CLA Connect Open Forum

Possible Purchase of Existing Laundry

  • 1.  Possible Purchase of Existing Laundry

    Posted 14 days ago
    I am considering purchasing my first laundry. I have a few questions I would like to ask the forum, but first I will some background info on potential site.

    • Opened in 2002
    • Stand-alone strip mall type of facility with four other stable businesses and gov't satellite office
    • Ample and convenient parking all times of the day
    • Located on very busy intersection
    • City has 88,000 people, but surrounded by other communities,
    • 54% of housing is rental
    • Annual income per household is $46,800
    • Nearby are multiple apartment complexes and motels
    • Secure visible location.
    • Customers pay for all washers and dryers using card system.
    • Mechanical Systems are 2015 or newer. 
    The business has generated an increasing gross revenue in each of the last three years.

    How do I evaluate or hire someone to evaluate the equipment prior to purchase?  I need to know what the remaining useful life is on the equipment and whether it has been properly maintained and its actual value.

    When reviewing the financials what I focus on when analyzing the asking price?

    Lastly, are there any experienced owner/operators who are willing to have my wife and I ask questions about being business of owning and operating a laundry?  We would schedule a telephone interview and respect your time.

    I provided my mobile and e-mail in my signature. Thanks to all in advance.

    ------------------------------
    Thomas McDonald
    Potential Investor
    Lake Forest IL
    847-208-3867 mobile
    mcdonald2409@gmail.com
    ------------------------------


  • 2.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago

    The business has generated an increasing gross revenue in each of the last three years.
    Thomas McDonald,  11-06-2018 13:54
    Only moderately interesting.   How about the profit?  What does it earn?

    When reviewing the financials what I focus on when analyzing the asking price?
    Thomas McDonald,  11-06-2018 13:54
    Figure out the free cash flow or owner's benefit (search the forum for long postings on this) and see what multiple he's asking.  Four times, good deal.  I've seen seven times sell around me, but that's nuts.


    Stand-alone strip mall type of facility with four other stable businesses and gov't satellite office
    Thomas McDonald,  11-06-2018 13:54
    How awful is the lease and how big are the scheduled increases?


    ------------------------------
    Luigi
    ------------------------------



  • 3.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago
    Thanks for replying.

    Free cash flow is $71,000
    Business dropped asking price recently after being on the market for a long time.
    Selling multiple is just under 3.0, which from what you have said and I have read is a good price.
    Not sure about leasing info yet.  I need to sign NDA before I get leasing info, but lease has options available through 2034.

    Any comments on how to evaluate equipment?

    Tom

    ------------------------------
    Thomas McDonald
    Potential Investor
    Lake Forest IL
    ------------------------------



  • 4.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago
    Sign the NDA, get the lease info.  That seems like a very fair price, which has me wondering...

    In terms of equipment, easiest way to measure is to go a handful of times and see what's out of service.  Does some stuff look like it's been out of service for a long time?  Then those machines are almost certainly junk.  Does everything work? Then you might be in good shape.

    Get the models and manufacturers and spend some time on Ebay and you'll get a sort of idea of the value.  Although I will say that Ebay has Wascomat antiques for sale for real money, where in my area, I can only give them to the scrap yard.

    If you're buying it for less than 3X FCF, you should have plenty of money to re-tool the store with updated equipment, unless you need the profit to live.

    At 25% down, that's a note of $190k give-or-take, or around $1,500/month.  Leaving you $6k/month in free cash flow.

    Sounds like a smokin' hot deal.

    Sorry to be a cynic, but there has to be more to the story.  buying $6k per month for $63k down payment?  I'll take a 10% cash-on-cash return all day and twice on Sundays.

    I have a strong suspicion you didn't calculate your free cash flow correctly, sorry to say.  But if you did, look at the lease and put down a deposit.



    ------------------------------
    Luigi
    ------------------------------



  • 5.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago
    Thanks Luigi!

