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Growing By Acquisition: The Worst Of Times Are The Best Of Times

by Allan Z. Gilbert
Posted On: 10/13/2003

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TOPSFIELD, MA - About six months ago, I had lunch with an operator who was complaining about how difficult it is to grow profitably during hard times. He said, "Profitable locations become almost impossible to find. And even if you do find one, convincing them to change vendors is like pulling teeth."

I suggested that in lean times, operators work harder to protect their locations. Competition gets more intense as operators attempt to replace business lost due to layoffs. In an effort to maintain a share of a shrinking market, some operators foolishly offer predatory pricing or commission deals for new business. More often than not, the existing operator is forced to meet the predatory offer, and everybody (except, perhaps, the location) loses.

In this kind of environment, it may make sense to explore other growth alternatives. For a number of reasons, hard times are the best time to consider acquiring a competitor. Among those reasons are:

1) More operators tend to get into financial trouble during difficult times and they may be forced to sell.

2) It's easier to finance the acquisition because banks are typically looking for business, and interest rates tend to be lower.

3) If you can successfully acquire an aggressive competitor today, life becomes much simpler when the good times return.

4) During hard times, good operators usually have enough employees to "seamlessly" blend the two operations. This is not always the case during good times.

5) It may be more cost effective to acquire existing businesses than to incur the sales costs and the required capital investments to equip new business.

6) It may well be the only profitable way to grow during a recession.

Unsophisticated operators may ask, "Why would I want to acquire the problems of an unprofitable vending business?" The answer is that most (not all) of the problems can be easily solved. And if you can creatively and cost effectively combine the business with your existing company, a number of costs will be eliminated.

Properly handled, a company that can't even cover its debt service for the current owners can turn into a cash cow for the acquiring owners. Let's examine some of the major problems that acquisitions present.


When you acquire another operating company, the "bottom line" is that you are not acquiring the seller's bottom line. In truth, you are buying the seller's top line, i.e. the existing sales volume. You also acquire the equipment and rolling stock; the relationships with his locations; the existing selling prices; and the existing commission rates.

The seller's bottom line, whether it be a profit or a loss, is a result of the seller's management skills. He or she may be undercapitalized, over-staffed, intellectually challenged and/or burdened by fixed operating costs that are simply too large for the existing business to support. In addition, route support costs (route labor, supervision and vehicle expense) may be much too high.

On the day you acquire the company, you have the opportunity to correct all of these problems. However, as we shall see, some are easier to correct than others.

If the seller's route support costs are too high, it may be due to a lack of understanding of how to properly schedule a vending route, or how to structure a route incentive program. That's an easy problem to solve. However, if the problem is caused by a preponderance of low capacity, older equipment that requires more frequent route service, the only effective cure is to replace those machines with new ones. Although this, too, is easy to do, it's expensive. And the astute buyer will allow for the additional capital investments in the purchase price offered to the seller.

If the seller's gross profit percentage is too low, the astute buyer will look for the cause. The most common reasons are: lack of purchasing power; fidelity losses (route, cash-room or warehouse theft;) and selling prices that are below market rate.

The first two are easy to solve. On the day after the acquisition, the acquired company will begin to benefit from the buyer's purchasing clout and the buyer's accountability systems. However, if the problem is caused by low selling prices, the buyer is going to have to renegotiate them with each location. And, as we all know, sometimes that can put the relationship with the location at risk. Therefore, the astute buyer will also allow for the loss of some business in the price offered to the seller.

Finally we come to the question of commissions. Is the level of commission payments reasonable? Even if the level of payments is reasonable, are they being calculated and reported honestly? These are important questions to answer. If the seller has quoted extravagant commission rates and covered themselves by dishonestly reporting lower sales, unless the buyer is prepared to continue the practice, somebody is going to have to renegotiate the rates with the locations. This is a very difficult problem to solve. One approach I recommend is to offer the location a realistic rate, with a fixed, minimum  guarantee equal to their average paid commissions for the previous twelve months.

