Industry Experts Discuss Their ‘Formulas’ for Increasing the Value of Your Laundry Business
The valuation process of a self-service laundry is an art, not a science.
Therefore, when it comes to boosting a store’s value, absolute formulas won’t necessarily work for every single laundromat in every single market throughout the country. Each laundry needs to be viewed separately, through the eyes of the store owner, as well as those of a potential buyer. In addition, perhaps no one’s opinion carries more weight than that of the laundry customer – the ultimate end user of a store.
Despite this lack of any guaranteed formulas or sure-fire calculations, there are certain specific rock-solid factors and characteristics that have stood the test of time, and that all laundry owners should know and focus on when looking to increase the value of their businesses – whether or not they’re actually looking to sell their laundries.
This month, we’ve enlisted a number of industry experts whose job it is to understand a laundry’s truth worth. Our panel includes Carol Dang, Elite Business Investments; Brian Grell, Eastern Funding; Karl Hinrichs, HK Laundry Equipment; Bryan Maxwell, Western State Design; Rhonda McLane, Florida Laundry Brokers; George Morgan, Best Laundry Brokers; Ted Ristaino, Yankee Equipment Systems; and John Vassiliades, J. Vassiliades & Co.
What factors most directly impact the value of a self-service laundry?
Brian Grell: Nothing matters unless you’re making money. Cash flow trumps everything else. You can have the most beautiful store in the world and the best lease on the planet, but if you’re losing money, there’s no conversation. Cash flow is the number-one driving force.
George Morgan: The most important factor can be, but is not necessarily, the lease. The lease can be neutral and can have no significant impact on the value, if the rent is at or near the fair market rent. It could add tremendous value if it is a long-term lease of 10 to 20 years, with rent significantly lower than the market value. Or it could have a negative impact, if the rent is significantly higher than the market value, especially if it’s a lease longer than five years.
Also, if the landlord will not renew the lease, this takes the value down rapidly, plus it makes the laundry difficult to market.
Assuming the lease factor is neutral, the main factor is net income, after all hard operating expenses are considered; this includes factors such as depreciation; a loan payment; basic automobile expenses, excluding a delivery vehicle for full-service laundry; office equipment for the home; and so on.
The next factor is the age and condition of the equipment. There is no hard-and-fast rule, as the condition of the equipment can be as much of a factor as the age. In my practice, I don’t use the IRS’ seven-year depreciation rule; instead, I use the typical life span the equipment will be in operation in that specific market. I call this the “economic life” of the equipment. In a high-volume laundry, the lifespan of the equipment is typically less due to the wear and tear factor. I never factor in all of the accumulated depreciation of the equipment when I’m appraising and valuing a laundry. I usually deduct about half of the actual depreciation using the “economic life” as a guide.
Another important factor is the condition and appearance of the interior of the laundry. Does it have the original 1973 interior, complete with dated wallpaper, dingy floor and worn-out countertops? This really drags down the value of store. The interior should look bright and clean, and feature contemporary colors.
John Vassiliades: The factors are net cash flow, strength of lease, stability of demographics, competition, deferred maintenance and age of equipment – in that order.
Rhonda McLane: When a laundry owner contacts me to ask my opinion of what their laundry might sell for, I am initially interested in three main factors – what is the store netting, how much time is left on the lease, and the approximate age of the machines.
Carol Dang: Most stores are sold based on the cash flow and the return on investment the buyer will be getting. Buyers are looking for a three- to four-year return on their initial investment.
However, even if the store has a good ROI, if the lease is not long enough and the buyer is not able to sell in the future, the value of the store instantly goes down. The rent also is a key component. If the rent is high to begin with and the increases are very high, this also reduces the value of the store.
The age and condition of the equipment is usually the least important factor in determining the value of the store. If the laundry is showing a high cash flow and the lease is good, the age of equipment can be looked at as upside potential for the new investor.
Karl Hinrichs: Cash flow and lease terms play huge importance in the valuation of a laundromat. If the store is not making any money, what is the value of the store? Zero, plus the salvage value of the equipment. If your lease is expired, what is the value of your store? Zero, plus the salvage value of the equipment.