    I will take all your comments to heart and get some more info.  I have not had access to the books yet, but your comments are helpful.  I will pay attention as to how the Free Cash Flow figures were determined.  My wife and I are both inexperienced -- not previous business owners, but were good with numbers and analysis.  Thanks.

    Tom


    ------------------------------
    Thomas McDonald
    Potential Investor
    Lake Forest IL
    ------------------------------



  • 6.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago

    I need to know what the remaining useful life is on the equipment and whether it has been properly maintained and its actual value.
    Thomas McDonald,  11-06-2018 13:54
    2018-2002=16 years old.  It's not like buying a used car.  It's being maintained if it's not out of order and generates income.  The equipment value doesn't matter unless you plan on replacing and selling them.  The business valuation is what's important and is usually based on a multiple of the annual net income anywhere from 1x to 5x.  If the equipment looks old and tired, maybe a 3x.  Many owners don't know what their mats are worth and choose an arbitrary number, usually asking more than they paid to get their money back and make a profit.  Unless moving, retiring, or tired of failing, I can't think of any other reason to sell a profitable business.  Be cautious.


    When reviewing the financials what I focus on when analyzing the asking price?
    Thomas McDonald,  11-06-2018 13:54
    Agree.  Net income after all expenses!  Multiply that by 3 or 4.

    ------------------------------
    Chris Mallam
    Norfolk VA
    ------------------------------



  • 7.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago
    Thanks Chris.

    I will sign the NDA in the next few days and have more info. We will be cautious.  Laundry accounting should not be that complicated. However, does anyone recommend I have an outside accountant look at the books or would reviewing myself be sufficient.  I just want to cover all my bases,

    Tom

    ------------------------------
    Thomas McDonald
    Potential Investor
    Lake Forest IL
    ------------------------------



  • 8.  RE: Possible Purchase of Existing Laundry

    Posted 14 days ago
    it's not going to hurt anyone to take a look over your shoulder, but it isn't something critical.

    What you need is the sales number.  Gross receipts.  Bank deposit.  Whatever you call it, it's the amount of money coming out of the store, obviously not counting the money used to buy $5 bills or dollar coins or whatever to keep a "bank" at the store.

    If you're free cash flowing $71k, your sales are probably $350,000 or so or $6k or $7k per week, $27k/month.

    Start with the $27k, subtract off your rent, your labor (hours open, plus overhead, plus some overtime for sick days or vacation), subtract off your utilities (make them monthly), then internet, phone, alarm, CAM fees, maintenance (figure on lint removal yearly, rodding yearly, divide that to make it into months).

    That's your FCF.

    I suspect that there is a big math error somewhere.

    Do you need an accountant?  I dunno, how many line item expenses do you have?  It's not a complicated business.  There are a lot of one-offs that add up to a monthly cost, so put in a fudge factor.    You get to depreciate the machines, so that's nice from a tax standpoint.


    ------------------------------
    Luigi
    ------------------------------



  • 9.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago
    .    A multiple, any multiple, is not a good indicator of value for a Laundromat. Multiples are used in real estate purchases but have limited value in the Laundromat business.
         Example:  #1 store nets $75,000 per year, has three year old equipment, a market rate lease with two years remaining, two five year options with escalators to highest and best use.  Two competitors within one mile and a population of 35,000 in one mile radius.
         #2 store also nets $75,000 per year, has fifteen year old equipment, a gross lease at 75% market rate, with 13 years remaining and two five year options with the same terms and condition as original lease term.  No competitors within one mile and a population of 65,000 in one mile radius.
         #3 store also nets $75,000 per year, has six year old equipment, a market rate lease with 4 years remaining and no options. Landlord refuses to give any lease extensions until he's reviewed the tenant payment history for three years, but gives no indication he won't offer options in the future.  Three older competitors within one mile and a population of 26,000 in one mile radius.
         Using the above facts, what multiple should be used for the three stores above? Laundromats are cash flow investments, the value of which does not really lend itself to multiples.  Just my opinion.
         ​​​

    ------------------------------
    Larry Larsen
    Distributor Employee
    Laundromat123.com
    Anaheim CA
    ------------------------------



  • 10.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago

    Laundromats are cash flow investments, the value of which does not really lend itself to multiples.
    Larry Larsen,  11-07-2018 12:10
    Gotta (strongly) disagree.  You're correct that they're cash flow investments, with some real property thrown in, so it's very straightforward to value it using multiples.

