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Renting machines to route drivers


tallguy

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I am about to grow and I'm trying to consider the best way to do it.  I have plenty of capital and I'm most interested in the locating portion of the business.  I don't really have time to keep handling the route driving myself.  I need to hire a route driver.  There are many questions about the various ways to pay drivers (commissions, salary, a mix) and the legal status (contractor vs employee).  One thing I haven't seen covered is the idea of just renting a route to a driver.  I think one forum mentioned this tangentially, but I haven't seen it talked about in any detail.  

 

It would work a lot like the taxi business.  Cabbies don't work for the cab company.  They definitely aren't employees.  They aren't even independent contractors.  They rent the cab, the dispatch radio and the medallion from the company.  The rent is the same regardless of how many customers they pick up or don't pick up.  This frees the company from any concerns over employee theft and frees them from having to monitor employees they won't be able to physically supervise.  From the cabbies' perspective, it gives ambitious hard working people with no money, no credit and no skills the ability to earn a fairly decent living.

 

Obviously there are a lot of details that I'd need to get a lawyer to specify in the contract.  Basically, I buy and place machines.  I'll handle the first couple months myself to get a feel for the location's worth and then I offer it for rent.  The drivers have to pay me upfront for the inventory and the coins in the mech. They work at will and pay a monthly rent.  If either party is unhappy with the arrangement, its terminated.  I pay for the inventory and coin mechs still in the machine and find a new lessee.

 

Has anybody tried this in the vending business?  Did it work?  

 

Is there any other way for somebody without experience or capital to enter the business?  

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I am about to grow and I'm trying to consider the best way to do it.  I have plenty of capital and I'm most interested in the locating portion of the business.  I don't really have time to keep handling the route driving myself.  I need to hire a route driver.  There are many questions about the various ways to pay drivers (commissions, salary, a mix) and the legal status (contractor vs employee).  One thing I haven't seen covered is the idea of just renting a route to a driver.  I think one forum mentioned this tangentially, but I haven't seen it talked about in any detail.  

 

It would work a lot like the taxi business.  Cabbies don't work for the cab company.  They definitely aren't employees.  They aren't even independent contractors.  They rent the cab, the dispatch radio and the medallion from the company.  The rent is the same regardless of how many customers they pick up or don't pick up.  This frees the company from any concerns over employee theft and frees them from having to monitor employees they won't be able to physically supervise.  From the cabbies' perspective, it gives ambitious hard working people with no money, no credit and no skills the ability to earn a fairly decent living.

 

Obviously there are a lot of details that I'd need to get a lawyer to specify in the contract.  Basically, I buy and place machines.  I'll handle the first couple months myself to get a feel for the location's worth and then I offer it for rent.  The drivers have to pay me upfront for the inventory and the coins in the mech. They work at will and pay a monthly rent.  If either party is unhappy with the arrangement, its terminated.  I pay for the inventory and coin mechs still in the machine and find a new lessee.

 

Has anybody tried this in the vending business?  Did it work?  

 

Is there any other way for somebody without experience or capital to enter the business?  

One of the reasons that taxi companies can do this is because there is usually a limit to the taxi licences available in any given area. What would keep your lessees from simply installing their own equipment and booting you once they made enough to do so?  if you go this route, you'll definitely want to maintain a liability policy on your machines

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The taxi model is interesting. What if you get a person that leases your route and runs it to the ground? With the taxi you just lose a few fares, with vending you would have guys like me taking over your stops.

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One of the reasons that taxi companies can do this is because there is usually a limit to the taxi licences available in any given area. What would keep your lessees from simply installing their own equipment and booting you once they made enough to do so?  if you go this route, you'll definitely want to maintain a liability policy on your machines

 

Yeah,  I need to talk to lawyers and insurance people about the details for sure if I decide to proceed.   Right now, I'm just brainstorming.

