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Chapter 2
Pitfalls, Risks, And Rip-offs!
This is probably the most important part of this book. While there is
TREMENDOUS OPPORTUNITY FOR SUCCESS in this dynamic, growing industry. .
. there are ALSO some pitfalls and risks as with any business. The most
important thing to look out for are the 'rip-offs'.
WARNING: The biggest mistake you can make would be to let any of this information scare you into not taking action. Be aware of this for your own financial well-being. . . but don't ever let it stop you from starting on the path towards financial success in the exciting vending business!
There is an old saying: "If something looks too good to be true, it probably is". That may OFTEN be a true statement, but it has caused a lot of people to pass on the best opportunities of their lives. Some things really ARE very good!
Regardless, I do want you to have balanced information. You should know
the good and the bad. . . and THE BAD ISN'T SO BAD. . . ONCE YOU'RE
INFORMED. Here it is:
It has been my experience that when people do fail in vending, more often than not, it is almost always one of these 4 reasons:
Most Common Reasons For Vending Failure
Biz-Op Scams
Being victimized by one of the unscrupulous biz-op (business opportunity) promoters which abound: Paying way too much money, being sold very poor quality machines, and sometimes a flawed and ineffective vending concept (that looked great to someone that does not know the business). Also, many of these companies just take your money and never ship you anything.
Locating Companies
Trusting a professional locating company. Most of these companies look good, but in all my years in this business I am aware of only a couple that I would recommend to you.
Spending All Funds Available
Investing too much money at first. When they did learn the truth about the vending business and could have corrected their mistakes and been successful. . . it was too late for them. They had already either spent all their money and/or borrowed all they could get a hold of. They were out of the game, and out of money too!
Used Equipment
Buying used equipment. Buying old technology and poor appearance does not help to get or keep locations. Besides, you spend too much time and money making repairs. It's no bargain. A bargain is new equipment at a big discount.
If you follow the instructions in this book, you will not make any of these mistakes. You will learn how to buy the right machines, at the right price, and how to get great locations regardless of your background (no sales required, unless you want to). You'll also be able to start small, without risking too much, until you feel comfortable expanding.
While most vending equipment manufacturers and distributors are ethical and honest. . . there are many unscrupulous promoters who use a variety of techniques to separate you from your money. Some of these techniques are downright dishonest and/or illegal (even involving fraud and theft) but most are simply misleading and deceptive. Many of these techniques are quite legal, operating in the GRAY areas of the law, and yet they are still 'rip-offs'.
I estimate that vending machine fraud runs between $50 million and $100 million in the U.S. each year!
This includes not only outright theft, but selling machines that will not perform their intended purpose. . . and even QUALITY machines that are sold at grossly inflated prices.
So is vending as good as it looks? It is BECAUSE vending is so profitable that it has attracted so many unscrupulous promoters. If you will just steer clear of these vultures, and learn the 'VENDING SUCCESS SECRETS', you can get started with the right machines for much less money and 'GROW RICH IN AMERICA'S BEST CASH BUSINESS'!
Let's take a quick look at some of the predominant pitfalls, the risks, and especially the rip-offs. . . that you will most certainly want to be aware of as you plan your exciting new business venture.
Are You The Entrepreneurial Type?
Webster's Dictionary defines entrepreneur as:
"One who organizes and directs a business undertaking, assuming the risk for the sake of the profit".
Entrepreneurs are made, not born. Anyone can learn the skills required. The big question is whether or not you're WILLING to learn the skills, exercising sufficient SELF-DISCIPLINE to implement them. . . and to ASSUME THE RISKS, to whatever degree they might be.
Are you really eager to be your own boss? To control your time and your life. . . your destiny? To experience the kind of wealth and freedom that comes only with running your own business? Are you willing to put in the time required to achieve your goals, and not be unduly discouraged by the inevitable little setbacks that may come to pass?
Hard though it may be to believe, I'm aware of some seemingly quite silly examples of failure in the vending business. For example: One of my own vending machine purchase customers failed when he never placed his 10 new snack vending machines in the locations that he had obtained. He just never quite got around to it, so there they sat (in his garage). Eventually, as a favor to him, I bought back all of his machines.
Most everyone would like to have a lot of money and the quality of life it can provide for themselves and their family. . . but not everyone is willing to do what it takes to get it! The fact that you have this book in your hands indicates that you are probably the kind of person who is willing to do what it takes. . . and that you're just looking for the right opportunity. If so. . . congratulations, you've found it!
The vending business is probably one of the least risky businesses you could ever become involved in. . . assuming, of course, that you buy the right machines, at the right price. . . and considering that if you start small you have so little to lose by giving it a try.
Consider this example: If you invested a lot of your money in a shoe store and it didn't do well, you may be in big trouble. But if you invested a lot of your money in (quality, fair priced) vending machines and they (or some of them) didn't do well. . . the worst thing that could happen is that you'd have to move them. . . right?
