Laundromats are absolutely a great business! This is true. Laundromat owners boast high returns and short hours. The laundromat business sustains itself even through the toughest economic downturns; laundromats are a necessity of life service provider. These statements are all true. We have clients that return their entire investments every 3 years or less.
So, why is it that so many laundromats fail?
First you should realize that laundromat industry standard models are designed to fail over a 12-to-15-year span, about the life expectancy of equipment. Each day that equipment gets older and each day the lease term gets shorter. The laundromat investment is clearly time lined.
“Only the laundromat owners intervention and determination will keep the business from crumbling and keep the timeline and lease terms moving forward.”
Once a laundromat reaches a certain point in its life it must be reinvented; good operators intervene every 5-to-7 year. Many others do not. The income and the atmosphere in the laundry typically reflect which owner does and who doesn’t.
Most laundromats available on the market are in some state of decline and many are no longer sustainable at all. Starting at about the 9th year in most cases the equipment begins its decline, costs rise, customers become disappointed and the business starts failing to replace fading customers, next you will begin to lose established customers who have become disenchanted. This is a slow death. However, it can continue to cash flow for quite some time. By minimizing deferred maintenance, cutting staff hours and operating with “out of order” signs. There is a high likeliness that this will be the condition of the laundromats that you are looking at to acquire. In some cases, it is no longer an acquisition of a laundromat but rather an asset sell-off or “Asset Sale” which requires a far greater understanding and approach. But yet, amongst this group come the most successful acquisitions.
Now, when the laundromat gets to this point it is no longer just performing an intervention. It will now require major re-tooling, new-branding and marketing strategies in order to grow.
When faced with this, the owner will often decide not to reinvest and then do the retool and chooses to sell the business. But if it is still making good money it may also be a very high multiplying value (maybe as much as the full 60 times monthly Cash Flow value). If the owner keeps it the laundry will soon start declining more rapidly. So “along comes Jones.” Eager, and has heard good things but is not too knowledgeable about the laundry challenges and what lies ahead.
It makes you want to shout. WAIT! This dying laundromat is being sold based on the multiplier of the cash flow as valued by the brokers at about 50 -to -60-times monthly earnings. But Jones missed that. Soon, the cash flow drops. Jones try’s everything he can think of and some works for a while but the equipment is killing the business and nothing will fix it in a manner that will offer a sustainable cash flow. Jones looks into retooling and finds out that new washers are over $6,000.00 each on average and other costs are similarly shocking. (It is common to purchase a laundromat for $150,000.00 and reinvest another $450,000.00 into it.)
As costs continue to mount and sales are falling, and now Jones needs to use family savings to keep it afloat. Jones needs to sell it. All of Jones’s friends are all saying what to do. Jones finds out that people that know the business will offer very little and now it seems that all can see the condition is bad. There is also a strong possibility that the exit strategy and the transferability of the lease terms are inadequate as well. It may be the case that Jones is not in a position to sell the laundry. Sometimes these unaware buyers are stuck in this dilemma for several years. Sometimes the cost of doing the retool are not even warranted based on the market and potential.
However, by breaking down and analyzing the forward potential of these opportunities you may very-well find that diamond in the rough.
Chuck Post
President, PBI Laundry Consulting, Inc
Author of the book, “The Laundromat” An American Dream Business & Entrepreneur’s Playground”
38 Years of servicing Laundromat Investors
See us at PBILaundry.com
Contributor:
I am the Founder Of BizBen.com. I consult daily with intermediaries, business buyers, owner/sellers & advisors daily about buying and selling California small to mid-sized businesses. Contact me today about joining & utilizing BizBen, consultations, & advisory services.
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