Advice on "leasing to own" route

[s.weir]

Hello,

So interesting little deal here that i want some advice on, for starters here is the ad:

I am selling my vending business that generates about $25,000 revenue annually, however it has greater potential for someone who can make more frequent visits to the locations.  Due to other engagements I currently make bi-monthly visits however, weekly visits should increase the turnover substantially.  Great margins and great side business.  Following are the description of the machines.  All machines are in excellent condition.

Antares (7 machines on locations)

Fast Break (7 machines on locations)

CT-48 (4 on locations +1)

Seaga (1 on location)

Soup machines (2 on locations)

Candy machines (14 machines on locations + 4)

So this guy is selling his route for $35 000 (remember people machines are more expensive in Canada and so is the goods they sell lol) and it is definitely overpriced, but i think he is correct and it has more potential then he is getting right now.  So I was interested, however since I am just getting Back into the business I figured this might be a nice quick boost of expansion.  Problem though is that I am a University student so capital has to be used carefully so obviously i don't have $35000 sitting around let alone want to use it on a route I am still unsure of, so here is what i did.

I emailed the guy proposing to run his routes for him in a sort of lease to own style.  This allows me to get a great feel as to whether it has potential or not and also allows me to use the one resource I have lots of right now, which is free time.  So I would just give him X percentage of the profits per month (or a set rate) and pay slightly more then I would if I were to have just payed the price initially.  I am meeting up with him this week to discuss it, but here are a few things I want to negotiate with him:

1. I will pay him 50% profits per month towards the balance and the rest goes to me as profits.

2. This is all covered by a legal agreement

3. I want to pay TOPS $35 000 by the end even with interest because that is quite over priced with machines performing under what i would like them to be performing.

So yeah I am pretty excited about this and obviously will be doing extensive research into it prior to agreeing to anything, but I would really like your comments, opinions and suggestions.

Thanks!

 

[mission vending]

I used this method a couple of times way back when I was starting in the business. One went well, the other not so well. The key is spending the time and $$ needed to draft a good agreement. Don't do this yourself, get an attorney to write this up if you decide to proceed. Have all the key points in writing and already agreed to and signed by both parties and it should not take much to get the agreement formalized.

A few things to consider:

1. How are profits calculated? Are you including vehicle expenses, phone etc?

2. Who is responsible for repairs?

3. How much are you going to pay monthly, set amount or %

4. What happens if an account is lost? Who is responsible for the equipment?

5. Can you get out or are you committed to finishing the agreement? What if he wants it back at the end?

6. How will he know you are reporting all sales? Can he audit locations?

7. What will you tell locations?

There are many other points to consider, this is just a couple of minutes of thought. So again, IF you move on this be careful and take your time and try to solve as many potential pitfalls BEFORE you take this on in your agreement.

[s.weir]

Thanks Mission these are all excellent points and i didn't even consider your point 2 and 4.  We are meeting early this week so I will know what his conditions are, what can and needs to be negotiated and if its worth it.

[amc-vending]

the way I would set it up in a contract of course is that you pay him x amount down then so much per month till the balance is paid in full however long you two decide on the contract to run.  And you keep all monies that you collect. BUT you will be paying him a set amount each month.

When figuring how much you can pay per month take what he says he grosses per month times that by .7 and then divide by 2.

that should be pretty close 1/2 of your profit after buying product. (not counting gas etc)

also any repairs on the machines would be on you unless he will warranty the machines for x amount of months.

[s.weir]

AMC thanks that does seem like a decent plan. Out of curiosity was the multiplying it by 0.7 to calculate more realistically what he is probably making or is it to figure out money coming in minus product?

[amc-vending]

it is to figure a more realistacally gross amount per month.

the divide by 2 is to figure your net afterwards

stated gross amount per month  $1000.00

Times .7                                                700.00

Divide by 2 for appx net                        350.00

in that example your appx net would be around 350.00 per month

and see if he would take 200.00 a month in payments based on this example                                             

[JEREMYTINA]

it is to figure a more realistacally gross amount per month.

the divide by 2 is to figure your net afterwards

stated gross amount per month  $1000.00

Times .7                                                700.00

Divide by 2 for appx net                        350.00

in that example your appx net would be around 350.00 per month

and see if he would take 200.00 a month in payments based on this example                                             

Depending on the size of the down payment, wouldn't that create a 3-4 1/2 year payment plan?  Might be difficult to get him to accept that...IMHO

