Guidance about EMS industry & prospects for new

Hello vikramscr4

You would have the problems as:

1. Cashflow
2. Retention of existing staff - Keep the good ones, as the others leave replace with recommended staff
   
3. Development of new staff
   
4. End of first year extra (double) taxation, based on projected profits for the second 12 months. (If your tax structure is similar to most)
5. Competition from China, Taiwan, Korea, Vietnam (For cheaper pricing structure)
6. Retaining of existing Customers
7. Development and retention of new customers
8. Freight structure development
9. Customs and Tariff barriers if you export
10. Internal Interstate barriers - Unknown if you have these)
11. Technology Upgrades
    
12. Other potential problems.

Items (5) and (11) above are probably going to be the major difficulty, and is are items over which you have no control at all.

Personally, I would not presently mortgage all assets and property, particularly in view of the present decline of what were once good and prosperous markets.

Kind Regards....

1. Don't mortgage your house. Put some money down and buy it with paper.

2. Also, don't buy it without knowing how you are going to increase its sales. And you might use an intermediary period where you help him improve his sales as part of the purchase process. Make it a staged purchase.

3. EMS can mean many things. Do you mean Electronic manufacturing services? What exactly do they do or make?

4. There are always ways to change a selling proposition from price to some other attribute. Determine how you will do that prior to buying the company. There is always room for new entrants in any market. Look at the iphone entering a market also characterized with "low margins & high turnover"... one in which Motorola has been worn down so bad it is about to sell the phone division and leave.

You can look around for some unexploited pre-existing patents... but don't fall into the common error of engineers who think what they need is a better product or reduced production costs.

5. See more information at

http://corporatepartnering.com/3-acquisition-aids.htm

http://corporatepartnering.com/2-teleconsult.htm

http://thelastthird.com/

http://duediligence.info/

Curt

cpart@spamarrest.com

Well, first You find out how much is profit from this 250 000$ and what is exactly what is being sold. By buying existing company, You would not be new in the market, and Your success would depend on reputation of this company, too. It is usefull to know also why there is no more sales per year, is it production capacity, demand on market or concurent companies?

As somebody allready mentioned, dont mortgage Your property unless it is all You can do, and there is the way to negotiate with owner, who would maybe want some sort of regular income rather than one time pay, so You should offer to give part of profit every year to present owner. Just keep in mind that company that does not grow is stagnating and dying, so part of profit should be allways reinvested in its growth. But, You must first find out what are costs of >>cold run<<, i.e. how much profit You have to make just to cover all expenses.

That owner age can also tell You something, but consider this: company need not be sold if it is doing well, owner just have to find someone to run it for him! So, young blood could be infused different way, and former owner could be kept on payroll with good and complimentary salary, and he can drop by from time to time to advice You, also!

So, why dont You offer him to run his company for a year or so, so You can see if You can do it or not, else You would take all risc on Your back with no guarantee of sucess... That would also be time when owner should to introduce You to his suppliers and clients, and to teach You how he was doing it so far. You have to take into account also work inertia, so if You think something could be done better way, first find out why things are done old way, and if You introduce change, do it gradually to see if new system is working or not, and to let workers learn new way of doing things. Really, even if You buy company, You should keep owner on payroll, he would be worth his weight in gold! Just consider how many mistakes he has made to learn his trade, so if You want to avoid them, better consult him on any >>improvement<< You would like to introduce, specially if it is first try for You....:-))

Above all, make list of questions to ask owner, and WRITE down his answers, visit his company and check everything, starting with inventory and renting of space and ending with workers qualification and age to products, their design, quality and generall usefulness to to clients. After puting it all on the paper, write all ideas You get what seems to be possible improvements, and then ask owner if this could be done or not, if not why not, and if possible, why he has not done it....:-))

Regards from Zagreb, the capitol of Croatia, Europe

Marijan Pollak, IT SA/SE 1st. Class, Instructor and Team Leader

P.S. I try to advice You since I married Indian girl from Kolkata and I like Indians even if two of them has made big debts and run away from my country, and they took my money that I invested in their business........ Like You want to do, I mortgaged my property to get cash for business, so try everything else first!

1) Please collect past 3 years balance sheets. 2) Check up with the Bankers if financial information provided is true. 3) Check up with their clients about reputation of the company. 4) Are you already in this field of business? if not then better dont touch it. 5) If every thing looks good then you can take risk. 6) Better have one more partner to share the risks. Never mortgage your basic assets. Also let good financial adviser guide you regarding soundness of the proposal.

