1. Should you pay a Location a Commission?
2. If a machine/Location is not profitable and you want to move the machine and cancel the contract, how is this handled?
3. Should I get financing for my vending business?
4. Do I need to pay taxes on my products to put into a Vending Machine?
5. Is there a formula for how much a location with a machine will cost?
6. Can you break down the costs involved with owning a venidng route?
7. How do I lease equipment to start a vending business?
Should you pay a Location a Commission?
Negotiate contracts or agreements with property owners or the location managers to place your vending machines on their premises. Generally speaking, commissions can be avoided in situations where there is an employee benefit. In situations like laundromats, golf courses, nursing homes, retail businesses, or other locations which do not benefit the store - you will generally expect to pay a commission. Some people avoid commissions by emphasizing the services and convenience you're providing to both the employees and the location customer base having a vending machine on premise. You could also want to emphasize the financial risks in terms of paying for a machine placement, the cost for insurance and other overhead, stocking the machine, loss due to out of date items, as well as other costs and risks. However, be prepared to share a portion of your profits, if necessary. If you need to pay a commission, always tie it to your net revenue and never pay a flat monthly fee. It's important you understand the concept of “net revenue” and how to calculate net revenue prior to discussing commissions with location managers.
If the location manager insists on a commission, you should let them know that the commission will require a 1099 be issued from your business at the end of the year. You will be required to get the business EIN/SSN in order to be able to issue the 1099 at the end of the year. You will also be required to have the specific name of the organization/person to whom the commission check will be drafted. This will help to suggest if this is a legitimate request or someone trying to skim profits from the location business.
Include a “revenue plateau” for net sales in the commission agreement. Frequently, you can create a tier approach… 0% to $300, 3% to $300 to $500, 5% for sales $500 to $1000, 7% for sales $1000 to $1500 and 10% for any sales beyond $1500. Determine what time frame these plateaus reference such as weekly, monthly, or quarterly.
If the machine does not generate enough sales for any particular period of time, then you will not owe a commission. The commission should specifically be spelled out in the location contract that is written and agreed upon.
Always pay the commission by check on a quarterly basis so you have a recordable detail of your payment, to whom the payment was made and the date of the payment for your taxes. Avoid paying in person... your schedule might change and you might not be able to see the person who needs to be paid. Additionally, you want to set up a repeatable verifiable process right from the start. You should never pay in cash, always pay by business check from your LLC checking account (don't pay by venmo, paypal, Etc). The commission you pay is a deductible amount for business expenses on your annual taxes for the business.
It is likely that the location manager does not have an understanding of how small the revenue stream will be for vending machines. It is possible and likely that the location manager may want to verify the commission is being paid correctly. This is a reasonable request. Always have evidence to substantiate reported net revenue profit numbers, such as: machine’s counters, spreadsheet of product placement, credit card reports, etc.
Agree to pay a commission on locations that are open to the public AND have a decent amount of traffic. If the location is a closed location (not open to the public) and the location manager or owner of the location wants a commission, generally this employer is trying to make money off of their own employee's. History has shown in these situations, they are generally too focused on the bottom line and won’t care about the employees or having a good vendor relationship. In these circumstances you might want to consider passing on the location as it may be a red flag and harbinger of negative things to come … frankly, this kind of viewpoint has often shown that it may be more headache than it's worth.
If a machine/Location is not profitable and you want to move the machine and cancel the contract, how is this handled?
IF there is no contract, You just tell them sorry the machine isn’t doing enough sales to be profitable so I’m picking it up. It’s business , they will understand. If there is a contract, termination of the contract should be spelled out in the contract. It is usually a good option to offer the machine to the business at market condition terms. It costs time and money to move it, if you can sell it for market value or just a little below, you may be ahead of the game.
If the site isn’t viable then you have to look after your interests and move the machine. However if it’s a slow site that is related to other outlets you might also service then taking a loss on one to retain others is sometimes necessary.
Depending on the terms of the contract, it is generally better to pull the machine as quickly as possible to limit the possibility of vandalism or destruction of the machine. Sometimes people get angry when the machine is leaving.
Should I get financing for my vending business?
Generally speaking, your first machine should be purchased with cash. Most people are unable to secure loans to start the business. Luckily, There is not a lot of money required to open a vending business. You will need to finance a few thousand dollars to get the business up and running. The vending machine and/or location will be the largest part of your investment.
Depending on the size of your business or as your business grows, you may want to organically grow the business. This means you will use current profits to finance future growth. If you want to grow faster than your financial situation can accommodate, you may need to secure financing at this point to purchase vending machines, fund overhead expenses and stock the machines with products.
With a track record for the business, You may be able to secure a loan from a bank or other financial institution, or you may want to consider alternative financing options such as crowdfunding or angel investors. It is generally recommended that you dont take out a loan.. When you only have a few locations, there’s no security in vending. If you take out a loan; the loan has to be paid back whether you’re making money or the location is not profitable. Also, if you lose your location, there is no money coming in yet the loan must be serviced.
