In checking sites like Bizbuysell and vendingroutesforsale, I frequently come across overpriced routes that simply do not earn enough to warrant the asking price. What gives a vending business real value and what are the pros and cons to buying an established route?
The first thing to consider when looking at a for sale business is the purchase cost, the gross sales and the net profit. Using an example I saw earlier today, a bulk candy vending business was selling for $50,000, the gross sales topped out at $33,000 and the net profit was at $20,000 a year. It sounds good since it means about 60% profit, but looking much closer at the details and reports is important to make sure that the numbers have proof to back them up. You don’t know how often they previous owner ran the route, or how often they changed the candy. It is important to analyze the reports from individual machines in order to gain a good idea of how profitable the business may really be.
The common way to come up with a price for selling your business is by multiplying its yearly net profit by two and factoring in company assets and market variation. With routes in general there are not a lot of assets involved, it is in fact really just the sale of a job that the seller is no longer interested in doing, so price must be taken into consideration. For the particular example the seller listed sixty locations on the route with a total of 275 coin operated machines. Now valuing each used machine at $50 (keeping in mind that it is a 30 year old business), that is $13,750 in machine assets, which is probably a pretty high estimate.
All in all the sale of the route and business does not sound all that bad, based on the numbers provide it would take about three years to recoup the initial investment. Three years is quite a bit of time though, especially when that is all of your profit going to recoup your initial investment. Most of these vending routes do not have owner financing available and banks will not make loans to purchase routes and rarely make loans to buy vending businesses.
Keep in mind that most of the locations on the route have no formal business agreement with the seller, essentially leaving no value or job security to you the buyer. When looking at the sales of route based businesses it is a mistake to assume that you can simply step in to the sellers shoes and make the same amount of money off the bat. Things to take into consideration are the knowledge or parts of the business that may not be written down, such as what candies work well and how often the machines must be serviced. Depending on where you live in comparison to the owners location may lead to increased time and money being invested into running the routes. Any employees that the owner may have had running the route may not stick around, leaving you with little to no staff and none of the valuable knowledge they may possess. You will also have to meet the business owners on your route, which could lead to a very different relationship than with the previous owner. Forking over $50,000 out of your own pocket doesn’t sound like as great of an idea now unless some of these concerns are addressed.
Despite the concerns buying a route can also be a great way to expand your existing business. Many routes may have under performing locations that simply moving those machines to new locations could increase profits by 10-20%. Ideally you would hope to have a buyer with detailed records of how each machine performs and what they have done to optimize it.
No matter what scale the business is, it is vital to your success to apply the same logic to big or small operations in order to figure out their true value. These people that are selling will often talk it up to be more than it is, making false promises that one day may make you wish you had never come across them in the first place. Their motivation for selling can tell you a lot about the business, and also how much room for negotiation there is in the price. Older owners may be looking to retire, therefore they may not be willing to negotiate all that much.
In all honesty buying a route when you are new to the industry is a very bad idea that will no doubt teach you a lesson or two in failure. Going from zero to 275 machines will cause you a massive headache that will prove to be more than most people can handle. Vending businesses do not take a lot of capital to start, nor to expand. Once you have a significant business presence that is indeed a full time job and not just a side stream of income, then no doubt buying routes is going to be more effective than adding locations one by one. Starting out in the vending business you have to learn from the bottom up to be successful, just like with anything else.