Thank you all for the support. Comments & suggestions are useful to me. The company is strictly into Electronic Manufacturing Services - designs come in from developed western countries such as USA, EU, UK where costs are high and this company does the whole assembly starting from PCB, components sourcing & soldering both throu hole & SMT, wave soldering & delivery. The Managing Director of the company (owner) will continue to run it along with me for another 5 years atleast until I learn the business. Profits are in the range of 10% give or take 2%. He started this company about a year ago but he is in the industry for over 15 years. His previous company was into products (telecommunication switches) as the sole supplier for ITI (Indian Telephone Industry) and the company went bust over night due to sudden change in technology in telecom space. He is a trustworthy gentleman and has a fairly alright balance sheet. He wants me due to my background experience and I am interested in evaluating this company as a potential candidate as this fits right in with my background, experience & most importantly its a running factory that I can manage from get go. The company has a handful of US clients such as PTI who outsource to them. Labor issues in India are cropping up due to wage inflation resulting in high attrition therefore eroding margins in every industry these days. The owner is clocking 1/2 Million this year and says he can take it to 3M USD with about $100K investment in machines (adding more assembly lines).

Yes I will do the due diligence in understanding his costing structure, profitability of company, partners, customers etc. Let's say all these are OK, then

My question basically boils down to: In any business right decisions and right action needs to be in place to be profitable, now let's say that's given and I have the confidence and guts to take it there question is will it succeed amidst these factors

a) Capital intensive - new technology new machines constant upgrades

b) Compete with PRC, Malaysia, Taiwan, Vietnam as well as India etc

c) Is this an industry that has a major threat that will take it down or wash away (not in my control factors).

d) If i dont put my house on the line then it has to be funds from friends & family and I can slowly buy the company by taking lesser share of the profits. He is acceptable to this. Thank you for the tip! But i unless there is a doomsday scenario (which i can predict given answers to a, b, c above) i dont want to coming back from it. I am not that type, once i am in i am and figure it out. Also time waits for none so I dont want to spend another year experimenting something i am not sure of even if he allows me to do it.

THank you very very much for these great suggestions

Let's see........

a) Capital intensive - new technology new machines constant upgrades

You need strong contracts with those clients that are outsourcing, so THEY should provide You technology and machines, and in case of changes also provide support and new technologies and machines with training........ More they enable You to produce, more would THEY profit from outsourcing, right? Then, if things are put that way, You only need to make relativistic price calculation sheet, such where every expense would be calculated relative to some most changeable price on World level, i.e. crude oil price for instance. Also everything else, including labor cost should be calculated this way. Once You set formulas and Your biggest clients agree on them, You have basis for continous price recalculation...... Client that provide machines would get prices that much less, how much yearly depreciation of machines would be, which would of course enter price calculations. So, they would be interested to put as much work on those machines as there is capacity for production, because of bigger savings THEY would have. Most important is to put profit % for factory in the calculations that would be fair to You and which clients are willing to pay, and they would be more willing to pay bigger profit if You reserve part of it for factory expansion, which is also in their interest............

b) Compete with PRC, Malaysia, Taiwan, Vietnam as well as India etc

With strong contracts with clients that buy at least 90% of this factory production, and this is usually 10% of clients, Your b) question would not be issue.....

c) Is this an industry that has a major threat that will take it down or wash away (not in my control factors).

As explained by answer to a), if clients are tied up with strong contract with long break period (say 5 years), and if it is THEM who should bear brunt of changing technology, You would not fear any such thing............

d) If i dont put my house on the line then it has to be funds from friends & family and I can slowly buy the company by taking lesser share of the profits. He is acceptable to this.

As I explained strategy for a), mayor expenses would be sadled over to clients, and I think it would be prudent to be as ambitious as THEY are in expanding capacity of that factory, and only limiting factor would be number of clients that want to do business this way, that would NEED products You would make, and if there is no buyers, for whom would You produce? Only case for exception would be where You can get licence for production of some product that would be in great demand in India itself, where domestic production would bring benefits in lower production costs and no custom taxes, oversea transportation costs, etc.

Actually, I invented one such device that such factory as this one could produce, and if You would be interested later when there would be a prototype to demonstrate and patent rights secured, then we can see if it interest You :-))

One of cruciall factors would be quality of products, but surely You would have to meet standards that clients would set, so even for Indian market Your products would be in demand, in spite of usuall Indian beliefs that products of Indian factories are incomparable in quality with ones from, for instance, Germany :-))

I am sure that good product can be fast acceppted and make name for itself......