 

Two main things would stop him.   A non-compete agreement would have to be part of the original agreement.  The bigger stop would be the biggest stop in the whole vending business.  In all likelihood, he lacks the capital to do this.   That is actually the huge barrier for most people in this business.  Think about what you need to enter the vending business as an owner/operator.  You need a lot of cash.   I estimate it would take about $100k to start/build a reasonably full sized route.  It pretty much has to be cash since it is really hard to finance used machines.  You can't really have to much more than that though.  There aren't a lot of millionaires that want to haul soda all day.  You have to have a lot of free time.  Effectively, you can't have another career or you must be willing to change careers.  You need to be in good physical shape (ie fairly young, especially when starting).  You have to be a very hard worker, but you can't have developed skills that would be more lucrative somewhere else.   There just aren't many people that fit all these descriptions out there. 

 

There are however a lot of hardworking ambitious people without the cash.   If I happen to stumble onto one of the few that has the money, I'd actually be willing to work with them.  It would be a lot easier to just buy the location from me than to risk violating the non-compete.  I'd even be willing to finance it.  Reading this forum and from my experience with small businesspeople in general, I know that most sellers aren't willing to carry a note even on favorable terms.   

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or he could secretly be a locator if he has vending buddies, telling him which ones make the most so his buddy can take over the account

 

 

True, but that could just as easily happen with an employee.  I'd argue it could happen even easier.  He will be making more money off of the better accounts than he would as an employee.  He'd have to get a reasonably big kickback to give it up.  Is it really in the friend's interest to pay that big of a kickback when the friend could just approach the business directly.   Also, the business is likely to turn the friend down since the friend can't admit he is a friend (if the client told me a lessee conspired against me, I would certainly sue under the non-compete).  Finally, it should be noted that if the lessee loses an abnormally high number of valuable accounts, he'll get blacklisted from doing business with me again.  

 

It just doesn't seem worth it when its fairly easy to just buy the location from me or just approach different locations the old fashioned way.  

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you can start a small route for less than a couple hundred

then build

 

Sure. If you are super ambitious.  That is going to take up a lot of your time and money when you don't have much of either.  Its putting you on the all mac and cheese diet for a very long time.  I'm willing to work with these people, but I think most are just trying to live a fairly comfortable lifestyle right now.  

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Tallguy,  You need to decide whether you are in the machine distribution business, ala a USI distributor, or the vending business.  The model you're kicking around is very close to how the USI distributors sell their machines.  They go out and find locations by presenting them new machines and once the location is set and filled by a distributor-friendly vendor, the USI guy starts hunting for a buyer for the account that is over-equipped and using questionable sales figures.  Obviously this is an out-and-out sale but it's very similar to what you're talking about.  If all you want to be is a salesman or locator then this scenario is what you're talking about being. 

 

This is also similar to the Cooperative Vending business model where you lease machines to a location (in your case, a route driver), sell them the product to fill the machines with and perform certain repairs on the machines.  This model has been used over the years where a location didn't warrant either the machines the location wanted and/or the labor cost required on the vendor's part to service the account.

 

You will find that there won't be much loyalty to you by your renters when they discover how much work it takes to produce whatever profit there is after paying you the rent, providing their own transportation, their own insurance (remember, they don't work for you), pay for any  repairs, buy the products and pay the taxes and the commissions.  As you know, sometimes there isn't much left at the end of the month.  Because I believe you would have quite a bit of turnover with this plan, your accounts will get tired of the musical chairs and begin looking for a more stable vending company. 

 

If you're serious about being in the vending business then you need to be a real vending company that has employees, pays them well and expects them to do a good job for you while you constantly inspect their work.  You will need controls in place to limit theft and to control your products and cash.  You can still require non-disclosure and non-compete agreements from employees and the ones who intend to do a good job for you and to represent your company well won't be complaining about those documents.  Pay the employment taxes, the unemployment insurance and the workman's comp insurance, pay them for vacation after their first year of service and provide them with a professional uniform.  Give them company owned vehicles that are professional, clean and properly set up for the job they need to do. 