If you decide to get into vending, I recommend that you start relatively small, regardless as to your financial resources. Most vending biz-op (business opportunity) promotion companies insist on a MINIMUM order of $5,000. to $10,000. or even much more. This is for THEIR benefit, not yours.
For many people $10,000. to $50,000. IS a small investment, and that's OK if you can afford it, and do your homework first.
But you can start in this business on a shoestring if that's what you need or want to do. Besides, why invest a lot of money until you've had first hand experience in vending? It only makes sense.
If you start out with a small investment you're comfortable with and discover how great and profitable the business is, you'll feel equally comfortable expanding. But if you start out too big, you may not sleep nights.
I think the best advice I can give you is this: No matter how good this all looks to you, don't risk more than you can afford to lose. Start relatively small and your risk will be correspondingly small. THEN expand as fast as you want to.
One of the nice features of the vending business is that it doesn't require you to quit your present job (or business), or invest your life savings to begin, or to become successful. You can invest a 'comfortable' share of your savings (or take a small loan) and 'test the waters' with a PART TIME vending business. . . growing as you feel so inclined (as your confidence builds).
When you're through reading this book, you should take stock of yourself and what you've learned. . . and decide if you are willing to give it a try or not.
If you decide that you ARE willing to assume the minimal risks involved. . . the next step is to decide if you have the self-discipline to service your vending route as you are being advised in this book. There are some people who are just not willing and/or able to accept responsibility for the most simple management tasks required in this particular business. Nevertheless, you must believe in your ability to handle it, and be committed to achieving you financial goals, if you are to succeed.
Welcome to the world of entrepreneurs. If you really want to. . . you CAN do it!
Myths
Here are some commonly held misconceptions that you should not be taken in by.
"The Mafia Runs The Industry"
Nothing could be further from the truth. What probably perpetrated this myth is the old Elliot Ness movies in which gangsters laundered money through the vending business. . . but that's just 'show biz'. I suppose you could assume that organized crime has some involvement in virtually all types of businesses, but I've never seen any evidence that vending has been singled out in any way. Don't give it another thought.
"Too Much Competition"
There may be a lot of vending machines out there, but there is very little REAL competition. Most locations complain of poor service, machine breakdowns, and/or stale products from vending operators. If you care about your business and offer good equipment and service, you will find that there is a tremendous opportunity awaiting you!
Even in situations where there appears to be competition, there are new types of machines available that literally blows the competition away! I'm aware of one machine, in particular, that will get 8 out of 10 sales when placed right next to any competing machine!
In snack and drink vending, most of the competition is from the larger vending companies who want locations with at least 100 or more employees (or similar customer traffic). This is because they have so much overhead, and their equipment is so expensive, that they must have very, very high volume locations. You will find a huge opportunity open to you in locations with 20 to 100 employees (or similar customer traffic). . . and they eat just as much as the people in the bigger locations.
When in comes to games and impulse machines, much of the real competition is in the arcades and bars. Arcades only represent about 15% of all game machines located. About 45% are in taverns and bars. I don't recommend starting an arcade unless you have some experience with the business first, as they can be risky. The easiest locations for a beginner to get started with are restaurants, retail stores and shopping malls.
There is no shortage of good locations for a well-managed vending operation. . . all geographical locations. . . all markets. . . all machine types.
Also keep in mind that the industry is growing at around 9% to 11% per year. . . creating a lot of new opportunities everyday!
B B B Report Reliability
It seems almost sacrilegious to say anything but positive things about the Better Business Bureau. They are almost an institution in America, and have certainly done admirable things for the promotion of ethical business practices in over 80 years of service. But there are some important, generally applicable facts that you should be aware of:
Each BBB office has some leeway as to how they may operate, so there are sometimes slight differences, but they are all under the same basic umbrella.
Whether negative OR even positive, you can NOT rely on BBB (so called) 'Reliability' Reports alone if you want to make a well-informed, reasonable, and prudent decision. Those who do so may well later regret either lost money, aggravation, or missed opportunities. Here's why:
In my opinion, the BBB is basically a 'complaint house'. So called 'Reliability' Reports are most often based upon the number and type of complaints filed (IF any) and whether or not those complaints are resolved. There are many reasons why you can not rely on these reports. . . REGARDLESS as to whether they seem negative OR even positive.
Each BBB is a non-profit corporation SUPPORTED by local BUSINESS OWNERS. Their By-Laws generally state that their purpose is the "protection" of the "vitality of the free enterprise system". Therefore, an argument could me made that they may have a conflict of interest as a consumer advocacy group.
They say that they attempt to encourage fairness in business and discourage deceptive trade practices, and yet they themselves engage in practices which one may question. Not the least of which is the very fact that they call themselves a "bureau". . . which has lead some unknowing people to believe that they are an agency of government, and they are not (which gives them added, but UNDUE credibility).
A common definition of 'bureau' is defined by Webster's Dictionary as follows: "A government department, or a subdivision of a government department". The BBB is neither.
Business 'Reliability Reports' are compiled by background information PROVIDED by the SUBJECT BUSINESSES THEMSELVES on a questionnaire. . . and are seldom investigated or checked out by the BBB. . . making the information provided dubious at best.
