A precision machining company of this size is usually bought with a senior term loan or unitranche sized on EBITDA after equipment replacement, an asset-based line against receivables and inventory that can include a term piece against the machines, and sponsor or buyer equity, often with a seller note or rolled equity. The building is financed separately or leased. Lenders underwrite the appraised value and age of the machines, customer concentration and end markets, the quality certifications and export registrations, whether the people who quote and program stay, and the capital spending needed to stay current.
- Usual structure
- Senior term loan or unitranche, plus an asset-based line that can include machinery
- Cash-flow leverage
- Senior lenders commonly 2x to 3.5x EBITDA, measured after replacement capex
- Equipment
- Lent against appraised orderly liquidation value, not book or purchase price
- What moves the credit
- Customer approvals and concentration, end markets, certifications, key machinists
- Common buyers
- Sponsors building precision manufacturing platforms, strategic add-ons, management buyouts
The machines: collateral, with an appraisal attached
Lenders are more comfortable with a machine shop than with most service businesses its size, because much of the price is metal: CNC mills and lathes, multi-axis and Swiss machines, inspection equipment, and often the building. But lenders do not take the depreciation schedule or the purchase price allocation as the value of that equipment. They order an appraisal.
The appraiser reports fair market value, what a machine would sell for given time, and orderly liquidation value, what it would bring in a managed sale within a set period. Lenders lend against the lower one, net of the cost of selling. The gap is widest on specialized or older machines with a thin resale market and narrowest on common, recent CNC equipment. See equipment appraisals. Some asset-based lenders add a term piece against that value alongside the revolver; see machinery and equipment in an ABL.
Collateral helps, but it rarely carries the whole price. A profitable shop sells for more than its machines are worth, and the difference is goodwill, financed on cash flow. Buyers at this size are mostly sponsors assembling precision manufacturing platforms, manufacturers buying capacity or capabilities, and management teams buying out founders; see add-on acquisition financing and management buyout financing.
Who the shop makes parts for
A contract manufacturer's revenue is only as durable as its customers, and machine shops are often concentrated: a few manufacturers can account for most of the work. Lenders want revenue by customer for several years and look at the end markets behind them, because each behaves differently.
| End market | What lenders like | What lenders worry about |
|---|---|---|
| Aerospace and defense | Long programs, demanding specifications, approvals that are hard to replace | Certifications and export registrations that must stay current; program cuts |
| Medical devices | Steady demand and strict supplier qualification that makes customers sticky | Regulated quality systems and a small number of large customers |
| Semiconductor equipment | High-precision work at good margins | Sharp swings with the chip equipment cycle |
| Industrial equipment | Broad customer base and repeat part numbers | Cyclical demand when capital spending slows |
| Energy | High-value parts | Revenue that moves with commodity prices |
| Automotive and high-volume work | Volume and long runs | Thin margins and customers that re-bid often |
The stickiness comes from approval. A customer that has qualified the shop to make a part, run first-article inspections and loaded it into its supplier system will not move the work lightly. But a change of ownership can prompt the customer to review that approval, and some supply agreements require consent to a change of control. Lenders ask which customers have been told and which agreements need consent; see change-of-control consents and customer concentration.
Certifications and registrations that follow the owner
Many shops hold quality registrations such as ISO 9001, AS9100 for aerospace or ISO 13485 for medical work, and some are registered to handle defense articles under export controls. These open doors to customers, and losing one can close them quickly.
- Quality registrations are issued to the company's quality system by a registrar. A change of ownership usually has to be reported, and the registrar may audit; the system, and the quality manager who runs it, has to survive the sale.
- Export-control registrations for defense work carry notification duties on a change of ownership, and stricter ones where a foreign buyer or investor is involved. Counsel should confirm them early.
- Customer-specific approvals and special-process certifications sit with each customer's supplier-quality team and may require a new review.
Lenders will ask which of these the shop holds, what share of revenue depends on each, and how continuity will be kept. A shop whose aerospace revenue rests on a registration that lapses at closing is a very different credit from one whose registration continues without a gap.
The people who quote, program and run quality
In many founder-led shops the founder is the best estimator and programmer, and sometimes the only person who can set up the hardest jobs. Quoting is where a job shop makes or loses money, and the knowledge of what a part really costs to run often lives in one head. Lenders ask who quotes today, who programs, who manages quality, and which of them are staying.
