lot to keep your equipment there. Maybe everything already looks pretty good and it just needs a coat of paint. Or maybe you just need to go through and clean everything up, and you can let it sit for a little while and keep it plugged in so people can look at it. And it’s better off to wait and see if you can find that right buyer over some time. Or maybe you’re paying a ton for your lease and maybe your equipment needs a lot of money put into it that you’re not sure you’re going to get back and you just need to be out of it, then you can make that decision to say, “You know what, I just need to get out of this. I need to liquidate now. I’m calling the local auctioneer to get some bids.”
What should I anticipate if I’m the seller where the buyer is going to squeeze when we talk about the assemblage of assets or clean up the assets?
If you were going into, say, a small manufacturing facility, and you’re only buying the assemblage of assets, and that’s already a horrible conversation to have with a 60 something business owner who was looking forward to retirement and now based on the current economic situation or any other situation has found that their business does not have a lot of value. And now you have some guy like me showing up and telling you your equipment doesn’t really even have a lot of value. And those are difficult conversations to have. And that’s a very difficult part of any valuators job, regardless of what field you’re in. The buyer wants to see how they can make money. So when a going concern, the buyer sees cash flow, and they’re usually buying the cash flow, in a distress sale or an asset only, the buyer is going to look what are my efficiencies? How can I work this into my current operation? What can I do with these assets to make money? And if I don’t need them, or I don’t want them, what can I liquidate them for?
I think the buyer and the seller both see their bottom dollar as, if I have to have an option, what will I get for this minus any expenses required? The top dollar for both of them is what can I do with this? And that might be a different answer for every single business owner. If you have relationships with a client who needs a product that you need these assets to manufacture, they’re worth a lot to you. If you don’t have that relationship, well, they’re probably scrapped. So I guess I would say, as the business owner, don’t be emotionally invested in what you did with these, you have to understand this is a piece of metal, and the buyer is going to come in and only see what they want to do with it. And you can’t take that personally. That’s their motivation for offering you something as well. How much money can I make off it?
I think I would just encourage common sense. You don’t know what the buyer wants. You don’t know what the buyer needs. You don’t know what they’re going to make good use of and not. So I don’t think you as a business broker or I as an appraiser would ever encourage anyone to put a lot of money into something when they don’t know that the buyer of the business or the buyer of the package of assets is going to want it. So if you have a row of CNC machines, and they’re all looking a little tough, think of if you’re selling the house, wait till the buyer comes to you and says, you have to put a new roof on it before you put the money into a new roof and if that’s worthwhile. So maybe they only want the big lathe and a little lathe and they don’t need the milling machines. So maybe you put a little money into updating the two lathes, because they’ve said that’s something they didn’t want to do, and you already had a mechanic there to do it. And then maybe you take the other stuff to a consignment, resale place, an industrial consignment or maybe you take it to an auction and you get rid of it that way. There’s no use to put a lot of money into something that you don’t know if your buyer wants.
Is it better to just offer a warranty on the equipment, or go ahead and fix it?
If you’re having an asset sale, I think you have to make an assumption that you’re not really in a position to offer any sort of a warranty. You need out. You’re not in a position to continue worrying about this stuff. In any major manufacturer, there are secondary marketplace warranties you can buy. There are service contracts you can buy for every type of machinery imaginable. So let’s say you do have that big CNC lathe, and they want to make sure it works and you’re not in position to offer that. Maybe you knock off the cost of one year of a third party service contract. Maybe there would be some way you could assure them that it will work for the next year, you could have somebody come out and check it out and have a package where they come every three months and recalibrate it. You usually would sign service contracts. So a new machine it would come with a year, and then maybe you would buy a three year service contract.
Can you sign a service contract from the manufacturer for a 15 year old piece of equipment?
At that point they’ll probably go to a third party company that is like a licensed service and sales dealer or licensed service and selling company for this manufacturer and 20 other manufacturers in this region. And you can Google these and they’ll put you in touch with these people. And then they’ll come out and they’ll offer you service contracts and they’ll do everything else. This is becoming more and more important because it’s so hard to find technicians for the newer equipment, people are doing a lot more leasing equipment and hiring service contracts as opposed to buying equipment and having a guy in the shop that is going to fix for you.
