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: ACQUISITIONThose 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 OVERHEADEach $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.
A business may claim to be profitable, but this must be verified through a judicious and methodical examination of facts. While an acquisition can be a great way to grow the business and improve profitability, if mishandled, it can be your absolute worst nightmare.
OPTION 2: GROWTH BY TRADITIONAL SALESNot only has the cost of growing the top line internally reached an all time high, it is now off the charts in terms of its degree of difficulty.
There are no profitable accounts to gain that are not already being serviced by an existing vending company; the only business to get is the business some other vending company already has.
The problem with growing one account at a time using the traditional “prospect, qualify, propose and close” method is not only that it takes a long time, but it is also expensive.
The only way to win new accounts from the competition is to solicit the account exactly when they happen to be dissatisfied with their existing service provider; timing is all important.
To gain new business, it is necessary to have an ongoing sales and marketing program that will ensure that your company is consistently visible in the marketplace. If your competitor has such a program in place and you don’t, guess who is going to come in second.
OPTION 3: FIND NEW MARKETSAnother option for growth is to expand into new geographical areas. This makes sense for a company that has a dominant market share in its existing marketing area and is running out of room to grow. A company with a documentable track record of exceptional service and quality can certainly win accounts in a new territory.
Expansion to new geography in concentric circles is the most preferred method of geographical expansion. Jumping out into noncontiguous markets can be costly and troublesome. This, as with any start-up, is a capital intensive strategy, and new operations are unlikely to be instantly profitable.
A detailed 5-year plan, which recognizes the expense of salaries, vehicles, equipment, product, marketing, and additional operating facilities, is the recommended first step in laying out this type of venture.
OPTION 4: DIVERSIFICATION INTO NEW SERVICESOperators can also find new services to provide existing customers. After many years of lip service, most vending operators are now getting serious about expanding into OCS.
There are some real success stories here; vending operators figure out the OCS business quickly, with only an occasional bump in the road while they learn the discipline and process of managing accounts receivable. Other logical areas for diversification could include water service, catering, manual feeding, and wholesale distribution.
None of these methods for growth will work if you lose more business than you bring in. A structured account retention program is an absolute necessity to minimize the loss of accounts to your competition.
The vital importance of account retention should be reflected in the written performance accountabilities for all managers and supervisors. Existing accounts, nurtured through long-term relationships, are always more profitable than newly acquired accounts. Guard them well.
An account retention program is especially important as a part of the fold-in plan of a newly acquired vending company. There have been some legendary train wrecks in which an investor has purchased a company only to lose 40 percent or more of the newly acquired accounts in the first year.
ACQUISITION: THE LOGICAL OPTIONIn reviewing all of the ways to grow, it becomes obvious that acquisition is a logical option for those who have access to capital, who know how to evaluate an acquisition target, and can negotiate effectively.
The past two articles I wrote were designed to help sellers prepare their business for sale. They offer a good road map for buyers as well. Those articles addressed the key points that a seller must address in order to allow the business to optimize its selling price.
HOW MUCH DO YOU OFFER?How does the buyer determine what to offer the seller? Some of the greatest minds in the industry are still grappling with this question.
In part, the buyer’s valuation process is a mystical process likened to reading tea leaves. The buyer will always rely very heavily on his intuitive sixth sense, market knowledge and ability to read between the lines of the financial statements.
Three most basic fact-based ways to evaluate a business are: 1) asset valuation; 2) historical earnings valuation; and 3) future maintainable earnings valuation.
Investors do not use only these methods to arrive at what they are willing to pay for a company. They often use combination methods. Statements of earnings before interest, taxes, depreciation and amortization are used to evaluate an acquisition target’s potential contribution to profit and overhead.
VALUATION METHODS VARYThere are countless variations of financial measurements used. One example of a contribution formula often used is as follows:
Operating Revenue – Operating
Expenses + Other Revenue + Add backs – CAPEX = Contribution.
CAPEX refers to funds used by the buyer to upgrade or add assets such as buildings, equipment or vehicles to maintain or increase the capacity of newly acquired operations.
When best estimates of non-financial, intangible factors are linked together with the empirical data available, it’s decision time. The buyer either makes an offer or moves on to other opportunities
Once the decision to buy another vending company has been made, the 25-point “Buyers want to know” and “Seller’s due diligence check list” that were given in my February article offer good starting points.
These key elements are listed in bullet point form on pages 29 and 30 in the February issue, and can be accessed over the Internet at: www.amonline.com/print/Automatic-Merchandiser/Is-It-Tim-To-Sell-The_Business/1$20892. These check lists will give a buyer a good indication as to how well the prospective operation has been managed.
For Buyers, Diplomacy Always Pays in the End
Acquisition requires diplomacy, as many buyers have learned the hard way. Consider this case study. A selling operator is being threatened by the bank to cut off his line of credit and call his notes. One of his primary suppliers has him on COD, and his largest two accounts are sending out “cattle call” RFPs specifying technologically current equipment and guaranteed commissions.
The buyer, with the scent of blood in his nostrils, moves in for the kill and offers the seller a way out; a no cash down, low ball offer. The seller, who has little fight left in him, does have his pride. He agonizes for a while, then decides to go down with the ship. Better to lose everything than to be made a fool of, he tells himself.
In my opinion, the buyer has made a serious strategic error. All he has accomplished is to fracture the relationship with the seller who now vows never to sell to this buyer, even if he was the last company on earth.
A much better approach is to treat the seller with all of the respect and affection that you show your best client. Think of the seller as a highly valued potential customer, not a piece of meat. I will skip all the old rhetoric about “win-win.” However, I do advise that from a pure business strategy standpoint, this approach will always work better for the buyer in the end.
Key Benefit of Larger Company: Dedicated Sales
One of the advantages that larger vending and foodservice companies have is a full-time sales person. To get someone with good potential will require a base salary of $50,000 to $70,000, plus fringe benefits, liberal commission draw and a company car. Then they have to be adequately trained; skip this step and you will live to regret it. Industry specific sales training is expensive, and if you’re thinking of doing it yourself, chalk up another blunder.
There exists only a limited number of consistently high performing, professional sales people in the vending industry. They are justifiably the most highly treasured of all employees. If you’re planning to lure one of these prized people from another company, be prepared for an employment contract with at least six figure earnings guarantees and heavy on perks.
Tom Britten, NAMA Knowledge Source Partner, is an analyst, intermediary and professional consultant with more than 30 years of industry experience. He functions as a full service resource available to all vending, OCS and foodservice companies, large and small. Contact Britten Management Services LLC for a free and no obligation consultation at 813-469-5437 or via email at: [email protected].
