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Issue Date: Vol. 53, No. 5, May 2013, Posted On: 5/21/2013


The Market Value History Of Vending Operations And How Technology Will Change Future Transactions


by Marc Rosset
TAGS: vending route, vending company acquisition, office coffee service acquisition, Professional Vending Consultants, Marc Rosset, vending route value, OCS business value, 4Cs vending, American enterprise experience, Canteen Vending, Sodexo, Aramark, vending operator, selling a vending business, vending route technology, cashless vending, vending machine network, dynamic vending route, economic condition, small business, American business, full-line vending

After 20 years of negotiating and completing numerous vending and OCS company acquisitions, I have seen the market value for the companies in our industry go from good to bad to excellent. Where are we presently, and what does the future hold? First, let's look at some history.

THE 1990s

In the 1990s, many of the original owners were in or near retirement and ready to pass the torch to family members. But things were changing. Downsizing of large factories and 4Cs were beginning to take hold, and PCs and new technologies were changing the American enterprise experience. Many of my first clients were selling because their children or siblings wanted to work with computers, or had found other professions they wanted to explore after college. The kids discovered a world of opportunities that didn't include getting up at 5 a.m. and sometimes working until 9 p.m., or later if a client called with an emergency like a cooler leaking water on the new carpet in the office.

For the first time in our industry's history, there were more sellers than buyers. And seeing that many of the buyers already had had their sons or daughters take over the operation, or had family members waiting in the wings to do so, those companies would not consider selling for a very long time (some never will), so you had ready-made purchasers for the owners who felt that they had to sell.

The national companies like Canteen and Aramark were not really in the picture; they had become less eager to expand by acquisition at that time. Canteen would buy a company, on occasion, but it was mostly focused on expanding its franchise business. It continued that strategy until just a few years ago. Aramark had decided to focus more on foodservice and OCS. In fact, they were selling off street vending divisions around the country, and still are. That forced potential sellers to deal directly with their major competitors, which, for the most part, were larger regional competitors or Canteen franchisees. In a few instances, a Coke or Pepsi franchisee wanted to get into full-line vending.

Very few outside-the-industry buyers, such as private individuals or venture firms, had the money, know-how or willingness to become involved in a low-tech, asset-heavy and low-profit business. Sodexo thought that it wanted to compete in that space and tried buying a few companies, but the firm soon changed course, realizing it had been a mistake.

During this period, typical market prices for the purchase of "good" operations were between 30% and 45% of sales. (Market values quoted in this article don't include inventory, coin and receivables).

A LOOK AT 2007

By 2007, hundreds of original owners had sold. The industry was going through many changes, and more and more operators were making the decision to exit rather than attempt to grow internally or by acquisition. The proliferation of "vend management" companies, changes in K-12 school vending brought about by the obesity issue, Pepsi and Coke contracting for the "pour rights" at virtually every major university in the U.S., and continued domestic downsizing and export of U.S. jobs overseas were making it very difficult to operate in a competitive business environment.

Then the world experienced the economic disaster caused by the collapse of the housing and banking industries. For the next few years, you could hardly give a vending business away. Besides the high cost of fuel, products, healthcare and taxes, banks mainly stopped lending money to the average small business -- the only ones who could easily get money for an acquisition were those that didn't need it.

Offers of 20% to 35% of sales were not uncommon. In some instances, buyers were offering no more than the wholesale value of a company's assets; sometimes not even that much.

AFTER THE COLLAPSE

By 2009, there was a spark of revival in the economy. Housing began a slow ascent and the new technology of "fracking" and the discovery of other new energy sources held promise for recovery. The European economic collapse, and slight slowdown in third-world countries, put more emphasis on reinvesting in the U.S. (China's rapid growth had begun to slow, too). And the moderate increase in U.S. employment began to rejuvenate the country and, along with it, the vending industry.

Around this time there were three developments that have brought valuations to current levels.

The first was the commercialization of new technologies which would change the way we vend. For the first time, machines could be networked and, with the right software, you could schedule service more efficiently, know when there was a service-related problem with a machine and know what products were selling out, or not selling at all -- all while sitting at your desk. All the operators I know who have invested in this technology have told me that they are able to run larger routes with fewer employees, and their bottom lines have gone up.

The second development was the new enterprise based on the "mini" or "micro" market that is the latest rage. Most operators I speak with today say that this new way of supplying product is the No. 1 reason for their increased profit. Unfortunately, not every account can be run this way, and within a few years I would imagine that most viable accounts for this process will already be installed. If we do not continue to "reindustrialize" America, this newfound profitable surprise will be limited in scope.

The third development was Canteen Vending Corp.'s getting back into acquisition mode. A few years ago, the company changed its focus by starting to purchase competitors instead of trying to franchise them. Some larger independents without viable exit strategies now had industry competitors who were willing to buy them.

This may or may not last, as corporations tend to change their strategic planning over time; I already see a slight pullback after numerous acquisitions. But for the short term, a new, larger industry buyer had rejuvenated the sphere.

Market value for companies had risen out of necessity. Some major and secondary metropolitan areas have only a fraction of the good operators they once had. Many of the largest operators understand that you need to "grow or go," and the quickest way is through acquisition. That has put pressure on buyers to up their offers so they will be able to acquire the few remaining excellent operations in their service areas. In the past few years, good-to-excellent operations have gone for 40% to 55% (a few higher) of sales. But I believe this won't last.

WHAT WE SHOULD EXPECT

In fact, I feel that we have begun to see a slow shift back to lower market values. Why?

Big buyers have taken a huge share of many markets in the U.S., but everyone knows you can't just keep acquiring and running your operation on rebates. You also have to run the business effectively; networking technologies and micromarkets can help.

As a company spends millions of dollars networking and upgrading their equipment and software, its owners are not going to be excited about paying an inflated price to acquire another company that has not upgraded to those amenities. In order for an acquisition to be effective, the purchaser has to bring all its equipment online. And the cost of the purchaser upgrading the seller's equipment that lacks these technologies either will result in a lower offer or no offer at all. And the seller's route and technical personnel will, in many cases, need to be retrained at an additional cost to the buyer. This is new, and I believe it's a game-changer. I've already seen this scenario occurring with some of my listings over the past year.

Other compelling reasons are that, regardless of how much our economy has recovered to date, hardly anyone can expect the U.S. to become the expanding industrial powerhouse it once was, beginning in World War II and continuing through the advent of the computer and Internet age. Companies now are doing more with fewer employees. And unless our economic situation greatly improves going forward, we should expect further cuts in government facilities, defense manufacturing and military establishments, and continuing difficulties in the schools. We also have to be concerned with possible new regulations about plastic bottles, clients "going green," and increasing costs for technologically sophisticated machines.

Increased technology, while a godsend for operators, will also mean fewer client employees. This mixed bag can mute the industry's market value.

I believe that, within the next five years, the handful of remaining excellent vending industry companies will prefer to put more money into improving their own operations than into purchasing companies that still are operating in the past. Most good companies will always find an interested buyer, but at what price? I feel there will come a time when an operator who has not kept up will have very little, if any, value to an advanced competitor.


MARC ROSSET is founder and president of Professional Vending Consultants Inc., a specialized intermediary for acquisitions of full-line vending and office coffee service companies in the U.S. and Canada. PVC has represented more than 300 transactions with gross sales value of over $770 million since 1995. And Rosset has played a key role in helping to establish industry-recognized guidelines for the value of vending, OCS and foodservice companies. Email PVCinc1@aol.com


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