Originally posted – Jan 25, 2013
George Morgan has seen it before.
“A lot of people fall in love with the idea of being a laundry owner,” said the president of Best Laundry Brokers, headquartered in Grass Valley, Calif. “They get so enamored with this feeling. They see themselves collecting money and being successful – and they forget to do the basics.
“And, if the seller doesn’t represent all of the expenses or overstates the store’s income, a buyer can easily be tricked. I’ve seen it many times.”
As Morgan rightly noted, buying a self-service laundry these days is no small investment, and there are few consumer protections in the business world. As a result, potential buyers need to do their homework, assume nothing and verify everything.
Laundry owner Brian Brunckhorst, author of “Secrets of Buying and Owning Laundromats,” understands that every buyer is a little different, just like every laundry on the market varies slightly from the others.
Therefore, he suggested that the first step any prospective buyer takes should be to decide on three things he or she is looking for in a store: (1) return on investment, (2) net monthly income and (3) the store’s condition.
“It’s critical when evaluating a laundromat that you understand your own personal ‘set of rules,'” he said. “For me, I want a store that would give me a 20 percent return on my investment, if I paid all cash; however, someone else may need 25 percent to feel comfortable with that laundry.
“Also, what potential upside does that store have? Some people want a store that is in perfect condition with no maintenance issues; others are looking for that diamond in the rough. But knowing what you want gives you the ability to target stores that work for you – everything outside that criteria is not so interesting anymore. You’ve created a target for the ideal store for you.
The Evaluation Process
Whether you discover a store for sale on a website, in an ad in your local newspaper or by just driving past, your first step is to call the seller.
And there are some basic questions you should ask:
• Why are you selling?
• How long have you owned the laundromat?
• How much are you asking for the store?
• Do you lease? How much time is left on your lease?
• What’s your monthly rent?
At this point, you’re simply trying to get to know a little bit about the seller and the business – just to get a rough idea whether or not the laundry is even worth pursuing.
If it is, the next step is to get in your car and see the store for yourself. However, before you even go to the laundromat, drive around the neighborhood – at least a couple of miles around the store.
“I’ll drive up and down those streets,” said laundry owner Jason Lombardo, author of “How to Find, Evaluate and Buy a Laundromat.” “I’m looking for any competition, any other laundromats. I’m also looking for any vacant storefronts, where someone may be building a new laundromat. That may be why the seller is selling in the first place.”
Also, while driving around the store’s trade area, observe the neighborhood. Is there older housing? Are there new apartment complexes or older apartment buildings? Is it a densely populated area? Is it a low-income area or a higher-income community? Is it a college-driven market?
“In a perfect world, you would want an area where people are earning $35,000 or less,” Lombardo explained. “You want an area that has women with children; Hispanics are great laundry customers; older housing; and large number of rental units. Those are key demographic factors. Of course, if there is little competition, that’s a consideration.”
Lombardo also suggested printing out a Google map of the five-mile radius around the store you’re considering.
“You’re going to place an X on that map where all of those other laundries are located, and then you’re going to draw a circle on that map showing where you think those stores are pulling their customers from,” he said. “It’s a simple exercise: I think this store’s pulling from this area, which is about a mile and a half around it; this store’s probably pulling only from that side of the highway; they’re building a new store, and it’s going to be right in my area and so on. When you’re done, how many circles are overlapping into the trade zone of the store you’re looking at?”
It’s also a good idea to call the local Chamber of Commerce: Is the city planning on doing construction on the street in front of the store you’re thinking about buying? Are they going to close the highway exit that diverts traffic right in front of the store? Are they considering tearing down that old apartment complex across the street?
“I know of a store where the city built a pedestrian bridge right next to the laundry, and it killed the visibility from one direction of the store,” Lombardo noted. “If there is something that’s going to change the visibility or traffic in front of your store, that’s important.”
“What is going on in the community relative to its economics?” asked Michael Finkelstein, president of Associated Services Corp., based in Danville, Va. “Has there been a big business that has shut down and the people might be moving? Also, how long are the other retailers’ leases in your shopping center? You don’t want to go into a shopping center if, after a few years, you’re going to be the only tenant there – or if the supermarket is moving out and there’s no draw.”