 

You are at a point where some of us have been before.  I ran my business out of a series of larger and larger vehicles and larger and larger warehouses until I reached a point that I had to hire my first route driver.  This was my business and I intended to continue growing my business so I never considered giving anyone a piece of it.  If it was going to be done correctly it was going to be done my way.  I hired my first driver when I picked up a large single account that required a dedicated driver due to the 100 machines involved.  My new driver was paid a weekly salary and ran the previously existing route out of the van I had been using.  I had a 14' Isuzu box truck custom built and I ran the new route myself for the next year.  Once we got all the new machines installed and filled, this arrangement worked out very well.  While I didn't have controls in place yet, I knew what to expect from every account on the van route so that when something didn't seem right with the collections I was able to spot it immediately and address it.  My new driver had no idea of how well I knew that route.  He stuck around for the next several years, by the way.  I continued to run the new route myself so that I knew it like the back of my hand and when the time came to expand with another large account the next year, I hired two people.  One was a new guy to run the van route and then a second new guy to train on the new route we put in service with a bunch of retail accounts.  My first hire was then put on the route I had been running as he now had the experience needed to run it.

 

I trained the third driver on the new route with an identically equipped truck as my first Isuzu was.  Once he was trained I could finally step back and begin managing the business.  I invested in route management software and began to monitor overs/shorts, stales, change funds, etc.  I put an office person to work answering the phone, counting the money and entering sales into the computer.  I made all the deposits, performed all the repairs and equipment moves, ordered all products and paid all the bills.  Whenever I did a repair I would also inspect all the machines and then correct any issues with the driver.  As we continued to grow be added a third Isuzu the next year again (it was the last vehicle we added) and laid the three routes out geographically and workload-wise.  The van was retired and because the Isuzus were all clones of each other and loaded identically, it gave us the flexibility that any driver could use any truck at any time when needed. 

 

I paid them all a salary that I do admit now was too low.  I had experimented with hourly pay at one time but was eaten alive with overtime and I never liked the downsides and complications of an incentive pay system.  The employee will always work in the way that is most advantageous to him, so an hourly rate causes overtime, salary causes work to be done too fast without attention to detail, and since salary made more sense to me, I had to continue to "expect and inspect."  I gave every driver a flat 5% raise every year and they got 1 week of paid vacation after one year of service; 2 weeks after three years.  Those were good times during the industry growth of the 90's.

 

There's no reason you can't create a strong business by using paid employees.  I would always caution you to not give control of any part of your business away.

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AZvendor,

 

Words really don't describe how much respect I have for you and what you have accomplished.  I've been mostly lurking on this board for awhile now and you clearly know your golpher.  The thing is that we are approaching this from a couple of different angles and different skillsets.  I'm primarily an investor.  I'm not really a great manager.  Also, I have to be realistic about the fact that I don't have that much time to dedicate to management.  Its always best to give as little control away as possible and its certainly possible to build a very strong business using paid employees. 

 

The thing about vending is that it actually provides a pretty good income for people that have money and time.  In reality, very few people have both.  This forum provides a lot of advice for hard working people that lack capital.  I have the opposite problem.  I have the capital but realistically don't have the time.  Its not that I'm not hard working.  I am, but I also have other investments and responsibilities.  Dedicating more time to vending inherently means less for them.  I need to give up control.  If I'm not investing in vending (or similar small businesses), I basically have no alternative to investing more into the public stock market, where most of my money is already.  A public shareholder has almost zero control over management.  Management will basically steal from you in ways that even the most brazen employee/lessee wouldn't even consider.   Ever wonder if stadium naming deals cause people to buy enough product to justify the cost.  Everyone knows they don't come remotely close but the CEO gets very good seats to the Super Bowl thrown in with the deal.   The returns on capital for most public companies are atrocious. Think of how much earnings a $1000 soda machine makes in a year.   Even a somewhat poorly placed machine will normally earn back at least $20 a week in profit.   If I'm doing all the work myself, I make $1000 off of it for the year.  If I was to invest that $1000 in Microsoft, I'd get back $27 in dividends for the whole year.  Believe it or not, Microsoft is actually one of the better ones.  I know in theory Microsoft is using some of the extra non-dividend earnings to reinvest and that in theory that will make more dividends in the future.  Look at a list of big companies from 30 years ago and you realize it doesn't always work out that way.  What I am looking for is a way to invest and get back a bit more than Microsoft will give me with a bit less work than doing it all myself.  