An adverse rating may be applied by the BBB if a company fails to respond to a customer complaint (s), if the company resolves complaints but fails to resolve the "nature" of a series of complaints, or if (in the infinite wisdom of the BBB) they feel the complaint was not resolved fairly.
Contrary to popular belief, however: No adverse rating is necessarily given a business simply because complaints have been filed against them. The BBB considers complaints a normal occurrence (which they are, of course) that most all businesses experience to varying degrees. The BBB does not necessarily require the business to meet the customers demands, but primarily to RESPOND to them. And NO INFORMATION regarding past 'responded to' complaints are provided to inquirers unless obvious unethical or abusive patterns develop.
Many unethical businesses can fall through the cracks of the BBB reporting system because they may communicate well with their 'unhappy' customers, so complaints never even get filed in the first place unless and until it's far to late to do any good, if ever. Or complaints are actually filed, but are adequately responded to (but not necessarily to the customers liking). So, a company with a GOOD-looking report COULD actually be someone you would definitely NOT want to do business with.
Even a 'GOOD-looking' Reliability Report is, at best, only a report of an ABSENCE of unresolved complaints filed. . . NEVER an endorsement by the BBB. That may seem sufficient for your needs until you're aware of the above details.
On the other hand, even a company with a 'BAD-looking' Reliability Report may not be so bad at all. The BBB generally will NOT TELL YOU the NUMBER OF COMPLAINTS filed, nor the 'NATURE' of those complaints, nor the NUMBER OF CUSTOMERS that particular company serves. . . making it IMPOSSIBLE for you to decide for yourself the degree of relevance of the adverse rating.
They expect you to defer to THEIR judgement ONLY, with NO INPUT as to the severity of the reported problem (which can and does vary widely). In America, all people are guaranteed the right to their opinions and free speech (under the First Amendment of the Constitution). Therefore, the BBB is entitled to express their opinions, but they are not necessarily valid or correct. . . and they give you VERY LITTLE OR NO INFORMATION with which to MAKE UP YOUR OWN MIND.
I'm not saying that the BBB 'Reliability Reports' are of no value. . . they are often of value. . . they're just not 'reliable'. I believe that to IMPLY that they ARE 'reliable' is in itself misleading. . . and is self-serving to the member businesses of the BBB (in the minority) who (good or bad) impose their beliefs and values on other non-member businesses (in the majority) and consumers.
To summarize: A seemingly 'good' report doesn't necessarily mean anything. . . and a seemingly 'bad' report doesn't necessarily mean anything. All reports, good and bad, provide information which adds to the big picture, and which can stimulate further investigation.
The moral: Whether negative OR even positive, you can NOT rely on BBB (so called) 'Reliability' Reports alone if you want to make a well-informed, reasonable, and prudent decision. Those who do so may well later regret either lost money, aggravation, or missed opportunities.
I suggest you call your local BBB and ask for a free copy of their brochure entitled "Tips On Automatic Vending Machines". The publication may be helpful, however, I believe you will find it quite pessimistic. For example: This chapter entitled "Pitfalls, Risks and Rip-offs" exposes much information you should be aware of, however, it is counterbalanced with a lot of positive information in the rest of the book. The BBB's brochure lacks this balance and leaves me with a generally negative (and unwarranted) feeling. DON'T LET IT GET TO YOU. It is not their role to promote any business or activity and, therefore, they have very little positive to say on the subject.
For very interesting details on the motivation behind this booklet, see the chapter titled "Trade Publications, Organizations, And Shows" under the section titled "A Note Of Caution".
I've dedicated a fair amount of space to this subject because it represents a particular myth which has proved an expensive lesson for many people. . . and equally so for missed opportunities as well as lost money and aggravation. Now that you know the truth. . . ask more questions, get more references, listen to your gut (your intuition is usually right) and make up your own mind.
"We'll Get Your Locations For You"
Virtually all vending equipment distributors and promoters contract with professional vending machine locating companies to provide locations for their customers. . . although many of them are not very 'up front' about it.
Many who sell you equipment promise you that "OUR locators will get you your locations" but they simply sub-contract to these professional companies. The only advantage they gain by misrepresenting this fact is that it may give their prospective customers a false sense of confidence in them. . . leading them to believe that they are a 'complete' service and supply source. This gives them added but undue credibility.
The companies who do work for many of these distributors and promoters are happy to work directly for you as well. And you'll generally have better control and get better service that way.
By the way, I want to make it perfectly clear that I recommend exercising CAUTION when considering working with ANY professional locating company. Look for more on this in the next section: "What To Watch For" under the subheading "Professional Locators", and also in the chapter titled "Getting Great Locations".
"It Takes A Lot Of Money"
This is a matter of personal choice. You can start with as little as 1 or 2 machines, and grow quite successfully from there (many have done just that). For $2,000.00 to $5,000.00 you can make a fairly aggressive start. Part-time, or full-time. . . $500.00 or $100,000.00 start-up. . . it's all up to you. Remember, as I said earlier, I do not recommend large investments until you are comfortable with what you are doing.
