Thinking of buying a scrap metal business.... Any advice?

Hello everyone
Thank you to the many members that created very informative conversations across all aspects of the scrap metal business, I am new to this industry and learnt more from this forum than anywhere else

I am thinking of buying an established scrap metal business and was hoping for some advice or PM support. I absolutely love every aspect of this business and its positive impact to the planet. A few questions I do have right now are....

1. Am buying existing inventory (scrap) at current market value..... any tips how to accurately assess the true value. As it stands today, the scrap wont be re-weighed or sorted (too much work).... so it will be estimated. And with that being said is there a risk of cherry picking the best scrap out of the pile prior to the purchase date?

2.Found many subscription based scrap pricing sites..... any suggestions for free ones or subscription based ones you can recommend?

3. Scrapright software (current software)..... is this the best?



4. Is now the time to buy a scrap business? I have confirmed margins are maintained by passing through price fluctuations. Financials are relatively steady considering the up and down trends over the past 10 years. There was a great thread that outlined the risk and downfall of a few companies holding and waiting for prices to rise.

5. Have you successfully used tradeshows or social media to increase awareness and create a new generation of scrappers? I walked through 3 landfills and saw nothing but opportunity to increase awareness.....there's so much scrap hitting our landfills still.

5. And lastly..... any basic tips from other scrap metal business owners..... Do or Do Not etc.


Feel free to PM me, and thank you in advance for any advice you can share.

Sounds like you have the funds for doing such an endeavor, I wish you the best of luck.

1. When it comes to assesing the value, I'd look at what other places are getting for their scrap and come up with a figure that's in the middle.

2. My own personal experience has been that recycle.net's the best even though their paid subscription now. Their prices when they were free were as accurate because they took in all the prices from everywhere and found the average. Worth the subscription price, plus you're open to their buyer/seller network.

3. Never heard of it but it looks like the standard when it comes to scrap software.

4. This went with my opening line - it sounds like you have funds to do it and there's no real time to buy a scrap business per say. Buying a scrap yard is like buying an auto yard - if the business has business, there will always be business no matter wht time of the year it is.

5. This one's kind of hard to answer. For the first part, social media does help especially facebook if you're willing to pay for ads as they get displayed on all of their pages or wherever their ads show up. I'd also look into local newspaper classified ads and what not. The second part deals with the general public's census on what they have to and don't have to. If there's no law or regulation that states what can and can not be thrown away, you can talk about it and offer it till you're blue in the face, but the material will find a way to get there.

6. In my short run as a scrapper(I'll eventually do it again if I can find a good enough deal on a dakota(yes I said dakota, not ranger or f-series or box van), I've found that people will give you what they want to give you and they'll give you more of it if you'll pay for it. If you do on site pickup, I'd suggest using a lift or a couple of strong guys because back in January I hauled away a dish washer that had a concrete ring in the bottom(didn't know about it at the time) and me and the brother-in-law had a heck of a time getting it into the back of the 98 f150 I had because I didn't have a lift. If you're serious about buying an already established business I would look at all angles before deciding - is it in the right location, how are the books, how's the clientel, etc..



Just my two cents on the matter,
Matt

I never bought a scrap metal business, but have bought a few other businesses. My general advice about buying existing inventory. Seller is always going to over value the business and existing inventory is almost always way over valued. I would just counter with half of sellers estimated value and meet with increasing counters of lower values! Good advice is use the SBA's guide lines on buying existing business and cut those estimates by at least 10 to 20%. Remember first 3-5 years are going to be tough on any new business, buying a existing business is better than starting from scratch, but also comes with problems as well.

Consider hiring a business buying consultant or broker, they do exist and would be money well spent! Make a 20 question list of any seller. First question, why are you selling? Second question, how long would you be willing to be retained to mitigate possible problems and help insure your success? (don't let the seller cut and run with your money).

Like bigburtchino just said...it's something a lot of people who are new at buying business over look. NEVER sign the documents without a clause to hold the previous owner responsible for things that might arise in the next 12-18 months. Do you research...how much bad blood has this seller left behind. Call around to yards, buyers, sellers, etc...and ask about them. If you get "I sure an sorry X is selling, I hope the new owner can do as good of a job with the level of service" etc... or do you get "Either way I'll never do business with XXX, even if Donald Trump owned it."

Look at it not as a potential purchaser of the business but do you research as a potential customer of the business.

As far as inventory. I would knock 20-30% off the price of what he/she quoted the inventory...it's ALWAYS going to be worth more to the owner because they want top dollar, but realistically you aren't going to get it as a seller. Have an accountant go over the books for the past 3-5 years.

If you have the money have someone look at it professionally who can go back and project profits as well as ways it can be improved. A lot of current and new business owners underestimate the experience and knowledge of a business consultant who has no tie to the business that can give you a straight forward answer....and last but not least. DO NOT, DO NOT, DO NOT!!!!! Allow your want of the company start to rationalize the negatives of the company you are trying to buy. EVERY aspect of the company has a $ amount. If it has negative income then walk away. Unless it's something the old owner did that was just a waste and could be turned positive.

There are so many things to go over and it's 12am where I am, but the best advice I can say is leave emotion out of it. Be cold, calculating, and meticulous about everything down to the cost of pens needed to be purchased. I've purchased 7 companies that I've flipped or tore apart. It's about $$$ plain and simple. Emotion should NEVER be involved!!!

