Over the past 2 months our family has started a small vending machine business! I love the idea of semi-passive income. This is the idea of businesses that require some work from the owner, but relatively minimal compared to a full time job. Rental real estate fits nicely into this, as do storage units, car washes, blogs, books, and vending. I really like vending because the barrier to entry is extremely low. We started my 10 year old nephews bulk vending business with under $1,500. With the relative success of this I had been looking for full sized vending machines to get started for a business with my 13 year old son.
Launching A Full Size Vending Business:
The reason for vending machines is that for the most part they are 90% passive. Every week we spend about 30 minutes visiting to restock and collect money. With locations close to home this is a relatively small amount of time, and on par with having rental houses with a much smaller investment. Most items have a 100%+ markup (buy for 50 cents sell for $1).
We started a coin op bulk vending business with our 10 year old in July and that has worked fairly well. The machines weigh about 40 pounds and have 3 bays for different types of candy. At one of his locations the owner mentioned being interested in a full size combo vending machine. We did a lot of research and these combo machines are hard to come by. When you can find them, they tend to be fairly pricey. Most used ones are in the $1,500 to $2,500 range.
Buying The Machines:
I had been looking for combo vending machines for months. There was one post that I was interested in, but the total cost was more than I could stomach. The seller was about 60 minutes from my house and had a set of 5 combo vending machines listed at $9,000. He later dropped the price to $7,000. They had been listed at $7,000 for a while when I reached out and I offered $5,000, $1K per machine. We ended up agreeing on $5,500 for all 5, which is $1,100 per machine. Here’s an identical set of 5 of these exact same machines that sold used for $15,750!
I had to rent a U-Haul to move the machines. I rented the smallest size with a ramp which is a 15′ box truck. The U-Haul by my house didn’t have any available and I had to drive an extra 30 minutes to another location. I spent around $100 in fuel, plus $200 for the U-Haul rental.
The machines were in a storage unit and the seller helped me with loading them. I have an appliance dolly, but man these things are heavy. They weigh 500 pounds each. He helped me tip the machine back on the dolly and I pulled it up the ramp then we set it down in the truck. You really want 3 people to move these things. They are about twice the weight of a large fridge. I was spent by the time we got the last one loaded.
These specific machines are more difficult because they have casters on the bottom of them. The casters are just barely inside the footprint of my dolly, so I can’t get a super good bite on them. I think I will end up cutting off a bit of my dolly so it fits between the casters to make moving them safer, or attaching plates to make my dolly wider so both casters fully fit on it.
Lesson 1: Moving Vending Machines Is Difficult:
These machines weigh 500 pounds each. This is about twice the weight of a heavy full sized fridge, or twice the weight of a high efficiency front load washing machine. HEAVY. oh, and as far as vending machines go these are light. It is more common for vending machines to be in the 700 to 900 pound range.
I got the machines to my house and had about an hour to unload before I needed to return the truck, and I was by myself at first. I first wanted to put them in my pole barn, but my pole barn door is up an incline and gravity would not let me even attempt to unload them, so I put them in the garage instead. The first machine I took down the ramp and then decided to take it off the dolly and push on its casters. Well there is a tiny lip between the asphalt driveway and a concrete pad and when the casters hit that the machine tipped and there was no way I could stop it. It fell on it’s face.
Getting the machine back up was also an ordeal. I used a prybar and a series of boards to get some space under it then I was able to lift it upright. I moved the rest using the dolly. Mrs. C. arrived home and helped me tip back the machines on the dolly and watched the sides of the ramp to make sure I was centered. This machines had some scrapes and I also broke the plexiglass and one of the locks on it.
When deploying the machines, moving them is once again hard, because I don’t have a U-Haul and I don’t want to spend the money on one each time I put a machine in service. We moved the machine out of the garage in front of my van, then tipped it over, with a couch cushion to protect it from damage when falling 2 feet from the tip. then we push it into my van. The first time it fell below the dip in the van, which made it difficult to pick up and pull out at the location. The second time we moved one I put boards in to make the floor of the van even with the hatch.
It takes 3 people to get it out of the van. 1 pushing from inside and 2 pulling from the outside, then tip it upright. Hopefully the machines will stay at all their locations for a long time.
