Introduction

There are a fair number of businesses in the light industrial area that are for sale at any given time. Light industrial businesses have some appeal because they share some unique characteristics. The barriers to entry are moderately high, because most light industrial endeavors require are $200,000 to get started. The costs of equipment, payroll, insurance, building lease, etc. will create a demand for capital that many individuals cannot meet. In this article, we are going examine coating related businesses for sale.

Most consumer products have many parts and most of those parts need to be “coated” in one way or another. Coating the bare metal, wood or plastic parts may be done to improve function, aesthetic appeal or durability. In the businesses I have performed due diligence on, I have reviewed metal plating, paint and powder coating. I can save prospective buyers a great deal of time when looking at this class of business. As the result of reviewing several companies in each category (plating, painting and powder coating) I have reached several important conclusions.

The Good

Generally, the demand for coating services is very high. Every manufacturer, large or small, likely has its parts coated in some stage of its assembly process. Although most large manufacturers are loather to facilitate coating services in house. This is in a large degree due to sophistication of the business, the equipment costs and amount of additional labor necessary to support the effort. Finally, especially with metal plating and wet paint operations, there are environmental considerations to manage.

More interestingly, business that are dedicated the some type of coating process are critical links in many large manufactures’ processes. For example, a particular consumer product may be composed of several hundred parts, both metal and plastic, including nuts, bolts, screws, etc. If the product is made from flat cold rolled steel, the steel is likely to move through the following process. The flat steel will be cut to shape, punched with holes and often bent into some formation. The manufacturer of the final consumer product, let’s use lawnmowers, may perform these operations internally or outsource this function to a metal stamping and bending operation. If the process is outsourced to Company A then as Company A finishes its metal stamping operations, it will ship the results to the coating operation. The coating operation, Company B, will apply one or more coatings to the formed pieces of steel and then ship them to Company C, the assembler. Company C is likely bringing the product to market and will handle final assembly of a wide variety of formed and coated steel, wood and plastic parts and assemble the final product.

What makes this interesting is that Company B, the coating operation is a critical step in the process. Company B need to be able to respond quickly to Company A’s shipment of shaped steel products and must coat and quality check the shipment, before shipping it off to Company C. All three companies have several projects of various lengths and complexities and all three must coordinate their individual production schedules very closely, so that Company C’s production line is not sitting idle waiting on parts from Company B. Worse, Company C may discover that Company B’s work is sub standard, and they are forced to halt production, while Company B redoes it work.

Another important consideration is the barriers to entry in this business. As a rule, these businesses require plenty of equipment and labor. This costs money and most entrepreneurs eager to get into the coating business may not be able to get their hands on the cash needed to cover the equipment, installation, startup workforce, lease payments, licenses, insurance, etc.

Thus, there are several factors that make coating related service businesses attractive businesses to purchase. There is great demand for coating related services and those who specialize in those services are often critical components of their customers’ supply chains. There are also significant barriers to entry for many would be startups who might consider entering the space.

The Bad

At the same time, there are several important negative things to consider when scrutinizing these businesses. First and foremost, there is a reason why many larger, sophisticated shops outsource the coating services. The equipment is expensive, but that may not be your problem as a potential purchaser. Maintenance, however, is your problem. Surprisingly, these processes rely on physics and chemistry and the how exactly the individual processes work may not be obvious to you as a new owner. This makes maintaining the equipment and/or determining the source of quality problems very difficult.

Well, of course, you could rely on your seasoned team, right? This is probably not an option for you. If your business for sale is located anywhere in the south, your ability to communicate basic directions to your staff will hinge on your mastery of the Spanish language. Most of your staff will be at minimum wage or slightly higher. Their ability to contemplate any significant issues will not likely be a strong suit. You will be amused with their ingenuity as it relates to creating hot lunches for themselves, using your $100,000 powder coating ovens. Needless to say, dealing with low level labor is a major downside to these types of business. You will need to pay one person to stand over these people and these processes, in order to maintain quality and keep things from getting off track.