    In your cases (above) you aren't actually calculating the cash flow.  It just takes homework.  Calculate the cash flow based on the length it is coming in.

    Laundromats are very similar to very risky bonds.  Valuation is almost identical.

    I will agree with one thing; the lease changes the expected term of the cash flow, one of the reasons I won't lease.  It's very hard to calculate that uncertainty and the landlord has you by the short-hairs.

    In the end, I absolutely guarantee his numbers are not just off, they are way off.  Way, way off.  Either there's a gotcha regarding the lease being about to end, or they aren't including the rent, or what happens a lot, the listing agent doesn't even understand the term "free cash flow" and just inserts yearly revenue there.

    If we ever hear from him again, mark my words, it will be to explain how the original numbers weren't correct.


    ------------------------------
    Luigi
    ------------------------------



  • 11.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago
    Edited by Larry Adamski 13 days ago
    Guys,

    Here is my theory about valuing a laundromat based on using a calculated multiplier X Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA):

    EBITDA:
    EBITDA is a formula for determining actual cash flow.  This formula says you should take the total gross sales and subtract all normal operating expenses.  Normal operating expenses do NOT include: interest expenses, income taxes, seller or buyer depreciation expense or seller or buyer amortization of old or new equipment.  In other words, the actual, normal operating expenses that are required to maintain the business and keep the doors open are added together and then subtracted from total gross sales.  This would include all expenses that reoccur on a regular or irregular basis and are paid to employees, vendors, etc.  Note:  the rent is a normal operating expense which EBITDA accounts for.  High rent or low rent doesn't need to be accounted for later.  As you can see, EBITDA accounts for differences in normal operating expenses from one laundromat to another laundromat.

    The multiplier:
    The multiplier must account for variables that EBITDA cannot possibly account for.  These variables include the condition of the equipment, condition of the leasehold, years remaining and terms of the lease, simplicity of the operation, etc.  If, for example, the washers are newer but the dryers are very old; it may make sense to divide the condition of the equipment into 2 or more categories with a rating for each.  Each category is given a rating from 0 - 5 with 5 being most desirable and 0 being not desirable at all.  It's even okay to rate a category between whole numbers such as 2.8 or 3.2.  Next, the category ratings are added together and that total is then divided by the number of categories to get the average rating.  This average rating could come out to 3.45 or 2.88 or whatever.  In any event, the rating does not get rounded up or rounded down.

    An example:
    With EBITDA established to account for earnings after all normal operating expenses and the average multiplier established to account for the terms of the lease, condition of the equipment, complexity of the operation, etc.; one need simply multiply one figure by the other figure to get the estimated value of the laundromat.  For example:  Let's use the following numbers and ratings:  EBITDA - $75,000; condition of washers - 4.2; condition of dryers - 2.0; condition of venders, changers, etc. - 2.5; condition of leasehold - 4.0; lease - 4.6; simplicity of operation - 3.0.  The 6 ratings total 20.3.  Divide 20.3 by 6 to get the average rating of 3.38.  3.38 X $75,000 = $253,500.  So, in this example, the value of this hypothetical laundromat would be estimated at $253,500.  Obviously, a laundromat with different equipment, a different lease or a more complex operation would value out differently even if its EBITDA was the exact same $75,000 as this hypothetical laundromat.

    Practical application:
    Obviously, a number of unbiased judgements must be made when rating the various categories.  Categories don't need to be limited to just a few.  The number of categories depends on the particular laundromat being valued and the feelings and concerns of the person doing the valuation.  One category that I like to use is "simplicity of the operation" because I feel a simple, straight laundromat is more desirable than a complicated laundromat that offers drop off laundry, etc.  Of course, while a complex laundromat would therefore require a lower "simplicity of operation" rating; it would likely also show a higher EBITDA number.  Thus, the value could come out higher despite a lower simplicity of operation rating.  Anyway, this is how I do it but I'm always looking for a better way to value a laundromat.