Currently we have 1 at the kids’ school, 1 at the place Mrs. C. volunteers at, and we are about to place one at a service business a friend of mine runs. Two of these locations are within 3 miles of my house, and the other location where Mrs. C. volunteers at we visit frequently anyways, that one is about 15 miles away.
Some vending operators hiring movers for locating machines. These guys typically have pallet jacks to move the machines and really large lift gates on their trucks. Perhaps at some point I will get a truck with a lift gate, of course I also need somewhere to park the thing.
Lesson 2: The ROIs Are Fantastic:
Between the 2 machines we have set up right now we are averaging $30 per day in sales for $900 a month in gross revenue across 2 machines. Keep in mind 2 machines effectively cost $2,300 total ($5500 purchase + $300 Transportation / 5 units Then X2 units). Of this $900 $450 needs to be used to buy new merchandise and that leaves gross profit of $450. Yes we should subtract the mileage cost of going to the store to buy supplies and going to the accounts to service them however we are already at these accounts anyways for other reasons on a weekly basis. The only cost is then the time and fuel for going to Sam’s club. Our gross profit is then very close to our net profit. For argument’s sake let’s say $75 will cover fuel and wages for stocking, these 2 machines then provide net profit of $375 a month. X 12 months is $4,500, a 195% cash on cash return.
$450 a month is on the high end what a rental property for me cash flows, yet we only have about 5 percent of the amount of money in these vending machines as we would in a rental house. Granted we are not benefiting from leverage, although I could finance the machines on my HELOC and effectively pay under $7 a month for the financing cost.
Also, these are expensive machines. Buying just pop machines is much less expensive and I can often find used pop machines in good working order for around $500 each. The difficult part is getting the accounts and moving the machines there. Once the machines are in place they become cash cows.
Lesson 3: Buying The Wrong Machines
These machines are combo machines, originally sold in a package deal by 1-800-Vending. My understanding was the original pitch of these machines was 1-800-vending was selling a business and the machines cost over $5,000 each and they would assist with finding locations. It appears that 1-800-vending and Healthy You Vending are the same company, or at least have similar machines with a similar business plan. Healthy You Vending charges between $8,000 and $9,000 per machine, and the machines are extremely similar to these.
I have read that these also are poorly manufactured compared to other machines and were designed to be difficult to impossible to service. They used custom parts that you can’t order from anyone else AND they won’t sell parts or service machines not purchased by the original owner.
As an example that I have found frustrating is that the keypad on one of these has some buttons that don’t work (because I dropped the machine). On a normal machine the keypad can be plug and play replaced, on these machines the keypad is tac welded in place, so removing and reinstalling a new keypad will be a ton of work. And that’s if I can find a keypad to replace it with.
Check out any vending machine forum and look for discussion on combo machines. The “real” vending operators will tell you to run from these things. In addition to the proprietary parts issues and how these specific machines are cheaply made, most vending operators see it as a business needs to be busy enough to justify a snack machine, and if you are doing combos you will have to visit more frequently due to lower capacity. The preferred method is having a pop machine and a snack machine rather than a combo.
I will say that even with having this knowledge now, I still got a good deal. These machines are not perfect, but I paid $1,100 each for them, not $5,000 each or $9,000 each. I have under $6,000 invested in this and just the 2 machines I have out now are paying off the total bill at a rate of $400 a month. With our 3rd location starting soon and 1 more machine to deploy (or sell) I am confident we will hit a breakeven point this year. Even if we didn’t it’s OK because this $6,000 is a very small part of our world.
Interestingly enough this is the exact price I paid for a tax auction house in 2008, when $6,000 was about a third of our total net worth and 90% of our available cash. That screw up was a big deal, now if I lose $6K, it’s barely a blip on the radar. Unfortunately a lot of the people who buy these machines from 1-800-vending or Healthy You Vending are investing a large part of their net worth / available cash.
Another deceptive advertising claim around combo vending machines is from Selectivend through Sam’s Club. They sell a combo vending machine for $4,450 and offer a rebate on product that will pay for the machine! This of course, sounds too good to be true. They claim that once you sell through the product they will give you, the earnings will pay for the machine. The products in the rebate?
