Question
I am currently in the computer industry and am becoming burned out. I am looking at purchasing a small commercial cabinet shop that specializes in 32mm melamine construction. While I have very limited experience in this area I do believe that the current owner has a very good system and is willing to train for a short period of time. I am not completely new to woodworking or cabinet building as I have enjoyed woodworking since junior high and have equipped my garage with several pieces of machinery and have made a few pieces for myself and family. What can I expect in this industry? How can I overcome the downside of the business and what are some of the benefits? How have you grown your business? Please discuss marketing ideas, employee issues, contractor issues, payment issues, and what kind of profits a small one or two man shop might expect.
Forum Responses
(Cabinetmaking Forum)
Give your head a shake! If you really enjoy woodworking and money isn't important, go for it. One advantage you will probably have over me is business skills. I'm an excellent tradesman but a lousy businessman. It's actually more important to have the gift of the gab, as they say.
I put up yard signs at every job, advertised heavy, and basically did all I could to make my name as common to the locals as WalMart. Joined the Chamber of Commerce, became a director, bought signs for the rodeo grounds, banners for parades, etc.
I'm still working on it! Still not making a good living, but I'm getting by. By-products kept me afloat during this winter's slow down (chests, dressers, etc). But business is hectic again.
Difference is, now most of the work I'm doing is high-end. At first it was just plain Jane stuff. Keep researching, thinking and contemplating. Read all you can, too. I will tell you this, you have to do what you love to do in this field. Otherwise it'll make you gray way too early.
To run a business you need business experience and skills. To run a cabinet business you also need cabinet experience and (if you're the one doing much of the work) skills. I would strongly recommend you gain both on an after-hours / part-time basis before quitting your day job.
You could work your regular day job, then work for a cabinet shop another 4 or 5 hours (it'll be good training for the long hours when you're running your own business).
Or buy some more tools and machinery and run a small business out of your garage.
Be careful buying an existing cabinet business. A small shop especially is mostly worth whatever the tools and machinery are worth. Reputation/good will are attached to the owner, not to the shop. They will leave when he does.
It's difficult to hire a good shop man if you have little or no experience hiring people. And certainly you won't know what to look for in the way of skills. And what happens when your shop guy quits on you, in the middle of a big job or two, and you're not up to speed on how to build things?
As far as money goes, there's not a lot. You can make a decent living if you work very hard. At any rate, just be careful. Don't risk your family's savings and future without testing the water first.
1 - Just because you've built some furniture in your garage does not give you adequate experience to become a business owner. I don't intend to offend you on this, but all of us have seen (or bid against) shop owners who simply don't know what they're doing. It sounds like you lack the specific business experience in this field to run a shop. There's much more to it than spending a few weeks with the existing owner.
2 - There are plenty of 32mm cabinet shops around. You're not buying anything special. Unless you have some specific customers that you have relationships with, you will be in deep *!%&. As an owner of a small shop, you are selling yourself and your knowledge of the trade. Without any real experience, how will you do that?
I don't mean to come off negative, but hopefully realistic. This is a tough business, and as others have said, you have to love it. You may think you love to work with wood, but when you're faced with the business challenges that are typical of this industry, you may change your mind.
Here are issues that I ran into:
1) Does the owner really want to sell? Twice, I had owners who backed out of the deal after advertising their business for sale.
2) Will the owner really train you, or is he really thinking retirement? Will he stick around for a year or more, full time, till you know what you are doing? Is this someone you can get along with and like?
3) What do you bring to the table besides money? How can you make a contribution?
4) What market is the business in, and would you really be happy working in that marketplace?
5) What happens if the key employees quit, because they don't like you? Or because they think they should really be running the operation, not you?
I guarantee you the owner is asking too much for this business... who is going to do the appraisal - you, him, the broker or a professional? Are his books in order? How much of his business is done in cash, and not reflected on the books?
Best of luck, but be careful about taking too big a leap.
As to how much you can expect to make working alone (assuming you are operating in some decent market base), once you get your shop skills dialed in, you can probably match the annual salary of, say, an elementary public-school teacher with only a couple of years service (minus the sick leave and health insurance of course). That's assuming jobs come along to keep you busy and you price your work correctly. Moving beyond that seems to require employees or better machinery or more skill and speed (which comes with practice). I'm thinking that's about the most precise guesstimate you'll find regarding anticipated income.
I hope you discover you have some startling design skills and can wow the carriage trade with pieces "to die for" and bring in lots of Daddy Green. I read articles from time to time in the trade magazines about folks doing this instead of slugging out kitchen cabinets day after day (which isn't all bad if you like the working-for-yourself deal).
