Earlier this week we spoke about an opportunity to get involved in a relatively simple, straightforward and profitable business. Something that literally anyone, including college students and retirees could do.
As promised we provide the conversation that I had with the businessman I was introduced to.
I’ll alert you in advance that his isn’t a frontier market business. Joel operates entirely in the U.S. Normally we look outside the States, however there are opportunities everywhere, and although we think the States has some tough times ahead of itself, this does not preclude us from seeking out particular investments which provide us with a decent return with limited risks. We believe this particular deal ticks all the necessary boxes.
So, what’s the deal? Cash baby, cash…
Joel runs a company called Nationwide Automated Systems (NAS for short). It’s a private company operated by Joel and his partner of the last 17 years.
Put simply, NAS owns and leases ATM machines in hotels, convenience stores and gas stations across the US.
Right now they control about 20,000 such machines, owning 2/3 of those directly, and leasing the other 1/3 from individuals that have purchased the machines and leased them back to NAS. Hence the opportunity…
Joel and I spoke via phone from his poolside cabana location at the Four Season’s Maui. I have to admit that I was momentarily a bit envious. No matter where you are, or what your perspective, the Four Season’s Maui has to be one of the nicest spots on the planet.
Mark: I guess the first thing to ask is how did you get started in the ATM business? I know there are some barriers to entry so how did you guys stumble into this?
Joel: Well actually at the time I got into it, which I think was in ’95, I was with New York Life. I was an estate planner for them. One day I got a call from my (now) partner in this business. He’s a CPA and had always done my taxes. I’ve known him for years. He said there was a fellow in his office that was getting into the ATM business and he wanted to meet me because I had insurance customers that owned property, and he wanted to put his ATMs on those various properties.
So I went over and met the guy and we made a finder’s fee deal.
It didn’t work out as planned, and he wound up owing my partner and myself about $6,000. We never got paid, and we started chasing him for the money. We started gathering all this information about ATMs. We talked to his bank, his processing company, etc. and we decided to try it ourselves.
We put up about 6 machines. We couldn’t touch his machines because they didn’t belong to us. It was a total disaster. I was almost immediately looking to sell the machines.
Then we got a break. I have a brother who’s a securities attorney in Texas who deals with some hotel chains. He set up a meeting with a client and I flew to Houston. I met with them, and that meeting ended with us getting the Sheraton Astrodome. At the end of the first month there was huge volume. We grew from there.
We landed Hilton in ’97 and they gave us 1,800 properties to do. After 17 years we’re approaching 20,000 machines running. We’ve done mostly hotels, but we have 5,000 Exxon Mobile stations, and a lot of convenience stores.
Mark: So, in actuality you’re selling a small business. People buy the machines from you and then my understanding is they lease them back to NAS who places them, maintains them and insures them.
Joel: Yeah, the individual owns the machine and we lease it from them. It’s a small business really, so they are entitled to depreciation. They write off 20% a year over 5 years. Basically they’re getting their money back in 3.8 years when it’s all said and done.
The machine owner can keep it forever if they want to, but after 2 years they can sell them back to us and we’ll literally give them their money back. After 2 years we’ve made a profit and we don’t care whether they own it or we own it.
Mark: So then when you buy those machines back from the investor, they’re NAS machines. They don’t get sold to another investor. In that instance they become an asset of NAS..?
Mark: In a way, NAS kind of backstops the business owner’s risk because you guarantee a minimum payout per machine per month is my understanding..?
Joel: That’s correct. Actually we guarantee it for a year based on the machine’s cost. Let’s use round numbers – if the machine costs $20,000, by contract we have to pay the owner $4,000. We’re guaranteeing them 20% per annum on the lease back.
If the machine produces less, then we send them a makeup check at the end of the year. However, we changed that about 3 or 4 years ago and now we just give them their 20% monthly. So we’re going to send the owner a check of $330 per month, per machine that they own. We also pay at the rate of $0.50 per transaction, so if the machine does more than 660 transactions a month then the investor gets the difference.
Mark: OK, so if you’re in a high traffic location you could do better.
Mark: Which tend to be the best performing locations?
Joel: The convenience stores are really the best locations we’ve ever had. Selfishly, we try to keep the best locations in house. As an example, we do the Waldorf Astoria in New York. That hotel produces 3,000-4,000 transactions a month. We’re not going to give an outside owner that hotel.
We make sure and give owners locations that we know will perform to at least the minimum, guaranteed payout.
Convenience stores are excellent. By the way, that’s what we’re doing now. We’re installing 2,500 additional convenience stores.
Mark: We imagine a lot of the current owners will want to pick up these additional locations because, like you said, you haven’t been offering new opportunities for awhile.
Joel: That’s correct.
Mark: So you’re offering a first right of refusal to existing owners, but those interested in getting involved for the first time – there’s also a chance for new people to come in, correct?
Joel: Short answer, yes. Here’s what happens. Current owners always have their name on my waiting list whether they buy 1 machine or 10 machines. They’re always anxious for more machines. As an example, if you said to me today, ‘Put aside 100 machines for me,’ I would put them aside for you, new owner or existing. If you’re buying 1 or 5 or something like that, it’s not a problem. With 2,500 locations I’ve got enough available now.
If you’re interested in doing something with us, now is a good time to do it. We’ve gone as long as four years without a location. They’re hard to come by.
Mark: What’s the typical lifespan of the machines? Do they literally last forever?