Surely you'd agree that anytime you have an opportunity to make up to 100% to 500% (or more) annual return on your money, it doesn't have to take a lot initially. Even a small initial investment compounded (reinvested) over a relatively short time can add up to a fortune. See the heading: "The Magic Of Compounding BIG Returns" in the chapter titled "Why Vending".
One thing to be careful of is that you are prepared for all costs you may incur. Don't forget that you will have freight costs, product inventory (except for games and impulse machines), and locating costs to name a couple. In addition, for some types of equipment, in some areas, you may need permits or licenses etc. (See the chapter titled "Getting Started" as well as individual machine chapters).
"Don't Tell Anyone"
Some promoters use this technique. They ask you to sign a 'Non-Disclosure Agreement' in which you promise not to tell anyone what they share with you regarding their vending equipment. They'd like you to believe that they offer something new and unique, not found elsewhere. This is only a marketing gimmick. If you look around a little you'll find the truth is that the same, or very similar equipment and opportunities are available from many other companies.
What To Watch For
Here's some of the misleading, deceptive or downright illegal marketing practices some unethical companies use to separate you from your money:
"Biz-op" Promoters
A biz-op promoter is any company that is in the business of promoting any income or business opportunity.
My advice to you is that you should exercise extreme CAUTION when considering doing business with ANY vending biz-op promoter. While there are a few good ones around, these companies are notorious for poor concepts, low quality, exaggerated profit claims and high prices. They typically put all their money into slick marketing and professional exteriors. . . but they rarely deliver.
Most of them charge high prices just because they have learned that they can get away with it. . . but many have no choice because they have set themselves up with such high overhead.
How can you recognize a biz-op promoter? They are companies which are obviously primarily sales and marketing organizations. You'll find them at the Business Opportunity and Franchise Shows. You'll find their ads in newspapers and magazines. And you'll receive their expensive information packets in the mail.
The point is, they spend so much money finding sales prospects with
their expensive Madison Avenue marketing campaigns. . . even more on
closing the sale. . . and 20% to 30% commissions for their salespeople.
. . that they HAVE TO markup equipment 300% to 400% in order to stay in
business.
The simplest way to describe this is just to say that it
is a FLAWED MARKETING CONCEPT. Their overhead is just too high. I am
intimately familiar with the economics of how they operate because (I
must confess) I used to do business that way. When I learned the error
of the concept I immediately made changes in an effort to provide an
honest, valuable source for information and equipment. YOU can NOT pay
the prices that these companies MUST charge and still make a good return
on your investment.
In addition, they often sell poor quality equipment, and come up with poor vending concepts that they can make look good or unique, but just don't work in the real world.
Another important point to remember is this: The ONLY way they can get people to pay their high prices is to EXAGGERATE the profit potential. Don't believe it!
Technically speaking, I am still a biz-op promoter only because (after all) I DO promote the vending business. . . but that is where the similarity ends! This will become more apparent to you as you read on.
"Biz-Op" Shows
These are the business opportunity and franchise shows that come to your area one or more times per year. I prefer to call them a "den of thieves". You'll see them advertised on TV, radio, newspapers, etc. Yes, there are some well known and quite legitimate companies participating, but I believe them to be the exception. Most of the participants are the unscrupulous biz-op promoters mentioned above.
There are several show "circuits" (or show companies). Each one has a show going on almost every single weekend somewhere in the U.S. Many biz-op promoters participate in several shows in a given weekend. It is not uncommon to pay $10,000.00 per weekend, per show for booth space. It is also not uncommon to set up $50,000.00 displays. Consider all the related overhead like air freight to get their display moved each week, airline costs for staff, hotels, meals, etc. Add to that the 20% to 30% commission that they pay their salespeople.
Can you see why their prices are so high? Do you really want to pay for all this? Again, this is simply a FLAWED MARKETING CONCEPT. YOU can NOT pay the prices that these companies MUST charge and still make a good return on your investment.
This book has been banned by the largest show promoter in the world. In fact, most all the shows have banned (or will ban) this book from distribution at their shows. I have been told that my open and honest method of distributing information and equipment is not welcome there. . . that I would cost the other exhibitors too much money in lost sales. If they let me in, they would lose too many of their other exhibitors.
There is very little "opportunity" at these shows. If you have time, you may find them interesting, but leave your checkbook at home.
Professional Locating Companies
One of the single biggest reasons why some people fail in the vending business is because they relied upon a "professional" locating company. Trust me. . . there is almost nothing "professional" about most of these companies, except their very convincing marketing tactics. In all the years I've been in this business, I can think of only a couple of companies that I would refer you to if you called me on the phone today (I don't even list them in the Appendix because I want to be in a position to withdraw their names quickly if their quality of service changed suddenly). Believe me, if you went through as many of them as I have, you'd feel the same way.
