If we are basing the value of a Laundromat on its Profitability, then how do we actually determine a number? To say 3-4 times the annual profit of a store is the answer; but how do we determine the profit of the Laundromat?
Do we go with the tax returns of the current owner? These numbers are probably understated in value. The current owner may say that they lost some of the quarters between the money boxes and the bank. This is not un-expected in a cash business. (Illegal, but not un-expected.)
Do we go with the owners hand written figures? It is probable safe to assume that these figures are probably on the high side. I have rarely heard a Laundromat owner say that their store is only making a little bit of money. Most owners think of their Laundromat as making wheelbarrows full of quarter. Laundromat owners, like our children are all geniuses and are all going to be doctors or lawyers or both. In the real world, Laundromats (just like people) come in all sorts of shapes & sizes and different levels of income production. Your job is to determine the true profit of the Laundromat up for sale.
In my many years in the business I have bought and sold several Laundromats. I have also assisted in Laundromat evaluations and in counseling entrepreneurs on purchasing Laundromats. What you need to do is gather as much information about the Laundromat as possible and create a Profit & Loss Income Sheet. These are accountant terms, but this is the process required to know if you are purchasing a high powered sports car or the family mini-van. By gathering income figures and then subtracting out the "real" expenses, you can determine the actual Cash-flow of the Laundromat and the annual profit.
For you to get as much information as possible you need a motivated seller and a motivated buyer. My definition of a motivated buyer is a person who has the funds & resources and is willing to commit to the purchase of a Laundromat business. A real buyer is characterized as being a person who has the financial funds to commit to the purchase and also is a person who is mentally willing and able to commit to the expensive purchase of an existing Laundromat. The challenge to the seller is to qualify the potential buyer. It is easy to look at bank or brokerage statements to determine the financial health of the buyer, but you cannot tell if they have the commitment to go through with the purchase.
We call this the "failure to commit" syndrome. Many a "girlfriend" has found this out the hard way that their "boy friend" will not make the commitment to take the next step and become their husband. There are some people who just suffer from the ability not to commit even though they truly want to purchase a Laundromat. They will make excuses or blame someone else for stealing the store out from underneath them. But the bottom line is they are just too worried to make a mistake; so they don't make any decision (and thus can't make a mistake). A good sign to look for is of the potential buyer owns / or has owned multiple businesses or Laundromats.
As a potential buyer, you need as much information as possible about the existing Laundromat. You need to determine the actual revenue and expenses. Laundromats are a cash business and are ripe for not reporting the accurate cash receipts. What I do is have a frank conversation with the owner and tell them the following:
- I am very interested in purchasing the store,
- I will be basing my offer on the profitability of the Laundromat,
- I need access to their checkbook so I can get a handle on their expenses (for at least 1 year),
- I will need 1-2 years worth of utility bills,
- I will need a copy of their lease,
- I need to be there when they collect the machines so I can verify the collections,
- I need a copy of their WD&F receipts book for the last 12 months,
- Once I have created a Profit & Loss for the store, then I can give you a firm purchase offer.
- And whatever happens during this process, in the end we will shake hands and part as friends.
Unfortunately, many times you are dealing with a broker as a "middle man". Sign any agreement to assure them their commission, but try to talk to the owner directly. This will be faster and more productive in the long run. Plus this will eliminate a layer of potential massaging of the figures. I believe in the immortal words of Ronald Reagan "trust; but verify". What I have found is that most Laundromat owners unfortunately do not know exactly how much money their Laundromat makes. They might know the gross, but not the real profit. If the current owner is paying bills with cash, then they are really clueless about the profitability of the Laundromat.
A motivated seller will not mind to share their figures and documents. Most will be very cautious but if you are up front with them and say that you absolutely need this information, the honest seller will provide the numbers. You may have to sign Non-disclosure agreements or even put in escrow a nominal refundable down payment. Understand that for the seller, this is part of determining the real buyers from the "tire kickers".
