The Best Deal I’ve Made Yet

One man’s trash is another man’s treasure. The more my mindset is focused on creating wealth, the more I realize the wisdom in these words. If you use a little creativity, you’ll find overlooked opportunities everywhere.

In How to Start a Bulk Candy Vending Business for Extra Income I promised to write about the biggest deal I’ve made yet. I wrote:

I have a keyword alert set up on my eBay account that alerts me whenever a listing has the words candy vending machine in it.

A keyword alert like this tipped me off to the biggest deal I had ever come across at the time. I found a listing that enabled me to buy out an entire vending route with locations for less than the machines alone were worth. I’ll tell you the whole story in another post…

Here’s the whole story…

When we lived in Austin full time, we decided to start a candy vending business to supplement our income. The more locations we found, the more we fell in love with the business.

When we moved to Los Angeles to pursue careers in the movie business, I started thinking about expanding our operation to the west coast. Since our business in Austin was such a low-maintenance gig, we decided to keep it and just fly back every two months to maintain it.

I had a keyword alert setup on eBay that sent me all the listings that mentioned the words candy vending machine. Every other day or so, I would get an email with the latest listing for used candy machines from people that bought too many and gave up on their business.

Two months before we were set to move, one listing caught my eye. A man in Los Angeles was selling his whole operation including twenty active locations profiting $500 a month, and twenty machines in storage. Isn’t it funny how synchronistic life can be when you set your mind to something?

I put the listing on my watch list and counted down the days until the end of the auction. In the meantime, I calculated what I thought the business was worth.

Book Value Method

There are several different ways to value a company. The most basic way is to calculate the “book value,” or what the assets of the company are worth.

This is a good way to find the low end of the value range since it doesn’t take into account any value that the owner has created by putting those assets together. It’s the salvage value of the company.


This company owned 40 machines
A used machine is worth around $100
40 x $100 = $4,000
Discounted 50% for risk = $2,000

Cashflow Method

Most companies on Wall Street are valued based on their cashflow. Have you ever heard of a price to earnings (PE) ratio? It’s the price that someone is willing to pay based on the company’s profits.

A PE of twenty means that people are willing to pay twenty times the company’s earnings. If a company makes $1 million a year, someone would be willing to pay $20 million for it. Since they would be cashflowing $1 million a year (assuming earnings remain the same) on their $20 million, their rate of return would be 1/20 or 5%.


I wanted to make at least 20%.
20% = 1/5 = PE of 5
I used $250/month as a profit figure in case he was exaggerating.
$250/month = $3,000/year
5 x $3,000 = $15,000

The key to this method is factoring in the amount of money required to manage the business, even if you plan on managing it yourself. You should always value a company as if you were not working in it. Subtract out the cost of hiring someone to run it for you. Otherwise, you’re just buying a job, and you can get those for free.

20 machines = 10 hours of work per month
10 hours x $10/hour = $100
$200 x 12 months = $1,200/year
$1,200 x 5 = $6,000
$15,000 – $6,000 = $9,000

Once again, I discounted the value by 50% because of the risk involved with eBay purchases.

$9,000 x 50% = $4,500

My new negotiating range was $2,000 to $5,000. My bidding strategy was to wait until the last minute and bet the house. I anxiously counted down the days.

With one hour to go, I kept nervously reloading the auction page to see if anyone had bid. I was surprised that no one had. Maybe they were waiting till the last minute like I was.

With two minutes to go, no one had bid. I put in a proxy bid of $4,000, which broke his reserve at $1,500. My heart thumped loudly as I kept clicking refresh. I was prepared to bump up my bid to $5,000 if absolutely necessary.

Ten seconds to go, no bids. Five, four, three, two, one…

I won.

As the only bidder, I got it for the reserve price of $1,500!

Now What?

After several minutes of celebration, I started to have a few doubts. Why didn’t anyone else bid? Was I missing something? What if he was full of it? What if all the machines were in a bad neighborhood?

I reassured myself with the fact that I could sell off all the machines for $4,000 in the worst case.

I made arrangements to meet the seller on one of our scouting trips to Los Angeles.

I Get the Keys

We met at the storage garage where he was keeping the twenty unplaced machines. He was an interesting character, kind of geeky with a nervous dislike for silence. He was a really nice guy, and was bending over backwards to make sure I was happy.

I was a little worried that he was going to be sour that he didn’t get more for the company, but it turned out that he was happy to get rid of it. He casually mentioned that he had paid $20,000 for the company several years before, when there were 40 locations. He must have lost interest in the business and let it dwindle to 20 locations.

A quick scan of the machines confirmed that they were in decent shape. The storage garage was cluttered with tools, boxes, and parts; a reflection of his disorganized business.

As he handed me the list of locations and the keys, he added one important piece of information:

“By the way, I didn’t mention this in the listing, but there is something else you should know. There are about twenty additional locations I am throwing in with the others. I’m almost embarrassed to tell you because I have let some of them go.

