A t the beginning of this series back in February, I stated that operators who are not planning to sell their business must now plan for growth if they intend to stay in business. I posed a set of questions designed to gauge the operator’s level of enthusiasm, financial depth, investment in technology, investment in training and personnel, and the presence of a formal marketing strategy.
I noted that any operator who did not answer these questions in the affirmative should consider selling their business in light of the unrelenting challenges facing operators in today’s business climate. Larger companies have always had cost advantages, but now the gap has grown to such immense proportions that some small independent companies are simply unable to compete and may be facing extinction.
Due to the burgeoning increased cost of product, fuel and other costs of operations and resulting thinner margins, critical-mass has become essential. The number of accounts and size of market share needed to allow any vending business to be profitable has increased substantially.
GROWTH MUST BE ONGOING
I am convinced that the only way an operator can hope to sustain a reasonable level of profitability is to work relentlessly towards increasing top line revenue; cost cutting alone won’t work any more.
There are a number of obvious advantages to higher volume; size does matter. The higher the volume, the greater the purchasing power, which can lower buying costs and improve profit margins. Larger operations also provide more career advancement opportunities to existing staff, which serves to boost morale and improve employee retention.
Let’s consider the ways to grow.
OPTION 1: ACQUISITION
Those steadfast operators who are committed to the long pull should consider acquisition of other vending businesses as a viable growth strategy. One major advantage of growth by acquisition is that it is expedient and predictable. Properly executed, acquisition of other companies is also the most cost efficient path to growth in most geographic markets.
Examine your historical new business growth rate through traditional selling. Perhaps your rate of annual revenue growth ranges from 2 percent to 10 percent per year (recently it may have even been flat or negative). Ask yourself: at this rate, how long it will take to add $500,000 or $1 million to your top line? How long can you wait to grow?
If additional routes are added through acquisition, it will be necessary to invest in some additional overhead, but not as much as a stand-alone operation would need to invest when adding routes. Ideally, as with any low margin business, a vending operation organizational chart should be as flat as possible.
GOAL: MORE SALES WITH LESS OVERHEAD
Each $400,000 in sales will normally require one route; however, if new stops can be added to existing routes, the top line can be expanded with minimal direct labor expense. For the vending business, the span-of-control ratio of workers that one manager is able to supervise effectively is commonly thought to be one manager per each eight routes. However, if managers are competent and route people are well trained, this can easil y be expanded to 12 routes per manager.
When growing through traditional methods, each new account installed will require capital investment for some new equipment and often an accompanying investment in aesthetics and area treatment. With the addition of new accounts through acquisition, this expense is satisfied through the purchase price and is generally more cost effective.
ACQUISITION PROSPECTS ABOUND, BUT...
It is not hard, in any market, to find operators interested in selling today. While this creates some benefits for potential buyers, there is an abundance of vending companies for sale that are not good candidates for acquisition; buyers must evaluate potential prospects carefully.
Qualifying an acquisition target requires careful due diligence. As noted in the February article, the main objective is to prove a sustainable profit; present and future. Everything else is secondary.