Don’t worry, however, all activities in the shop will be made visible to your managerial “dashboard.” This dashboard will let you know how many projects are in the queue and percentage completion of each. Also, it will automatically re-order important materials and reroute work activity in the event of equipment failure. It handles scheduling and shipping with ease. Six Sigma quality tests will be automatically recorded and unit cost level accounting is built in. Maybe in the Perfect World that Walgreen’s keeps telling us about in television ads. Most likely, there will be piles of incomplete parts stacked up throughout the shop and it will be up to or a very costly shop manager that you employee to figure where a particular customer’s job stands. Other than time cards, your employees are not likely recording anything and quality checks will be the result of Julio’s giving the barrel of parts a “good looking at.” Needless to say, this business is complicated and tracking all the areas of complexity to maintain quality, efficiency and effectiveness is difficult without the appropriate systems that most small businesses in this category lack.

It is up to you to meet your customer’s requirements. If another company delivers the parts to you late, it’s your problem. If one of the major pieces of equipment fails and your vendor cannot get someone on site to make repairs, it’s your problem. If the steel is poor quality and pits appear in the coating, it is also your problem, since the coating, no the steel will be blamed. This can be a difficult position to be in.

Of course, most the materials used in this business are considered environmentally unfriendly. Windy days can blow spray from wet paint shops into surrounding areas, causing issues and stoppages. Metal plating businesses must adhere to rigorous EPA inspections and standards. Powder coating shops have far less issues are the most environmentally friendly of the three.

Like any business, you need to watch your cash flow. Most large customers do not pay quickly, but you have to cover your costs in advance. This business service is often considered a commodity and there often many choices for customers. As a result, payments terms tend to be in the favor of the customer.

In the powder coating business, there are some major players like Metokote that are specialists in heavy duty, high production operations. Metokote has operations scattered around the country to handle powder coating for large customers. In many cases, they will set up shop within their customer’s operation.

The Ugly

The most troubling part of this segment of the industry is that most of this business is going to Asia. While substantial manufacturing activities are still performed here in the states, the trend is definitely to coordinate those activities overseas. Initially, many companies were struggling to offset the manufacturing savings with the coordination issues of overseas manufacturing. But those coordination problems are evaporating quickly as forecasting, transportation and coordination become better organized. More importantly, many companies are outsourcing the entire production process overseas, retaining design, sales and marketing in house.

Conclusion

There are several important conclusions to draw with respect to the coatings industry, including: 1. Don’t go into this business unless you have run a coatings shop previously.

2. Ignore wet paint and metal plating businesses. They are plagued with environmental issues. While metal plating is useful for internal parts, powder coating is apparently the technology of the future for most everything a consumer can see.

3. Powder coating appears to be the most active, future oriented portion of the space. In this process, metal parts are chemically washed and then dry paint powder is spayed on the metal. The powder adheres to the metal due to electrostatic forces and the parts with the powder coating are baked in an oven. The baking process actually fuses the coating and the metal, creating a single substance. The entire process relies on a mix fairly complicated technology and the process can be wrought with variables. For example, a 5-stage wash usually outperforms a 3-stage wash. This matters if you are handling products that are particularly dirty when received and may reduce your need to rework parts. The guns and coating chambers are also a matter of technology, although the actual application doesn’t require much technical knowledge. Certain types of low grade steel react poorly in the heat of the oven, and imperfections may come to the surface, destroying the finish.

4. The most successful powder coating shops are those that can handle more aspects of the manufacturing process for their customers. Shops that can handle metal stamping, metal bending, powder coating and inventory management are in a good position to offer their customers a single source solution. The different capabilities also provide more diverse sources of income.

When evaluating businesses for sale, stay clear of these businesses unless you have a history of running a similar operation. If you have such a background, you will probably know to gravitate towards a full service shop that offers a range of capabilities and serves a multitude of clients. Remember that there are some substantially large competitors and that most of this work is going overseas.