I just met a lady who owns a 150 vending machine portfolio that cashflows $650,000 per year!
As a mother of three, she runs this business and employs one full-time employee (FTE).
She works around 55 hours a week servicing half of these machines. The FTE services the other 75.
To free up some time to spend with the kids, she’s looking to sell 29 of them.
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Here’s the deal:
I was amazed she was making that much cash from something as simple as vending machines.
I set up a call with her to learn more. Here’s what I learned:
Listening to this woman’s story flooded my brain with memories.
In the early 2000s I attempted (and failed) to acquire and install a vending machine at my high school. Junior Jason knew it would work because the school canteen only sold healthy food. A high concentration of kids that crave sugar and have lunch money to spend? Shooting fish in a barrel!
But it didn’t happen. My master plan was rejected by the school principal. I learned it was against the state’s education’s policy — something about childhood obesity rates and rotten teeth.
Anyway, this was my chance to realise a childhood dream…
After having a call with the seller, it was apparent the profit numbers presented didn’t factor in some big costs — labour, travel and servicing costs.
I did some back-of-the-envelope math to normalise this profit.
I made the following assumptions:
The summary is below:
So, if you normalise the EBITDA for these labour costs, the EBITDA halves to $73,000, taking the asking price close to 8x EBITDA.
This doesn’t include any contingency for random costs that inevitably come out of the woodwork, like vandalism, looting, fishing said asset from the Brisbane river…
Based on these numbers, the asking price is way too high. I’d be looking at max 3x adjusted EBITDA for this one.
Other considerations:
Pros
Cons
Like most hospitality and food businesses models, competitive advantage comes down to one thing — real estate. The best returning venues are locations with high foot traffic and limited food and drink options. Bonus points if they’re in a location where people have time to kill (like nursing homes and airports).
Other ideal locations include:
The thing is, even if I negotiated the purchase price down to a reasonable multiple, and I could cherry pick the ‘winners’ of the portfolio, would I pay a multiple of profit just for the location?
My hunch is if you offered even a fraction of that cash multiple to the landlord of a desired location as an incentive, they would take it and displace the incumbent.
So then the real question is: do I have the time and enthusiasm to scout out these locations? In other words, can I be bothered doing this myself?
If the capital outlay of a single machine is only $5000 to $7000 and it cashflows ~$25000 adjusted profit per year, the IRR is pretty great. You just need scale to make it worth the dollars.
This is why it’s important to measure returns in both dollars and percentage terms.
Would you rather 100% of a grape or 60% of a watermelon?
In the end, I decided the earnings and opportunity cost just didn’t work for me. There wasn’t enough upside for the hassle. That’s not to say it couldn’t work for you!
While this particular deal isn’t for me, I still love the idea of a vending machine business. If you get a sizeable portfolio with prime locations and product mix, it can definitely be a cash cow.
I don’t know about you, but $650,000 of annual cashflow to support a family is pretty darn good!
Perhaps I’ll re-visit this business model in the future. A project for the kids, or a mid-life crisis muse.
Ah, nostalgia…
Jason Andrew is a chartered accountant and founder of SBO.
This is an edited version of a blog post that first appeared on the SBO website.
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