As vending companies grow, they often encounter the opportunity to service an account as a subcontractor working for another company. A common such occurrence is when a foodservice company manages the manual feeding of the location but subcontracts the vending to a vending specialist.
Many vending companies develop good working relationships with foodservice firms. But there are situations that can arise that can be problematic. This is why it is important for vending operators to have formal contracts when they serve as subcontractors.
This article will present key elements of a vending subcontract. As a former executive for a large vending company and a current vending and foodservice consultant, I have found these contracts useful in protecting the interest of the vending operator.
Non-commercial foodservice companies that don’t have a vending division will often consider the inhouse “res vend” (residential) concept as a means to provide vending services utilizing their cafeteria workers. When the realities of who’s going to fix the machines when they break down, manage cash controls, manage product storage and the like surface, they often turn to subcontracting.
Some mechanics employed at traditional vending companies will do the repairs for the foodservice company on a moonlight arrangement.
Why be a subcontractor?
Some operators feel that subcontracting diminishes control and increases costs. However, in some cases, it is the only practical, cost effective way to offer vending as a delivery system for food and beverages.
Why does the contractor sub the business to another party? It may be that they lack the resources, skills or motivation to do it themselves, or in the case of the vending management companies, management is their core business. Any contract holder may subcontract vending services, in whole or in part, to a third party if it:
- Satisfies the location owner that the third party can adequately provide the service proposed to be subcontracted;
- Acknowledges that it remains responsible and accountable to the location owner for the provision of any subcontracted services;
- Obtains the written consent of the location owner.
In this relationship, the subcontractor serves at the pleasure of the contractor, the holder of the prime contract, who deserves all the respect and cooperation the subcontractor would offer to any other client. A vending operator who isn’t prepared to do this should steer clear of subcontracting.
Subcontractors are still responsible
When a vending operator is the subcontractor, as in any other P&L contract, the operator assumes full risk of loss and is not provided any promise of profitability. Also, the same two universal business rules apply: a) No side deals, b) It’s not a good deal unless it’s a good deal for both sides.
In a business where the vending operator is a guest on someone else’s property, the operator is never really free to run the business exactly as they choose. When one serves a location as a subcontractor, there are even more rules he/she must comply with.
In subcontracting, there are some things that differ very significantly from direct business relationships with clients. These differences will be reflected in the contract with the contractor and these terms and conditions are often considered onerous by vending operators.
Elements of the subcontract contract
One element is the confidentiality clause, which reads as follows:
The terms and conditions of this Agreement are confidential. Sub-Contractor, its representatives and agents shall maintain the confidentiality of the terms and conditions of this Agreement. The Sub-Contractor acknowledges that the Contractor will keep confidential the terms and conditions of its agreement with the Location Owner and will not disclose this information to the Sub-Contractor.
The subcontractor pays the contractor a commission and he/she in turn pays a portion of the commission to the location owner. This begs the question, “What is the contractor’s profit?” “How much of the commission is he holding onto?” Answer: Actually, it’s none of anyone’s business. If the subcontractor becomes too curious about this, they may jeopardize the relationship.
Rarely is the commission from the subcontractor paid to the location owner as a straight pass through. In most cases, the contractor collects a fee off the top which can range anywhere from 5 percent to over 20 percent commission on net sales, with the remainder going to the location owner.
Another element of the contract is references, which reads as follows:
Sub-Contractor shall not voluntarily make it known that they provide vending services to the Location Owner or that they are a party to this Agreement in any written document, oral presentation or request for references.
Beware of too much secrecy. If the contractor is subcontracting the vending business without the knowledge of the location owner, this will result in complications.
Another element is the non-compete clause, which reads as follows:
During the term of this Agreement and for a period of three (3) years thereafter, the Sub-Contractor agrees not to solicit or accept solicitations, directly or indirectly, for vending services from the Location Owner.
This can be troublesome if the contractor loses the contract and the location owner issues a request for proposal, often known as RFP. Technically, the operator cannot respond.
