Route Purchase Logistics

[tallguy]

I'm considering purchasing a soda/snack route.    I see a lot of talk on the forums about valuation based on grosses.  I think I got a pretty good handle on that. I am interested in help with confirming that sales are what they say that they are.  I know several methods but I don't think any of them are really foolproof.  I could check the vend counts on the machines and do a second ride through with the seller and see how much money comes out in the meantime.  However, he could very easily go to every machine on his route and just buy 30 of each in the middle.  I could ask to see his tax return.  I don't know for a fact that he is selling his entire route.  I could set up an escrow account, but that has the potential to just complicate a discrepancy instead of solving it. 

 

He has made clear that he doesn't want to finance it.  I don't need to finance it but I would like to avoid handing over a large amount of money on a word.

 

Also, am I being paranoid with him knowing the location of all of my machines and potentially having duplicate keys?   Should I change all of the locks immediately upon new purchase?

 

How have people handled these issues before when buying and selling routes and locations?  How often are people burned by these kinds of issues?

[AZVendor]

You are raising valid issues and you are correct in being concerned.  I'm glad you asked and I'll make some suggestions.

 

The hardest part of this will be verifying the income he claims.  If these are not his only vending locations you should be able to figure that out by looking at his books or his tax return.  The tax return should have a schedule C for each business he owns.  The schedule C for this business will show his reported sales, products purchases, depreciation with an associated equipment list and all of his business expenses.  The schedule C is basically a P&L statement in the IRS format.  If there is any business income not on that schedule then he is under-reporting his income which is doubtful, but you can compare the sales he claims to what he tells the IRS.  He might be over-claiming income to you.

 

The only other ways to confirm his sales are if he uses any kind of route accountability and keeps the collection slips for each machine/location, then you could compare dates and collection amounts.  These numbers might be recorded in a ledger, either on paper or computer, and you could spot check the route slips to the ledger.  You could also ask to see his bank deposit records and compare the total added to the account to what he reported on schedule C. 

 

Running the route one day with him, then taking all the collections and extrapolating them out you one year of sales won't work very well.  There are too many variables in location traffic, human nature as to what they buy, variations in his schedule, etc.  The only way you will know if what the machines are doing now is comparable to what he claims is to run the route over a period of weeks and months to see what you actually collect averaged over time.  There is a variable in that too, as you will hopefully take better care of the locations and generate even more sales than he did.

 

It is not uncommon for there to be an escrow account set up with funds to be paid out at a later date dependent on a target sales amount or some other parameter such as a pending new account.  This can easily be set up if you're using a broker for the deal, but it doesn't sound like you are so you'd both have to agree on a third party escrow service and create an signed, notarized agreement as to the terms of the escrow account and when and to whom the money is paid. 

 

People get burned in one way or another all the time in vending, just look at all the biz-op sales that are made with Chinese combos or Healthy vending.  The best way to diminish the chances is to not take everything the seller tells you at face value.  Ask or demand supporting documents to prove sales, ownership of equipment, location contracts, commission rates, etc.  If you choose to believe everything the seller tells you, even though a voice inside you is warning you otherwise, you could get burned.  It's normal to have hesitancy and doubt on a purchase like this but don't get paranoid.  Remember, you have this forum on your side to advise you and encourage you to do your due diligence.

 

You should plan on changing all the locks immediately after taking possession and keep the old locks and keys for future needs such as used machines you might buy without locks, or if you ever sell a machine to someone.  Do this even if he might be offering to repair things for 30 days or so.  You'll simply have to meet him at the account in that case, to let him in to the machine.  That's a good thing though as you can then watch what he does to fix it.  What you don't want is your machines sitting with common locks in them or with you simply not knowing who might have had keys to them, including someone at a location.

 

If you'd like to get some new locks you can PM me for information as I have locks in stock and can set you up with one key code for all your machines.

[tallguy]

Thanks for all the help.  You've answered every one of my questions in a lot of detail.  As you can tell, I'm new and diligent.  Would you say buying a route or building from scratch is the best way to start?  I have the money.  If I don't spend it on vending, it will be in a mutual fund which offers far lower expected return so I'm tempted to just jump in with buying a route.  Still, I'm a little nervous that even with accounting safeguards, I might get taken for a ride.  I definitely will not be accepting everything he says at face value.

[moondog]

I'm considering purchasing a soda/snack route.    I see a lot of talk on the forums about valuation based on grosses.  I think I got a pretty good handle on that. I am interested in help with confirming that sales are what they say that they are.  I know several methods but I don't think any of them are really foolproof.  I could check the vend counts on the machines and do a second ride through with the seller and see how much money comes out in the meantime.  However, he could very easily go to every machine on his route and just buy 30 of each in the middle.  I could ask to see his tax return.  I don't know for a fact that he is selling his entire route.  I could set up an escrow account, but that has the potential to just complicate a discrepancy instead of solving it. 

 

He has made clear that he doesn't want to finance it.  I don't need to finance it but I would like to avoid handing over a large amount of money on a word.

 

Also, am I being paranoid with him knowing the location of all of my machines and potentially having duplicate keys?   Should I change all of the locks immediately upon new purchase?

 

How have people handled these issues before when buying and selling routes and locations?  How often are people burned by these kinds of issues?