Therefore, save Your resources for money for such cases where there would be need for investment of money, be it in factory building extensions or starting new product line and paying license for it.

I am sure that as long as You calculate prices of products transparently to buyers and according to agreed upon formulas, there should be no problems for You.

Good Luck and God bless You!

Marijan Pollak, IT Systems Analyst & Systems Engineer 1st. Class, Instructor and Team Leader

P.S. You can contact me directly with email in regard to my inventions and their production in India......

I get concerned in that the company IS still a startup company (at one year old). I ask WHY is he trying to get rid of it so soon?

Also... running a small startup company is a totally different scenario than working for Intel. Management techniques used there probably will not work in a little firm. Just as an example... If I need 1000 widgets, I cannot fill out a purchase request and hand it off to a team of purchasing people to get the parts. I have to do the research to locate the widgets, deal with the sales people, write the check for the purchase.

And while you are doing the above, you find out that someone wave-soldered 500 pc boards, bound for the European Union, using leaded solder.

You will find that the headaches are many many more, and radically different than anything you have found in a big company.

If you go for it though, I do wish you luck.

Bill

Several inconsistencies- "currently clocking half million this year" vs "Sales of 250000;"

"WIth another $100,000 can get to 3 million"?

I don't think so tim. If he could pull in 30 times the new investment, he wouldn't be trying to sell, he'd be borrowing.

There is much danger here, and its not where you think.

milo

Mr. Milo, considering that company exist just one year, it is quite possible that it made sales in value of 250 000$ last year, because of starting up in new field, even if similar to previously produced goods, and that so far results show twice as big average sales per month, thus >>clocking<< half milion, probably as prediction of total yearly sale...... It would still be better if it is half milion in two and half months :-)) but of course it depend on total capacity of production and orders received, and there could be much more orders in second year on this market, too!

You also have no data about investments made so far, so how can You calculate 30 times factor? Maybe it is quite opposite and owner invested far more than factory earned, so he see it would take few more years to really earn profit, and would sell to at least have peace of mind in his old age and leave struggles to someone else?

So it is still question why owner is selling it if it obviously is getting beter then first year, unless owner is old and have been exosted by shocks of changing technology and struggle to start anew, practicaly from scratch..........

so how can You calculate 30 times factor?

$3000000 expected new sales resulting from $100,000 new investment

3000000/100000= 30 times payoff of incremental investment.

one rule of thumb that i have seen for buying business is 5 times sales.

But that is for an ongoing business with demonstrated customer orders on the booiks and history.

You are correct that I have no data about investments made so far. That makes my point about the magical 30 X power of the New $100,0000 incremental investment even more important.

My point was that a 30 times payoff on an incremental investment is a slam dunk if its real, or its fantasy in the real world in which I have worked all my life. I never saw any 30X payoffs on incremental investments.

When I post to this forum, foremost in my mind is "protect the Questioner- from himself and the situation."

I feel that my advice, considering the facts presented, did exactly that.

The facts in this case speculated about $3,000,000 in potential sales when demonstrated sales (SALES-NOT PROFIT!) is just $250 000, with visions of $500,000.

This is called selling the sizzle, not the steak.

Your comments about prior owner being exhausted, struggling and old age do identify a possible motive to sell, but do not argue a business case to purchase. Only a charity case . I believe original poster was looking as a business case, especially as he will be fully committed to this project should he invest.

I saw no compelling reason to invest from the data presented.

milo

Thanks for the response.

milo

Honored sir,

I also did not recommend purchase of company without checking everything (see my previous comments) but You wondered why would owner sell such company if prospects are so bright in doubling sales this year compared to last year sales, so i tried to speculate about HIS reasons. For me this is also reason to be carefull and dont rush where angels fear to tread lightly :-((

Othervise, any calculations are impossible because we have no data about investments made, not even about cost of production, and therefore cannot know how much profit, if any, this factory is supposed to make on 100$ of selling price. That said, even if it may look that IF sales in just TWO months are near 500 000$, THEN it would be possible to earn 3 milion $ per year IN SALES value. Not knowing production cost and actual profit per product, we cannot calculate nor extrapolate from past to future profit, can we? THEREFORE Your statement HAS NO MEANING and how could something without meaning be IMPORTANT? I dont really see where You have taken this 100 000$ from either, so counter to Your hypotesis, there could be uncountable more other hypotesis that would be equally meaningless because they are NOT based on hard facts.