Just a couple of things come to mind.

1: Site contamination and any prior beefs with the EPA. It's like buying an old gas station that had leaking underground tanks -or- a site where toxic waste was once stored. It's the current owner and not the previous owner that's fully responsible for any fines & cleanup costs.

2: Timing is everything ! It's likely that you'll make some learning mistakes in the first few years. If the economic climate where you are is excellent the business will be able to absorb the loss. If the economic climate is marginal or poor it's possible that an error in judgement will put you under.

It would be a shame to look back five years from now and say to yourself that the basic idea was good but that it wasn't the right time to jump in.

Wow! Thank you so much.....so many replies with important comments and insights. Thank you so so much!

A quick summary of the great points, and some answers to some of the questions:

Am interested in this business because it's very profitable, and because we want to move back to Ontario (where the business resides) in a rural area where there simply aren't jobs for my previous profession. I ran a large company for 20 years that required similar fundamentals as the scrap business..... but am obviously green going in.


The motivation of the owner to sell is retirement

References have been completed...especially the long term key accounts

Zero emotion process so far......although I really love anything to do with recycling.... it's redundant as a most of my time is on identifying the risks versus the positives. This company is oddly consistent with respect to EBITDA etc.

The 20+ year GM will continue to manage the operations, so thankfully there will be some real experience retained in the company from day 1.

I will be indemnified from any past or future contamination costs etc. (a pile of legal stuff, won't even try to explain)

The owner will finance a large enough portion of the company to be equally as motivated to ensure the transition is successful, and contractually committed to provide consultant support for 6 months.

Having read the great inventory comments.... am in the process of fine tuning the contract to make absolutely sure the inventory value is "net" which should mean, at the very least, I don't eat any variances related to shipping/market etc. (Contractually, the working capital included in the sale is set at an exact dollar value.... (Inventory, AR, Etc.). If I understood the feedback properly a front end assessment will simply have more risk..... If I can focus on "net value" and possibly incorporate a portion of the purchase as a hold back pending a reconciliation based on it's actual sell price it should de-risk. Will takes some shuffling and sorting..... but maybe the only way to assess the yard? If that isn't possible... will definitely pursue a X.X% less than current market value to retain enough of a margin to retain value obligation.

Thanks again! It's great to see such an active community of members giving so much to this forum.
Am very very grateful

I'm reluctant to post to the thread again but i really would urge caution.

The EBDITA numbers are not a trustworthy indicator of performance. The main problem is that it's uncommonly difficult to get reliable data on the changing value of a currency. Hypothetical example: The Acme Widget company posted a net profit of 1,000,000 dollars in 2004. Ten years later in 2014 it posted a net profit of 1,250,00 dollars. At first glance it would appear that profits increased by 250 k.

There's a fly in the soup ! Over that ten year period the value of the currency (the buying power) dropped by 50%. After adjusting for currency inflation real profits actually dropped from one million to 750 K. The business is showing a downward trend in profitability.

This isn't so bad as long as the company has a very healthy margin of profit. If the company is only marginally profitable the real numbers might indicate that it's actually running in the red & headed for bankruptcy.

Warren Buffet's opinion on the EBDITA might be worth looking into.

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There is a difference between being a long term paid employee of a company and being an owner of a business. As an owner you've got to be constantly asking yourself how what you're doing fits within the big picture. There are forces in play far bigger than yourself that you have absolutely no control over. Most of the time your tail end is hanging out there in the breeze. About the best that anyone can do is to develop some kind of forward thinking and adapt to future trends well ahead of time. If you call it right you survive. If you call it wrong your business dies and you lose everything.

Part of it depends on which economic model you subscribe to.

One of the more popular models is the Keynesian model:

What Is Keynesian Economics? - Back to Basics - Finance & Development, September 2014

One of the more conservative is that of Von Mises:

Ludwig von Mises: The Concise Encyclopedia of Economics | Library of Economics and Liberty

I know that this is stuff that most folks don't think about all that much but it can be an awfully hard fight if you find yourself swimming against the current.

First question are you Jewish? second question what scrap market are you planning on buying into? Third question what do you know about buying, processing, shipping scrap metal? How can u accurately assess the current inventory in a market that's in a free fall. You could buy the entire company and the price of commodities could fall out on u the first day you own it. Nothing like buying a business (huge expense) then getting slaughtered by falling prices. Yards are closing left and right inventory levels are at all time lows in some yards and the mills in America are only melting at 60 percent capacity with no signs of an uptick in the next 6 to 12 maybe 2 years. It's a tough business people either respect you or walk all over you. Your competitors are constantly knifing you in the back(margin compression) trying to steal your customers and offering a few bucks more then you for the scrap. Processing is key in the business if you can't move material fast you are gonna lose your ass. I contract for huge scrapyards some process material faster then others and have preferred status at certain mills from shipping A+ material. They can pay more then you process it faster and crush your margins because you can't do it like them and they get a few bucks more from the mill and deal in huge volumes. It's really scary times in the scrap industry right now and once it's over and the prices start to rise lots of smaller yards are gonna be left in the dust and closed down. Do what you want I am just giving you a heads up that's someone's always looking to eat your lunch and they don't care if you starve it's the most cutthroat business out there.

Originally Posted by harsas

Relevance?

Ditto