This does not mean that you should rule out a professional locating company. . . just exercise extreme CAUTION. And consider hiring a local individual to do locating for you (which can work out great). There is more information and many very successful solutions which are covered in the chapter titled "Getting Great Locations".
Take The Money And Run
I REGULARLY run across people who tell me they have paid 'deposits' or 'full payments' of $2,000.00 or more (sometimes much more) to companies who never ship them anything. . . and subsequently disappear.
Moral: Know who you're doing business with. Pay C.O.D. when possible and practical. And listen to your intuition. . . it's usually right.
Exaggerated Profits = High Prices
This is one of the most common rip-offs. High prices on equipment. Yeah, the equipment may (or may not) be good, and there is certainly a POTENTIAL for profit. The promoter may even have a couple of 'shills' who will say they are "making a fortune" with these machines.
The bottom line: Beware of unscrupulous companies that PRESSURE you for quick decisions and make EXAGGERATED profit claims in order to sell you overpriced, poor quality, or poor concept equipment.
Remember: Exaggerating the profit potential of equipment is the ONLY way these slick operators can get anyone to pay 3 to 4 times what it's worth. They do it in very clever ways that keep them within the law. . . often it is not even in writing, or they get you to write it out on a worksheet yourself. Check around until you're comfortable that you know the true profit potential and value of the machines you're buying. (See "Established Routes" below).
References, Paid References, And Shills
It's 'business as usual' for biz-op promoters and even reputable equipment distributors to provide references of existing so called "successful" route operators, and other references as well. I've always advised to go ahead and check out these references (which may well be fine), but don't make a decision SOLELY on the basis of a couple of references.
Keep in mind that almost any company can come up with at least a couple of good references. . . and they certainly aren't going to give you the names of negative references, unsuccessful distributors, etc. Still, this is one (of many) reasonable and prudent ways to check them out.
It's also very common (almost standard practice really) to pay route operators for providing references. I believe you will find this is usually legal as long as the reference tells the truth. . . but if a cash commission payment (for example) is linked to your purchase, how impartial do you think the reference will be with the information provided? There's lots of room for abuse here. . . sometimes even involving 'shills' who outright lie.
Many people would like to talk with a successful route operator or two before making an investment. . . and that is fine. Also consider, though, that if you are a successful and busy route operator you have better things to do than take 10 or 20 calls a month (which almost always last 30 to 60 minutes each) from the prospective customers of your supplier. That's why it's almost impossible for equipment companies to get people to act as references unless they compensate them in SOME way. See the chapter titled "A Better Way" for more on this subject.
Be sure to temper the information provided from references with a little common sense, in light of the above. Question both the company (what their policy is) and the reference (what they're getting out of it). Of course, that doesn't necessarily mean you'll get the truth.
Just ask a lot of questions, consider other factors when checking them out, and rely heavily on your gut instincts (your intuition is usually right).
If possible, see if you can get the company to put their policy regarding reference compensation in writing. My own company policy is as follows:
FREEDOM TECHNOLOGY does not ask our customers to take phone calls as references. We often receive nice letters from satisfied customers, which I sometimes share in whole or in part (while protecting their privacy). But I do not offer any sort of compensation in exchange for these letters, as I consider such practices to be unethical in most cases (particularly if not disclosed).
By the way, you'll find that many companies limit their references to their bank, attorney, accountant, etc. While these are fine to list, these references will usually not provide you with any particularly useful information. You need to check with their suppliers, associates, and customers, etc. . . and ask if they offer a WRITTEN satisfaction guarantee of any kind.
While a written satisfaction guarantee is not very common in this industry, I do offer such a guarantee on machines purchased through my company, FREEDOM TECHNOLOGY (See "Satisfaction Guarantee" in the Appendix under "Forms And Miscellaneous" for details).
Promises, Promises
There's an old saying among attorneys that goes like this: "A verbal agreement is not worth the paper it's written on". Humorous, but nevertheless quite true.
No company will object to putting any promise or agreement in writing if they are reputable, and if they really intend to perform. IF it's important to you, get it in writing. Don't rely on anything the promoter or distributor does not (or will not) put in writing. Enough said.
'Weasel' Clauses
A weasel is an agile 'slippery' animal known for it cunning and slyness. Hence, a 'weasel clause' is a provision in an agreement which is designed to let one or more parties 'slip out' of a responsibility which was otherwise thought to be agreed upon.
Weasel clauses are commonly used in all areas of business, which means you have to read agreements carefully. It's always good advise to consult with an attorney if you are unsure of your ability to read and understand any agreement.
'Help Wanted' Ads
These ads appear in many forms. A sales company runs a 'thinly disguised' ad trying to create the illusion that you'd be "practically" working for them. . . that the whole route is already "set up", etc. These ads often run under 'Help Wanted', 'Sales Help Wanted', 'Business Opportunities', 'Established Businesses For Sale', etc. The goal is almost always to sell you overpriced equipment, and to make you believe that there is "little or no risk". To the best of my knowledge, there are no legitimate opportunities of this kind.