It seems also You have dropped something from Your >>Rule of Thumb<< as to me " 5 times sales " does not say anything..... Did You mean that value of factory should be 5 times sales value? Since this is old factory in new business, surely they had to undergo tehnologicall change where old machines are thrown out and new instaled (or at least for most part), and first 2-3 years can be even loss untill enough orders come to cover production expenses, so even fact about 250 000$ in sales is no measure of factory worth, specially because amount of investment made is unknown.

I believe we both want to help our coleague engineer who want to buy factory, but disusion such as Yours cannot help if You pull arguments out of hat :-))

So my conclusion is that its prospective sales of 500 000$ PER YEAR, even if it is double compared to first one still say nothing as we dont know % of profit, neither before nor after taxes.

In addition to this, any business is risky and no profit is guaranteed, unless one has long term contracts with at least biggest clients, where THEY would bear brunt of any possible technology change, as they should because they are outsorcing production and expect savings in their costs, and they should guarantee purchase of enough of products for factory to be profitable.

I wonder why originall poster is not commenting what we discuss, at least he can give beter data for Your formulas........

We both are trying to help.

You are taking the high road of global issues.

I am taking the low road of inconsistencies in story at the micro level.

If owner wants to sell, why then in next post is he willing to stay on 5 years until the poster is on his feet?

Making general assumptions about the flow of cash through the business from the given data is a stark contrast to some of the claims being made or floated.

if this year is 500,000, and an additional 100,000 makes it possible to get to 3000000, then why is he selling? Business reasons only please.

This is not going to be a very pretty transaction, especially as one perso nmay be putting their life savings on the line.

milo "protect the customer"

I am sorry I have overlooked this part about additionall 100 000$, I tought YOU invented that :-((

Now Mr. Milo, once one invest all he have, there COULD remain posibilities of further investments, and it was stated that this is supposed to be invested in production machines, therefore it would enlarge production capacity, and enlarged production COULD bring more sales, once one have something to sell..........

THAT would be excelent reason for finding investor in such company, but I would NOT sell the company with such good (?) perspective.........

Still, it could be case that profit margin is so low it render it unprofitable, and this people offten overlook, not remembering that it should at least cover all their personall expenses, AND having additionall money for further expansion. All other common sense advices I have given in first place before, as prospective buyer/investor should check each and every detail of company in question, and most basic is ecconomy of production, capacity of production and customers orders size.

I think our coleague would have by now enough help to decide and some options to investing his money.

I have been in such situation where I mortgaged my property and invested in business, and then we get orders 10 times bigger then we could finance, and since we were unable to fulfill them, clients went elsewhere.... It happened because my business partner was too greedy and did not want to reveal factory selling price nor to client buying price, and too fearfull that if we made contract directly between factory and buyers, we would be bypassed.........:-(( He also was thinking that he is superior businesman because he finished Harward Business School, compared to me who has 40 years of work experience, 34 of which in business as adviser and 15 out of 34 as director and owner of my company, which has survived where over 100 000 other companies in same period has sunk under and become extinct.

Marijan Pollak, IT SA/SE 1st. Class,

Instructor and Team Leader

Director and owner of company OBERON d.o.o. Zagreb

Republic of Croatia, EUROPE

The lessons that we learned!

Nice to discuss this with you. You bring up valuable considerations that will serve the original poster well..

milo

Dear Fellow CR4 friends,

I had a very good meeting with the owner yesterday. He has invested $300K in the machines. He has 1 line of SMT Juki machine, pick & placer fully automatic, screen printer & wave soldering ovens 2 of them. For thru hole he has a crew of about 30. His industry experience is 20 years his family runs a Resistor manufacturing company. He started this last year and over last 4 months (set up time of about 8 months) sales is $250K. Of this 90% has been thru hole business & 10% SMT. He says profits are 50% on thru hole (net) due to lower labor costs in India and on SMT its about 30% net. Is this believable as per industry standard in India? His current orders and his confidence makes him project $500K sales in current year. At full capacity we calculated he can make sales of $1.5M. I have given him an offer to value the company since its only 1 year old based on Assets - liability rather than x times revenue or profits. He is thinking it over. Let's say I get in at a reasonable price & as per my request he promises to run factory for another 5 years at least until I learn the business & factory is it a good choice for me given my career change. I want to make sure I am not getting into a sick industry or a dead end. Is it possible to get orders and work hard turn the company around to $10M or $50M company in 5-10 years? of course with more invested.

thanks in advance!

I must say that India IS an up and coming star in the Electronics industry. Many US companies are putting in plants there. I do have some questions though.