In summary, the only difficult problems are the quality of the vending equipment and vehicles, and realistic selling prices and commission rates. You can partially address these problems by discounting the purchase price. Once you address these problems, the rest is easy, and the benefits are truly amazing.


When you creatively combine two businesses, a number of costs can be eliminated due to economies of scale or redundancy. The most obvious costs are those that had been incurred to support the former owner. The combined business will only need to support one owner/manager, so the entire cost of the seller's salary, payroll taxes, benefits, vehicle, and other management perks, are eliminated. Don't forget to include any of the seller's personal expenses, such as club memberships or a spouse's car, that may have been paid by the company.

If the two businesses can be combined and run out of one building, one set of  "occupancy costs" can be eliminated. These include rent, utilities, building maintenance, security, cleaning, fire and liability insurance, and even a good portion of the telephone costs.

Almost all of the seller's "inside" supervision costs can usually be eliminated. The reason for this is that the combined businesses will only require one equipment shop, one warehouse, one cash room, one commissary, one office and data processing function, and one service manager. Even if the acquired company were too small to employ supervisors for any or all of these functions, it would require fewer man-hours to perform them when the businesses are combined, due to economies of scale.

For example, it is likely that both companies are purchasing from many of the same suppliers. The combined businesses will process substantially the same number of purchase orders and supplier invoices as the buyer processed before the acquisition. They will simply be for larger dollar amounts. Similarly, the warehouse will receive substantially the same number of supplier deliveries, but with larger quantities. The commissary will produce the same variety of products, but with longer, more efficient production runs. The office will still generate one periodic payroll. It will simply have more names on it.

Even functions with direct, variable costs (that is, the cost goes up in direct proportion to the amount of work required, as with cash processing or route data entry) may become more efficient. The added volume from the acquisition could make the investment in more sophisticated and efficient cash processing, data processing or warehouse equipment cost effective.

Finally, the buyer may even improve his purchasing power, based upon the addition of the seller's dollar volume. This applies not only to product purchases that affect gross profit, but to a whole host of support costs such as insurance, uniforms and employee benefits.

In short, the buyer acquires all of the seller's dollar volume, and very little of the seller's "inside," fixed costs. Even "outside," route support costs typically improve. The addition of the seller's business in the same geographic market usually means better route density, which translates into less "windshield time" for drivers between stops.

For all of the above reasons, the additional sales volume generated by a well-conceived acquisition may easily yield pre-tax cash flows of 25% or more to the buyer, even when that volume could barely support the seller as a standalone business.

However, the magic I've described   above only works if you can consolidate both businesses under one roof. What can you do if the acquisition target is located many miles away?


Most professionals would agree that it rarely makes sense to operate full-line vending accounts located more than 50 or 60 miles from the warehouse. The reason is that a typical vending route costs more than $30.00 per hour ,50¢ per minute , to operate, taking into account  only the cost of the driver's salary, payroll taxes and benefits, vehicle costs and direct supervision costs.

If the driver has to waste an hour and a half driving to his first location every morning and another hour and a half returning in the afternoon, the excessive windshield time will eliminate any hope of an operating profit on that kind of route. The only viable options when acquiring a competitor this far away involve setting up a branch or a depot operation in the area.

If you opt for a full branch operation, you should be aware that it will be difficult to eliminate many of the seller's costs. Even though you can eliminate the seller's salary, benefits and perks, you will still have to hire somebody to manage the branch. Unless the seller was drawing an extravagant salary, there may not be huge savings. Similarly, you will not be able to eliminate the occupancy costs or even most of the inside costs such as office and cash-room expenses.

If the branch is not too far away, you may be able to consolidate equipment rebuilding and general ledger accounting functions, which will produce some savings.

Professionals typically approach the acquisition of a full branch operation with great care. They understand that in this case, they really are going to acquire the seller's bottom line, modified only by the management expertise and purchasing clout that they bring to the table. However, that may be enough. The addition of skilled management and improved cash flow based upon the buyer's purchasing clout may be enough to carry the day.