- 25 cases of Gatorade (600 bottles) at $14.88 each or $372
- 58 cases of water (2,320 bottles) at $3.18 each or $184.44
- 8 boxes of peanut butter crackers (960 packages) at $9.78 each or $77.92
- 13 boxes of mini pretzels at $13.98 each, or $181.74
The total value of this rebate is $816.10, not $5,000. Sure you will generate enough money to pay for the machine once you sell ALL of these items, but that won’t happen anytime soon. In most vending machines these items would not be top 10 products, with the possible exception of the Gatorade. Water is the highest margin vending product, but it will take an eternity to sell 2,320 water bottles at $1 each in a single machine. Someone taking full advantage of this deal will end up with pallets of water that won’t move. This is an interesting marketing ploy, but is not a great deal once you read the fine print.
Lesson 4: Rigorously Test Used Machines
I did not test any of the machines I bought. I bought from a storage unit and they had sat for a long time. I’m used to buying houses without requiring inspections. I take on risk to get a better deal. I did the same with these machines. Unfortunately 1 of the 5 units the compressor doesn’t work on. We will end up using this machine as parts. Although this looks like a loss, having parts available, especially for these machines is a good thing. A lot of these parts cost a fortune on eBay, if you can even get them. While it won’t generate us revenue, it will still eventually pay for itself.
Lesson 5: Pop Vending Is Superior To Snacks
Going forward I want to do only pop machines for new machines. Why?
- Pop machines are common on the used market while combo machines are rare.
- Pop machines can be found for much lower prices, often in the $250-$500 range.
- People tend to want a cold soda more than snacks at most locations.
- Pop has a more predictable pricing. It is rare that pop cans cost over 50 cents to buy.
- Pop also goes on excellent sales from time to time.
- Pop cans last a long time, the sell by date is usually at least a year after being shelved. This allows for bulk buying on sale.
- Pop cans are more resistant to critters. Bugs and mice are a lot more likely to get into your candy bars than a solid aluminum can.
- There are also far fewer SKUs to keep track of. With a pop machine I might have 7 selections. With our combo machines we have several dozen SKUs.
- Pop only machines have a high capacity and can often hold over 500 cans. These machines only hold 138 cans and 37 bottles. I’ve seen 1 machine that holds 840 cans, of course the tradeoff becomes size and weight as that machines weighs 830 pounds.
The downside to pop vending over snack vending is the machine is a bit more complicated. It has a compressor and has to get cold. It therefore uses more electricity than a snack machine.
Lesson 6: Vending Is A Great Method To Teach Entrepreneurship
This is going to be my sons business. I bought the machines and am selling each machine to him at the cost I paid for them, so about $1,150 per machine. He pays this back with 40% of the machine earnings. Right now 50% of revenue goes to replacing the products sold, 40% debt repayment, and 10% in his pocket. We also financed the original stock, so his current loan is a few hundred dollars higher than the machine costs. He should be able to be fully paid off by the end of the summer and then its all profit on these machines.
He is going to the store to buy the products, stocking the machines, and learning all the ins and outs of managing the machines. My main focus with this is to change his perspective on earnings money from just being exchanging hours for a set rate to deploying X units that earn Y dollars. This is the same math whether it is vending machines, rental properties, storage units, or giga factories. Getting his capital to work for him, tweaking the management of that capital and having his assets make him money.
The money he will earn from 3 machines should be more than enough to fully fund a Roth IRA every year. He is actually already an employee in our Amazon FBA business and we are working towards him being able to max his Roth IRA through that business. The money he earns from vending might lead to some awesome Lego creations.
Lesson 7: Offer 10% Commission To Business Owner:
We were able to get 3 locations with no royalty payment to the owner. We had a couple leads that fell through because we thought we could get 0% royalty by offering a service to the sites employees and customers. Sure 10% isn’t a ton of money, but using the above examples $45 a month to the owner could be worthwhile especially for them having to literally do nothing. I think 10% is a fair commission and going forward we will be offering this to new accounts, provided they have a busy location.