He grossed $250K in 1/3 year... which would be equivalent to $750K annually. Why does he project only $500K for this year? Why are profits 50% on thru hole and only 30% on SMT? I would expect labor to be more intensive on thru hole thus resulting in less profit for thru hole than SMT... unless he is amortizing the cost of the pick n place machines.

I ran some calculations and profit should have been $112.5K for thru hole and $7.5K for SMT or $120K total for the 4 months in operation.

Bill

Hello Sciesis2

Presumably you have allowed for the much lower labour rate in India.

For many operations, to use much labour is cheaper than the cost of using high-technology machinery.

The machinery cost has to be amortised across its expected life, but local labour rates do not generally increase as quickly.

In such cases, more people are cheaper than less machinery.

Kind Regards....

Yup!! but he already has bought the machines.

How is employment in your part of the world?? I have concluded that my perfect job would be one where I would spend April through September here in the U.S. and October through March in the Southern hemisphere. That way I could have eternal summer.

Bill

Hello again Sciesis2

I'm retired now, have been for a few years.

Employment in New Zealand is still OK in some areas of expertise.

There are perhaps better opportunities in Australia, where larger scope exists.

As far as the "eternal Summer" goes, I had thought of the same, years ago, but never did it.

Kind Regards, from far away....

Honored coleague, it simply look too good to be true! 50% profit? That would be excelent! If this IS true, and You can find that by inspecting books, then it is excelent opportunity, but that much less reasons for owner to sell SUCH factory!? Just how old the owner is? As I allready wrote, he could have hired somebody to run factory for him, if infusion of >>young blood<< is all he want! So, he invested 300K$, but with such good earning, he would earn 250K$ of profit this year, so what does he need Your money? Or it is case You want to invest milions? Just the same, once You buy factory, You would have no money left for new investment, at least for some time, would You? You can still do it, if You follow my advices! If You do follow my advices and they would be great help to You, then You can send me 100K$, as they would save You milions and bring unlimited posibilities of expansion that would exactly fit needs of Your customers, who would also be Your business partners :-)) Check how stable orders are, and if there is no contracts with buyers who are supposed to save money by outsourcing, then formulate such and insist that THEY provide technology and machines as I allready explained.......or I can do it for You! Then, You would have guaranteed buyers who would have to supply You production facilities of capacity large enough to fulfill their orders. It was been found out that 10% of buyers buy 90% of production and opposite, that 90% of buyers buy just 10% of production, so find out who are biggest buyers and tie them long term with contracts. If You formulate prices based on most unstable resource price on the market, then You would also have no problems in calculating prices of Your products and there would be no oscilations in demand or profit........ But if profit is 50% from sales price, that means it is markup of 100% on production price, and this Your buyers would not like, and You better cut it in half once buyers would supply machines and technology as well as orders, because this would make them order still more products as they would save more money this way....... Logic of economy say that it is better to sell 1000 pieces with 20% profit then 100 with 100% profit, as total volume of money is twice as big, no? Think also that one function of factory is to provide jobs to people, so more workers You employ, less yealous people would be of Your sucess, and they would work best if You share part of profit with them.

Which brings us to question, what YOU want to get from this factory! If it is just money, I repeat again, one can earn more by not being greedy, or You intend to run factory few years and then sell it and enyoy the life with money earned? What if You do suceed and factory would be earning this 50M$ per year in sales, what would You do with money? It is not possible to expand factory all the time on same products, and if You follow my advice, Your production would be exactly matched to needs of buyers anyway.......

As I have mentioned earlier, I am also inventor and one of my inventions would be in great demand in India, with estimated sales in range of 100k units per month, with profit of 100$ per unit, if You would agree to limit profit to 20% to make device more affordable to people. I would start production with one company from Croatia, but I know right away that this factory would not be able to produce that much, and same product would be in demand in whole of Africa and Middle East, where also could be sold at least that much per month....... So, if You need my advices and would be interested in production of such devices, we need to stay in touch...

You can contact me on oberon@globalnet.hr directly........

Regards, Marijan Pollak

Hi Friends, thanks again for great comments. I am going out of town for a while & I will pick up again with him by looking into his books in greater detail regarding the profits & sales in the projects this far. Sorry if I was misleading earlier, he does not want to retire or leave anytime soon at least for another 5-10 years. He wants some more money not a whole lot may be about $100K to streamline certain things and buy some equipment. He did $250K in 4 months but keeping same pace he believes he may average only $500K with no new customers. I ask again, a medium to small set up such as this, would it weather the competition and storms in this industry or is the industry itself a dead end or sick industry or is there money to be made by servicing the western world?