What are the industries that have a good secondary market that are looking at absorbing equipment?
What you have to look at is, like you said, what industry does this play into? And what’s the outlook for that industry? So I don’t want to make too many comments about what’s happening right now because we just don’t know what’s going to happen, but every industry is different. So for example, if you have energy related assets, maybe you have fracking units, or anything related to a fracking site, the fortunes of that equipment rise and fall with the fortunes of the industry. If you have certain types of large machine tools that are almost always used for aerospace type materials, then the fortunes of the value of those machine tools are going to rise and fall with the fortunes of the defense and aerospace industry.
Construction equipment before we came into the pandemic, there were a lot of states and counties that were flushed with cash and were signing up big long term infrastructure contracts. If those contracts continue, that equipment is going to be worth a lot of money. Infrastructure building in foreign countries, that’s where a lot of these secondhand construction equipment goes. What are those going to look like after the pandemic but that would be the market that’s going to affect the construction equipment. Agriculture, that follows its own pathways, independent of pretty much every other type of industry, farm machinery. We’ve all read a lot about the downfall of dairy, so that obviously affects dairy equipment, row crop and just grain equipment, fruit and vegetable equipment. This stuff all follows its own timeline and they all follow their own industrial patterns. So I would really caution anyone from making blanket assumptions about we’re in a pandemic, we’re going to have a recession, the value of all equipment is going to fall. Well, that’s not necessarily true. It really depends on what industry you’re in, what verticals you’re in, and the fortunes of those industries over the next four months.
How are you making the adjustment on your valuation due to the circumstances surrounding this appraisal?
Like everyone else, we are on webinars every week, where everyone sits around ask this question and they’re just hoping that somebody with a lot of initials after the name gives a good answer. Well, we are doing how we are handling it and how a lot of appraisers I know are handling it, we sort of put into client disclaimer in the report, we’re emphasizing that this effective date is the date that it is. And don’t assume those results are going to be good in a quarter or six months from now. And we are relying on the market data that we have. So we subscribe to a service that tracks auction results. A lot of big auction companies for trucks and trailers and farm machinery and construction equipment, they publish their auction results, you can either pay to subscribe to them, some of them are free. Ritchie brothers, for example is free. The NADA is a truck and trailer guy would pay for that. A lot of farm machinery services, some are free and some you pay for machine tools, auction results, you can find a lot of those online or you just call your buddies in the profession and you say, “Hey, I saw you had a stamping shop two weeks ago. How did that go?”
And we’re just using the most recent data available and until we see that data really fall, we’re not discounting prices a whole lot right now, as of now, prices have remained strong at auction for this equipment. That might seem hard to believe, but you have to remember the factories that produce this equipment are also slowing down. So when there’s not new equipment to be bought, the value of used equipment goes up. So as of now, we have not had to make a lot of deductions. We are putting those disclaimers in and we’re watching every appraisal, we check the market again to make sure it’s still on track. And when it’s not, we’ll start knocking the values down.
I would say especially about manufacturing assets is, we’ve seen a generational shift of off shoring, the supply chains for heavy equipment, automobiles, defense and aerospace. And that’s for a lot of different reasons political and consumer driven. But these are generational shifts, it’s not like, all of a sudden, all of these supply chains are going to be shifted back overseas because we had a six month recession due to a pandemic. So the value of these assets, this equipment, which is needed to produce these parts, is not suddenly going to disappear. Now, if you try to liquidate something tomorrow and we’re in the middle of a pandemic, and people are hoarding the cash, and yeah, it might drop, but it would be a little presumptuous to think that suddenly all these CNC machines or these assembly lines or these robots are going to be worthless, because we had a pandemic. It’s going to take a longer term reduction in demand before something like that happens. These suppliers have been asked to make these investments by the large manufacturers is generational investments, and they’re not going to suddenly turn around and go back overseas. In fact, a situation like this might drive more companies to do more business domestically. So the domestic supply chains are going to need that production capacity, they’re going to need the quality equipment. I struggle to believe that it’s just going to fall off the map like it did after 2008.