After driving through the neighborhood, mapping out the competition and checking with the Chamber of Commerce, it’s time to evaluate the store itself.
“Pull into the parking lot or out in front, and just stand there,” Lombardo said. “What is your first impression of the outside of the building?”
Could you see the laundromat from both directions as you approached? Is there eye-catching signage? Is the building appealing? Does the store look welcoming? Or, is there a garbage can tipped over in front of the store, are there unsavory types hanging around, and is there a bar next door? Make notes, and then go inside.
What’s your first impression of the interior? Is it well lit or too dark? Does it need new flooring or some fresh paint? Begin thinking immediately of what’s not working and what needs to be fixed or changed. Is there a snack machine? A soda machine? A soap machine?
“You should be making notes as you go along,” Lombardo said. “It needs paint, this window is cracked and so on. Sometimes, I’ll even put a dollar figure to it. For example, it looks like it needs lighting – that will cost $1,000. These trees in the front are causing a visibility issue – it will be $500 per tree to have them removed. Or the flooring will cost a couple thousand dollars to upgrade. Just do a quick little ballpark figure.”
Also, be sure to log in all of the equipment and their vend prices, to get a quick handle on just how much this store may be grossing. For instance, write down all of the different vend prices for the washers – six toploaders at $1.25, eight 30-pound frontloaders at $3.75, etc.
Next, add up all of the washers at each vend price to arrive at the total amount for the entire store for just one turn.
“For most machines, the ratio of dryer income to washer income is somewhere between 40 percent and 60 percent,” Brunckhorst said. “If the washer income is $1,000, the dryer income would be somewhere between $400 and $600. You can use 50 percent as a good ballpark estimate.”
Now, let’s say the store’s washer/dryer income for one turn is $150 per day. Conservatively estimating that the store does three turns per day, you arrive at a gross revenue figure of $450 per day, or $13, 680 per month.
“A store that someone is selling is going to be around three turns per day.” Brunckhorst said. “If the store is doing five turns per day, it’s not likely to be on the market. In general, you’re looking at three to three and a half turns per day for stores that will be for sale.”
Factoring in the estimated rent (based on the local real estate market and the square footage of the store), along with the approximate utility and payroll expenses, you can quickly figure out about what that store is netting on a monthly basis.
Of course, the next step is to determine what the laundromat is really worth.
The Valuation Process
Don’t confuse valuation with due diligence. The due diligence process is more of a verification process; however, that doesn’t start until you have a signed purchase agreement. Therefore, you need to figure out the value of the store before you make an offer – otherwise, you’re very likely going to be changing your offer.
Although the true value of any business is simply the value that a willing buyer and a willing seller agree upon, there are several schools of thought with regard to how a buyer can arrive at a figure he or she is comfortable offering. A common practice is to use some sort of multiplier system to set a reasonable price.
For example, in his book, Lombardo suggests two to five times the laundry’s annual net income. Then again, Larry Larsen of Laundromat123.com offered, “In southern California, the multiple has ranged from 40 to 70 times the monthly net income.”
Whether basing your projections off of the store’s annual net income or from its monthly net, the key to success is the same – arriving at an accurate multiplier.
For Brunckhorst – who uses a formula that starts with a base multiplier of 50 times a store’s monthly net income – there are six key factors that will adjust that multiplier up or down:
The Lease. “Let’s say there are two years left on the lease, the seller wants $400,000 for the business, and it’s making $8,000 a month,” Brunckhorst said. “Eight grand a month is great. Over two years, that’s $192,000. But, wait. If the landlord doesn’t renew your lease after two years and you lose the business, you’re going to lose $208,000. That’s a terrible deal! So, the length of the lease is critical.
“You want a lease that’s 15 years or greater, including well-defined options.”
According to Brunckhorst, if the store’s lease is 15 years, he will keep the multiplier at 50. If the lease is longer than 15 years, points should be added to that multiplier. And, if the lease is less than 15 years, points should be subtracted.
