The 4 Most Common (and Costly) Mistakes Laundromat Newbies Make
“Some of us learn from other people’s mistakes; the rest of us have to be the other people.” – Zig Ziglar
Whether you’re a seasoned entrepreneur or someone looking to be their own boss for the very first time, the self-service laundry business has many fundamental advantages over other small businesses.
But don’t let the allure of an “easy-to-run, all-cash, recession-resistant” business be your downfall. Below is my list of the four most common mistakes that beginners make. Taking the time to learn from other’s failures will help you avoid the same pitfalls – and might just save you thousands of dollars in the process.
Mistake No. 1: Underestimating the Complexity of Running a Self-Service Laundry
It’s easy to understand why so many people make this mistake. It’s just washers and dryers, right? All you have to do is collect the money and refill the change machines. While it’s true that the self-service laundry business is relatively easy to operate, don’t be fooled by its simplicity. A laundromat, at its core, is still a business – and just like any other, it needs to be run and managed properly if it is going to be successful. In fact, its very survival may depend on it.
To start, even before getting into the business, potential investors need to develop an entrepreneurial mindset. You need to think like a business owner. Most people growing up were never taught the skills needed to start and run a business. It was just how we were raised. We were taught how to be employees.
In my journey, going from working as an engineer at a startup company to owning my own businesses, I took some time and studied how other successful entrepreneurs made the transition. I read many self-improvement books and started attending seminars and workshops designed for people looking for a change. It wasn’t until I started studying how others became wealthy that I realized how important your thoughts are. It begins with how you think. Your thoughts and the conversations you have with yourself will directly impact your business and your life.
From an operations point of view, there is more to running a laundry than just doing the collections and overseeing the day-to-day operations. As the business owner, you will be in charge of all aspects of the business, from the management of the staff, to overseeing the maintenance of the equipment and the facility; from advertising and marketing, to bookkeeping and cash flow management. If you are not highly skilled in each of these areas, at a minimum, you should have a basic understanding of these different processes and be able to manage them effectively.
Mistake No. 2: Lack of Due Diligence
The analysis of a business is called due diligence and, in my opinion, it is the most important step of the purchase process. I can’t begin to tell you the number of times I’ve received emails from distraught owners after they closed on their businesses, only to find they have been bamboozled by the seller and have grossly overpaid for their stores.
Due diligence is a very detailed process. Ideally, you should allow yourself 45 to 60 days to complete it. Don’t let a seller talk you into a short due-diligence period. Anything less and you run the risk of not having enough time to do the research. To keep it simple, I have broken down some of the most important “checklist items” into five categories.
There are several things I like to look at when evaluating the location of a self-service laundry. The list includes performing a demographic analysis, a competition analysis, obtaining a crime report for the location and the surrounding neighborhood, and obtaining the current building plans from the city for the store you’re buying, as well as finding out if there are any other stores in the neighborhood that have permits pulled for remodels or new construction.
When purchasing a laundromat, it is critical for you to attempt to verify the reported income. This means, at a minimum, you need to perform a water analysis, verify the bank statements for deposits, examine sales receipts for wash-dry-fold, monitor the store collections and take water meter readings.
What you are looking for is each and every expense that is associated with the operation of the laundromat. Having a complete list of expense items is a must. The most common expense items that I have found to be regularly missing from the books include payroll, worker’s compensation, repairs and maintenance, personal property tax, business tax, triple-net expenses, cleaning supplies, and security system fees.
Have a mechanic test each machine and give you a list of all the service items. Get the owner’s maintenance repair schedule, past repair receipts, and age and model of each machine. Look for signs of water leaks behind the bulkheads. Check the pipes for corrosion or leaks, and the roof and the boiler for leaks. Inspect the electrical for code violations and make sure there are emergency shutoff switches behind each fixed-mount frontload washer and dryer.
Store Value Analysis
Recalculate the value by performing a store value analysis. In general, a self-service laundry’s value is based upon a multiple (called the Store Value Multiplier or SVM) of its monthly net income (the key word being NET). The SVM starts at 50 and is then adjusted up or down depending upon the lease, equipment, competition, local market conditions and other factors. These are industry-defined standards and formulas used for the evaluation of a laundry. Most laundromats’ SVM range is between 45 and 65. That would mean a laundromat with a net monthly income of $4,000 would usually be worth between $180,000 and $260,000.
Mistake No. 3: Lack of Business Capital
Often, new business owners fail to set aside enough capital reserves (money) to run the business once they take it over. To avoid this, you should begin with a good business plan that has realistic targets and a revenue model of best, likely and worst case outcomes for the business. Included should be steps that can be taken to increase the business. Beware of buying a store based solely upon the seller’s pro forma of expected returns.
Anticipating upcoming expenses are a must, but don’t forget that once you close escrow on the purchase of the business, you will need to spend some money to fill up the change machines and pay deposits for utilities. Keeping a cash reserve equivalent to between three and six months’ worth of expenses is a good idea, especially when starting out. If you bought the business at the right price, it should be generating income from Day One. If you didn’t buy it right, your working capital might get depleted rather quickly.
If you are building a store from scratch, make sure you have enough cash on hand to cover your expenses for a year. It might not take a year before you break even, but can you imagine having only six months’ worth of reserves and it taking a year to break even? Where are you going to get the money? There are countless stories of people who spent a half-million dollars or more on a laundromat and six months later go out of business because they ran out of capital. It’s unbelievable, but it happens. Don’t let it happen to you.
Mistake No. 4: Being a Lone Ranger
When new owners first take over a business, it is not uncommon for them to try to increase profits by reducing expenses because every dollar saved is money in the bank. The largest and easiest expenses to cut are payroll and maintenance, because these are both jobs that owners can do themselves. What’s more, by working in the store, the owner can provide his customers with immediate service when equipment breaks down.
The problem with this line of thinking is that the tradeoff is the owner’s time. Both payroll and maintenance expenses are what keep an owner from having to work in the store as an attendant. This all goes back to the complexity of the business and not trying to be a jack-of-all-trades and master of none.
By having a team and hiring the right help – both in getting into the business (business brokers, lawyers, CPAs and consultants) and in operations (attendants or janitors, bookkeepers or accountants, equipment maintenance, advertising consultants, etc.) – the owner is free to pursue other opportunities, such as expansion of the business or finding another laundromat to buy.
Brian Brunckhorst is a multi-store owner based in northern California, as well as the author of “Secrets of Buying and Owning Laundromats.”