Another thing that happened in the equipment industry, prior to 2008, there was sort of a long term build up, sort of the old legacy equipment from a lot of manufacturing processes. Well, in the years 2010, 2011, 2012, 2013, I was in the auction industry at that time, and that was just scrap yard city. Every auction you had these old legacy machines selling for scrap, going to the scrap yard, those were high scrap price times. And that was sort of thinned out the inventory for manufacturing equipment a bit. Since then business owners have been running leaner, they’ve been running without such a backlog of equipment. And so even though you might see some of the same trends, there simply isn’t the inventory of obsolete equipment to suddenly make everything worthless in the way that it may have been 10 years ago.
Were you an auctioneer since you were in the auction industry?
Yes I was.
How do you learn the auctioneer chant?
Like most auctioneers in Indiana, I went to Leopold. At that time it was in Indianapolis, now its back up in Auburn. And you just practice, they teach you, you drive down the street and you sell the telephone poles one after another. It’s a lot of fun. It’s a lot of work. It’s a pretty high stress, high octane industry. You are evenings, weekends, you never quit. It doesn’t matter what if you’re selling cows or real estate or grandma’s China, it doesn’t matter. It is a drive, drive, go, go, go industry. I have a lot of respect for those guys that are out there cranking every day. I prefer the appraisal industry. It’s a little more family friendly.
Do auctioneers print money through the unbelievable businesses they do?
In the industry, I had professionalized dramatically in the last few years, the industry as being the local guy who does it part time to professional operations with a full time staff, online operations and sophisticated representation. I think that that’s an industry and it’s just really professionalized, and you can get some really professional services the old stereotypes of auctioneer Joe and his Cowboy hat standing on a farm wagon, that’s just not. If you go to a modern farmland auction, or a modern equipment auction, and you haven’t been to an auction in 15 years, you’d be amazed by how clean professional the industry is.
Can you talk a little bit about just the appraisal process?
We try to make it simple for you. We try to ask you, “Who are you? What do you actually need?” A lot of people say, “I want to know what my equipments worth.” Why? Are you a lender that needs to collateralize against it? Are you a business owner that needs to think about selling it? Are you a business owner who’s thinking about buying it or replacing it? Are you an accountant that’s worried about tax strategies? Are you an attorney that’s representing somebody fighting over it? Because all of these different things bear differently on the results of the appraisal. Like we said value is the price to a certain party at a certain time. Well, each of those parties have different timeframes and different reasons for wanting to know the value. So the first thing we want to know is why do you need to know? What do you actually want to know? What question do you want to answer? What’s your problem that needs a solution? And then after that, we just want to know what is it that you have? And then we’ll ask some basic questions about the histories. If we do a site visit, we’ll tour the facility, we’ll take pictures, get all the empirical information, make model, serial, year, maintenance histories, overhauls, controls. We try to get an impression of the maintenance procedures in the facility, the environmental, the storage conditions of vital assets, and then we try to be quick and efficient about it so that we don’t use a lot of your time as the client. We know everyone’s running their own business, and the last thing you want to do is hire an outside professional and find that it takes you more time than them to do the job.
What are the different levels of reporting after all that?
The actual evaluation process once we really find out what you need, and we get the asset inventory in good shape, then we go to the market, like we’ve said, and we start putting values on things. And it’s all an estimate, and nobody knows exactly what’s going to sell for tomorrow. We’re trying to give reasonable estimates so that you can make some common sense decisions for whatever it is that your purpose is. And the report is pretty straightforward. A good appraisal report should not just say here’s the value and here’s the asset list. A good appraisal report needs to say, “Here’s why you needed this. Here’s why we did it this way. Here’s where we got these values. And here’s a major asset that was valued a lot higher or lower than you expect. Well, here’s how we came up with this.” And it should be more conversational.
