Have you ever tried to sell a route but weren’t sure how to figure its value? Have you ever looked at purchasing a route but were unsure of how much you should pay? Determining the fair value of a vending route can be tough! I’ve heard someone say you should never pay more for a route than what the machines were worth, but that doesn’t sound right. We all know some locations are better than others, and therefore more valuable. This article will provide a guideline for determining the fair value of a vending route which can serve as a starting point for negotiation.
The rest of this post explains how the route evaluator works. If you just want to download and use the calculator, click here.
The formula we’ll use for estimating the value of a vending route has three basic components, the value of the machines themselves, the estimated cost to service the machines, and the estimated monthly income after the cost of the product. Let’s take a look at each in turn.
The Value of the Machines
I saw an ad recently for a few vending machines for sale. The seller claimed to pay $6,000 for each machine and is offering them at a great deal for only $2,000 each. At the same time, there were other sellers selling the exact same machine for about $400. Maybe this is common sense, but please don’t think that what the seller paid for a machine or a location has any bearing on what it’s actually worth. Do your own research and keep an eye on advertizements to get an idea of what machines are selling for.
The Cost to Service the Machines
If there are multiple machines in different locations all over town, it’s going to cost you more in time and gas to make a run than if there are multiple machines all on one street. Even if you’re doing the run yourself, use an hourly rate for the time it takes to service all the machines. If you were sick, or if you were to hire someone in the future, you would have to pay them. Your time is valuable, and you shouldn’t work for free. Also, estimate the amount of gas you’ll use. You could try to take the current price of gas and the mpg of your vehicle to come up with a number, but it’s probably easiest to take the standard mileage deduction. It’s close enough.
The Estimated Monthly Income
Finally, we’ll need to know how much the machines are bringing in. If you’re buying a route, the seller should be able to give you an estimate of monthly sales. This is good enough to use for these calculations and to get an idea of what you’re willing to pay, but I highly encourage you to ask for bank statements. After all, you’re not buying a box of baseball cards at a garage sale here, you’re buying a business. The seller should be able to back up his claims. From the current sales, you can estimate the cost of the product. This may vary by location, but an estimate of 50% should be reasonable.
Calculating the Present Value of the Vending Route
Now that we have the required info, we’ll use what’s called a present value calculation. Explaining this calculation in detail is beyond the scope of this post. Fortunately, Microsoft Excel can do the work for us! At this point, it may be helpful to open Excel and follow along. Pick a cell and type in “=PV(“.
The Present Value function takes four parameters that we’re interested in: rate, nper, pmt, and fv. The Rate is complicated and can differ from person to person, but you can think of it as a way of putting a value on what else you would do with the money if you weren’t buying a vending route. For our purposes, 10% per year should be fine. All of our other numbers are in terms of months, however, so use 10% (.1) and divide by 12 which is .0083.
nper stands for Number of Periods. This is how long you expect to operate the route. If you’re selling the route and you’ve been running it for 10 years or if you have a contract which guarantees the machines can stay for another 5 years, you can explain to the buyer that the route is very stable and therefore worth more. You might be justified in using 60 months. If you’re buying a route, and the seller placed the machines three months ago in a strip mall with high turnover, you might not be able to count on keeping the location for more than a year. I usually start with 24 months and adjust from there.
pmt stands for Payment. This is the amount of net profit you estimate will be coming in from all machines per month. Remember to subtract you time, mileage, and cost of product from the monthly sales to estimate the monthly payment.
Finally, fv stands for future value. This is where the value of the machines come in to play. If everything goes exactly as planned and at the end of two years you have to leave the location, you still own the machines. You could move them to a new location or sell them. If you assume you can keep the machines in good condition, it’s probably a safe bet you can sell them for about what they’re worth today.
Whew! That was a lot of information! Still with me? Let’s consider a brief example. Let’s say you see an ad for a route for sale in your area on the internet. The seller is asking $5,000 for three machines located in an office building. After talking with him on the phone, he says the machines do a total of $600 per month in sales (about $200 each machine). He says he services the machines once a week and it takes him an hour. He also tells you what the machines are. You’re familiar with these machines, and you estimate they’re worth $400 each ($1200 total). You also know the office building is 10 miles away, so for this example, we’ll estimate 20 miles of driving per week, 4 weeks per month, and 44 cents per mile which comes to about $35. You also figure you can do the run in one hour, but that it will take another half an hour of paperwork and running to get product. You think an hourly rate of $15 is reasonable, so 1.5 hours per week * 4 weeks per month * $15 per hour = $90 per month. Let’s also assume product cost is 50% of sales. this means the $600 in sales is reduced to $175 (($600*50%) – $90 – $35). Expenses take their toll pretty quickly! Finally, we’ll assume that you can count on the machines staying where they are for another 2 years (24 months). We have all our information, let’s plug it in to Excel. Type in “=PV(.0083, 24, 175, 1200)”. The result I get is $4,778. Remember, even though we get an exact number, we did a lot of estimating. In this case, if I saw proof the machines were indeed making $600 per month in sales, I would be comfortable paying his asking price of $5,000. On the other hand, if everything else were the same except the seller said he paid $6,000 each for the machine and location and he wants to sell for $9,000 in order to pay off the loan, I would determine this deal is not worth pursuing.
I’ve done the work for you in Microsoft Excel. You can download the RouteEvaluator spreadsheet here. I encourage you to play with the numbers to see what happens. For example, if you were sure the route would remain for three years, you might be willing to pay more than $6,000. Or if instead you increased sales by $50 per month (maybe by adjusting prices) you might be willing to pay $7,000. Have fun!