Also, a store with new, modern, energy-efficient laundry equipment will be worth more than a store with old outdated equipment. But the newer store also will be making more profit per wash than the store with old equipment. So, the new equipment will be increasing profits and reducing expenses, thus directly increasing the value of the store. This is the win-win. New equipment brings in more customers and the energy efficiency lowers utility expenses and increases profit. The store owner wins with more customers and then wins again with increased profits.
How can outside factors, such as marketplace competition or shifting demographics, affect a store’s value? And how does one battle those outside factors?
Carol Dang: Marketplace competition can potentially have a huge impact on an existing store’s income, thus reducing its value. If you know of a new store coming into your area, now is the time to make your store shine. Replace equipment if needed; take a good hard look at your store’s appearance (paint, flooring, lighting, signs, etc.), including the outside (curb appeal). It’s also a good time for some aggressive marketing, such as sending out flyers, holding raffles and creating new promotions like a taco night or a pizza night.
Ted Ristaino: If the cash flow is strong, current competition has not had an impact on the store. However, some knowledge of current events in the marketplace is warranted. Is there a new competitor about to enter the market? Are there vacancies in the market that could give rise to a new competitor? Are the demographics of the neighborhood changing, with working-class families being priced out of the rental market by properties being marketed to young, childless professionals or older, empty-nest baby boomers? Is the city planning to alter traffic flow or access to the store?
Battling outside factors will require a hefty increase in spending for marketing and maybe equipment. If a new competitor is coming to the market, be sure your equipment offering is diverse and adequate. Vend prices must be competitive. Make sure that these outside factors are not the type that will cause a permanent loss of business; for instance, a conversion of a high-rise apartment building to high-end condos.
Brian Grell: Most people don’t understand their competition. It’s shocking how little most owners know about their competitors. They don’t know their vend prices or their wash-dry-fold prices. They don’t know their equipment mix. They don’t know what kind of attendants are in the competing stores. For some reason, they’re afraid to go into the competition.
It’s mind boggling how many people getting into the business haven’t even done laundry in their competition. They’re going to spend a half-million to a million dollars on a laundromat, and they’ve never done laundry in the competition.
Shifting demographics also is a factor. What’s going to happen going forward? Is there an influx of new companies coming in? Are new jobs coming to the area? What’s happening with the housing market and the economy? Is a new hospital coming to town with 3,000 new jobs, or is a new factory being built? That’s can change the potential for a laundromat significantly. Those are all factors that will affect the value of a laundromat.
Bryan Maxwell: Once you understand the existing business and understand current profitability, lease terms, etc., the most important outside factor to consider is the operating assumptions in the future. Are there fundamental changes coming to the environment around the store? When I speak with many potential clients, they want to see the existing demographics of the store. While current demographics are important, they are not nearly as important as what the demographics will be five years from now. The value of the store is based on its performance today, so whatever the demographics are today is somewhat immaterial. They are what they are, and the store does what it does in that environment. What’s more important is how will demographics change?
For example, many ethnic, low-income, urban neighborhoods are gentrifying. Instead of large, low-income families with a lot of laundry, these neighborhoods are becoming hip areas for high-income single professionals. Or, maybe the demographics aren’t changing, but new laundries are in development. How will the new competition impact the business? If wash-dry-fold or commercial accounts represent a large portion of the value of the store, where does that business come from? Is 90 percent of the business coming from one or two commercial accounts, or from many people from the neighborhood bringing in several smaller loads?
John Vassiliades: If the store has a history with steady or increasing net cash flow, competition will be less of a factor. If a new competitor has just moved in, the store value may be discounted due to the uncertainty of the impact of the competitor.
George Morgan: Competition doesn’t necessarily mean the existing laundry will suffer badly, as it depends on what the existing laundry owner does to combat this new factor. In my opinion, the biggest competitors to self-service laundries are apartment complexes with central laundry rooms, and dormitories and other housing facilities that have central pay-per-use laundry equipment.
