What Makes a Laundry Ideal for a Successful Turnaround?
There’s been a lot of talk about purchasing and retooling older, neglected laundromats. And, in recent years, it has proven to be a great strategy for many savvy laundry operators looking to grow their portfolios.
But buying a vended laundry is no small commitment – and purposely acquiring an underperforming business can be an even greater leap of faith.
How does one choose the right laundry business to turn around? Which stores are underperforming due to poor locations or changing markets, and which are slumping because of owner indifference or inefficient management? What factors make a laundromat a good candidate for a turnaround or a bad one?
“Every successful or failing laundromat for sale is different,” noted Luke Williford of The Wash House Laundromats, based in North Carolina. “Each situation should be identified independently. However, through experience, we’ve discovered certain situations and aspects that seem to be consistent with failing laundromats.”
Some of those factors that Williford looks for in a struggling laundry business are:
Capacity: Does the store have the washer and dryer capacity to serve the market?
Efficiency: Is everything out of service? How old are the machines?
Security: How many people have keys? This may help to identify whether or not the sales reported are the actual figures or if there is the likelihood that the business has “silent partners.”
Ownership: Is the owner local and involved in the business?
The answers to those questions let Williford know if he’s got a chance to improve that business’ sales and overall customer experience.
“I believe there are good locations that have been neglected by the owners, who have lost interest in the business,” said Jon Attarzadeh of The Laundry Room Express in Los Angeles. “However, you need to make sure the location has good bones and can answer the money that will be invested. I also look at density of population, as well as the competition – how many, how far away, and are they retooled or not. It all goes back to the ROI. You need to make sure you’ll get your investment back.”
“I look at factors related to owner/employee performance,” noted Brett Nolan, director of vended laundry systems for TLC Tri-State Laundry Company in Valdosta, Ga. “Have the services being offered changed drastically? For example, did a store go from being fully attended to being partially or fully unattended? Was a drop-off service eliminated? Were these changes made due to a lack of demand for the service or for the convenience of the owner? Will a good deep cleaning and fresh coat of paint change the perception of the store? Are the employees friendly to the customers? All of these questions should be factored in when looking at an underperforming store.”
“Older stores for sale must be carefully vetted,” explained Bob Eisenberg, president of BFE Consulting Group, based in Blue Bell, Pa. “Since they’ve been in business, it’s likely that some newer stores have opened and created additional competition. It’s important to look at all of the competition and decide if you can compete with the newer and perhaps larger stores.”
Demographics and the Marketplace
As with any retail endeavor, location is a key – and, with vended laundries, it’s perhaps even more so.
“I’ll never forget closing down a store in a dying small town and taking those same washers and dryers to a growing city,” Williford recounted. “Those same machines began to do five turns per day, when they’d only been doing one turn a day at the previous location. It was one of the hardest – but best – moves we made. It led us to a market not being served well, and now we have six successful laundromats in that market within a 10-mile radius.”
Williford has set a minimum estimated gross revenue that he would like to see per store. If a particular marketplace or existing store doesn’t project out to be capable of hitting that minimum amount, he won’t proceed.
“You are looking for a density of apartments, preferably in apartment complexes, not just rentals – as well as low-income families with a large number of children,” Eisenberg noted.
He also warned investors be realistic with regard to the size of the areas chosen for their demographic reports. For urban locations, he suggested studying the marketplace one-quarter mile, one-half mile and one mile from their potential locations. For suburban stores, one, two and three miles out are optimum, according to Eisenberg.
“Five miles out on a suburban location is essentially useless with regard to the core customer,” he explained.
Carol Dang of Elite Business Investments in Valley Village, Calif., suggested taking a look at how the other businesses in the area are faring.
“Are there a lot of closed-down businesses?” she asked. “Or is it a community that is going through gentrification? What about other vended laundries in the area? If there are other stores, are they busy and doing well? That may indicate an opportunity. Also, have the demographics and makeup of the surrounding community changed in the last few years?”
“I suppose retooling will work in any demographic, as long as there are enough renters, older homes or other situations where the residents need access to a laundromat,” Attarzadeh said. “I believe it might work better in a middle-class neighborhood, where the incomes are higher so that the vend prices can be increased, because the customers can afford it.
Clearly, all laundry customers will respond more favorably to a location with newer equipment.
“The store needs to be in an area where there are few upgraded laundromats,” Attarzadeh explained. “If you’re the only laundromat in the market that has upgraded equipment, you will capture a good portion of that market with proper advertising. By the same token, I would avoid saturated markets where several of the laundromats have already retooled, unless the neighborhood is very dense and you’re sure it can handle more business.
“All in all, I’m not interested in stores that are underperforming due to the location. I don’t know if one should invest his or her money into those situations.”
The size and configuration of the store also must be strong considerations.
“If you think you’ll have to change the configuration of the store to make it work, you’re probably better off building a new store from scratch,” Eisenberg said.
Some specific items to include on your checklist are:
- How old is the HVAC system? Is it still adequate?
- When is the last time the roof was replaced?
- Is there evidence of any leaks on the ceiling tiles?
- Are the electrical panels in good condition?
- Are the water and gas lines sufficient for your plans to grow the business?
- Does the laundromat comply with current ADA standards?
- Does the parking lot need to be redone?
“Older stores may lack sufficient off-street parking,” Eisenberg added. “If you’re looking to renovate a store and increase its business, it’s critical to have adequate off-street parking.”