"Representing Frito-Lay, M & M Mars"
Many unethical promoters will mention in their ads that you will be representing Frito-Lay, M & M Mars, Coca-Cola, etc. This serves to improve their image, and it sounds good to you, but it's nothing more than a lot of hot air. All it means is that you'll be buying these products and selling them in your vending machines.
The whole purpose of the misrepresentation being to raise their image by association, and give you a false sense of confidence in them.
"Established" Routes
There are some legitimate established route deals available (see below), but Biz-op Promoters and Distributors almost never sell truly "established" routes. Why many of them actually do, however, is advertise that they are established and then they establish them AFTER you buy them. This way they can get away with charging you 3 to 4 times more money than it's worth! Some 'turn-key' promoters do essentially the same thing, packaging what 'appears' to be established routes (see the section on "Turn-Key Vending" below).
As you may know, a 'WELL-established' business is valued NOT according to the value of the assets it holds (which are sometimes insignificant) but RATHER by the INCOME it can produce. The length of time in business is extremely important, because (for example) you would not want to pay much more than the value of assets for a business that was established only one month ago.
A vending business should be established an absolute MINIMUM of several months to a year before you should consider it 'well-established' and value it by the income approach (above). Otherwise, compute the 'real' value by totaling the equipment value, basic locating costs, freight paid, product inventory, etc. This is just one of the ways some slick promoters devise to charge you 3 to 4 times what the equipment is worth. Don't fall for it.
As a general 'rule of thumb', a truly 'well-established' vending route with QUALITY equipment will sell for AT LEAST the equivalent of the annual net profit and sometimes up to 3 or 4 times that amount depending upon other factors. For example, if a route was producing an annual net profit of $10,000.00, the sale price may range from $10,000.00 to $40,000.00 or more. If you could purchase such a route for only $10,000.00 (which you probably can not) you would be receiving a return on investment of about 100% A.P.R. (Purchase at $10,000.00, receive $10,000.00 annual return = 100% A.P.R.). If you paid $40,000.00 for such a route (which is more likely) you would be receiving a return of about 25% (Purchase at $40,000.00, receive $10,000.00 annual return = 25%). The cost of the equipment is irrelevant and is generally much, much lower. For these reasons, buying established routes is usually no bargain. You can set one up yourself for much less money!
But on the other hand, if you should ever decide to sell your own route you can see that there is an opportunity to make a lot of money! In fact, some people (just like you) establish routes over and over just to sell them later for a huge profit.
There are occasionally some 'well-established' routes for sale from individual operators (not promoters). They are rarely a bargain, however. If the route is doing real well, you will pay a very high price for it. If it's doing poorly, there's often a reason you can not fix (i.e. poor quality, worn out equipment).
Also, many so called "established" routes are sold by people who where mislead by Biz-op Promoters into paying 3 to 4 times what it was worth in the first place. . . they couldn't make it and you can't either. They want to unload it on you.
Used Equipment
I have been able to get good deals on used equipment from time to time, but it is rare. It takes a lot of 'know-how' to recognize the good deals from the bad. You also run the risk of excessive breakdowns and repair costs when you don't know what you're getting. Also, used generally = older designs and technology which makes locating more difficult.
You may think you're saving money on used equipment, but any such savings can be quickly LOST (and then some) through repair costs, and lost profits (plus lost locations) due to frequent breakdowns.
LATE MODEL used equipment which has been properly RECONDITIONED can sometimes be a good buy, and there are a few reputable companies that specialize in this (they advertise in the trade magazines). Quality reconditioned used (late model - 3 to 7 year old) machines are priced at about 10% to 40% less than similar new machines. Due to popularity, availability is very limited on many of these machines. . . particularly small glass front snack machines.
The vast majority of used equipment that you'll find for sale in the newspaper is poor quality, poor concept, and/or overpriced machines owned by people who have been ripped off by the biz-op vending promotion companies. They pay $1,000.00 for a machine they could have bought for $500.00 or less. Then they discount them to $600.00 or $800.00 and try to sell them as some sort of a bargain.
I've found that most people would rather have new equipment when they discover they can buy it at up to 75% off from discount distributors like my company, FREEDOM TECHNOLOGY. Besides, new, quality, well-managed vending equipment has the potential to pay for itself in less than a year anyway (if purchased at a fair price). . . and it's more attractive (making it easier to locate).
I no longer offer used machines through my distribution company. Primarily due to the problems mentioned above: Poor appearance, old technology, locating difficulties, frequent breakdowns, etc. Instead, I concentrate on offering the best machines at the lowest possible price. . . which makes locating much easier and keeps maintenance to a minimum. I think it's a mistake for a beginner to buy used machines. . . once you have a little experience. . . it may make sense in some situations. In my own routes, however, I prefer to stick with new equipment only.
'Turn-Key' Vending
Here, the promoter sells you a 'package' which is supposedly complete. You buy the vending machines and the locations (which the promoter usually secures AFTER your purchase), the promoter often delivers the equipment to the locations for you, uncrates them, sets them up, and stocks them with product. . . then hands you the keys (all ready to go). Hence, "turn-key".