When spending or funding your business, Shop around, the price difference on exactly the same items from one supplier to another can be significantly different; this is true for all parts of the business, products, accessories, repair services, insurance, etc.
Once your vending machine business is established, consider expanding to more locations or adding different types of vending machines if the opportunity arises.
Do I need to pay taxes on my products to put into a Vending Machine?
If you think about it, you pay tax when you purchase your vending items then tax again for making money off that item. Paying tax on the same item 2 times gets expensive. Figure out how to get a tax exempt form in your state. You can take that to the sams club to not pay taxes at the store. Completing a LLC, getting a business account at a bank should be the first step. You should be able to file for tax exempt purchases. Depends on your state but there's a form to bring to places like Walmart and Sam's club. That way you're not paying taxes twice.
Is there a formula for how much a location with a machine will cost?
There is no absolute formula to calculate what a location is worth. It generally is a negotiation. That said, there is a base calculation which should get you into the ballpark of what to expect for the location. There are two calculators, the first is the calculator for locations with a written contract. The second is a calculator for locations without a written contract (no contract means you could get kicked out 1 day after you purchase the location and the location is a higher risk and worth less - you have no idea of the history of the location or if the seller is on good terms with the location so the risk is much higher without a contract.).
Some people also calculate into the calculation if there is verification documentation of the income generated at the location. This might take the form of credit card documentation or other such independent verification. If there is no verification it is not uncommon to discount that location 50% of the calculation. You should note that if there is a credit card reader on the machine and the seller is not willing to show you the credit card reader reports, this should be seen as a huge red flag that they are not be an honest broker and you may want to walk away from the deal.
You should also note that ALL the credit card readers must be transferred at time of purchase as a condition of the purchase (and should be written into the purchase agreement). Do not transfer money unless the agreement is to transfer at time of payment otherwise it is not uncommon for the transfer to NEVER be done. The buyer CAN NOT do the transfer, it must be started by the person who owns the account with the credit card reader company. If the seller is not willing to do the transfer at time of sale, this would be a huge red flag that there is something wrong with the sale and you should reconsider going through with the sale. If you want to go forward without transfer, you must subtract $200 per reader from the sale price.
Generally speaking, the location with a machine should be calculated with the following formula:
Location with a Contract = ((Monthly Gross * 12 * .75) * (if no income verification multiply by .5 otherwise multiply by 1)) + market value of the vending machine(s)
Location without a Contract = ((Monthly Gross * 12 * .45) * (if no income verification multiply by .5 otherwise multiply by 1)) + market value of the vending machine(s)
For example:
A DMV location is being sold. There are two machines there, a drink machine and a snack machine. You have determined the machines are in good shape and have a market value of $1000 and $850. The machines are reportedly doing on average $600 a month in sales. In this example, there is no contract with the DMV. There is, however, verification from the credit card reader which shows both cash and credit sales for the machines.
Location Without Contract = ((600 * 12 * .45) * (1)) + 1000 + 850
The total market value for the location should be around $5090.
In the second example, Another DMV location is being sold. There is a combo machine there. You have determined the machine is in good shape and has a market value of $900. The machine is reportedly doing on average $700 a month in sales. In this example, there is a contract with the DMV. There is, however, no verification from the credit card reader.
Location With a Contract = ((700 * 12 * .75) * (.5)) + 900
The total market value for the location should be around $4050.
Can you break down costs of owning a route?
There are a number of expenses that will be encountered with a vendng business. Following example might help to shed light on expenses...
A route with several locations. Some of them may need to be stocked multiple times a week. The gross revenue for the route is around $3000 a month. The follwing expenses involve:
1. The cost of the product to fill the machines is around 50% of the gross.
2. Depending on your state, you must consider sales tax which is about 6% of gross.
3. Transportation to each location - gas is around $30 a month.
4. There are other costs that are generalized globally across all locations - these are items such as insurance, vehicle repairs, warehouse and office space, spoilage, accounting, income taxes, legal fees, licenses, commissions, business loan interest...etc.
5. If you pay someone to do the stocking for you, you will have to factor that in as well.
How do I lease equipment to start a vending business?
With few exceptions, the math just doesn't work to rent/lease a machine!
There are a few ways this plays out:
1) You pay more money for a depreciating asset. The value of the machine itself continues to loose value while you make payments on the loan.
2) There is really no way to know how the machine is going to perform or how much you are going to make at a location. It is entirely possible that you may put a machine in a location that will underperform and you will not make enough to cover the cost of the rental.
3) Frequently, people at a location are not kind to machines. While the machines are built to take a beating; dings, kicks, and scratches will reduce your machine value further.
4) It is entirely possible that you may need to remove the machine or the location will aks you to move your machine. Now there is no income on an assett you continue to pay monthly.
5) If the machine is removed from a location, it needs to be moved and will sit around until you find a location or the machine will bounce around until you find a stable income producing location. Note that all the while you will need to be covering the monthly payments.
It is usually recommended that you start with your own capital and purchase the machines with your own funds. This will keep risks low. When you have gained experience and can properly evaluate the risks/rewards for the business, you can then start to finance the machines.
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