 

I actually think its possible to get 100 $1000 machines that gross $40/wk, net $20/wk.  Thats $100,000 a year.  I rent them out for $40000.  The driver will be grossing $60k, but after he pays all his vehicle expenses, insurance etc,  he'll probably be making $40k. Its a pretty good living for a job that doesn't even require a high school diploma.  There is an awfully huge supply of hard working people making $8 an hour just looking for a chance to prove they can handle a little responsibility.

 

From my perspective, I probably have about $10k a year in expenses relating to maintenance, capital replacement,  checking up on compliance to the terms of the deal etc.    I'm netting $30k.  Thats more than 10x what an investment in a solid well run public company should deliver.  I know some of my numbers might be off a little but some of them are just being conservative as well.  I'm currently doing way better than $40/wk and I believe that a dedicated driver could probably handle more than 100 machines. 

 

I guess my biggest question is the one relating to where you said that the large turnover would be a problem for locations.  That was actually one of my biggest concerns with trying the employee model.  Employee or lessee,  I think route drivers skill and professionalism is about 99% of whether you keep a location or not.  I guess I was assuming that because I am in essence paying the drivers extra in order to  manage themselves, they would go out of their way to protect that income.  As I said before, losing locations whether through collusion, incompetence or unprofessionalism would be grounds for losing the entire lease.  If I was poor and had a family to support, I'd be super nice to the customers when I knew a single phone call could take me back to minimum wage. 

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You're forgetting about things like who will train the route driver and who will monitor him to ensure he's doing a good job.  I think what you should do, if you're determined to remain in vending, is to find and pay a good manager and a top notch sales person to build this business up.  There's nothing wrong with being the owner who fronts all the money while the people you hire actually run it.  Since you already understand the business you won't be shined on by anyone.  Let the manager hire and train the drivers, monitor them and hold them accountable.  You, in turn, will do the same for your manager and sales person.  With the right people in place you could easily build a successful vending business and continue your ownership and investment perspective.

 

By the way, even though you like the ROI of $20 per machine per week, those are very low numbers and you should insist that your accounts and machines do much better than that.  That's what you would pay the sales person for.  Give them a piece of each account that does more than a certain threshold in gross sales over the first few weeks after installation.  That ensures they will only look for the high grossing locations.  Use contracts with the accounts and charge market or above prices.  Don't pay commissions unless absolutely necessary and be profitable.

 

Again, keep it all in house.  You manage the managers and they manage the employees. 

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You're forgetting about things like who will train the route driver and who will monitor him to ensure he's doing a good job.  I think what you should do, if you're determined to remain in vending, is to find and pay a good manager and a top notch sales person to build this business up.  There's nothing wrong with being the owner who fronts all the money while the people you hire actually run it.  Since you already understand the business you won't be shined on by anyone.  Let the manager hire and train the drivers, monitor them and hold them accountable.  You, in turn, will do the same for your manager and sales person.  With the right people in place you could easily build a successful vending business and continue your ownership and investment perspective.

 

By the way, even though you like the ROI of $20 per machine per week, those are very low numbers and you should insist that your accounts and machines do much better than that.  That's what you would pay the sales person for.  Give them a piece of each account that does more than a certain threshold in gross sales over the first few weeks after installation.  That ensures they will only look for the high grossing locations.  Use contracts with the accounts and charge market or above prices.  Don't pay commissions unless absolutely necessary and be profitable.

 

Again, keep it all in house.  You manage the managers and they manage the employees. 

 

AZvendor,

 

Words really don't describe how much respect I have for you and what you have accomplished.  I've been mostly lurking on this board for awhile now and you clearly know your golpher.  The thing is that we are approaching this from a couple of different angles and different skillsets.  I'm primarily an investor.  I'm not really a great manager.  Also, I have to be realistic about the fact that I don't have that much time to dedicate to management.  Its always best to give as little control away as possible and its certainly possible to build a very strong business using paid employees. 