In principal, this doesn't necessarily sound like a bad idea. . . but in practice it is usually not desirable. This is generally the same scam we've already discussed. . . a method of selling poor quality and/or poor concept machines at 3 to 4 times what they're worth.
If you want to evaluate such an offer, just try the following. Look up the desired equipment on my FREEDOM TECHNOLOGY wholesale price list in the Appendix (or check prices elsewhere). Add the cost of freight and initial product inventory. Then add the cost of getting your locations (see "Getting Great Locations").
The only other service that they sometimes provide is that they may physically place the equipment and stock it for you. It's easy to find people with a truck or van to do this for you at a cost of about $10.00 to $15.00 per hour, or a flat rate of around $10.00 to $50.00 per location (depending upon type of equipment). For the sake of comparison, estimate that cost and add it on. In actual practice you would almost surely not use this particular service since it is so simple to place and stock machines yourself, and it's a good opportunity to get to know your equipment and locations anyway.
It is inconceivable that after completing the above exercise you would ever agree to such a turn-key plan. Sure, they can make it look mighty attractive with a lot of fancy brochures and glowing promises. . . but it's nothing more than a lot of hot air!
They put together the same package you can easily do for yourself. . . then they triple or quadruple the price!
The only way they can convince anyone to pay these outrageous prices is by misrepresenting and exaggerating the profit potential of the business. Forget it.
Lease-Back Deals
Some promoters offer to lease you the equipment for a fixed or variable monthly payment, and then they contract to service the machines for you (including collecting the money). Often, the money turned in is not sufficient to cover the payments.
A lease in and of itself is not necessarily a bad idea. Just evaluate the true cost and terms of the lease carefully. And watch out for any service contract.
"We're The Manufacturer"
This one may seem harmless. A promoter tells you that THEY are the manufacturer of the vending equipment. Of course, sometimes they are, but usually it is not true.
The whole purpose of the lie being to raise their image and give you a false sense of confidence in them.
The truth is that there are actually relatively few well established, quality vending manufacturers in the U. S. Many of these manufacturers offer what is known as 'custom manufacturing'. This equates to simply making the machine and putting the promoters name on it. They are not the manufacturer. They SUBCONTRACT to the manufacturer, therefore, it is often legal (though misleading) to state that they are in fact the manufacturer.
One of the problems with this is that if the Biz-op Promoter goes out of business you may not know who the real manufacturer is. Making it difficult or impossible to get parts, etc.
Furthermore, very few of the reputable, well-established manufacturers will sell direct to the route operator. Almost without exception, they sell through distributors like myself (FREEDOM TECHNOLOGY). By the way, buying direct does not necessarily mean you save money. For example: A couple of my suppliers will sell direct to route operators, but my pricing to you is lower than you would pay from those manufacturers because distributors get a large discount. . . and my markup is relatively tiny.
Usually, if you are actually dealing DIRECT with a true manufacturer, it is some small operation. These little companies come and go with the seasons. Would you like to take a chance on owning some 'orphan' vending machines that you can't get parts for? This is not to imply that all small manufacturers are bad. Just watch out for the little unstable operations. Check them out.
My company, FREEDOM TECHNOLOGY, is an authorized distributor for some of the largest and most respected vending equipment manufacturers in the U.S. These companies are very selective in who they choose to work with. I also deal with some small, but very reliable manufacturers who offer very unique equipment. And I don't put my name on them. . . I leave the manufacturers name on and let you know who they are.
'Apply' To Buy
This one really insults my intelligence. . . and I know it will have the same effect on you too. Yet it is so very prevalent among vending equipment promoters! Yes, you must actually fill out an application to get them to take your money (or so they will have you believe).
They make it seem almost reasonable sometimes. Telling you things like: "We offer PROTECTED TERRITORIES so we only accept the best applicants", or "We need to see if you QUALIFY for our program, since we only accept those with the qualities (and enough cash) to succeed", etc., etc.
The application always request personal information like how much money you earn, how much you have in savings, and questions to determine if you could likely qualify for a loan. The other questions are just 'fluff'. . . only there to make it appear like they care about you and your chances for success.
It doesn't matter who they are or what they tell you, there are only three reasons for the application:
To find out enough about you and your personal business (like how much cash you have or can borrow) so that they can determine if they want to spend any time on you (Known as: 'PRE-QUALIFY the sales prospect').
Armed with this information they can make a more convincing sales pitch to you. . . attempting to 'manipulate' you into doing something that you may later regret.
They figure (and they're usually right) that if they can get you to 'apply to buy'. . . that they've got you where they want you (psychologically speaking). They don't have to sell you on the true merits of the proposal. YOU have to SELL THEM on why they should accept you! After all, you APPLIED!
Isn't that just preposterous? Do you really want to give them the upper hand by providing such information? Would you truly want to do business with a company like that? Think about it. It's ludicrous!