Skilled machinists and programmers are hard to hire, so lenders read the roster closely: tenure, pay against the local market, overtime, and whether key people have retention arrangements. A founder who stays for a defined transition, or rolls equity, answers much of the concern. See rollover equity.
An appraisal that shows old machines is not only a collateral problem. It tells the lender that earnings will have to pay for new ones.
Earnings after the machines are kept current
A shop that has not bought a machine in years can show strong earnings while its equipment falls behind. Lenders look at the machine list, the ages of the key machines and the spending history, and deduct the capital spending needed to stay competitive before measuring coverage. A simple illustration in plain numbers: EBITDA of 1,000, less 200 a year to replace and rebuild machines, leaves 800 to service debt. See maintenance vs growth capex.
The other lines lenders check reveal how the shop is run: gross margin by customer or part family, scrap and rework, tooling spend, and whether overtime is covering a staffing gap. A quality of earnings review will test inventory costing and work in progress. Inventory is mostly raw bar and plate stock plus work in progress; asset-based lenders typically advance up to 85% of net orderly liquidation value, or roughly half of cost, on raw stock and finished parts, and usually exclude work in progress. See inventory advance rates.
How the financing fits together
| Piece of the deal | Common financing | Notes |
|---|---|---|
| Goodwill | Senior term loan, commonly 2x to 3.5x EBITDA, or unitranche | Financed on cash flow after replacement capex |
| Machines | Inside the senior collateral, or a term piece from the asset-based lender | Valued at appraised orderly liquidation value |
| Working capital | Asset-based revolver on receivables and inventory | Receivables typically advanced at 80% to 90% of eligible invoices |
| Building | A separate mortgage, a lease from the seller, or a sale-leaseback | Environmental review is standard given coolants and solvents |
| Gap financing | Seller note, mezzanine or rolled equity | Subordinated to the senior lenders |
Where the revolver and term loan come from different lenders, they split the collateral under an intercreditor agreement; see ABL and term loan split liens. Where the seller owns the building, the buyer can lease it or finance it separately; see acquisitions that include real estate. A shop this size has usually outgrown SBA 7(a), which caps at $5 million. In a conventional deal an earnout tied to customer retention is possible if the senior lenders agree to it and it is subordinated to them.
The machine shop file
The term loan needs the P&L, balance sheet and debt schedule, with a year-to-date P&L and AP aging where available. The asset-based line adds an AR aging by customer with days outstanding, the existing liens and an inventory report. The acquisition adds the target's latest full year of figures, never an older year, and the letter of intent. A machine shop file also needs:
- A machine list with make, model, year, controls and condition, and any lien on each machine.
- An equipment appraisal, or the lender will order one.
- Revenue and margin by customer for each year, with each customer's end market.
- Quality and export registrations, with the latest audit results.
- Inventory split into raw material, work in progress and finished parts.
- A staff roster with roles and tenure, and the capital spending history.
Senior bankers run every Midas Partners engagement. Once the documents are in, software builds the financing model, lender presentation, blind teaser and underwriting memo in a day, and a senior banker checks every page before the client approves it. The model carries the appraisal and the capital spending plan into the coverage math. Of the 1,800+ lenders in the book, 235 write asset-based loans and lines and 1,148 write term and private credit. See the package.
Common questions
- Will the lender lend against the machines' full value?
- No. Lenders lend against an appraisal, usually orderly liquidation value net of selling costs, which is lower than fair market value. The rest of the price is financed on cash flow.
- What happens to our AS9100 or ISO registration when the shop is sold?
- The change of ownership usually has to be reported to the registrar, which may audit. The quality system and the people who run it have to carry on. Lenders ask what share of revenue depends on each registration and how continuity will be kept.
- Do customers have to approve the sale?
- Sometimes. Some supply agreements require consent to a change of control, and customers with strict supplier qualification may review the shop's approval. Lenders ask which customers have been told and which agreements need consent.
- The founder is the shop's main programmer. Is that a deal-breaker?
- Not if there is a plan. Lenders look for staying programmers, documented processes and a defined transition, often with the founder rolling equity or holding a note.
- Can work in progress go in the borrowing base?
- Usually not. Asset-based lenders advance on raw material and finished parts, and exclude work in progress because it is hard to sell to anyone else.