My take home now is +$250K a year on 2.5mil to 3mil in sales.
I am glad to see that someone at least posted solid numbers to help this guy out instead of telling him to keep his day job.
I've seen that those who risk everything either do great or go broke.
So contributor S, I'm curious - how long have you been in business, how long did it take to grow it to $300K to 2.5 million, and to what extent was your own personal wealth tied to the business, so that if the business went down, you went down with it?
If I were twenty years old, it would be a different story, but now with two kids in private college, I can only afford to risk my time and a modest amount of money.
+250K is my salary, not company profit, which runs around 14% to 20% (that's after my salary). I pay my fair share of taxes.
I've never bet the farm on anything around here. Saved my money and paid cash for everything except the building. If it all goes to hell tomorrow, it won't take me with it.
I would agree to be real big takes that gamble of everything you own +++ and I haven't got the balls to do it. I'd rather sleep at night.
10% for "owner's salary", and another 14-20% for profit (is that net or gross)? I would be interested to find out exactly what you're producing.
Just had a designer who we did a house for call in a panic. She bought furniture for a guest bedroom from a well known LA manufacturer and the client hated the finish. Asked us to strip it and match our furniture. We stripped and found maple veneer on the top only of the night stands and it was sanded through in two spots. The drawers were formed MDF and the rest was MDF sheet. Fake finish. They paid $2000 for the night stand, so the client probably paid three.
If it's made well and unique, you can make a living at this, but it isn't easy.
I netted $96K last year. Not bad, but certainly not as good as many other businesses. From my experience, I see many people struggle in this business because they have no experience. They think since they've pushed some wood through a table saw, they can make good money like the boss that's "keepin' them down". There's just not terrific money in this business, and to make decent money it takes a lot of very hard work, previous knowledge, a business sense, the ability to find good employees (who trust you know what you're doing), and some luck.
You should gain some experience or expect to really suffer for several years until you gain the experience (and hope you don't go bust before you get there).
Materials: 25% 750,000
Labor: 20-25% 600-75000
Fixed Overhead: 10% 300000
Other Expenses 10% 300000
All right, I'm up to 2.1 mil in expenditures. Although I doubt his overhead is 300k a year. Now he also has to be able to turn $1000 worth of plywood into $4000 worth of cabinets, product, etc.
This leaves us with a theoretical profit of .9mil, or 30% gross. He pays himself 10% or 250000 a year, leaving about 20% net profit for the company to buy whatever new toys he wants, maybe even a company Jaguar, who knows?
While I agree that there aren't many of us out there making the same money, none of us should expect less. If you have low expectations, you are setting yourself up for failure. Use him as an example of what to strive for.
AWI has an interesting Cost of Doing Business Survey each year. Their highest profit companies aren't even close to contributor S's figures.
Setting goals is one thing. Starting a business with a skewed sense of reality and goals is another. If you all recall, a guy asked for advice on possibly buying a 32mm shop, with little experience.
8 months later, having worked the longest and hardest I have ever worked in my life, I was the poorest I have ever been. No money and having to put up with customers who just loved being a pain. Thankfully, I was only 19 at the time, and had no wife or family to support. 6 years later I am only beginning to make money.
So, now you know what you have the potential to make, and also that you most likely may not make it.
If I were you, and you had a job making 40-60k per year, I would give very hard consideration in quitting. As you know, the economy sucks, and now isn't the best time to start a company unless you have plenty of money in the bank.
Contributor S's numbers seem real. A shop owner near me made similar kind of money back in the seventies and eighties. Anywhere from 12 to 20 employees with the ordinary woodworking tools of the day. Two to three kitchens a week. This county only had a population of around 50,000 at the time and was growing pretty fast. He retired in the early eighties with a seven-figure stash.
I wonder what a company does with that $350-600k of net profit per year? I would think an owner might take home more than $250k/year if that was really the case, and was paying taxes on those kinds of profits.
For a larger operation, I think 10% for the owner is a great take. As any type of business grows larger, I think you see profit margins shrink a little bit due to inefficiency, etc.
Since I'm not a custom cabinet maker, I'm kind of curious what the total percentage of your materials run for a job. Are you able to make a $50 sheet of plywood into a $200 product?
But at year end, material costs are almost always in the 30% range (this includes buyouts and subcontractors).
Year end labor costs are about 30%. Overhead (shop and office) are about 25%.
That leaves about 15% net profit (before paying owner's salary, depreciation, etc.).
We always figure each employee accounts for about $125,000 in sales.
From your figures, I also gather that your employees are very well paid, probably averaging about $14-15 per hour. For each 125,000 in sales, each employee costs about $37,000. So I'm figuring about 28,000 in pay, maybe a few thousand for insurance, etc., and the rest to take care of payroll taxes?
