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Why are OCS Businesses Worth More Than Vending?

So why are vending businesses generally worth less than comparably sized office coffee businesses? In the acquisition market today, a well-run vending business will often sell for 50 to 60 percent of revenue while it is common for OCS operations to sell for 100 percent of revenue. There are several quantifiable reasons as well as several intangible ones.

Consider two companies:

ACME VENDING * Sales of $2,500,000 * Net Income $175,000 * Maintenance Cap-Ex $100,000 (4%) * Free Cash Flow $75,000 * Return on Investment 5% * Selling Price $1,500,000

ABC OFFICE COFFEE * Sales of $2,500,000 * Net Income $250,000 * Maintenance Cap-Ex $25,000 (1%) * Free Cash Flow $225,000 * Return on Investment 9% * Selling Price $2,500,000

As the example demonstrates, the office coffee acquisition provides a 9% return on invested capital in spite of selling for $1M more than the vending business. The table does not consider growth capital, only the money needed to maintain the existing business. There are several reasons for the large purchase price differential.

Capital Consumption Rate

A vending business consumes capital at a far greater rate than an office coffee operation. Not only is the equipment far more expensive but it also is subject to generally greater wear and tear. This means an operator has to repair, replace or refurbish their equipment more frequently and at greater cost.

The cost of today’s technology in the vending industry is an added cost that may not result in higher sales. The IT requirements of an OCS business are significantly lower on average.

The problem is exacerbated by the fact that competition in the vending business often forces operators to replace equipment sooner than is necessary to retain accounts. Therefore, the vending operator is reinvesting in existing accounts at a greater rate.

Customer Concentration

Vending by its nature focuses on higher volume accounts and results in sales being concentrated in fewer, larger accounts. Although this may be desirable from an operational perspective, it creates a potential risk for a buyer. The loss of a single large account may push a vending company quickly into a negative bottom-line.

OCS on the other hand, will have more accounts which each represent a smaller percentage of the overall business decreasing the risk associated with lost accounts.

Service Requirements

The vending operator has higher service costs as equipment must be serviced more frequently. Additionally, repair calls at night and on weekends adds a burden to vending that OCS does not incur.

OCS operations are typically Monday through Friday, 8 to 5 type of businesses. This allows an office coffee operator to avoid overtime and service call pay. Further, coffee service clients are normally serviced less often which is an added benefit to profitability.

Micro-Markets versus Pantry Service

The introduction of micro-markets has been a boon for the vending business. It provides a different business model and potentially lifts sales. The downside is the fact that much of the sales increase is in perishable foods which have lower margins, and require more frequent servicing. A micro-market also requires an incremental capital outlay and added technology for management.

Pantry services differ in several regards. First and foremost, when the product is delivered to the client, they own it. The operator is not responsible for stale products and waste. There is nominal capital required to implement, all of which makes pantry service more attractive from an investment perspective.

In conclusion, it is easy to understand why office coffee is a more profitable business and much more attractive to investors. That explains why rational investors will spend more for office coffee service businesses in today’s market.

#buyervendingbusiness #vendingvaluation #mergersandacquisitions #businesssales #vendingbusinesssales #vendingbusiness

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