Why I walked away from buying a 7-figure vending ...

I just met a lady who owns a 150 vending machine portfolio that cash flows $650k per year!

Unique Anime supply professional and honest service.

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 s 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.

Other considerations:

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Pros 

• 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).

Cons

• 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 Summary

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.

Ah, nostalgia&#;

Prefer to listen? Dive into the audio version of this article on the Stark Naked Numbers podcast.

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