 

The thing about vending is that it actually provides a pretty good income for people that have money and time.  In reality, very few people have both.  This forum provides a lot of advice for hard working people that lack capital.  I have the opposite problem.  I have the capital but realistically don't have the time.  Its not that I'm not hard working.  I am, but I also have other investments and responsibilities.  Dedicating more time to vending inherently means less for them.  I need to give up control.  If I'm not investing in vending (or similar small businesses), I basically have no alternative to investing more into the public stock market, where most of my money is already.  A public shareholder has almost zero control over management.  Management will basically steal from you in ways that even the most brazen employee/lessee wouldn't even consider.   Ever wonder if stadium naming deals cause people to buy enough product to justify the cost.  Everyone knows they don't come remotely close but the CEO gets very good seats to the Super Bowl thrown in with the deal.   The returns on capital for most public companies are atrocious. Think of how much earnings a $1000 soda machine makes in a year.   Even a somewhat poorly placed machine will normally earn back at least $20 a week in profit.   If I'm doing all the work myself, I make $1000 off of it for the year.  If I was to invest that $1000 in Microsoft, I'd get back $27 in dividends for the whole year.  Believe it or not, Microsoft is actually one of the better ones.  I know in theory Microsoft is using some of the extra non-dividend earnings to reinvest and that in theory that will make more dividends in the future.  Look at a list of big companies from 30 years ago and you realize it doesn't always work out that way.  What I am looking for is a way to invest and get back a bit more than Microsoft will give me with a bit less work than doing it all myself.  

 

I actually think its possible to get 100 $1000 machines that gross $40/wk, net $20/wk.  Thats $100,000 a year.  I rent them out for $40000.  The driver will be grossing $60k, but after he pays all his vehicle expenses, insurance etc,  he'll probably be making $40k. Its a pretty good living for a job that doesn't even require a high school diploma.  There is an awfully huge supply of hard working people making $8 an hour just looking for a chance to prove they can handle a little responsibility.

 

From my perspective, I probably have about $10k a year in expenses relating to maintenance, capital replacement,  checking up on compliance to the terms of the deal etc.    I'm netting $30k.  Thats more than 10x what an investment in a solid well run public company should deliver.  I know some of my numbers might be off a little but some of them are just being conservative as well.  I'm currently doing way better than $40/wk and I believe that a dedicated driver could probably handle more than 100 machines. 

 

I guess my biggest question is the one relating to where you said that the large turnover would be a problem for locations.  That was actually one of my biggest concerns with trying the employee model.  Employee or lessee,  I think route drivers skill and professionalism is about 99% of whether you keep a location or not.  I guess I was assuming that because I am in essence paying the drivers extra in order to  manage themselves, they would go out of their way to protect that income.  As I said before, losing locations whether through collusion, incompetence or unprofessionalism would be grounds for losing the entire lease.  If I was poor and had a family to support, I'd be super nice to the customers when I knew a single phone call could take me back to minimum wage. 

I currently run a 100 machine route and I can give you some realistice numbers if you are interested. I understand that it is a work in progress and needs to be polished. From experience I can tell you that $40k per year for a machine/location lease will a tough nut to crack.

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What happens when an account is lost at no fault of the driver?

Who pays for the repairs?

Who pays the moving expenses?

I think it is a decent idea but there are so many variables that kind screw you or the renter.

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What happens when an account is lost at no fault of the driver?

Who pays for the repairs?

Who pays the moving expenses?

I think it is a decent idea but there are so many variables that kind screw you or the renter.

Losing locations will be treated basically the same way as baseball players striking out.  You don't get in trouble if its just one or two but if you keep doing it, it ultimately costs you your job.  The lease would have to be renewed at regular intervals and I'd have the right to not renew it for that reason.  Obviously turnover is bad for me to.  I'd look at the circumstances of each account loss.  If the business closed down, it gets no demerits.  If they call me and say it was because he was rude or routinely left expired product, he gets huge demerits.  If they pick another vendor without any explanation, he gets a few demerits.