In the case of a new laundry being built, I tell my clients to make their laundries look new. This doesn’t mean they have to replace their equipment, unless it’s very old and looks like it. However, they have to make the equipment look new by perhaps getting new control panels and professionally painting or powder coating the dryers, assuming they’re not stainless steel. The interior may need new laminates on the bulkheads and folding tables, a new floor if it old one looks bad, new ceiling tile, and so on.
Also, they should be running effective promotions and specials to attract new business before the new laundry opens. And, once the new store opens and starts running its own promotions, mirror them – don’t give customers a reason to go to the new laundry.
To what degree does a laundry owner’s record-keeping impact the value of the business?
Bryan Maxwell: Buyers want to know what it “is” they’re buying. And, if the “is” is ambiguous and undefined, because records are poorly maintained, the buyer begins to lose confidence in the data and the value of the laundry will suffer. Since this is a cash business, many buyers are skeptical about the information provided by the seller. If information supplied to the buyer is accurate and clear – and if concerns and questions are resolved quickly – the buyers begin to have confidence that they know what it “is” they are investing in.
John Vassiliades: Accurate and complete records are a seller’s and a broker’s best friend. The better the records, the better the price – and the quicker the sale.
Carol Dang: Buyers look very closely at the type of records a seller has. Since laundromats are typically a cash business, it’s important that the seller maintain good records. The more precise the information is, the more confidence the buyer will have in the location. When a seller doesn’t have good records to support the value of his or her store, it makes it difficult for a buyer to determine the true value of the location.
Ted Ristaino: Buyers and financial institutions require up-to-date, accurate, verifiable records. These consist of an accountant-prepared P&L balance sheet and cash flow statements. In addition to these records, you can add tax returns and bank statements. Records in great condition enhance the sale process and, if they reflect profitable operations, enhance the value of the store. Poor or no records leave the determination of your store’s value to the mercy of someone “backing in” to a value, based on utility bills, store observation and equipment condition – and none of these activities leads to a valuation that is beneficial to the seller.
What are some characteristics or factors that don’t necessarily affect a laundry’s value?
Ted Ristaino: In most cases, the main driver of cash flow is retail, self-service laundry income. Ancillary income from vending, drop-off drycleaning or wash-dry-fold, while helpful, plays a much reduced role in value. The reason for this reduction is the buyer’s lack of control over the quality of the drycleaning or the probability of the wash-dry-fold staff staying on after the sale is consummated. If the buyer pays a premium for a robust wash-dry-fold business and the lead person quits or goes to a competitor, there will be a much reduced return or even a loss, depending on the transaction.
Also, the market value of the equipment in place should not play a role in store valuation. Cash flow is being purchased, not equipment. Equipment value is only important for collateralizing a bank loan. Compare two stores of equal size – Store A is 10 years old, has stable revenue, all equipment is paid for and generates $75,000 a year in cash flow to the owner; Store B is two years old, is growing revenue, still owes $200,000 for equipment and generates $30,000 of revenue for the owner. If both were on the market, Store A would get the value of the cash flow. At four times earnings, that would be $300,000. Store B would get four times earnings or $120,000, but also may want to get paid for the equipment since the store is new. Store B most likely would not be successful in getting money for the equipment. Cash flow is king.
Lastly, the store’s potential – what it “can do” – is meaningless. This is an argument to boost the price of an underperforming store. A buyer will pay only for what the store is producing today.
Carol Dang: The brand of equipment doesn’t necessarily matter that much, unless they’re brand new machines, with high energy-saving features. Other non-critical factors include the color of store and its décor, as well as the name of the laundromat.
Above all, how can laundry owners increase and maximize the value of their businesses?
Karl Hinrichs: To maximize the value of your laundromat, you need to focus on maximizing your store’s profitability. The more your store makes in profit, the more valuable the laundromat becomes. Looking beyond just the profit and loss, you can increase the value of your laundromat by increasing the length of your lease; adding additional revenue sources, such as wash-dry-fold, vending and a pickup/delivery service; and installing new equipment.