[amc-vending]

that was just an example

I am sure that his stated gross is alot higher then that - If it was only grossing 1000 a month - I wouldnt purchase it at that price

[JEREMYTINA]

I understand that.  The equation works whether its the $2000 a month or $50 a month.  But, the down payment will have a huge impact on length of time making payments to equate to $35K without interest.  A 20% down payment would still leave 38 monthly payments of  the $729.05 net,  your example pushes the payment to about 57% of this to five and change.  Which in turn pushes the number of payment out to 53 monthly installments.  If you made a down payment of half you could cut monthly installments down to 33.  Sorry, I like math.

[s.weir]

Thanks guys that is all great info.  Here is a question though:  Lets assume I can get the route up to $30 000 per year (2500 per month), don't want to put down a down deposit and pay him half the monthly profits towards the balance each month (would be paid off in 2.3 years), is this route worth buying?  Its nice for me because it doesn't really cost me anything except time and being a student that budgets time well I have LOTS of that to spare.  I am meeting with him on Tuesday and I want everyone opinion on what i should be offering/willing to take. 

Thanks.

[amc-vending]

Jermytina - I agree with you - the amount of the down payment would shorten the loan terms.  I was just figuring the max I would pay per month 

s.weir - To me it sounds like a fairly good deal and if you could work out something along the lines of what I mentioned above in my example then I would purchase it myself.  i.e. pay him a set amount per month after the down payment. 

With good service you could improve your sales amount per month and then have more available cash because your are paying him a set amount per month.

( i would probally as you grow pay him more per month to pay off faster)

hope it works out for you and be sure and come back and let us know how it worked out.

[JEREMYTINA]

Assuming your true gross can be grown to $30K, you're talking $2500 a month gross, $1250 net, spending half of net ($625) a month on the installment you could pay it off in 56 months.  100 percent of the net would pay it off in 2.3 years.  Are you planning on living on the income or plowing it back in to more machines and locations to increase revenue and reduce payoff time?  The other issue becomes keeping the locations for the length of time needed to pay off the agreed upon amount.  It seems like a real gamble to me, but bulk is the majority of our business, and full line is a different ball game I am not fully familiar with yet.

                 

Maybe offer him the total of 12 months current net for the route paid over 18 months time, service the heck out of it, conduct multiple surveys on product they want in the machines, reduce waste, and increase the margins on any new product put into the machine.  Just my two cents.  More experienced full liners on here likely have different opinions than I do.

[s.weir]

AMC, JEREMYTINA thanks you guys have really contributed and i appreciate it.  JEREMYTINA I will be servicing it like crazy and doing surveys and the likes to maximize sales.  No I am not living off of these, I am a university student so i only need a small amount to spend each month so all of it was going towards buying more machines to pay off this route faster.  If this all works out i am going to somehow send you two the equivalent of a beer ha ha.  Cheers!

[amc-vending]

cool - hope i works out great for you.

be sure and let us know how it all worked out for you.

[s.weir]

Will do!

[JEREMYTINA]

Excellent.  Good luck!

[s.weir]

If I pay back $1000 per month for the first 21 months I will have paid $21 000 towards the total.  In this time the money I am making off of the machines (and a bit extra from my existing route) will be put into expansion.  At the 22 month i will switch over, so that all the money that would have normally gone into reinvestment each month will instead go towards paying back the balance.  This will allow me to pay it off in 24 months.  This is optimistic, however when you see my spreadsheets and stringent calculations for expansion you realize I am very pessimistic when I am dealing with vending machines.  it allows me to have pleasant surprises.     

[s.weir]

Actually the same works when I do $800 a month and switch for the 22nd month.  I think i will aim to do $800 a month then this is a lot less risky and makes it easier to plan.  Heck even when i redo my projections so that I am paying $730 per month (the amount you get when you take $25 000 x 0.7 and then divide it by 2) and switch over in the 22nd month I will have it payed off by the 28th month, which isn't bad since in the mean time I am acquiring a larger route, after it is paid off the amount that I earn from that route will significantly increase and I am young and that's not that long ha ha.

Anyhow I will stop ranting until i can come back with some information. 