Are you including any equipment purchases, tooling, toys, etc. in your overhead account, or do you have to take that from the 15% gross profit?
So for the original questioner, if you can have a well-run operation and have sales of about 500,000 a year, you might expect to be able to pay yourself $75,000. Some people may scoff at that, but there aren't many people, especially in this economy, making that a year.
Sorry to sound so nosy, but to make it in any line of business, not only do you have to love what you do, you also have to be able to love the numbers side of it.
I also agree with your assessment that the questioner could make $75/year on $500k of sales if he had experience and was in a high-end market. If he tries to compete on price alone, he will not make it. That is where my concern would come in - with no experience there would be no established relationships and reputation. He would almost be forced to compete on price alone for a while.
This is a very tough business, but good profits can be had. There's a tremendous amount of risk, though, and inexperience really multiplies your risk (in my opinion, to the dangerous level).
Many of the owners were willing to share their bottom line numbers with me, and at least four let me look at their financial statements. Here is my conclusion: the average net to the owner for a well-run, successful cabinet shop, in the right market with a good track record, and lots of referral business, was about 15% net to the owner. Some were doing better - 18% to %20. Many were doing 5% to 10% net. Some were going broke.
The guys at True 32 also published their numbers on their web site, and they claimed numbers in the 20% to 25% net (if my memory serves me).
All of this is to say that a successful $500,000 business could/should net the owner between $50,000 and $100,000. Which suggests to me that contributor S could well make $250,000 on 2.5 million of sales. I've talked to others who are doing as well.
What's more interesting to me is how long it's taken him - or anyone out there - to grow that size of operation, what market they are in, what their capital investment was... i.e. how much was at risk.
If you make it without ever pulling down on savings, or signing personal guarantees, I would imagine we are talking about a business that took a decade or more to develop.
For instance, I've found that a high-end custom shop can grow to a certain level (probably $1-1.5 million) and still obtain a similar net/sales ratio. However, when you get above that sales level it takes some expensive employees to keep that work flowing, and your net/sales ratio goes down.
It seems, from experience, that shop efficiency goes down at that level too, because of the need for another level of management between the office and shop.
Basically, in my opinion, the growth above a certain point is not really beneficial. You take on more sales, and the net goes to higher paid employees and inefficiency. An owner ends up spending more time on the business side of things than the production side of things.
Contributor S's claim of making $250k on $3 mil isn't out of line. But making another $600-900k net on top of that is extraordinary.
You don't survive and thrive in this business without being automated, which costs a lot of dollars.
Comment from contributor A:
Been there, done that. I'll never make the money or have the security or regular hours (mostly 9-5) that I had when I was a systems analyst (aerospace industry). I have stopped popping Rolaids like candy, I sleep through the night and I have even lost weight.
Although I work more hours than I ever did in the computer business, I don't have to be on-call and go to work at 3 am on Sunday to rescue some pencil neck geek from a system crash. At the end of the day, I have an end-of-the-day.
I look at the positive influences that this has had on my life and I can only counsel you to take the leap.
Don't sweat the small stuff. Money isn't everything. I have learned to reduce the level of my desires to the level of my needs. Do without the $30/bottle wine, buy shoes not made by Nike, go to work for someone else. Learn the details. Spend all day sanding a gable or a crown moulding. Make something, anything, out of scrap pallet wood that has multiple compound angles and keep doing it until it is perfect. (Like the finger-painting of a child, taped to the fridge, it is something I am really proud of even though it means nothing to anyone else.)
I still keep in touch with former colleages and have enjoyed their envy when we get together for social gatherings. I refuse to wear ties anymore and my old suits don't quite fit since I am more physical than I used to be. When they grasp my hand and find it encrusted with callouses there is respect that wasn't there when I was just another "propeller head."
Do it because you want to, because you have an inner desire to create something. Do it because, like me, at the end of the day you want to be able to stand back and say "I made that!" or drive by a house and say "I built the kitchen there."
If, on the other hand, you want to make money and that is your primary focus, find another business.
He who works with his hands is a laborer.
He who works with his hands and his head is a craftsman.
He who works with his hand, head and heart is an artist.
I retrained, learned Autocad and a variety of other software cabinet tools and closed the shop. The first couple of years in the workaday world were difficult and trying to do this in the uncertain post-911 world didn't help, but, five layoffs later I have finally found a great company where I think I will be able to stay for many years. These days I am a lot happier person with a lot more free time on my hands to do things I love, like woodworking, which I never had time to do when I was running a business.