In addition, the buyer has the opportunity to increase the size of the branch by seeking more local acquisitions in the future that could be more profitably folded into the new branch.


In recent years, some astute operators have perfected an operating format for acquired operations located more than 50 miles away, that offers most of the cost advantages of a fold-in acquisition and still keeps the route people close to their locations. I refer to it as a "depot style" format.

When the remote operation is run as a depot, all of the back-of-the-house functions are stripped out of the branch, and the business is operated out of your home office. The only functions that remain at the branch are route labor, route supervision, field mechanics and sales.

Under a depot format, daily, route orders are "picked" at the home office and delivered to the depot by one driver, each afternoon. This driver unloads the route orders into secure cages for each route. The delivery driver also leaves change funds and route paperwork, and picks up that day's route collections and change funds.

Each afternoon, when the drivers return to the depot, they drop off their daily collections, and they e-mail the next day's product order to the home office. Service calls are answered by the home office on a toll-free line, and field mechanics are dispatched by cell phone. New equipment for locations is delivered directly by the home office, and older equipment is similarly picked up directly by the home office.

All of the cash processing, data entry, warehousing, purchasing, receiving, office work and equipment rebuilding is done at the home office. If a route person is out sick, the supervisor or a mechanic are available to cover for that day. Finally, in order to reduce the amount of product shuttled from the home office, it may pay to have some "heavy" product, like packaged beverages, delivered directly to the depot by the bottler.

A depot requires a lot less space than a full branch. It simply needs secure cages for daily route orders, secure safes for cash, a computer to email orders, and enough refrigerator and freezer capacity for perishable products. It should also have enough space for a parts inventory.

I estimate 2,000 square feet of space could accommodate 10 route people, if the trucks were parked outside. A full branch with 10 routes would probably require a minimum of 10,000 square feet. And, because it is substantially all warehouse space, the occupancy cost may well be 10% of the cost of a full branch.

Under a well-thought-out depot format, the buyer can realize most of the cost savings available under a fold-in scenario. The only real penalties incurred will be the cost of the shuttle driver and vehicle and the occupancy cost for the depot building, which is vastly reduced from the expense of maintaining a branch facility.

It makes sense to me.


About the Author

ALLAN Z. GILBERT is a pioneer in the application of management analysis tools to vending. He founded New England Vending Corp. (Lowell, MA) in 1959, and led its expansion into a leading regional provider of full-line vending, coffee service and foodservice management. Seeing the need for faster, more detailed and accurate management reporting, Gilbert founded Data Intelligence Systems Corp. (DISC) in 1972. DISC supplied groundbreaking computer hardware and management software packages to vending companies at a time when most data processing and report generation was done by service bureaus. In 1972, Gilbert founded Lemon Tree Systems, Inc. (LTSI) to franchise a unique vending-and-cafeteria concept which eventually had franchisees in 31 states and Canada. He established Merrimac Financial Associates in 1984, and it made an initial public offering through the New York Stock Exchange in 1998. He then became managing partner of The Merrimac Consulting Group in 1988, offering services related to mergers, acquisitions, appraisal and management evaluation, exclusively to vending, amusement and OCS. A graduate of Boston University and the Wharton School at the University of Pennsylvania, Gilbert served as a guest lecturer in Entrepreneurial Sciences at Babson College (Wellesley, MA) in 1982 and 1983. Long active in industry affairs, Gilbert received the National Automatic Merchandising Association President's Award for legislative leadership in 1987. He is a past chairman and director of the Massachusetts Automatic Merchandising Council, and received its Chairman's Service Award in 1988. Gilbert also was honored by MAMC in 1990 for outstanding service to the industry, and has served as chairman of the MAMC Scholarship Fund since 1992. Merrimac Consulting Group is based at 462 Boston St., Ste. 7, Topsfield, MA 01983, tel. (978) 887-9633.