You've hit on the exact pitfalls in buying an existing route.  Having bought many. I have yet to find one that was doing what the seller claimed using his product lineup.  One method that I've used is to pay in increments based on the actual gross receipts.  Basically I pay a fair value for the equipment up front and then run the route with the seller for three months and pay him the gross receipts.  While this takes extra time, I do find it amusing to watch some of them, those that grossly overstated sales, squirm each time we made our collections.

 

And ALWAYS change your locks.  Get the good Medico style with your own key.

[AZVendor]

 

Thanks for all the help.  You've answered every one of my questions in a lot of detail.  As you can tell, I'm new and diligent.  Would you say buying a route or building from scratch is the best way to start?  I have the money.  If I don't spend it on vending, it will be in a mutual fund which offers far lower expected return so I'm tempted to just jump in with buying a route.  Still, I'm a little nervous that even with accounting safeguards, I might get taken for a ride.  I definitely will not be accepting everything he says at face value.

 

Unless you are getting a bad vibe from this guy, go ahead and get more details from him.  You could end up with a good start in vending with his accounts. 

 

Whether you find your own accounts and start slowly with used machines or if you buy existing accounts and begin vending at a higher level is something only you can determine.  If you need the instant cash flow and returns then buy something existing.  If you are patient and don't need instant cash flow then build it from scratch one account at a time.  Maybe do both.  The slow way from scratch can be very slow so it really depends on what you need out of the business.

[tallguy]

You've hit on the exact pitfalls in buying an existing route.  Having bought many. I have yet to find one that was doing what the seller claimed using his product lineup.  One method that I've used is to pay in increments based on the actual gross receipts.  Basically I pay a fair value for the equipment up front and then run the route with the seller for three months and pay him the gross receipts.  While this takes extra time, I do find it amusing to watch some of them, those that grossly overstated sales, squirm each time we made our collections.

 

And ALWAYS change your locks.  Get the good Medico style with your own key.

 

This sounds like a good plan.  But I think he would have a few very good objections.  He is selling because he wants to get out of the business and not deal with doing the work anymore.  If we do all of our collections together, he has basically agreed to spend the next 3 months working.  I'd think he would be very hesitant to agree to this.  I suppose we could just drive from stop to stop collecting the money and I could do the stocking later.  Still, I think he would be very hesitant.

 

The other objection is who controls the locks during this period.  I presume he would.  If I controlled the locks, I could just empty some of the profits in the meantime.  I guess that isn't that big of an objection now that I think about it.  Of course, he'd have to wait while I stocked...

 

Do you find that people generally agree to do it this way?  Do they raise other objections that I'm not thinking about?  Also, fair value is a little bit of a question mark with machine prices since there seems to be a pretty wide gap in valuations sometimes.  How hard do I try to drive a bargain?  Is 3 months a generally accepted price?  Are there circumstances where I should give 4?  Are there other circumstances where I should demand 2?

 

I do like this idea a lot.  It seems difficult for him to juke the price this way.

[tallguy]

Also, what do I do about situations where I don't want the equipment.  I've seen routes advertised where they are using all fairly small combo machines.  I know how it happened.  A BizOp presented the idea that they could get rich quick.  They didn't realize how often they'd have to restock.  They got tired of the business and want to sell.  Some of the locations aren't bad.  I could install a soda and a snack and make a reasonable service interval.  I'd be willing to give up the first 3 months revenue for the location but I don't really want the equipment.  When I was thinking about making a flat offer for equipment/location, I was just going to account for this and offer a little less. But how should I offer "fair value" for a machine that I don't want and that I think others don't want either.  

 

I could just tell him to sell it to a wholesaler.  I'm hesitant to do that because I know that laziness is the primary reason he is trying to sell.  

[AZVendor]

If he's willing to run the route with you for two to four weeks, as he should anyway, then why not work out an escrow account deal with him for maybe 20% of the price.  Then if the sales are within some predetermined dollar figure over the first 3 to 6 months then the money is paid out to him.  Don't expect that you will get anyone to accept a bunch of terms with the risk of them not getting the sale of the business at the end.  Also don't expect them to hand you the keys without you paying them.

 

If you can get records to substantiate the sales then that's about the best you can do.  Then your only concern is how stable is he in the locations, so get contracts if he has them or feel it out yourself while you're running the route with him.  In truth, you may never know that he's on the ropes at any location until you get kicked out.  That's just the nature of the beast sometimes.  He may not even know himself that an account is shopping the vending around or that someone high up is unhappy about something until the bad new comes.

 

As to your question regarding the combo machines, if you can get the locations with machines for a song then you should run them until you can replace them with something better, if needed.  Even though you might not want the machines, you should run them until they don't work or sell them as you can find buyers and replace them with the machines you do like.  You probably won't be able to get the locations only and stick the seller with the machines - they're trying to get out themselves.

[mission vending]

If he can't prove revenue with the schedule C because he is committing fraud and tax evasion on his tax return then you really don't have many options because its obvious he can't be trusted.

 

Bank deposits, commission checks and product invoices can help you get in a range of revenue that you could be comfortable with but still is not absolute verification.

 

So from my perspective you have two options that afford you a level of protection from getting hosed on this deal.

1. walk away

2. a offer with a down payment equal to the value of the equipment with the balance to be paid after 90 days based on a comparison of his claims of revenue and what you actually experience. If it doesn't meet his claims then the final payout is reduced by the same percentage.

 

Finally, absolutely get your own locks and change all of them.