I haven’t been to any of these locations in the last six months and I’m not even sure if the machines are still there. You can take them or leave them. Here’s the list.”

What! I couldn’t believe it. Not only had I acquired $4,000 worth of machinery, and $6,000 worth of cashflow for $1,500; but there were potentially twenty more locations and machines!

Treasure Hunt

When I got in my rental car armed with the location list, I felt like I was on a treasure hunt. I started plotting locations on my map and formed a plan. I battled Los Angeles traffic to start tracking down the locations.

I went to the abandoned locations first to see if I could salvage anything. I ended up finding about ten of the twenty “inactive” locations to be salvageable. Even more shocking was the fact that they had money sitting in them!

I don’t know if he was just lazy, crazy, or disorganized, but he didn’t feel the need to go pick up the money that was sitting in these machines. By the time I had hit all the locations on the list, I had about $750 in quarters!

$1,500 – $750 = $750 initial!

This deal just kept on getting better. With the money I picked up in the first day, I had cut my upfront in half.

Perma-Grin

I flew back to Austin in total shock. We had found a great place to live, and had an income stream waiting for us. Two months later, we made the move.

As I got familiar with the vending route, the previous owner’s mismanagement became more and more obvious.

Cleanliness

It looked as if he had never cleaned the machines in his locations. There was melted candy, dirt, and dust all over the machines. He had let many of the candy selections run out, which exposed the gears and cost him money.

The first thing I did was cleaned up the machines and made sure they were filled to the top.

Settings

The amount of candy dispensed for a quarter in these types of machines is adjustable. The idea is to give out enough candy to satisfy your customers, but not so much that you kill your profit margin.

He had all of his machines set for the absolute maximum. Now, there’s a certain amount of candy that people expect for a quarter, and any more than that is wasteful. I adjusted all of the machines to more reasonable levels and increased my profit margin.

Storage

The biggest waste of all was the storage garage. Not only were those machines losing money by resting idle, but he was paying $250 a month to keep them there. This knocked out half of his profit!

I moved all of those machines into my kitchen until I found homes for them. It was annoying to have them there, but not $250 worth of annoyance.

A Deal to Remember

I first started thinking about creating value out of other people’s trash after I read Robert Kiyosaki’s Rich Dad Poor Dad. His perspective helped me to be able to see value in overlooked places.

After I read his book, I bought the game that he created called Cashflow 101. I would highly recommend this game to anyone who wants to learn to think like Robert Kiyosaki. It’s one thing to read about a concept, but it’s an entirely different thing to practice the concept over and over with fake money.

I played Cashflow 101 as much as I could so that I would make this new way of thinking a habit.

In the game, there are small deals and big deals. Candy vending is just a small deal, but I have learned that it takes a few small deals to trade up into a big deal. Now I have my eyes open for the big one!

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45 Comments

  1. John April 9, 2007 at 7:46 am #

    I just wanted to say, thanks for posting this. I really love finding stories like this that give specific details of the path to passive/residual income. I will definitely digg/stumble this post.

  2. Brian April 9, 2007 at 10:10 am #

    Thanks John! I appreciate you stopping by.

  3. Brian Lee April 9, 2007 at 11:15 pm #

    Thanks Joe! Looks like some good machines.

  4. Joe April 9, 2007 at 10:28 pm #

    Hi, I enjoy the blog. I saw a posting for vending machines on craigslist that you might be interested in.

  5. Joe April 9, 2007 at 10:28 pm #

    …and I forgot the link…here it is: http://dallas.craigslist.org/bfs/306786939.html

  6. Matthew Jabs April 10, 2007 at 6:31 am #

    That is awesome…congrats!

    How much profit are you making on the LA route now?

    My brother invested in candy vending & ran his business like the guy you bought your machines from. He invested like $10,000 in 20 new machines, never made his money back, and sold the 13 remaining machines for $200! If I would have been in the mindset I am now, I would have bought them from him & turned it into immediate passive income.

    I have another vending opportunity, but it isn’t candy. It requires much more risk (SBA loan), but would also come with much higher reward. Maybe I’ll watch eBay for bulk candy routes for sale in my area, build up my LT investment account, then have a good down payment for my other vending idea!

    Don’t forget to let us know how much profit you’re bringing in now!

  7. Brian Lee April 10, 2007 at 8:02 am #

    I’ve heard that a lot of people get into trouble with those types of vending scams. A brand new vending machine costs less than $200 and a location only costs brainpower.

    Steer clear of any scam that wants you to pay more than that

    Look for a report on my income ventures next week.

  8. Brian Lee April 17, 2007 at 10:14 pm #

    Easy, Taso… Just run a search on eBay such as “Candy Vending Machines” and once your results are returned, click the link that says “save this search.” Click the button to have your results emailed to you for the next 6 months.

    Thats it!

