Most of us who started out in office coffee service have grown our companies through direct sales. We went out in the field, solicited potential customers and increased our volume one account at a time. After a while, however, a point is reached in which we are so busy running our operations that we have little time to devote to new sales. When that happens, there are several approaches to help with sales and accelerate expansion.
One option is to hire a good operations manager to oversee daily business decisions while you continue to go out and sell, sell and sell. Another is to hire your first sales representative. This will require close supervision, providing the proper training and monitoring performance daily. The cost of salespeople is very high, turnover is frequent and the time spent managing them takes you away from other areas of running your business. The last option is to purchase a competitor to accelerate growth without spending the time and money to build a much larger company by yourself. Most large refreshment service firms in the United States and Canada have taken the acquisition course.
What do you look for when negotiating a fair price for an OCS company? What is a fair price to pay? What are you getting for your investment? Will the purchase allow you to eliminate many of the costs that your competitor incurred in running their business? What will be your return on investment, and how long will it take to pay for this new acquisition? Do you have enough office and warehouse space to absorb this company? Do you have to move to larger space?
There are many areas to look at before making an offer. You may have a price in mind, and so will the seller. The following characteristics of the seller's operation must be analyzed, and questions answered, in order to get all of the facts before you make your offer: Let's discuss some of the most important.
Accounts and sales. Regarding the prospective acquisition's accounts and sales performance, you want to know the total sales and gross profit minus sales tax, deposits and delivery charges. You want information on leasing sales and how they're billed (monthly or quarterly?) You need to know the number of active accounts and volume of each. The 50 largest clients are especially important; you need details on the volume of each, and about any contracts. You'll also want to know the number of invoices daily, weekly and monthly.
And what types of accounts are being serviced. Are they typical OCS customers or restaurants, where gross profit usually is much lower? What is the geographical area of the operation; can you merge its deliveries into your routes? If there are out-of-territory accounts served beyond the normal delivery area, how are they serviced?
Account receivables. You have to get a handle on the firm's receivable and aging (monthly averages for current, over 30 days, over 60 days and uncollectable).
Physical assets. It's essential to become familiar with the business's contracts: are there agreements for a set period of time? And how about leased equipment like water coolers, single-cup brewers, refrigerators, microwaves, icemakers and other appliances? When do those agreements expire?
Equipment. The potential acquisition's equipment is a major consideration, so you want to know the manufacturers, especially of the regular and single-cup brewers. And what is the age of the equipment and the numbers of pourovers, automatics, thermal server and airpot brewers, single-cup, water coolers (types), refrigerators, microwave ovens, icemakers, service cabinets, vending machines and anything else you will wind up running or replacing. How much old and new equipment currently is in inventory? How much is leased per year (single-cup brewers, water coolers and the like?)
Inventory. Another area of great importance in gauging a company's value is its inventory. You'll want a total breakdown of all products (coffee and other beverages, paper goods, etc.), as well as the quantity of products that are at or past their "use by" date. And inventory includes such replacement components as water filters and equipment parts.
Fleet and computer assets. If the potential acquisition's trucks and other vehicles are included in the sale, the prospective buyer will want to know their age and mileage, and whether they're owned or leased. Also of concern is the target company's computer system: is it compatible with what you currently have and can it be upgraded? If not, will you have to purchase a new system?
Owners, managers and employees. There are many personnel questions that must be considered. Are the owners and managers of the acquisition willing to stay on, and if they are, for how long? How will the owner be compensated during the transition? How many full- and part-time employees are there, and what is the total payroll? What are the details of company policies (like vacations) and benefits (e.g., does the company provide health insurance and, if so, is it single or family? Who pays (company, individual, split)?
Salesforce. You will want details about staff functions. How many salespeople are there? Are they full- or part-time? How long have they been with the company? How are they compensated? Consider not only salaries and commissions, but also residuals and bonuses, as well as benefits. Do they have noncompete agreements, and of what duration? What about salesforce expenses (mileage, cellphones, entertainment and the like)?
Delivery and route organization. Delivery personnel and route organization are related issues with which you'll want to become familiar. How many drivers and how many routes are there? Are they salaried or paid per delivery? How many deliveries are made a day, and how many stops are made per driver, on average? How do they navigate and communicate (cellphone, GPS, etc.)? Questions about staffing numbers, compensation and benefits must be answered for service and warehouse staff, office workers and customer service representatives.
Sales promotion. The purchaser also must become acquainted with the potential acquisition promotional activities, including its advertising and marketing to prospective and present customers, its website and direct-mail programs, its telemarketing (is it handled in-house or by an outside contractor?) and its account referral system. Related topics are the company brochure, telephone message-on-hold, bill and invoice stuffers, and radio or cable advertising.
Product mix. What percentage of sales is represented by coffee, tea, water and other beverages, as well as paper goods, snacks and janitorial supplies, among other commodities? What percentage of total coffee sales does private-label represent? What percentage is made up of single-cup system coffees, what brand is used and from which suppliers? What fractional-pack weights are offered -- 1.5, 1.75, 2, 2.25, 2.5 oz., etc.? If bottled water is in the product mix, who supplies it? And who are the company's wholesale suppliers?
Property and facilities. And what will the prospective acquiring company do with the acquisition's building? That may depend on any of several considerations. Is it owned or leased? What is the cost of staying, including rent, utilities and services? Can the structure be reconfigured to build out, up or in? Can the office and the warehouse accommodate additional volume? Is there enough parking for service vehicles and employees' cars? How long could you keep expanding before leaving that building for a larger one?
As you can see, there is much planning involved when looking to purchase an OCS company. The rule of thumb for what to pay traditionally is based on gross profit. In general, you can expect to pay 75% of total yearly sales, less sales tax, delivery costs, equipment and water bottle deposits -- if the seller's gross profit is in the 50% range.
Please let me know if you have any questions on buying a coffee service company or selling one. I can be reached at (516) 241-4883 or OCSconsultant@aol.com .
I want to wish all of my readers a very healthy, happy and prosperous new year.
LEN RASHKIN is a pioneer in office coffee service. He founded Coffee Sip in 1968 and later merged it with Dell Coffee, of which he became president in 1991. Sales at Dell topped $7 million. He also founded the Eastern Coffee Service Association and National Beverage & Products Association. He is a speaker at national and local trade conferences, consults on OCS sales and marketing, and is the author of two OCS training programs.