 

I'd pay for moving expenses and major repairs.  He would be responsible for routine maintenance.  Its like renting a house.  You call the landlord if the refrigerator breaks down but you are responsible for changing your own lightbulbs and plunging your own toilet.

I currently run a 100 machine route and I can give you some realistice numbers if you are interested. I understand that it is a work in progress and needs to be polished. From experience I can tell you that $40k per year for a machine/location lease will a tough nut to crack.

 

 

Sure.  That would be great.  The numbers are in no way set in stone.  My point was just that it would provide a much better income than alternative investments.

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Losing locations will be treated basically the same way as baseball players striking out. You don't get in trouble if its just one or two but if you keep doing it, it ultimately costs you your job. The lease would have to be renewed at regular intervals and I'd have the right to not renew it for that reason. Obviously turnover is bad for me to. I'd look at the circumstances of each account loss. If the business closed down, it gets no demerits. If they call me and say it was because he was rude or routinely left expired product, he gets huge demerits. If they pick another vendor without any explanation, he gets a few demerits.

I'd pay for moving expenses and major repairs. He would be responsible for routine maintenance. Its like renting a house. You call the landlord if the refrigerator breaks down but you are responsible for changing your own lightbulbs and plunging your own toilet.

Sure. That would be great. The numbers are in no way set in stone. My point was just that it would provide a much better income than alternative investments.

I'm not against your idea as it seems feasible, but you are basically subcontracting your business. It seems like it would be a whole lot easier to sub it out and they get a commission. You need experienced people to run a route. Getting "anybody" will lead to problems.

Your renting idea bypasses the risk of someone stealing money, but it opens you up to lost equipment. If it is subcontracted, the opposite is true.

Why don't you consider buying a business and managing it as mostly passive income?

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I'm not against your idea as it seems feasible, but you are basically subcontracting your business. It seems like it would be a whole lot easier to sub it out and they get a commission. You need experienced people to run a route. Getting "anybody" will lead to problems.

Your renting idea bypasses the risk of someone stealing money, but it opens you up to lost equipment. If it is subcontracted, the opposite is true.

Why don't you consider buying a business and managing it as mostly passive income?

I'm not sure I understand how I lose equipment.  Are you saying that they would just take the vending machine and put it someplace else?  That would be grand theft and I think that the contract would make it fairly easy to prove in court.

 

It is basically the same as subcontracting.  I think the only difference really is that we are agreeing on a fixed price instead of a percentage.  I think that would just make things a lot easier since I don't have to look over his shoulder and he doesn't have to worry about me looking over his shoulder.  

 

I would go with the driver the first couple of weeks and explain to him the basics of the vending business.  I'm not sure about the transition and finding people.  I think I'd like to just advertise for helpers and get a couple people to help me for a couple of days a piece.  I could use that as an interview process and find out if they were interested.  If they said yes, we could work out the details.  I'm not sure if I want to limit it to only experienced vendors.  That would greatly narrow the universe of potential lessees.  I feel like you can learn the basics of operating and making minor repairs to vending machines fairly quickly.  What sorts of problems do you think offering it to non-experienced people would create?

 

Why don't you consider buying a business and managing it as mostly passive income?

 

That is sort of what I would be doing.  If I did this, I would be interested in landing as many accounts as quickly as I could.  I'd be trying to approach new accounts but I would also be more than interested in buying accounts.  Do you mean why don't I manage this with drivers as employees instead of lessees?   Primarily time.  Somebody else suggested I hire a manager, but I feel like middle managers tend to add a lot of bureaucracy and expense with little value.  I also have to manage the managers.  I feel like the business is simple enough that I'm better off offering the front line employees a simple deal.  If you work hard and accomplish a bit, you get a very good reward.  If you don't, we end our relationship.  Ultimately, I feel like that will get better results than if I pay them less and divert some of the money into managing them. 

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