The next key clause is prohibited conduct, which reads as follows:
Sub-Contractor is prohibited from “R” Factoring and agrees it will be liable for all legal fees, investigative costs and full restitution should any factoring of sales, or other unethical business practices be discovered.
The practices of a few have tarnished the reputation of many. Don’t be offended by this; it is a blanket precaution.
Customarily, there are negotiations on rates of commissions. However, in most cases, vending companies do not negotiate other contractual protections with the contract holder. The operator’s success in these negotiations will be proportionate to the value of the deliverables that they see in your services.
Do your homework
These subcontract agreements are often entered into without the usual “courting” period, but this is a mistake. The resulting failure to establish the tangible value in your ability to do something better than they can is a common mistake that leaves you in a poor negotiating position.
If you are a subcontractor for one of the large corporations, you can be reasonably comfortable that you will be treated fairly and as an important partner. Don’t mistake this for kindness; they drive a very hard bargain, and in many cases they are much more powerful than the local independent vending operator.
If the contractor decides to take over the job and gives you your walking papers (it does happen), in most cases you have no recourse. This is particularly disturbing when they specified that you purchase all new equipment for their location at the outset. They will maintain that your machines are moveable assets, and in reality, you do not suffer any real loss other than revenue. Obviously, you will have a different opinion; you may be able to protect yourself with the insertion of a termination for convenience clause.
The termination of convenience clause reads as follows:
Contractor may terminate this Agreement without cause upon sixty (60) days written notice. In the event Contractor elects to terminate the Agreement without cause the Contractor shall purchase the Sub-Contractor’s owned equipment installed in the named locations. The purchase price for the equipment will be the Sub-Contractor’s book value.
Then there is the right of first refusal. It is seldom used by traditional vending companies, but is widely used by other service providers where there is a substantial capital investment and financial return is the first priority.
The right of first refusal clause reads:
For a period of 90 days prior to the expiration of the term of this agreement, the Contractor agrees to negotiate in good faith and exclusively with Sub-Contractor for a new vending services agreement. After the exclusive negotiations period, Contractor is free to negotiate with any other party. However, if Contractor receives an authentic offer from a third party for a vending agreement, the Contractor will notify Sub-Contractor and give Sub-Contractor 30 days to come to terms with Contractor which are no less favorable than those of the competitive proposal.
This can be a difficult clause to understand. It means that 90 days prior to the end of term, a renewal may be negotiated between the parties. Then, if no agreement is reached, the contractor can seek a different subcontractor. If the contractor finds a better offer, the existing subcontractor has 30 days to improve his terms to keep the contract.
The pouring rights agreements held by bottlers in accounts you serve do not exactly constitute subcontracting, however, you certainly do have someone between you and the location owner. When an operator recently offered an energy drink in the snack machine in response to a student request, he was quickly notified that the drink is a beverage. Don’t even think about trying to sneak a few selections of Red Bull into the food machine.
Such contracts will also prove useful when vending operators serve as subcontractors for vending management companies.
Vending management companies promise to make the location owner’s vending program more profitable than a traditional operator can by doing the following:
- Making sure the most optimal mix of equipment and latest technology exists at every location.
- Negotiating the highest possible rate of commission return on behalf of the location owner.
- Solving service issues quickly; no out-of-order equipment or empty columns.
- Micro-managing the collections so the location owner gets the correct commissions, on time, with no “R” factor.
I find it interesting that some vending operators complain loudly that they lose money on subcontracts that are unfairly structured, after voluntarily signing on for the job. Either they did not complete the necessary pro forma, didn’t read the contract, or they thought they could work the deal up once they got it. All of the foregoing are poor business practices.
Everyone would like to deal directly with the location owner and skip the middleman. That aside, there are many more success stories than failures in subcontracting. It can be very good business if you approach it with your eyes open.
About the Author
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 food service companies large and small. Contact Britten Management Services, LLC for a free, and no obligation consultation at 813-469-5437 or via email: firstname.lastname@example.org.