What to look for in a boat company

it is difficult to imagine anyone making a good income with boat building these days. Most of the sucessful boat builders, even after a breif profitable period, will sooner or later close down.

A lot of hard work, a lot of things that can go wrong, a lot regulations that keep changing and nothing you can do about it. At best you might make a decent modest income, at worst you break even and stick it out for many years hoping things will improve, prolonging the agony. (losing money quickly can actually be better, you know you need to get out asap).

You need to look at your income stream (sales), and your costs and overhead. If any of these change you lose. It is often that business owners selling out will hide some of the expenses, or they have certain special skills and spend long hours doing them to make it pay for them. You might have to hire those special skills, and very quickly lose money. You have to project what the future holds in terms of expenses, material costs, salves volume, etc. the current owner might see changes coming and want to get out now, you have to find out what if any changes might be coming down the road.

There are several elements to a manufacturing business: 1) sales; do you have dealers, can you add more, who is your competition, can they edge out your products, or offer them for less money than you? 2) materials and labor costs; do you have reliable suppliers and source of skilled and trained employees? Are they willing to stay for a new owner? will anything change that may affect costs, or quality of the product. It is possible to save material or labor costs without affecting quality? 3) Design: is the product current? Is it consistent with customers in your target market want? are competitors bringing out new models with more or better features?

since customers buy boats infrequently, you seldom get brand loyalty, so you have to keep up dating the features, colors or design to stay a head of your competitors. Each change is a risk, and may add costs, OTOH, not making changes to modernize the deign also has a certain amount of risk. Even interest rates can affect your sales, since it usually determines the out of pocket cost of buying something as large as a boat (which most buyers would likely finance).

All of these things will determine if you can stay in business.

I ran a small manufacturing business before, I do not think I would ever do it again A(too many things out of your control, too many unexpected expenses to make a profit). I am an engineer, I am happy to design, and occasionally build a prototype or first article. but I will leave manufacturing to others.

 

Pretty much all good advice. The thing most boat builders forget, that eventually causes them to fail, is that they are running a business. The end goal of any business is to make money so you can stay in business.

If this guy is making only custom boats to order then he has a very small market niche, a good one perhaps, but it can't be very large. If you're happy with that fine, but if you want to grow the company, not fine. You will need to market your product to attract new customers. How are you going to do that?

As has been said, take a look at the books or have a pro look at the books. Are they bleeding money? Or, is he just old and tired and wants to retire? Will he agree to act as a consultant until you are sure you have the business on a good financial basis?

There are many more questions that need to be asked. And, Score is a great organization.

Keep in mind, there are about 400 new boatbuilding businesses each year and about 400 go out of business each year. (Coast Guard statistics) They are not necessarily the same business, but it's a pretty scary statistic. In a recession I have seen that out of business figure go up to about 800 and the going into business number drop to about 200.

 

I'd recommend starting with the books as others have suggested. Look at 1, 3 and 5 year sales (just the gross sales). If they have changed up or down, discuss why.

Gross sales can be an interesting but irreverent number. After reviewing gross sales look at net operating income (gross revenue minus the expenses necessary to generate that revenue). See how NOI has changed over the same period, especially relative to unit sales. Has the NOI per boat changed? It may be difficult to tie costs to each boat type if he has 5 models, but do your best. If you buy the company, focus on getting this information - you only improve what you measure.

Look at details of the expenses to see if there are any expenses he incurs that would be different for you. You may have more expenses than he incurs if you have to outsource some aspect of construction or he may be paying for some overhead that you don't need. Account for these items and adjust NOI to reflect what YOU would have to spend to produce that number of boats.

The NOI divided by some percentage is what people call the "cap rate" or "market multiple". Say it's 10% for this industry (I don't have a clue what it would be for a small boat builder, sorry). If the NOI is $25,000 per year and he's selling the business for $250,000, then the multiple is 10%. Alternatively, if you find out from a source in the industry that the multiple is really 11%, then if the NOI is $25,000 then the business is really worth $227,000 as a going concern. If he has $500,000 worth of tooling, then in that case the business is not worth the material he's got invested in it. A professional business adviser will look to see if that is the multiple for similar businesses or is too high or low. This multiple can serve many purposes, one is to make sure you are paying (and he is getting) a fair price for the value of a going concern. You may also be able to use this to help incentivize him to stay on for some period of time. Frequently people will pay an agreed price and as incentive for the seller to stay on for, say 18 months, you recalcuate the value of the company at the end of the time period using the same market multiple and if the value of the company goes up, you agree to a second payment (maybe 25% of the increase in value). I've seen this in many manufacturing situations and it is a good deal for both buyer and seller. It helps keep everyone on the same side of the table.

After looking at all that, you'll need to assess whether you can realistically increase sales. You #1 gamble will probably be based on whether you accurately asses your ability to influence sales. Remember, you have no control over the market multiple, you have limited control over sales and gross revenue, you have a little more control over expenses. That means it's easy for you to screw things up, but it's hard for you to make a real positive turn around - that's why so many businesses fail - one way to do it right and a hundred ways to do it wrong.

Best of luck to you. A close friend getting ready to retire from boatbuilding just told me the best way to retire with a million bucks is to invest 3 million and 20 years. It's a tough line of work.

 

Just spoke to a friend who is involved in manufacturing. He has not specifically worked in boat building and it has been a while since he's purchased a going concern (his research was from 2010). He said for small manufacturing with sales in the $1 million to $5 million range, he saw businesses sell as a going concern for 3-4 times the seller's discretionary earnings (annual owner's cash left over after paying all the bills) plus inventory (or any raw materials that will go into finished products).

Remember, look at the sellers expenses and adjust for your expenses. If he's paying himself $10,000 per year and you are going to hire a manager for $40,000, account for your payroll expense, not his.

I asked about land and the simple answer is to value that separately. It's easy for a broker to help value the land by its self. Tooling is not valued separately. This may not be the type of advice you are looking for - but I get a lot of info from people on this site and this is one of the few times I can contribute to a discussion. Good luck.