John Vassiliades: Increase the net cash flow, have the most complete records possible, and be sure the store is in the best condition possible. Having up-to-date, energy-efficient equipment would help.
Carol Dang: Know your competition and know your end-user. Look at what type of equipment your competitors have – small machines versus large machines, etc. Look at what your competition is charging. Who are your customers?
Replace equipment and/or add larger machines, if needed. Remodel and update your store. Increase vend prices, if needed. Market your business. Train your attendants to greet each customer and to thank them for coming in.
Ted Ristaino: Plan at least three years in advance for the sale of your store. Don’t be impulsive. Get your records in order. Trim expenses where prudent, eliminating non-essential items. Increase vend prices, if possible, to increase margin. Fix equipment to maximize efficiency – leaking drain valves, etc. What temperature is your water set for? Are water levels correct? Make sure your lease has at least five years left – preferably seven to 10 years left. Make sure you’ve exercised your option to renew. Make sure you know what your store is worth. In short, make sure that your store’s performance is attractive to the market. Talk to your attorney and accountant about tax considerations and the structure of any proposed deal.
What are the most common mistakes committed by laundry owners, with regard to the value of their businesses?
Ted Ristaino: Making an impulsive decision to sell before taking the steps necessary to prepare to sell. For example, if the store has a history of losses, it’s important to turn those losses into profit before putting it on the market. Other mistakes include not knowing what the store is worth or how to structure the transaction. Additional missteps that hurt store value are laundries in poor physical condition – dirty and dark, with a lot of equipment out of order.
Also, by not declaring all of a store’s income, the owner hurts the value of the store. Buyers will make the argument that any premium for the store has already been taken out.
George Morgan: I’ll sometimes see unnecessarily high expenses for things like insurance, natural gas and labor. I’ll also run across excessively high maintenance costs, which is usually caused by either really old equipment or an unskilled repair technician who is good at purchasing repair parts. Also, if you have an attendant or cleaning person who has a foul personality, this individual can chases away customers – replace that person immediately. What’s more, owners need to always be aware of what the competition is doing and make sure their vend prices are in line with the market.
Karl Hinrichs: In my 36 years of experience, the biggest problem committed by laundry owners is by having a selling price stuck in their head. The value of a laundromat is a simple formula – the annual profit times a “multiple.” The “multiple” is the real area of negotiation, as the profit is simply the annual revenue minus the annual expenses. The other problem is that many laundromat owners don’t know what their store makes, simply due to poor record keeping.
Another miscue is to have an emotional mindset where you cannot accept to sell your store for less than a certain amount. This is the emotional side of the brain working against the deal and not looking at the store’s value logically.
Carol Dang: A major mistake is not maintaining the equipment, including the bill changers, and letting machines sit out of order. Other common errors are keeping the lights off during the day to save money; not maintaining the appearance of the laundry’s interior (scuffed walls, floor tiles missing, dirty restroom, etc.); not returning money to customers when machines malfunction; closing too early; offering the wrong mix of equipment (too many toploaders, not enough dryers, not enough large frontloaders, etc.); not training attendants to greet customers in a friendly way; and non-functioning outdoor signage.
Brian Grell: When I walk into a laundromat, the first thing I do is inspect the restroom – and 90 percent of laundromat restrooms are disgusting. Why would you expect your customers to want to do laundry where the restrooms are filthy? I’m not bringing my kids into a dirty laundromat. It doesn’t cost much money to keep the place clean. But, again, 90 percent of stores are what I call “zombie laundromats.”
Another common mistake is having attendants who are not dressed professionally. Sometimes you can walk into a store and not know who the attendant is. They’re blending in. You want that attendant to be dressed in a company shirt or apron so that customers know who the employees are right away.
Also, you should be interviewing attendants like you’re interviewing a sales associate. Don’t hire people who can’t communicate; attendants need to be communicators. It’s a basic mistake that really hurts the business.
Are there any commonly overlooked nuts-and-bolts type factors that can help operators boost the value of their laundries – some “tricks of the trade,” so to speak?