Also, regarding lease terms, frequent rent increases should cause the multiplier to drop. For instance, if you have a lease where the rent doesn’t increase more than once every five years, no adjustment to the multiplier is required, according to Brunckhorst. However, if the rent goes up once every eight years, add to the multiplier – and if it goes up every year, subtract.
Equipment Mix. There are two things to consider – age and condition.
“If the average age is three years, there is no adjustment,” Brunckhorst said. “If it’s less than three years, you give a positive adjustment to the multiplier.”
For equipment condition, it’s more subjective. Simply rank the machines “good,” “average” or “poor,” and adjust your multiplier accordingly.
Competition. The more competitors within the market area, the lower the value of the business, due to price competition, Brunckhorst stated.
Therefore, if there is only one competitor within a mile radius, you add to the multiplier; however, if there are two within a mile, there is no adjustment, he explained.
Vend Pricing. Brunckhorst suggested looking strictly at the washers and trying to determine the average price per pound of laundry. For example, a 30-pound washer that vends for $3 is doing wash at 10 cents a pound.
If the average for the entire store is 10 cents per pound, there is no adjustment. If it’s below 10 cents a pound, you subtract from the multiplier.
Demographics. “The main thing I look for is whether the neighborhood is increasing or decreasing in renter population,” Brunckhorst said. “If it’s stable, there’s no adjustment. If it’s going down a little, make a little adjustment to the multiplier. This one is very subjective.
“You can pull a demographic report to help you out, but it might be more accurate and helpful to simply visit the local U-Haul truck rental location and ask them if people moving in or moving out of the area. They should know.”
Amenities. This deals with the overall layout of your store, versus that of your competitors – as well as comparing the parking situations among the stores. Adjust the multiplier accordingly, based on how the store you’re considering buying stacks up against the competition on these two important and, again, very subjective criteria.
“Now you’ve got a number based on a starting point of 50,” Brunckhorst said. “Most stores in this country sell for somewhere between 45 and 65 times their monthly net income. This formula gets you to the value of the business, not the building. The building has to be evaluated separately.”
“Purchasing strictly on a formula should be avoided,” Larsen warned. “If you have properly addressed your costs and your income, the price you pay should primarily be based on the lease and the income. Secondary considerations include potential competition, length of remaining lease term, age of equipment, appearance of the laundromat, location and pride of ownership.”
The Due Diligence Process
After you make an offer and it gets accepted, the last phase is the due diligence process.
“My grandfather used to say, ‘Trust the dealer, but count the cards,'” Brunckhorst, said. “Because the value of a store is based on its net income, getting that net income accurate is important.
“For example, let’s say the seller claims the gross income is $11,000, but it’s really $10,500. And he says the expenses are $6,000, but they’re really closer to $6,500 a month. All of a sudden, you’ve got a $1,000 a month swing. Based on your multiplier, this can be anywhere from $45,000 to $65,000 difference in valuation. That’s why it’s so important to really nail the numbers.”
The five main steps including in the due diligence process:
Location Analysis: You want to perform a demographic analysis. Pull the demographics and calculate how much laundry business is within that market. Then, allocate the amount of business within the market to all of the stores in your market to figure out how much everybody is earning.
You want to study the competition and figure out what they’re doing that you’re not. You’re also looking to see whether more competition is coming in. Are the existing stores remodeling? Learn the neighborhood and the market.
In addition, obtain a crime report for the location and surrounding neighborhood.
“Do you feel comfortable walking around that neighborhood at 10 at night?” Brunckhorst asked. “That’s my criteria. That’s a personal preference.”
Also, visit the city planning department and pull the building plans. Look at what the original plans were for that laundromat. Is it different than what you’re buying? After all, what happens if you buy the store and the former owner didn’t pull permits for their changes? If you ever want to remodel, the city may come in and say, “This doesn’t look like your original plan.”
Income Analysis: You need to verify the seller’s claim of reported income.