  9. Taso April 17, 2007 at 8:22 pm #

    How did you set up the alert on eBay? When I read this I like the idea and thought to myself how handy it would be to use, how is it done?

  10. Adventures In Money Making August 31, 2007 at 1:34 am #

    Excellent post!

    I guess the seller was making more money through some other ventures, or else he was just plain stupid(which i doubt, else he wouldn’t have had the $20k to begin with).

    I bought an ebook on vending routes but it didn’t seem cost effective to spend money to buy a large vending machine so I didn’t pursue it. Your post is a lot more informative!
    thanks for sharing.

  11. Brian Lee September 14, 2007 at 4:13 am #

    Artem, you have a point. Hate to say it, but I’ll have to do some re-calcuations. (I was paying too much to have it managed anyway!)

  12. Artem September 14, 2007 at 2:13 am #

    Hey, great post! The only thing is that I’m not entirely sure about is how you factor in the managerial expenses into the Cashflow method of valuation.

    Shouldn’t you subtract the $2,400/year managerial expenses BEFORE multiplying the yearly cashflow by 5? That would give you only $600/year of pure profit ($3,000 – $2,400) with the valuation of just 5 x $600 = $3,000, not $12,600.

    Regardless, great deal and keep it up!

  13. mondito September 17, 2007 at 9:27 pm #

    I always wonder how you can increase your profit when the quarter per vend is fixed and the cost of candy continues to go up. With the increase cost of gasoline and candy I kept breaking even or less.

  14. Brian Lee October 11, 2007 at 7:25 am #

    Yeah, the thing with Kiyosaki is that he’s strong on concept, but weak on details. I’ve seen him in person and I wasn’t that impressed, but the overall concepts of his work are very profound as far as I’m concerned.

  15. Mia October 11, 2007 at 6:40 am #

    I love your story! Our 9yo son got a vending machine last summer. At 1st he stocked it with M&M’s but soon realized he wasn’t making much money from those. He ended up investing in some cheap little toys and capsules (ebay). Right now the machine sits in our entry way and anyone coming into our home almost feels compelled to put in a quarter. I figure when he’s older he can manage a system similar to yours and make a nice passive income when attending school. Thanks very much for your informative post – I can’t wait to share it with my son when he gets home!

  16. FinanceAndFat October 11, 2007 at 7:20 am #

    That is a really incredible story! Thanks for sharing.

    You know, I always thought Kiyosaki was a bit over the top and not really trustworthy, but your experience is making me reconsider. I should probably give his material another try.

  17. Brian Lee October 25, 2007 at 8:38 pm #

    Wow, thanks Mike!

  18. Mike T October 25, 2007 at 8:35 pm #

    Hey Brian, great post. I went on ebay and bought two vending machines for a total of $240 just to get started. I also have two locations set up: my local tremendously busy barbershop and car detailing place. Thanks for the idea and I left a tip for you too! Wish me luck buddy!!

  19. Appfunds November 6, 2007 at 7:02 am #

    I love such stories, man ! They make you act.

  20. Winning Startups July 28, 2008 at 8:36 pm #

    Wow you are pretty clever I like the story with the vending machines I am like that too when I bid and no one else did. Why didn’t anyone else bid? Too funny.

  21. Keith November 20, 2008 at 7:18 pm #

    Well done. You got me into gear and I found a great vending machine and location right next to my house!

  22. Ronald Baro January 12, 2009 at 12:02 am #

    You’re right about when they say that one man’s trash is another man’s treasure, but what if the Treasure that the one man threw out? was really a Treasure? I hit pay dirt this wieek. It made me feel as if I am the Real deal Indiana Jones. I found at a GoodWill Store? a Valuable Guitar that is Considered the Stradivarius of Spanish Classical or Acoustic Flamenco Guitars. The person who had it? gave it up and didn’t know what they had? so they donated it to GoodWill and Goodwill didn’t even know what they had Either. It was a Double Whammy!!!! It’s a Vicente Tatay Tomas Model. I congratulate you all at this site Genius Types.

  23. how to manage personal finance January 20, 2009 at 7:35 am #

    Great article. And you’re right about using a little creativity- sometimes that’s all it takes! My most successful business venture to date was something that might be considered outside the box. It does take time, effort, and creativity, but with enough of all three you can make it happen.

    Great post.

  24. Honest Internet Businessman March 1, 2009 at 11:04 pm #

    Thanks for the post. Your writing is superb and I’m envious.

  25. Sanjeev July 26, 2009 at 8:15 pm #

    Sounds like an incredible deal, well done!

  26. Katty August 19, 2009 at 10:55 am #

    Very inspirational story! Thanks for sharing the details! I wonder how the candy vending business is doing in a recession. Have you noticed any changes? Katty

  27. Vic November 14, 2009 at 5:48 am #

    Huh..that’ story is very uplifting. For the vending machine thing…that was creativity and resourcefullness.

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