“I prefer a larger location with adequate parking and customer access,” he pointed out. “Customers would like to park in front, grab a laundry cart and haul in their laundry. The easier we make this process for them, the better. It’s all about fast access and convenience.”
“I always want to see ‘good bones,’” Nolan said. “Replacing equipment is straightforward. However, once you get into the need to upgrade utilities or major infrastructure concerns that a landlord will not help with, the numbers can get tight very quickly.”
At this point, the question is how much will it cost to correct the problems and re-create a viable store? After all, there is a lot of value sitting in a laundromat in terms of plumbing, electrical, ducting, carpentry, drains and so on.
“Although some utility upgrades may be required, keeping them to a minimum will provide a faster return,” said Ted Ristaino of Yankee Equipment Systems, headquartered in Barrington, N.H. “The cost to upgrade a store has two components – immediate and longer term. The immediate cost to upgrade is to put the store in a position to successfully compete to regain market share. As the store returns to profitability, it can fund longer-term projects.
“On the other hand, if the immediate cost to upgrade is prohibitive, you need to look for another opportunity. Potential owners need to be completely honest with themselves at this juncture as to how their upgrades will translate into a successful store.”
“I had an opportunity to buy a great location for retooling,” Attarzadeh recalled. “However, the landlord wouldn’t offer a long-term lease. So, I pulled out of the deal. For me, it’s important to have a 20-year-plus lease to go into a new or existing location. You need to look at the ROI. It likely will take at least 10 years to pay off your loan, so a long lease is very important.”
For Williford, all purchase offers on existing stores are contingent on taking over the existing lease or creating a new lease.
“The goal is to serve well and make a profit, not just pay the rent,” he said. “If the rent is too high, it will be hard to make a profit. Everything in the laundromat business is contingent upon a good lease or mortgage.
My brother, Lee, and our attorney are experts on the laundromat lease. We are an anchor tenant, and we market ourselves as such to landlords and management companies. Our commercial broker represents us in this and does a great job of brokering most of our new leases.”
The Willifords typically prefer a 10-year lease with one or two five-year options, or a five-year lease with three five-year options.
“The lease is everything,” Eisenberg stressed. “You’re not buying old, used equipment. You are purchasing a business in place, which is useless without a lease. You must have a long-term lease in place that you can assume. It should be at least 10 years, and I would discuss options after that with the landlord. If the landlord is not willing to write a new lease as you would like, that is a big red flag.”
Beyond looking at the length of the lease, you must understand the common area maintenance (CAM) charges and how they will be calculated. Also, pay careful attention to the annual rent increases and decide if those will be affordable in future years. In addition, find out who is responsible for the building’s roof – if it’s you, be aware that it could get costly down the road.
“If you’re uncomfortable with the landlord for any reason, be aware that you’ll have to deal with him or her for the entire time you own that store,” Eisenberg said. “And, of course, it’s imperative that you have a real estate attorney review the lease for your protection.”
“It’s often difficult to find much information about a seller,” Eisenberg said. “What you need from the seller are three years of business tax returns and three years of utility bills. If the store owner won’t comply, that’s a red flag.”
Attarzadeh added that laundry businesses which are solid candidates for a retool and a successful turnaround are probably not earning much revenue and likely may even be losing money – thus conducting in-depth due diligence on the seller may not be as necessary as in other situations.
“If one decided to do any due diligence, it should be to look at the utility usage to help evaluate the current revenue.”
No doubt, it’s also helpful to find out if the laundry has been the seller’s main source of income or merely a side venture. In other words, how “present” is the current owner in his or her business? This can sometimes help to explain a store’s lack of success.
Finding the Right Location
“It’s important to look at the economics,” Eisenberg said. “You must take a financial snapshot of the store as it is prior renovation and then project the cash flow forecast after acquisition – including the return on your investment to purchase, the cost of leasehold improvements, the cost of new equipment and initial advertising expenses.
“No doubt, you’re looking to dramatically increase income, but your expenses also will increase. It may take several months to get to positive cash flow, so make sure you have adequate funds to cover this.”
The best advice Williford had for those looking to breathe new life into some of today’s tired, older laundromats?
“Hunt!” he declared. “The more stores you visit the better your odds of finding a location in a good area that is poorly managed, poorly equipped – and ripe for a laundromat flip!”
“As the saying goes, it’s location, location, location,” Attarzadeh stated. “I believe a strong location needs to play a major role in this decision. I would not be interested in getting into a location where I would have pay a lot of money for the acquisition, and I would stay away from stores with bad lease terms. Also, the parking situation is another major factor. Any existing store where these factors are not in my favor will not be good candidates for a turnaround process.
“With that said, the laundromat concept is not going away. If we can make this chore easier for our customers, the better chance we have of attracting more customers and building our businesses.”
Due to a strong economy, the reality is the industry is growing and that creates opportunities, Eisenberg stated.
“New, larger, state-of-the-art stores are being built in all markets, which are a better representation of our industry,” he said. “As a result, you have to do your homework and decide if a store, once renovated, will be able to compete with the current standard in the industry. Again, careful analysis of the demographics will determine whether or not the marketplace can support another store.
“It’s difficult to find that ‘diamond in the rough,’ but they are there. You’re looking for a laundromat that’s not well-run but in a good location. Perhaps it has older equipment to which the owner hasn’t been paying attention. If the competition isn’t a threat and you can purchase the business at the right price, you may have a golden opportunity on your hands.”