    ------------------------------
    Larry Adamski
    Muskegon Laundromat
    Spring Lake MI
    ------------------------------



  • 12.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago
    The formula to use as a guideline while purchasing an existing Laundromat seems a brilliant tool from Larry.
    Also, the scale to assess the condition of other critical items seems relevant and practical. As you mentioned, the critical items  may not have to be the same for all Laundromats. Therefore, it is of strategic importance to assess the critical items first before assessing the facility.
    For example, parking may be critical for some laundromat and must be factored in too.


    ------------------------------
    Willy Francis
    Manager/Owner
    Magic Coin Laundry
    Etobicoke, ON Canada
    ------------------------------



  • 13.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago
    .    There are a few issues here that do fit the current use of multiples in my area.  Larry A. provides a good calculation process for a buyer to arrive at a value.
         If the seller and his broker use a different method, you're not going to end up with a sale.
         Again, regional practices may dictate use. In SoCal the use of a multiplier operates this way. Take the monthly net and multiply it by 50. The sellers bought their stores believing in this simple use of a multiplier.
         Now that the buyer wants to sell, the seller believes in the 50 times rule and won't budge on the selling price.
         Over the years, brokers have fostered this belief in a simple multiple. My eyes glossed over reading the complex method of using a multiplier used by some.
         It would take a Herculean effort just to sell the this concept of a complex multiplier to a SoCal buyer and a seller. The seller already "knows" how to value his Laundromat.
         Over the years the multiplier has changed from 40 to 50 to 60 times the monthly net (60 times when demand for Laundromats is booming) but what remains constant is brokers and sellers avoiding expense items in order to increase the purported monthly net.
         A "rule of thumb" only works if buyer, seller and broker are using it the.same way. It's the way it is used in SoCal that I find unfair and unreasonable.

    ------------------------------
    Larry Larsen
    Distributor Employee
    Laundromat123.com
    Anaheim CA
    ------------------------------



  • 14.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago
    Edited by Larry Adamski 12 days ago
    Larry L,

    The problem that I have using "monthly net" is what month is being used?  Is the highest grossing month being used?  Is the lowest expense month being used?  The concept of using a single month as the basis for setting a value seems inherently unfair to Mr. Buyer.

    In coming up with a value calculation, I try to use something more common place. Most businesses are valued using EBITDA - even to the point of ignoring the condition of the equipment.   A machine shop, for example,  may simply use a chosen multiplier times EBITDA without regard to the shop equipment perhaps assuming that the equipment is good enough to produce the current earnings so why worry about its condition?
    ------------------------------
    Larry Adamski
    Muskegon Laundromat
    Spring Lake MI
    ------------------------------



  • 15.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago
    .    Larry A, we don't value on a single month, we use the yearly net divided by 12.  Expenses and income are easily understood as monthly averages to SoCal brokers, buyers and sellers.
         Just like rent is discussed as a monthly average in SoCal while other parts of the country speak in terms of yearly cost per square foot.
         Your comment on selecting a single month for income illustrates that Laundromat language varies from region to region.
         Never even occurred to me that someone would think we select a single month. Sorry I confused you.

    ------------------------------
    Larry Larsen
    Distributor Employee
    Laundromat123.com
    Anaheim CA
    ------------------------------



  • 16.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago
    Larry L,

    Thanks for clearing that up.  I have never seen any talk about using the AVERAGE monthly figures so I wrongly assumed that the most recent month or perhaps even the highest month was used.

    So basically California uses average monthly sales and expenses while the midwest uses annual sales and expenses. I find it interesting that California goes an extra step to divide the annual figures by 12 and then uses that higher multiplier.  I  fail to see any advantage in doing it that way.

