I just met a lady who owns a 150 vending machine portfolio that cash flows $650k per year!
As a mother of three, she runs this business and employs 1 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.
Here’s the deal:
- Vending machines: 29
- Reported EBITDA: $148k
- Asking price: $567k
- Implied EBITDA multiple: 3.8x
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:
- The vending machine industry is highly fragmented. On one end, you have corporations like Coca-Cola that own, operate and service their own machines. But the vast majority are owner-operators with full-time jobs, using vending machines to supplement their income.
- The average vending machine makes around $5k – $6k of profit per year (excluding labour). A machine costs about the same to buy brand new.
- Some landlords require you to pay rent for you to place a machine at their site – a commission of 10 cents per sale. This covers electricity costs. Most do it for free as a service to their customers.
- All modern machines have software which tells you, real-time, the amount of profit and inventory available per machine. Shopify for vending machines – love it!
- Most vending operators have a ‘run’ of about 10-15 machines.
- The key to a successful vending machine operation is:
- Location. It’s all about real-estate. Fish where the fish are.
- Good operators. Make sure the thing is always stocked.
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 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…
The financial tear-down
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:
- A machine takes ~1 hour to maintain and service per week.
- I pay a guy to service it – there’s no way in hell I’m spending my time driving up and down Brisbane tending to vending machines. I’d contract some gig economy folks to do it. You know, Uber and Deliveroo folks in between shifts. I’d probably need to pay a premium for the casual hours and petrol, so I assumed $50 an hour.
The summary is below:
So, if you normalise the EBITDA for these labour costs, the EBITDA halves to $73k, 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.
- Diversified. I like the portfolio approach.
- Not seasonal.
- Good margins (60%+).
- Novelty is cool (satisfies childhood fantasy) but probably short lived.
- Low working cap requirements (stock is cheap).
- Low volume, high effort.
- Current earnings aren’t sufficient to employ a guy – need scale. The gig economy idea would still require management.
- Potential to eat the inventory.
- Don’t know how to service machines. Would have to pay a guy to service them, which erodes margin.
What’s the moat (if any)?
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:
- Industrial estates (tradies)
- Hospitals (staff and patients)
- Suburban offices (stressed and overworked office workers AKA accountants)
- Community sports centers (hungry and thirsty kids and their bored parents who are pretending to be interested)
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 $5k to $7k and it cash flows ~$2.5k 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!
Whilst 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 $650k of annual cash flow 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.