Lesson 8: Leverage Online Sourcing:
For the first 4 trips of buying product for the machines we drove 45 minutes to Sam’s Club. We have a Sam’s club membership and they sell a lot of these vending items that we can’t get at Walmart or Meijer. I went on the 4th trip without Mrs. C. and I came back without 2 of the items we were looking for because they were sold out. Mrs. C. checked to see if she could order them online and we learned that with a $50 added cost Sam’s Club will ship most items (excluding pop) to our house at no charge. Just the fuel savings from this pays for itself in 3 months.
In addition to the fuel savings, we save a ton of time. It’s a minimum of a 2 hour trip to Sam’s and back. We also have a greater selection online because our order isn’t being pulled from just one store. As an added bonus Sam’s plus members get a 2% cash back accrual (this is not a credit card deal, you earn these points without needing a credit card.). Buying even $300 of snacks a month earns us $72 a year in credit. This also of course comes in handy for our normal household Sam’s Club spending.
This then leaves pop as the only item we need to buy locally and we can do this and stock up when there are good sales.
Lesson 9: The Vending Business Can Be Sold In The Future
What I’ve noticed is most of the time people are selling machines that are not on location, these machines are typically sitting in a garage or storage unit. What is less common is selling the actual business, which changes the way the machines are valued. For instance 10 vending machines might sell for $1,000 a piece or $10,000. 10 machines on locations that generate net profits of $200 per machine per month, or $24,000 a year will sell as a multiple of net earnings. At a very conservative P/E ratio of just 2 this business would sell for $48,000. Having the machines in good locations can 5X their value.
Scaling can make a massive difference. Let’s say we scale to 50 units with a value of $1,000 per unit that each generate net income of $200 per machine per month. This leads to $10,000 a month in net income or $120,000 a year. BUT it requires 30 minutes per machine per week to maintain. Ideally several of these machines would be on the same sites. For example at the nuclear plant I work at their are dozens of machines through various buildings all serviced by the same company. This greatly cuts down on service time per machine. If it takes 30 minutes a week to service each one, then it takes 25 hours a week to service this route. You could hire an employee at $20 an hour to do 100% of the servicing of the route. I would assume paying 35 hours a week as a buffer. You would therefore net roughly $7,000 a month rather than $10,000 but have no day to day involvement in the business. Freeing up that time is worth its weight in gold. I would much rather have $84,000 a year working only a couple hours a month than earn $120,000 working 140 hours a month.
So 50 machines that had a total cost of $50,000 allows you to earn $84,000 a year and you have a part time employee who is now earning $2,800 a month working a flexible job. At much lower amounts like 20 to 40 units the business doesn’t earn enough to justify an employee, because most employees are going to want at least 30 hours per week, even if you are offering a very competitive wage.
This business being larger could then demand a higher PE ratio if you went to sell it. I would estimate 4X net earnings or around $320,000, plus the value of the machines and inventory, putting it at a $400,000 sale price. (OK, so I went down the rabbit hole on this one 😉 )
Lesson 10: Sweat The Details:
On our 1st machine we got a call stating that although the customers can see the product, the machine is stating “sold out”. When refilling the machines you need to adjust the inventory quantity for that location so the machine knows when to tell the customers “sold out”. We forgot to do this and thus several of the items were reading sold out, when the customer can clearly see that the snacks are right there.
On our 2nd machine we were experimenting with a power timer for the location and as part of this Mrs. C. hit the power switch inside of the machine. A week later when collecting the money the machine stated something like 79 total sales, but only had 50 some dollars. When all items are $1 or more, something is wrong. Upon further investigation we learned that flipping the switch inside the machine resets the machine to its manufactured settings. These machines were made over 10 years ago and the default pricing is 75 cents. Doh! At least we learned this lesson early. That switch is a no-no going forward.
This vending machine business is in line with my long term goals. I want to take massive imperfect action to move my life forward and I want to create opportunities for my children to build wealth and learn finance at a young age to give them a massive head start when they enter adulthood. Expansion will likely be paused until we have recovered the original investment in the property and we set up systems for finding new locations and moving the machines. I think it is possible that in 2023 we will scale to more locations. A big question mark is my work hours for 2023 and 2024. If I start transitioning to fewer hours in these years and I also transition to doing rental houses that require less work to make ready, then I will have more time available to assist in growing this business.
What do you think of the vending machine business? Do you have any desire to get started?