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What You Need To Know When Buying Or Selling An OCS Business

by Len Rashkin
Posted On: 5/31/2010

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This past year has been tough for all refreshment companies throughout the country. I have heard many operators say that they should have sold their companies when business was strong.

Over the years, I have counseled OCS operators on purchasing companies and selling their own, and they all want to know how to evaluate a competitor's business and what price to pay for it, and how to position themselves to sell their own companies. I am going to cover many of the questions you need to answer when you consider purchasing or selling. This list is by no means complete, since each company is unique and the market areas around the country are so different.

Those looking to sell can rephrase these questions as statements to the buyer, like "We have 500 customers." There may be information that the buyer doesn't ask for; just volunteer the basics, but be prepared to answer most of the questions below.

Accounts: Number of customers? Number of customers in each geographical area (towns, counties, etc.)? What are the 15-50 highest-volume accounts and their gross profits (not gross sales)? Are there contracts? Will the accounts be guaranteed for 6-12 months? Are there contracts for coolers, among other allied equipment services? What has been the account attrition rate over the past few years?

Equipment: Number of pourover, automatic, air/thermal and single-cup brewers, along with bottled water and other coolers, refrigerators, microwave ovens, icemakers, soda and snack venders, among other equipment types? Make sure to ask about equipment brands, particularly when evaluating single-cup brewers.

Advertising and marketing: How many new accounts are added monthly, and what's the main source -- salespeople, referrals, Yellow Pages, telemarketing, etc.? Does the company have brochures, menus and other marketing materials?

Telemarketing department: How many telemarketers are there, and how are they compensated (salaries, commissions, bonuses, etc.)?

Salesforce: Number of salespeople? Are they full or part time? How long have they been with the company? How are they compensated (salaries, commissions, bonuses, residuals, etc.)? How much does each get paid yearly? What is the gross profit per salesperson? Do salespeople have contracts or restrictive covenants?

Office personnel: How many people are in each department (bookkeeping, clerical, office management, etc.)? What are their salaries? The same questions apply to human resources in the warehouse, service and marketing.

Delivery drivers and vehicles: How many route sales drivers? How do they get paid -- salary, by the stop, commissions on sales of allied products, etc.? How many stops do they average daily? Are trucks leased, rented or owned? How old are vehicles and what is the mileage on each? Are they paid off, or when will they be paid off? How many routes are there? Do you use outside delivery services?

Computers: What information system is employed by the company? How old is it? Is software customized for the company or is it an OCS-specific package? How many terminals or networked computers are installed? Can they be upgraded?

Sales and product mix: What are your total sales, excluding deposits, sales tax and delivery charges? What is your gross profit? What are your gross profits on coffee and related items: water bottles, janitorial supplies including paper goods, etc.? What percentages of product sold are coffee and supplies, cups, paper goods, janitorial supplies, water, soda/juice/cold beverages, equipment rentals? What are your percentages of private-label coffee vs. national brands, and of single-cup vs. batch brewed coffee? What fractional-pack sizes do you provide? What's the cost of your private-label coffee and who supplies it? How long is your contract and how many pounds a year do you purchase? How many pounds must you still buy to fulfill your contract? What are the sales volumes of soda, snacks and other items? Who supplies your bottled water, and how much do you sell? What are your rentals on coolers and other equipment? Do you provide water filters free on coolers? If not, what are your filter sales?

Suppliers: List your main suppliers for coffee, paper, canned beverages, janitorial products and snacks, among other commodities.

Accounts receivable: What are the current 30-, 60- and over 90-day figures? What's the average order per invoice, and number of invoices monthly, presented on delivery and sent after delivery, along with CODs and statements sent monthly? Are water service invoices processed separately? Are your equipment rentals generated monthly or quarterly?

Employee benefits: Do you provide health insurance, and what is the insurance plan? What percentage of the cost does the employee pay? What are the policies for vacation, sick days and personal days? Is there a 401K plan, etc? What about an employee handbook?

Building: Is the company building leased, rented or owned? Is there a mortgage on the property? If leased, when is the agreement due to expire?

Owners and management: Does the owner want to stay on as an employee or consultant? For how long, and for what compensation? Are there any managers that you feel should stay with company? What is their compensation?

In the first category above, I mentioned a "guarantee of accounts" for a set period of time during which a customer will not leave the new company. This topic is very sensitive for both seller and buyer, and can become a deal-breaker if both sides are inflexible. The price paid for the company will help determine if a guarantee is needed.

If you are purchasing well below the market price, the seller is not likely to guarantee any of its accounts. And when the price is paid upfront, you will have a difficult time getting a refund for any lost accounts later on. You could have the seller's attorney hold some money in escrow for a set period of time.

Often, the seller will stay with the new owners for a period of time so a smooth transition occurs and the accounts still see and speak to the old owner. If you are selling and have to guarantee your accounts along with their sales volume, an agreement could be structured to allow for an adjustment in the buyer's favor if you lose any sales. At the same time, if sales increase from the account base that you sold, money is adjusted upward in your favor.

Buying or selling is very complicated and mentally gruelling. It may be a good idea to have someone represent you in the negotiations. The negotiator is not emotionally attached to your business, and may be able to get you a better price. And it will give you more time to run your business.

Call me at (516) 241-4883 or email to discuss this article, or any ideas for an OCS subject that you would like me to address.

LEN RASHKIN is a pioneer in office coffee service. He founded Coffee Sip in 1968 and after 22 years merged it with Dell Coffee, of which he became president in 1991. Rashkin helped found the Eastern Coffee Service Association and served as its president for nine years. He also was a founder of National Coffee Service Association and served as its director between 1971 and '77. He was the executive VP of the National Beverage & Products Association from 1999 to 2006. A frequent speaker at national and local trade meetings, Rashkin now consults on sales and marketing for the office refreshment industry.