    ------------------------------
    Larry Adamski
    Muskegon Laundromat
    Spring Lake MI
    ------------------------------



  • 17.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago
    Not to be pedantic, but some basic math?

    Taking yearly free cash flow, dividing it by 12 (monthly) and multiplying it by 40...is the same thing as...taking the yearly free cash flow and simply multiplying it by 3.3?

    Meaning, you're (or "Californians") are simply using a multiplier between 3 and 4, which is the same thing as the rest of us.

    Dividing, then multiplying?  Seems like an added (and weird) step?

    ------------------------------
    Luigi
    ------------------------------



  • 18.  RE: Possible Purchase of Existing Laundry

    Posted 10 days ago
    My guess is it is to smooth out seasonality when doing due diligence.  So when you go to do the quarter count then it's easier to compare to the monthly number.  For those that can't do math I guess.  It shouldn't matter as you point out.

    ------------------------------
    WEI CHEN
    Los Angeles CA
    ------------------------------



  • 19.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago
    Hi Tom,

    Sorry I'm late to this thread.  Good comments from some really sharp folks so far.  I might have missed this, but in his number of $71,000 free cash flow.  Is the current owner working, and if so how many hours?  When I say working, I mean being there in lieu of an attendant.  If the answer is yes, you need to reduce the free cash flow by the cost of hiring attendant to be there.  Net owners benefit means different things to different people.  We all work to varying degrees, fixing stuff, collecting money, etc..But my definition of net owners benefit does not include the owner physically being there.  Hope that's clear.

    ------------------------------
    Paul Kludt
    Multi Store Owner
    Lake Worth Coin Laundry
    West Palm Bch FL
    ------------------------------



  • 20.  RE: Possible Purchase of Existing Laundry

    Posted 13 days ago
    ​Thanks to everyone who has taken the time to reply to my question.  After I signing the NDA and reviewing the data, I will most likely have more questions for the community.  I am grateful that there is such a source for newbie!

    Tom

    ------------------------------
    Thomas McDonald
    Potential Investor
    Lake Forest IL
    ------------------------------



  • 21.  RE: Possible Purchase of Existing Laundry

    Posted 12 days ago

    I am grateful
    Thomas McDonald,  11-08-2018 11:21
    Well, you can certainly pay us back by returning with the "real" numbers.  I'm curious if I'm right (true FCF is not $71k).

    And watch for two sneaky items.  The first was mentioned above, that the owner wasn't valuing his own (or family) labor at market rate for attendants and shenanigans with the lease or rent or real estate.  One deal I saw, the owner was valuing the real estate at an appraiser's "highest and best use" per square foot valuation, but wasn't paying rent to himself, so he was completely double-dipping on the valuation.  It's hard to follow, but you want to break off the real estate when valuing, and real estate is generally valued at a multiple of it's lease returns.  "Cap rate".  So the appraiser had figured that the highest rent-earning property in the area was earning x per foot, so the laundromat building was worth $500,000.   Then, the laundromat business was valued at a high multiple of its earnings (7.5), but its earnings did not reflect it paying any rent.  So if an investor had bought the building separately, the laundromat would have to pay market rent, correct?   Or if the laundromat was never going to pay rent, then the building's value would reflect that.

    As far as I know, that laundromat is still on the market, and for good reason.  It's really worth a little over 50% of the asking price.

    And lastly, I don't wish to make enemies, you guys all seem to be great and generous people, but I have to say that valuing anything at a multiple of monthly gross/net/anything is goofball.   The terminology varies, but valuation of business is 100% dependent on the usage of EBITDA/Free Cash Flow/Net Owner's benefit...they're all acronyms for saying the same thing.

    ------------------------------
    Luigi
    ------------------------------



  • 22.  RE: Possible Purchase of Existing Laundry

    Posted 11 days ago
    Thomas....its your lucky day.....the godfather will help you.  I sent you a PM if you wanna call me.

    ------------------------------
    ORIGINAL GODFATHER
    ------------------------------