[coinvestor]

Two years is a long time to work for free just to pay off some Antares machines. Don't force this to work. If there is not enough to pay a loan and make some cash don't do it. I worked for free for 4 years before I started paying myself. There is always additional expenses.

JD

[mission vending]

Two years is a long time to work for free just to pay off some Antares machines. Don't force this to work. If there is not enough to pay a loan and make some cash don't do it. I worked for free for 4 years before I started paying myself. There is always additional expenses.

JD

Amen to that!!! Your time is more valuable than you are giving yourself credit for.

[s.weir]

Mission vender, coinvester; dually noted. I am just going to meet with him and see what he offers.

[coinvestor]

I have told other local vendors near me that I know and trust that if they ever want to get out of the business to let me know and I will pay them top dollar for the business in stages. I would do this by purchasing 1-2 locations a month until his route is consumed based on revenue. This way nobody is financing anything and we could both walk at any time and neither party would loose, but it would allow me time to come up with funds. In return for the slow sale pace I would pay a higher % of revenue than he would get if he sold outright.

What I'm getting at is, why not ask him to sell you 3-4 locations (or whatever you can pay cash for) now at a decent win/win price. Then in 2-3 months if its still for sale and your happy with the transaction you can hammer out the rest.

I know that things cost more in Canada, but that doesn't change the fact that he is asking 140% revenue for mechanical machines.

JD

[s.weir]

Coinvester...point well taken.  I have not overlooked the fact that due to the duration of the agreement, the high price he is asking for mechanical machines and the difficulties behind such an arrangement that this is by far not the greatest deal in the world or the best way to go about it.  The only reason I am still considering it and will see what he has to offer tomorrow (because he has yet to offer an arrangement of any sort since my intital offer which I did not post on here) is purely that because I don't know what he will offer.  In addition it is almost the end of the semester for me and while I live in the same province as my educational institution, I will be moving back home for the summer.  This will be the only summer that this is the case because I do not have to pay room and board at home so i can work and save the profits for my own use (summers to come i will be staying in the city of my educational institution, working my vending route and working here as well in a job pertaining to my field of study).  Once returning to school in September I will begin the operations of my business, by that i mean I have machines I have bought which are on location which i will be taking over then.  A fair portion of the money I am using for start up for my business will be put towards these machines and the rest that i will not need will be put into buying new machines and locations.  So the point of all this is that I will not have much money to buy portions of his routes until a month or few in.  If I work an agreement with him to either lease his route or lease to own his route, at a fair price, then regardless of if I end up owning the machines at the end or not it will kind of be like owning my own route AND working a vending route as a part time job (which in turn I can use the profits to put towards my route).

Sorry its lengthy, hope it helps make a bit of sense.  The main point is I just would like to use the route to produce some nice extra initial start up profit for me so I can use it to help my own route out.  In fact judging by his emails it sounds kind of like this is what he is hinting at and as long as i am paid appropriately and I am not legally responsible for the machines (so instead I would be a sort of employee) that is fine with me.

Cheers and thanks! 

[mission vending]

One final comment, if it's not in writing it didn't happen. Good luck with the negotiations, please keep us posted as you are able.

[s.weir]

So this is interesting.  I spoke to the guy yesterday and to be totally honest I kind of feel bad for him.  He has around 20 machines (some combos, some just snacks)  and he makes on average $700 profit from his entire route monthly... I make more then that from 3 machines in a month.  He seems like a really nice guy, but he has no business sense either and there is SO much waste in his route because he doesn't seem to understand that you should probably relocate to new locations if they are preforming like that. So obviously I am not interested in buying his route HOWEVER I might end up working for him as an employee.  I would get paid $300 for 24 hours of work a month (6 or less a week) and I still get paid the $300 even if it takes me much less time.  I will also be receiving an additional $50 or so for gas.  This works nicely because I can do parts of the routes around my classes whenever I have time so it acts as a flexible part time job.  Also I will be able to use this money as my living expenses (which are minimal since my residence, schooling and food is covered already) so the wage I would have taken from my small route can be put back into expansion instead.  I just have to give him a definite yes, we have to sign an agreement (including one where I do not steal his locations, which don't sound great anyhow) and he will be showing me the route. 

I think this is much better then the potential of buying his route.

Let me know if I have lost my marbles ha ha