When determining the revenue side, if it is a coin operated Laundromat; then you only need to look at the Laundromat coin collection. Looking at the bill changers is a waste of time because people off the street will come in and use the changers. Just count the coins from the money boxes. If the Laundromat is a card operated Laundromat, then you just saved yourself about 3-4 weeks of audits. Ask for a copy of the Annual revenue report for the last couple of years.
To keep the seller honest, I will get a percentage break-down of the revenue from the different sized machines. I also do analysis on washer to dryer ratio of revenue and also determine washer revenue vs. water meter readings (just to make sure that the buyer is not seeding the money boxes with extra revenue).
On the expense side, I use Excel spreadsheet and use the Laundromats checkbook to determine the expenses for the store. I will look at the expenses for a complete year and will verify that there are 12 rent payments and 12 months of utility expenses. The 4 big expenses for a Laundromat are Utilities, Rent, Note & Labor. Be sure to ask in depth about the labor component in expenses. Labor is an area where people like to use cash and you need to make sure that you fully understand the current situation. (You may want to ask again at another time just to make sure that the stories match.)
Be sure to determine all of the expenses. If any of the expenses are artificially reduced (not reported), then the Laundromat will look more profitable. Areas that Laundromat owners may not be reporting the expenses are:
- Labor (attendants are sometime paid fully or partially off the books).
- Repair Expenses (sometimes service technicians are also paid off the books),
- Soaps & Supplies
Any loans that the current owner has are not to included in your analysis. Also excluded are any accounting adjustments like appreciation or depreciation. These figures are never entered into your cash-flow analysis. The Laundromat is a cash business and all of your calculations will be based on the cash-flow of the business. If the owner does have an outstanding note, you may want to see if it is assumable. You will probably have to complete a full credit application but this might be a nice way to finance part of the purchase price of the Laundromat.
Once you have an average of the weekly revenue figure (minimum of 3 weeks collecting) you can determine what the annual gross revenue of the Laundromat. Once you have recorded all of the expenses (both reported and un-reported) you can total it up for the entire year. The annual profit of the Laundromat is the gross revenue subtracted by the annual expenses. This is the annual profit for the Laundromat. I usually figure a 3x multiple, 3-1/2x multiple and a 4 time multiple for the store so I have a rough price range. If this is a card store the multiple can even be higher.
As mentioned in the first article, there are fudge factors that either increase or decrease the value of the Laundromat. A short term lease will greatly reduce the value of the store. Conversely a very long term on a lease will make the Laundromat worth more. New modern Laundry equipment will increase the value of the Laundromat. A fully functioning card system will also increase the value of the Laundromat. There are your own personal factors that also influence the value of the store like that you need a tax write-off this year or that this store is sandwiched in between two of your other Laundromats. These are personal factors that could change what you are willing to offer for the Laundromat.
Once all of your numbers have been tabulated, now is the time to sit down with the seller and show them what you have determined. Show the current owner your findings and the calculated P&L and net profitability. Be honest & respectful, remember this is their baby. Ask them to check your figures and make sure that they are correct. You may find that you made a mistake that changes the numbers. On the other hand, the seller may not have realized what the store was actually doing in profit. Recently I was doing and analysis and the owner was surprises at how un-profitable his WD&F business was and he started to make changes to how he did business. In this case he was able to increase the profitability of the store by about $30k a year (which increased the value of the store from between $90k to $120k).
Many times buyers shoot from the hip and live to regret their impulsive decision. Take the time and do your "due diligence" and find out what the Laundromat truly is worth. Now you have a good starting point on which to adjust the value of the business upwards and downwards. By using numbers and then showing the seller where you are coming from, you are trying to removing the emotion from the buy/sell process. By removing the emotion from the sale, now it is not "my store" but it is about "the business" and we try to eliminate "I need this figure" to "this is the real value of the business" type conversations.
My best advice is to be analytical, remain emotionally detached, build the relationship with the seller and don't rush. Take your time and let you and the sell get comfortable in the buy/sell process.
