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Putting a Value on a Route

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I thought I'd start this thread with the idea of soliciting responses from everyone on how we evaluate a route for purchase and have a hypothetical example or two as part of the discussion and then pin this topic for future reference for those looking for this kind of information.


There are many different ideas and methods on how to value a route. Over the years that I have been in this business I've had the oppotunity to buy routes both large and small and one of the biggest challenges was to determine its value.


One method that I used several years ago was a formal business evaluation. The seller and I couldn't agree on a price and so we had a formal appraisal done by a CPA whose area of speciality was business appraisals. We spent $2500.00 on the appraisal and one of the things in his report was a comparables report. In the final report he provided information from a database on reported vending business transactions. The 20 transactions he had listed ranged from a low of 56% to 138% of annual sales, without real estate, and annual revenues of 100-250K. The median price for vending businesses was 78% of annual revenue.


Another method that I read about somewhere, I think it was NAMA, was to go 50% of sales for equipment on location, plus inventory, coin mech money, and other assets. Which is the method that I usually use with some modification.


So lets looks at a hypothetical route for sale, 38 machines, varying ages 3-15 years, generating 100K in revenue, includes a route truck 8 years old, 5 idle machines, miscelleanous parts, and some warehouse inventory.


Here is what I would consider a fair price:


  • 50% of annual, PROVEN revenue = $50,000.00
  • route truck $5,000.00
  • idle machines $4,000.00
  • Misc parts at wholesale value $2,000.00
  • 38 machines coin mech money $1,292.00
  • 38 machines inventory @ $150.00 per machine 5,700.00
  • inventory in truck and warehouse at wholesale value $5,000.00

Total $72,992


From here I look at other factors:


In this case a couple of machines are not MDB/DEX capable or upgradeble so deduct $2,000.00 to replace those machines at some point in the near future.


Industry average COG's is around 51% so add or subtract amount COG's is over/under national average. Say his prices are low and COG's is 58%, I will take the $72,992 X 7% = $5,109 and subtract.


Next I look at contracts or the lack thereof. In my experience I have lost about 3% of the accounts I have bought that do not have a contract. so 38 machines is 19 soda/snack locations and take the average sales of $5,263.00 per location (because you don't know which ones you will lose) and add back the value of the machines $1,800.00. Leaving a deduction of $3,463.00.


So for me a fair (maximum that I'm willing to go to) price would be $62,420.00.


Obviously you begin with offering less, sometimes far less. In this case I started at 40K and bought it for 45K, with the seller owner financing 25K at 7% for 36 months

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That's good information but I use what I consider to be a simpler approach.


I take 35% of the gross revenue (100,000 * 35% = 35,000) and the 23,000 in assets listed under revenue to come to a figure of $58,000.  $58,000 is the maximum I am willing to purchase this account for.  I used 35% as a simple "average profit" percentage.


Then, I take the 38 machines and multiply them all by $800 to get approximately $30,000 and add in the $23,000 in assets to find out how much I could realistically liquidate this business for if I had to right after I purchased it.  This comes out to $53,000.  It is pretty close to the $58,000 figure so I am not worried about using the $58,000.  The trick is to get a general idea of what kind of equipment the owner has and how much it is realistically worth.  Older equipment is worth a lot less than $800/machine while newer equipment may be worth more than $1,000/machine.


Finally, I check to see if this business can be paid off in 2 years based off of this simple math.  Since the business shows an estimated profit (based off of my 35%) of $35,000/year, it will pay out $70,000 in 2 years.  $70,000 will cover a $53,000 OR $58,000 purchase.


All that matters to me is that I could pay for this equipment within 2 years based off of these easy figures.  Even if the business tanked right after I purchased it (for $50,000 for example), I could probably liquidated it at a discounted price of $45,000 and walk away from it all with a very minor loss.  If the equipment was junk and I lost all of the accounts,  I may end up losing more like $25,000.


With this information, I would probably start at $40,000 like you Mission recommended but I would be willing to go up to $55,000.  Keep in mind that... if these were premium accounts that the operator had had for many years with premium equipment, I would be willing to go much higher (lets say $70,000 which is the maximum that the account should profit in 2 years).  The profit is the ultimate answer for me though.  I go where the profits are.  It's business 101.


I ALWAYS ASSUME that I will lose EVERY account in 2 years.  If I do lose the account in 2 years AND the accounts pay for themselves within those 2 years, I am left with paid-for equipment.  If I keep the accounts after 2 years, I start earning real profits.  Truthfully, I have lost about 5 accounts.  Four went out of business.  One was a combo machine that was pushed against the wall until the compressor went out.  The manager was kind enough to let me know that he called another vendor to take care of their vending so I wouldn't have to worry about my compressor ever going out in that location again (Gee.. Thanks...).  I still remember that account.  I am still upset about that deal.  I have cancelled several more due to low sales.  

By the way, I'm not bashing Mission's way.  He clearly has WAY more experience than I do.  People might also think my method isn't more simple than his but I do a lot of rounding and a lot of assuming in my math because numbers get out of control when you try to be too precise.  It's a lot easier to get a general number and work with the seller quickly in my opinion.  Trust me when I say that Mission has been doing this longer than me though.

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Just because I've been doing this since you were in diapers does not automatically make me right. :)

The idea here is to have a meaningful discussion about how we make a decision on how much to pay for a small route. Even our reasoning is different our individual maximum price is really not that far apart. It'll be interesting to see additional responses.

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