Joel: The original machines that came out in the mid ’60s are still operating. As a matter of fact, there’s one in Phoenix that has a big plaque that says, ‘This is the original ATM machine.’ They’re a box with a cash drawer and circuit board and occasionally we change out the circuit board or something, but we pay for that.
Mark: What kind of tracking system is in place to make sure that you’re tracking the machine transactions properly and the onwers are getting the proper payout?
Joel: We use processing companies. We have 5 of them around the country. They monitor the machines. If a customer goes to a machine and puts in any kind of credit card or bank card, within a millisecond the processor knows whether they have money in their bank account and they can release cash, or whether they don’t. They give us what kind of a card is used, the time of day, how much cash was dispensed, etc.
If the cash is running low in a machine, they send out the armored car to refill the machine. If a machine breaks down, they send out the service people. We have service people in each state, geographically, depending on how many machines we have that in that state. They pretty well monitor everything for us.
Mark: OK, and that’s covered by NAS not by the owner, correct?
Joel: Correct. We also insure every machine out there with Hartford, and they cover it for anything that could possibly happen, including liability insurance – $4 million per incident in case somebody gets robbed or shot using the machine. So we pretty well have it covered.
Mark: Over the last 17 years have you seen changes in revenue patterns? Is this a business that’s growing year over year or is it pretty consistent?
Joel: The business is pretty consistent; however, we’ve had times where maybe our machines are up 5% for a year or down 5%. When the recession hit 3 years ago, we did see a downtrend in most of our locations except for hotels for some reason. Hotel businesses picked up. It’s very hard to put a handle on it.
People use cash. Some people say, ‘Well, don’t they use less cash?’ We haven’t found that to be true. Cash is cash. If you travel yourself and you go to a city, you’re not going to walk around without some cash in your pocket. You have to tip, and cab drivers don’t always take credit cards, that sort of thing. Cash is still relevant. In our industry we always talk about the downside if we become a cashless society. We feel that’s still many years away.
Mark: That leads me into my next question. Most of our readers are pretty sophisticated and some of them, including ourselves, are of the opinion that the current financial system is heading for some sort of a shakeup and possibly even in a worst case scenario, a reset.
Joel: If something should happen – let’s say there’s a run on our banks or something – we’re a very cash-rich company. We have reserves that are pretty significant.
Again, remember, we own 2/3 of the machines that are out there. Independent owners only control 1/3. We would probably just pay the investors back and that would be the end of it. Like I said earlier, In our contract the owner can cash out, so that’s probably what would happen. We would be out of business, investors would get paid back and that would be the end of the story.
Mark: What about all the automation that’s happening with things like iPhones and Android phones?
Joel: It really doesn’t affect our business. You got to remember, our machines are strictly cash dispensing machines. You still can’t do that on an iPhone. I think that we’re probably very safe in my business for another 20 years before we have to start to worry about it, even with all these new innovations that are coming out.
Mark: Say that I work my way up and I eventually own 100 machines myself. I’ve got equipment now that’s theoretically worth $2 million, 100 machines times roughly $20,000 just for even numbers, which is giving me a massive cash flow of about $400,000 a year. No employees, no maintenance; it’s a beautiful business.
I can’t think of a reason someone would want to sell out of that situation but anything is possible. Does NAS allow people to sell their business as an independent, or does NAS always have first right of refusal?
Joel: Yes, they have to sell it back to the company. They can’t sell them to someone else. The only time they can transfer is if someone dies and it’s in their trust or will. Other than that if somebody wants to just cash out, it’s got to come back to us.
Mark: OK. Right now when you say you control 20,000 machines does that include NAS and the independent owners, or is that just NAS machines?
Joel: Right now the independent owners have about 6,000-6,500 machines – in that range.
Mark: That’s something like $120 million worth of equipment?
Joel: Sounds right.
Mark: So in a worst case scenario, NAS would be in a position to buy those machines back from investors?
Joel: Oh yes, absolutely. I would like to buy them back tomorrow to be honest with you, but most of my machines are with people that have owned them for years, they’re friends really, and they’re collecting 20% plus on their money.
I’ll turn the question to you. Let’s say you’ve been with us for 10 years and you are getting paid every month, without fail and I call you up and I say, ‘You got 50 machines; I’d love to buy them back. I’ll send you a check for a million bucks.’ What are you going to say to me? You’re going to say, ‘It’s going to cost you a lot more than a million bucks.’
Mark: Yeah because you’re buying the cash flow…
Joel: Exactly. We were approached by a big bank several years ago that offered us a fortune for our business. The only thing is, they didn’t want to take the independent owners machines. If I sold the company machines, it wouldn’t do me any good because I’d still have the same amount of work as far as the other machines are concerned.
So we didn’t sell out, and the current owners have a forever deal. If I probably had to do it over again, Mark, I would set it up differently. I wouldn’t do what I’m doing because the company is actually locked into the investors forever. My kids will be locked into the investors.
It’s been a wonderful business; don’t get me wrong and everybody’s thrilled with it, but I would probably structure it differently if I did it today.
Mark: What about these 2,500 new locations? Have you considered just buying them all yourself then and not offering them out?
Joel: We could except I have so many obligations from current owners that are waiting for new locations. I wouldn’t do that to them.
The way it’s probably going to come out is we’re probably going to take half of them and offer out the other half of them. That’s the way we’ll split them up.
Mark: OK, fantastic. I wish I would have bought a few machines years ago! Anyway, I want to let you get back to enjoying your vacation.
Joel: Thanks Mark. Take care, aloha!
Have a great weekend!
“The use of money is all the advantage there is in having it.” – Benjamin Franklin