Karl Hinrichs: One of the things I do every year is compare my vend prices with my competitors’ vend prices. If I have positioned my laundromat as a “price leader,” I need to maintain that position. Many times a competitor will slowly increase vend prices to match my prices. If I’m positioned as a price leader and my store offer advantages over my competitor, I need to raise my prices again. Boosting your vend prices will increase the profitability of your laundromat and, thus, increase the value of your store.
John Vassiliades: There are no real “tricks,” just good business management.
What are some cost-effective ways to really boost a laundry’s value? In other words, what improvements would give a store owner the most bang for his or her buck?
George Morgan: The most cost-effective way to boost a laundry’s value would be a complete ceiling-to-floor cosmetic renovation. Again, this would not necessarily mean replacing a lot of equipment, unless it needs to be replaced – but the owner needs to make the equipment look new. This typically boosts gross income by 25 percent. Equipment reliability and cleanliness are the most important factors to laundry customers.
Additionally, running effective promotions can increase income. Of course, these promotions should be put in place long enough prior to listing the store so that the improved income will translate into increased equity and value.
Carol Dang: You’ll get the most bang for your buck by adding fluff-and-fold and commercial accounts, installing more energy-efficient washers, and running a consistent and creative marketing campaign.
John Vassiliades: Raise you prices to the market level, cut your expenses to the minimum, and do whatever you can to increase business.
Karl Hinrichs: The biggest bang for the buck is to increase the profit of the laundromat while decreasing the expenses. Certainly, the least expensive path is with cosmetic improvements to the store. Customers are performing a cleaning function, so anything you can do to make the store cleaner and brighter or make the appearance nicer will help the store. This will take a while for the results to be noticed, but you will gain market share by brightening up your laundromat.
What’s the best advice you could give a laundry owner looking to max out the value of his or her store?
Carol Dang: The best advice is to take a good look at your existing equipment and your competition. Is it time to replace? Is it time to add more washers? Do you need more drying capacity? Do you need to increase your vend prices?
Also, ask yourself: Can your store use a facelift? Can you add more vending? How does your exterior signage look? Is it time for it to be replaced? Are all of your lights working? Is there enough light outside the laundry at night? Perhaps install an additional light over the walkway leading to your store. And, above all, advertise, advertise and advertise!
Brian Grell: If you’re staying in the business long term, you must, unequivocally, throw out all of your old machines. Period. End of discussion. The cash flow for anyone who retools their store is significant enough to completely change the value of the laundromat.
I have yet to meet anybody who has retooled who hasn’t had at least a 50 percent increase in cash flow. The retooling of an old “zombie laundromat” makes the manufacturer happy, makes the distributor happy, and makes the store owner happy because cash flow is almost guaranteed. And laundry customers, as well as the entire industry, benefit. There are no losers.
Karl Hinrichs: I would suggest that store owners start early and do the following:
• Keep very accurate records of collections and expenses.
• Look to increase revenue by increasing vend prices; adding additional profit centers like vending machines, video games, arcade games, ATMs, car vacuums and over-the-counter items; and marketing the store through a website, direct mail, flyers and cross promotions with neighboring businesses.
• Look to decrease expenses by getting the most competitive pricing on utilities and all other business expenses, such as garbage pickup, insurance, soap and laundry supplies; purchasing new energy-efficient washers, dryers and water heaters; and replacing any old T12 bulbs with T8 or LED lighting.
• Improve operations. If you focus on your laundry business, you will start to run your business better and more customer-focused. If you improve your store just a little bit every week, by the end of the year your store will show tremendous improvement. This will bring in customers – and that will increase your profitability and, subsequently, the value of your laundry business.
John Vassiliades: Start early, and create a three-year plan. Maximize net cash flow, keep excellent records and attend to all deferred maintenance. Keep your vend prices as high as the market will allow, add additional services, advertise and be sure your attendants are well-trained.
Ted Ristaino: Look at this exercise as an investment. And, above all, remember that there are no shortcuts – value is created as consistent profitable results are produced.
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