Buyers of small businesses have learned that in most cases it will be necessary to work full, or nearly full-time in their new enterprise in order to enjoy a return on their investment. In fast food, retail and most service companies, for example, if the owner isn't there much of the time to "carry a load" of the work to be done, he or she will notice that much or most of the profit is being paid out as compensation for employees to handle the assignments.
A notable exception is a coin operated laundry for sale (also referred to as a Laundromat), which typically can yield a 20% to 30% profit (before taxes, interest, depreciation and amortization) on gross revenues to the owner.
And the buyer soon learns that the privilege of earning a substantial margin on sales as an absentee owner comes at a price. While the typical owner-operated small business selling a business might be priced fairly at a multiple of 1-1/2 to 2-1/2, against annual earnings, even a modest looking and performing coin laundry-one that has only an average-duration (five to seven year) lease and some equipment in need of replacement-will likely generate offers of four times earnings.
The eager interest in laundromats for sale is understandable, particularly at the present time, when the U.S. economy is losing some of its momentum. A decline in home ownership and the slowdown in purchase of expensive appliances, such as washers and dryers, set the stage for a lucrative business environment and profitable future for owners of coin laundries.
WHAT TO LOOK FOR
Neighborhood factors represent the first level of investigation for a would-be buyer of this type of business. An area with high population density, and a preponderance of apartment buildings represents an ideal market for coin-operated laundry. There may be more than one of these operations in say, a 10-block radius, and so the prospective buyer is advised to visit all the laundromats in the area to determine if each seems to be thriving, and to verify whether the specific company being scrutinized seems to be doing its share of business.
Checking the condition of the business for sale--whether the premises are clean and the equipment seems to be in good repair-is the next step in analyzing a coin laundry for a possible purchase. The careful buyer wants to make sure there are no floor puddles--a sign of equipment or plumbing problems, and possibly an indication that the servicing and repairing of the equipment is being neglected. Another bad sign is the presence of a sign--especially if there are three or more of them-which say: "Out of order."
An "ailing" piece of equipment is a common occurrence in the coin laundry business. But if there are several machines down at one time, and if they remain out of service for more than a day or two, the prospective buyer should begin to get the message that there are deferred maintenance problems which the seller may be planning to transfer along with the business.
If the buyer is satisfied that a coin operated laundry enterprise is in a good area for business and is getting a fair slice of volume in its market, and if the premises and equipment appear to be well maintained, it's time to look at the business a little more closely before buying a business from a business owner, business broker, or agent.
With anything less than five or six years remaining on the lease with is held by the seller of the laundromat, the prospective buyer runs the risk of being effectively out of business before doing any better than recouping the investment. And with the exception of some old washers and dryers, along with a water heater and some miscellaneous equipment-there will be nothing to sell.
In some cases, a prospective buyer may be able to establish a good rapport in a meeting with the property owner. That would be the objective of a provision in a purchase offer that the deal can't move forward unless a new lease, or lease extension satisfactory to the buyer, can be obtained. If the existing lease is a "ticking time bomb" and the seller is "sure" that the landlord (or landlady) is willing to add options to renew, or to provide a fresh, long-term occupancy right, the buyer is advised to include a "satisfactory lease" contingency in the offer to purchase, and then meet with the property owner to find out if the seller's assurances are based in fact.
Another key contingency is the buyer's right to examine the seller's business records to verify that seller's statements regarding gross sales and profits, adjusted net income, are accurate.
At some point during due diligence - the prospective buyer's examination of business records, the seller may explain to the prospect, with a sly grin, that because this is an "all cash business," there may be some income that is not entered into the books-a statement meant to convey the idea that the seller is generating more income than can be proven, resulting in a "savings" of some income tax that should be paid. As this practice is not uncommon in all-cash enterprises, a buyer need not necessarily be frightened away from examining and moving forward to purchase the business. In other words, the idea that the seller is manipulating the truth for an extra advantage should make the buyer particularly attentive and cautious, but doesn't have to kill the deal if the buyer is otherwise interested in the business.
The taxing authorities, incidentally, are familiar with these attempts of some business owners to reduce their tax liability using various methods of "creative accounting." The IRS provides its investigators with some guidelines which also are useful for prospective buyers of coin-operated laundries.
Examining the company's water bills for the past two to four years offers information about water consumption at the business which then can be used to verify the company's level of actual revenues. Smart buyers find out from the manufacturers and sales distributors of the equipment being used, how many gallons of water are consumed by each wash (generally 21 to 28, depending on size of the machine). Once an average of gallons used per wash is established, some simple math can follow, in which the average cost per wash is multiplied by the number of washes in a defined period, as specified in the water bills. By adding in the presumed dryer income (usually 50% of income from the washers) a buyer can come up with a reasonably accurate guestimate about the revenues produced by the machines during the period of time under study. Similarly, the purchase records for soap, softener and bleach products placed in the company's vending machines for resale, will help the prospective buyer determine with reasonable accuracy, the amount of income that results from laundry product vending.
Here is a set of cost rules-of-thumb for the prospective buyer who has gotten this far investigating a laundromat business offered for sale, and wants to proceed: National averages reveal that about 25% to 30% of gross revenue in a coin laundry is spent on utilities--water, gas, electricity. Occupancy, including rent, lease expenses required by the landowner, and related costs account for another 25% to 35% of gross, depending on location. With insurance and some part-time help hired to service the machines, perhaps lock the doors at night, and related overhead at 5% to 10%, the owner should have access to at least 20% and maybe close to 30% of revenues for earnings before payment of taxes and interest on debt, and before setting funds aside, earmarked for depreciation and amortization.
A deal calling for a 1/3 down payment with seller financing for the balance, at competitive interest, will provide a buyer, paying four or five times annual cash flow, with a fairly typical return for purchase of a coin operated laundry.
As in most every business, laundromats are subject to technological improvements. The more that a seller has already incurred some costs of upgrades toward a state-of-the-art coin laundry business, the more the company's value. Some possible improvements to look for include newer (four years or less), more energy-efficient washers, dryers, and boiler (the oversized water heater used in these establishments), card-rather than coin-operated equipment and a system for putting buying power on a card, rather than just the old system--a changer that takes paper bills and "spits" out quarters. Other improvements to look for are security cameras along with an alarm system, perhaps one that is linked to a security company that is notified if any tampering is conducted at the laundry, energy efficient lighting and automatic door locks.
To the extent the seller has already paid for a "makeover" so the business is prepared for the 21st Century, he or she may be justified in asking a price at the high end of the range. These improvements contribute to a more efficient operation and save the buyer the cost of making these upgrades.
Coin operated laundries traditionally are among the most popular small businesses offered for sale. Because periods of flat performance in the U.S. economy are associated with greater consumer demand for coin laundry services, prospective buyers of a business in this industry can expect increased competition in the marketplace. And for those able to make the purchase of a laundromat business at a fair price, the next few years should be years of steady profitability.
About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.
Categories: How To Buy A Business