Protected Territories
Generally, the only way you're going to get a protected territory 'of any value' is if you're purchasing a legitimate franchise. . . AND if you're buying a very, very UNIQUE vending or amusement machine. But then you're going to be paying franchise fees. Undoubtedly, there are a few (not many) such deals around. . . but take note that:
Many slick promoters use this technique to entice you to "buy now before your territory is gone". It is USUALLY no more than a HIGH PRESSURE sales tactic, sometimes used with the 'apply to buy' marketing approach.
Often they never actually put it in writing in any way that is enforceable. If they do, they get around it with some sneaky provisions (weasel clauses) they slip into the agreement, or they simply set up a new business entity and start selling all over under a new name.
Besides, protected territories are of little or no value unless your equipment is very, very unique. Even if you actually had an ENFORCEABLE protected territory (or franchise) agreement on a particular machine, that doesn't mean that a competitor can't put another similar machine in your area.
Beware of paying extra for a protected territory or franchise deal. . . and don't let them pressure you into a quick decision that you may later regret, just because "your territory may be gone later".
Limited Time Offers
We are all used to seeing limited time offers. Most all retailers have short-term 'sales', etc. There are many legitimate reasons for limited time offers, like clearing out an overstock, improving sales in a seasonally slow month, etc.
The problem comes when the limited time offer is designed only to get you to make a MAJOR decision in an UNREASONABLE amount of time. . . like now, today, or tomorrow. This may be okay if you're buying a toaster on sale at Walmart, but it's not reasonable when investing large amounts of money in a new business opportunity.
My advice to you is that you run, don't walk, from such offers! Usually companies that pressure you for quick decisions sell poor concept, poor quality, and overpriced equipment or have something else to hide that they don't want you to take too long to think about it because they're afraid you'll come to your senses!
You're the kind of person who is not afraid to make a business decision once you have all the facts required to do so intelligently. Don't let anyone rush you.
Consider this: The only legitimate motivation to get started fast is to avoid the loss of the income you could be earning by delaying unnecessarily. Just be careful that an IRRATIONAL fear is not getting the best of your usual good judgement. . . causing you to put off making a decision at all. If you don't make a decision reasonably promptly, you probably never will. And you don't want to cheat you and your family out of a good thing, do you?
Scam Financing
I regularly come across people who regret having been duped into paying 3 to 4 times too much for vending machines when some slick promoter convinced them that their special financing added value to the equipment offer.
The way this works is: The promoter offers financing that sounds extremely attractive. It's almost never available at the initial purchase, however. . . only for later expansion, or after buying a minimum number of machines first. Usually it involves no interest (or very low interest) and very low or no down payment. Sometimes the down payment is on a sliding scale (i.e. so many machines at 50% down, so many at 25%, and a certain number thereafter at NO down payment).
While this may sound great on the surface, there are many pitfalls.
These companies are usually 'fast buck artists' who go for the quick 'one-time' sale. They don't expect you to ever buy from them again, although they will make glowing statements about how "this is the start of a long and prosperous association". They make their living by preying upon ignorant buyers. . . making one quick, profitable sale. . . and then going on to the next poor sucker.
Consider this outrageous example:
Option #1: Buy a machine at guaranteed lowest factory-direct wholesale price of $1,000.00 from a discount distributor like FREEDOM TECHNOLOGY. Obtain 100% (no down payment) financing for 36 months at high finance company rate of 20% A.P.R. (much lower rate is often available). Monthly payment is $37.16 for 36 months. Total of payments is $1,337.76.
Option #2: Buy the same machine from a slick promoter for $2,000.00 to $4,000.00. Whether bought now, or using their proposed financing later, your total of payments is at least $2,000.00 to $4,000.00 (more if they charge you interest)!
Obviously, this is a very bad deal. But some people take part anyway because they are ignorant as to the true cost of equipment, financing, and vending profit potential. . . and they're very enthusiastic about expanding and don't believe they can obtain expansion financing elsewhere.
What they fail to realize is that they would be doomed to failure if they paid these kind of prices just to get the promise of some future 'lousy' financing. If they do make such a deal they will not BE expanding. . . in fact they may well fail altogether.
Surely you'd agree that it's better to SAVE up to 75% on price, and then get your own 'legitimate' financing without suffering through one of these rip-off financing scams. You can't really expect to make a good profit if you pay 3 to 4 times the fair price of your machines.
See the chapter on "Financing" for more information on this subject.
Company Stability
Obviously, any promise, agreement, or guarantee is only as good as the company behind it. You'll want to make sure that you're dealing with a well established company.
Summary
Where Does This Leave You?
We started out by looking at all the reasons why the vending business is so great, and now you've read a long chapter which covers a lot of negative subjects. Remember the warning I gave you at the beginning of this chapter?
WARNING: The biggest mistake you can make would be to let any of this information scare you into not taking action. Be aware of this for your own financial well-being. . . but don't ever let it stop you from starting on the path towards financial success in the exciting vending business!
Because vending can be so very profitable. . . it has attracted a lot of con artists. Now that you know their tricks, and the other risks connected to this business, you are in an excellent position to proceed.
See chapter titled "Other Opportunities - And Mistakes!"
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