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 Passive 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. Since most machines only require service about once every two months, I considered it passive income.
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
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 investors are willing to pay based on the company’s profits.
A PE of twenty means that investors are willing to pay twenty times the company’s earnings. If a company makes $1 million a year, investors 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 investment, their rate of return would be 1/20 or 5%.
I wanted to make at least 20% on my investment.
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 investment, even if you plan on managing it yourself. You should always value a company as if it were a completely passive investment. 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…
As the only bidder, I got it for the reserve price of $1,500!
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!
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 investment!
This deal just kept on getting better. With the money I picked up in the first day, I had cut my investment in half.
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.
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.
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.
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!