A lot of appraisers get scared that someone’s going to challenge their value, and they’re going to have to defend it. And so they sort of hide their information. A good appraiser should be the other way around. Here’s all the information I used. If you think something’s incorrect, come talk to me about it. And we’ll see if there was a misunderstanding. Or maybe I can explain to you why the marketplace isn’t what you think it is. So we really try to be transparent and open. Every owner of every asset ever thinks it’s worth more than it is, you know that, as a business broker, your baby’s always the prettiest baby. And that’s just the way it is. And so we do a lot of explaining to people, look at the market information and tell me yourself if you think something different is justified. And so we try to hedge off some of those challenges in the report so that they understand where we’re coming from. We’re not bad guys. We’re trying to get good common sense things.
Do you believe that you can Google your asset and what you find on the internet is your value?
I spend 90% of my time valuing on Google. But what does Google actually tell you? If you look at the results of an auction, and there were 10 lathes of the same making model that sold in the last, say, 10 months at 10 different auctions, do you know how to interpret those stats? Was it online auctions or on site auctions? Were they all sales? Isn’t it possible some of those were incomplete sales that the auctioneer recorded and then they didn’t actually sell? Or let’s say you Google the asking price of a CNC lathe, how long has that page been up there? Is that from 2015? And the lathe was made in 2012. Well, that was a three year old lathe. Now it’s an eight year old lathe. Did that sale ever consummate? Have you ever talked to the dealers in the industry to know whether asking price is always 10 or 20% higher than you need? Did you account for the fact that that lathe had a 40 tool carousel, and yours only has a 20? Or that that lathe only had 2000 operating hours and yours has 10,000? So it is true that you spend most of your time on Google, but the interpretation of the data is what really matters in when you are an interested party, when it’s your equipment, you are psychologically incapable of interpreting that data properly, you don’t care that you can give it a good value. And we all see that in our daily lives. You list your car for Kelley Blue Book, plus 20%. The buyer comes and offers Kelley Blue Book minus 20%. And that’s just human nature.
What is the one piece of advice that you could give our listeners that would have the most immediate impact on their business?
One thing I want to mention was about sort of leaning up your equipment operation. A lot of manufacturers, they have this big back warehouse full of old equipment that they had dreams of reusing, or they think it gives them flexibility. If you want to sell your business, the new buyer is going to come in and they’re going to see the cash flow you’re producing with your current assets. That back warehouse doesn’t have any meaning to them, you’re better off focusing on your revenue driving equipment, everything else clean up and sell and use that back warehouse to do something else. Maybe you can do something productive that the new buyer will find value in because trust me; they don’t find value in a warehouse full of equipment that hasn’t been operated in five years.
And the second thing I really wanted to say is, we tour so many manufacturing facilities and I would strongly encourage these Boomer business owners who want to be able to sell their business in the next few years to clean up their facilities. There is a real shortage of skilled labor, skilled practitioners, machinists and millennials and the generation below millennials, Gen Z years. Even if they are skilled workers, they are not going to work in dark, dirty, dank environments with port airflow. When we open the door to a shop Ed, I’m not joking, I can tell you one step into that shop, the average age of the worker there. And if it’s a dark dirty shop with low ceilings, the average age of those labors is retirement age. And the operations manager is telling me they can’t find replacement. And their number one problem is workforce retention. And so if you’re a small business owner, I would strongly encourage you to make those investments in the air quality, lighting quality, the environment, millennials and the younger generation, we value experience. That day to day experience of feeling good about where you work and having this fresh environment. Those are the facilities that are for young talented workforce.
It’s really hard to find a young welder right now. And if you want that one guy out there to work for you, you need to have a clean look shop. And then when you go sell your business, now you can tell that buyer, “Look I have a young engaged workforce. I don’t have 40 guys who are three years from retirement that I can’t replace. I have a diverse, I have experienced guys, I have young guys, I have guys coming up. I have experienced diverse workforce who’s engaged, who’s loyal, and I have no problem attracting new workers. That makes your business more attractive to a buyer than an aging workforce that you’re struggling to replace.
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Website – https://www.capitaleanalytics.com/