“Watching them do the collections isn’t enough,” Brunckhorst noted. “You can’t believe the numbers, because it’s too easy for them to just put money into the coin boxes. That happens a lot.”
However, you still should monitor the collections for a month during your due diligence process. When doing so, you’re most concerned with the percentage of washer income to dryer income. Also, be sure to document the water meter readings every collection period.
What’s more, be sure to conduct some sort of utility analysis. It could be a water analysis or a gas analysis, but do something.
Verify bank statements for deposits, and examine any sales receipts for wash-dry-fold and any other ancillary profit centers. Find out how the seller accounts for that income.
“As for the tax records for the business, how much income did they claim for taxes?” Brunckhorst asked. “You can be fairly certain the store is not going to be making less than what they’re claiming, although it might be making more.”
Expense Analysis: You should be looking at every single expense item there is. It’s a long list – everything from rent to toilet paper for the restroom. And you’ve got to count them all.
“Whatever they’re not telling you, if you don’t find them, then you’re overpaying for the store,” Brunckhorst warned. “Every expense you miss costs you money out of your pocket.”
Some of the most common expenses items buyers often fail to account for include payroll, worker’s compensation tax, repairs and maintenance, property tax, business tax, triple net expenses and cleaning supplies.
“Find out if there are any liens against the business,” Finkelstein added. “Are there liens against the equipment? Is there money owed on the equipment? Are there any outside contracts that you might inherit, such as an alarm company or a maintenance agreement with an HVAC service?”
Equipment Analysis: This is where you literally hire a mechanic to test every single machine – even if the store doesn’t have any out-of-order equipment. Perhaps you can find a service technician from a local distributorship to do the job.
Document the age and model of each machine. You also want to get a copy of the seller’s maintenance repair schedule. If there isn’t one, at least get his or her past repair receipts.
In addition, look for signs of water leaks, especially behind the bulkheads. After all, leaks will affect your water analysis.
Check the pipes for corrosion, as well as the roof and the boiler for any leaks.
Hire someone to inspect the electrical for any code violations, and get a building inspector to inspect the premises.
“I spent $400 for a property inspection on the last store I bought, and he found $6,000 worth of stuff that the seller took off the price, because I made him,” Brunckhorst recalled. “Otherwise, that six grand would have come out of my pocket.”
Store Value Analysis: Now, based on your new-found net monthly income, re-do your valuation process.
“Hopefully, the value is now more than when you started,” Brunckhorst said. “If not, you have some decisions to make. You can present your figures to the seller: ‘Here is your income. Here are your expenses. And, based on this, this is different from what we were originally told – and that changes the value of this business.’ At that point, you need to see if you can come to an agreement with the seller on a new price.”
All in all, the key to a successful due diligence process is to allow ample time.
“A broker will want to give you 10 days to two weeks for this process,” Brunckhorst said. “That’s ridiculous. Demand for an absolute minimum of 30 days – and 45 days is better.”
Mistakes to Avoid
According to Larsen, the three biggest mistakes to avoid are:
Failure to meet the landlord: “If you are entering into a long-term relationship with a landlord, it would be prudent to meet and assess his manner. You can avoid discovering that your landlord is ‘unreasonable’ if you meet before you’ve signed the lease.”
Failure to meet the seller: “Discover why he is selling a profitable business, particularly in this depressed market. Ensure that all of the paperwork provided to you by the sales agent matches what the current owner is telling you. You’ll discover that most owners are very honest and interested in your success.”
Failure to meet the other tenants in the shopping center: “If you’re buying a laundry, meet the neighbors before you sign on the dotted line. Parking problems, gang issues, landlord problems and so much more can be verified by the neighbors. The best way to introduce yourself is to tell the person in the store you’re thinking of buying the laundry next door. Avoid asking for the owner, as this only makes people defensive.”
Above all, take your time to learn as much as you can – from the CLA, sources on the internet and, most importantly, others in the laundry business. You’re considering investing a lot of money, so do so with caution. Never get so excited to buy that you fail to review each and every document.
Or, as Larsen quoted, “Buy in haste, repent at leisure.”
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