Talk me down: Investing in a Declining Industry
During COVID lock down, I've had a bit of free time to work on a new entrepreneurial venture. Unlike previous ventures, this is more of a "time trial" to accomplish a goal versus a truly scalable project.
My goal is to set up a business that won't distract me from my career and will be capable of generating enough profit to fund a Solo 401K. With that in mind, I'm less concerned with scalability (~$200K annually) & exit value. Simple trying to maximize cash generation while minimizing effort in the future once things ramp up.
With that goal in mind, I'm going to write a really brief write up on why I want to place a few ATMs at local businesses. Below you'll find a brief summary of the investment highlights, risks and expected returns.
Quick note on the industry: while we are moving to a cashless society as both transaction fees /and the cost of POS systems decreases, I don't see society becoming entirely cashless. The younger and more affluent you are, the more likely you are to disagree with this, but I expect that a certain segment of the population won't move away from cash. For the sake of this post, let's agree that cash will continue to be used albeit at a lower percentage for the next 10 years.
Investment thesis: ATMs present an attractive risk / reward especially given the limited operating effort. I'll detail the transaction and unit level economics plus risks below. Focusing on the operating effort, to service a machine after placement it takes about 3 minutes plus travel time (note: I do not pursue locations in dangerous areas or outside of a 15 minute drive from an existing location). To really maximize my route density, I am taking a hit on margins and placing ATMs in "B level" locations.
Transaction-level economics Price charged for a single transaction = $3.75 Payment processor share: $0.25 Property owner share: $1.50 Profit from a single transaction = $2.00 (55% gross profit)
"Fixed costs" Insurance / administrative cost / filling cost = $50 per machine per month (assuming 5 machines) Initial cost: $2,400 for a new ATM with free installation & multi-year warranty Required capital: $3,000 - $5,000 per machine
ATMs in non-prime locations will be used ~100-200 times a month. The average machine should generate $4-5,000 of profit per year. In the first year, I expect to recover the initial cost of the first group of machines and return 50% over the capital that I need to park in the machine. In a machine's second year, I hope to generate ~$3,500 in profit per machine.
Risk / downside - Declining industry - Competitive - Poor scalability (reason why ATM manufacturers / payment processors don't own and service the machines) - Robbed while servicing the machines (minor)
Pros - Start up costs are low enough that it will not impact my daily life - Impressive return on effort for servicing machines (5 machines can be services with 1 hour of work a week if route density is high) - Easy business to have someone else operate down the line - Potential synergies with my real estate investments
I'll bite: besides the cash-only businesses, the only meaningful demand for cash I see is from illicit activities like selling drugs. If you avoid high demand locations, you're going to end up placing machines in poor neighborhoods.
That being said, this could be a great business for someone else to run for you (maybe an employee at a gas station fills it for a $0.5 cut per transaction?). The profit margins above should allow you to cut in another party pretty easily.
I recommend OP looks into ATMs within cannabis dispensaries that are CASH ONLY.
If you haven't done too much research into this, there are tons of people online (youtube etc) that do this. Not a bad gig but I'm unsure of the downsides.
I can't speak to the ATM investment other than placement will be crucial. I was interested in this and asked a golf course how often people ask for an atm and the owner said maybe a handful of times per year.
What about vending machines? I have a buddy who just invested in healthy vending machines (coconut water, power bars, etc) after doing a lot of diligence. Placement is less important and you're riding an upward trend. Would also complement the RE assets. Just a thought. He ended up placing at a few local universities very recently.
Appreciate the response. Placement is my biggest challenge at this point. I visited 10 cash-only businesses over the weekend. Unfortunately, the vast majority had ATMs but did not list it on Yelp / Google or an adjacent business had an ATM. Down the line I might circle back with the sites in the second group, but it is very difficult getting business owners on the phone during COVID.
During these conversations, several of the gas station owners commented that since COVID, consumers have preferred contact-less payment methods. Mentioned that both cash and physical card swipes have been down. People are using either credit cards or phones with NFC-tech to pay at a higher rate. Not great but something I've begun to seriously contemplate is how COVID will accelerate the transition from cash to digital payment methods.
I think you're far better off investing the cash in literally anything else. Entrepreneurship at small scale sucks, even if it's "passive". If you're in PE, save the cash for coinvest?
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