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What Info And Factors Play Into A Laundromat Valuation?

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Comments & Replies: 7     Views: 2893     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

Topics: Business Valuation, Buying A Business     Tags: business valuation, buying a business

Hey Peter, let me be the first one to jump in and answer this question from this laundry buyer.

The range you have listed is fair but you must have an understanding of the laundry model to understand why and if the business is a good buy for you. The value of a laundry is based on the income, lease, equipment condition and opportunity to expand as you go forward.

The return on investment (actual amount including all costs of the transaction) should be between 17 and 24 percent on the buy in. The difference between 17 and 24 will have a lot to do with the area you are buying in, the condition of the equipment and length and acceptability of the lease and also the ability to take advantage of improvements to the current model.

Other factors are too numerous to mention here but are available here on BizBen blogs. Keep in mind that laundries are very much fixed to the property and extremely expensive to build out. Long term prospects for growth are essential to keep in mind in comparing values of one laundry to another.

Hey Chuck, I knew you would be one of the first ones to comment on this discussion. Appreciate it (as well as all the laundry buyers on BBN!) :) . Hope your Laundry workshops are going well down in the San Diego area B) !

When buying a business, it's important to realize that price is determined not by what is "fair", but rather by what is "fair market value" ("FMV"). What does this mean? Basically, it's the price that an objective unrelated willing and able buyer and an objective unrelated willing and able seller will agree upon. How do we estimate what that FMV is? We look at similar transactions involving comparable businesses--type, condition, size, and location--to determine what ratios there are between the actual selling price and the SDE (seller's discretionary earnings or actual net cash-flow), the gross revenue, and, sometimes, the EBIT and EBITDA.

Each industry has different multiples which often reflect the relative attractiveness of the business. For example, coin laundries lend themselves to absentee or semi-absentee ownership; generally require little sales, advertising, or promotion; have steady, reliable cash-flow; are relatively low-maintenace; are all cash with no receivables to collect; and, have consistent, predictable payables.

So, demand is high; therefore, prices are high. Based on what comparable coin laundries have sold for (the actual sale price, not the listed price), various "rules of thumb" emerge: 100% to 150% of annual sales; 4 to 5 times SDE, 5 to 6 times EBIT or EBITDA. Consider this: 4 times SDE means a 25% return on investment with very little commitment of time, and that's how the buyer should be looking at the transaction, by there return on investment.

But, several other factors will significantly affect the actual market value, such as: the age of the equipment, the condition of the equipment and the premises, the length of the lease remaining and options for its renewal, and changes in the neighborhood demographics and the impact they will have on customer usage. For example, if the neighborhood is changing from apartments to condominiums, more people will have in-house laundries and fewer will use a coin laundry.

This is the perfect transaction for a prospective buyer to have a buyer's agent to help evaluate the business value and negotiate an advantageous deal.

I'll let the coin laundry experts speak to whether 4-5x multiples are the norm today and whether you can get a good business in that industry for less, but at the end of the day, "fair" is a subjective term. If a business provides the return you are looking for, the location and lifestyle you want, has good growth prospects (or is rock solid stable), and no other businesses in your area offer those same benefits the price may be "fair" even if the multiple is higher than it is for other industries.

The valuation of businesses in a given market or industry tends to fluctuate over time based on a variety of factors. When it's easier to borrow, there's less inventory on the market, the prospects for the industry look bright, and there are more buyers than sellers, multiples tend to go up.

While multiples are good to use a rule of thumb, to determine whether a multiple range is "fair" for an industry overall requires you to make a personal analysis as to the value to you of being in a specific industry, the availability of other options--either in that industry or in others, the growth prospects for the industry, and any other intangibles that are important to you.

I experienced this personally on the seller side a number of years ago when my partners and I received an offer on a business we had started and grown. The offer was "fair" by the standards of average market multiples for businesses in our general industry, but we saw something that the multiples didn't take into account. Our business was poised to ride a very significant market trend in our niche that had just recently started to build. The multiple we were being offered did not take into account that there was tremendous growth potential and that we were poised perfectly to capture that growth.

The potential buyer walked away frustrated that they'd made a "fair" offer and been rejected. Several years later we ended up selling the business for six times that "fair" offer. The buyer could have paid double what they offered and still had a home run a few years later, but they were locked into a very limited view of what was "fair".

Additionally, valuations depend on the position and needs of the buyer. For example, a buyer with 10 existing coin laundries in the surrounding area and a foundation of systems and management in place to run and market those may be willing (and able) to pay significantly more than a buyer purchasing what will be a single location.

The real question is whether you could invest the same amount of time and money into another business or industry and end up with a total result that is more beneficial to you. If you can't, then the price may be "fair" even if the multiple is higher than the average for other small businesses.

After doing due diligence, for buyers, on dozens of Laundromats, I have reached the following conclusion regarding their value.

Never buy a Laundromat based on multiples alone. You will get into trouble, because a long list of factors will adjust the price.
The partial list of factors includes,

1. Can the income be proved, other then by the utilities?
2. Rent as a percentage of gross income.
3. Terms of the lease.
4. Age of the machines. Life of different types of machines.
5. How many machines are out of service?
6. New equipment is more energy efficient then old machines.
7. Utility costs and what percentage of income are they.
8. How much is being spent on machine repairs? (Rarely provided)
9. Payroll; how much is being paid for what services? 1099 or W-2
10. What can be done to the location to increase customer traffic?
11. Can it support the debt service you will need to put on it.
12. Can you afford to update machines if required.

Conclusion: As you can see, the list is very long and the variables are many. The Laundromat industry says that 5 times net profit is the market value. Net profit as you can see from the list above is seen differently by buyers, sellers, brokers and due diligence experts. Do not buy a Laundromat with out having it fully reviewed by an experienced expert who has no financial interest in wanting you to close the deal. Independence in due diligence is the watchword.

Contributor: Business Broker - Lliquor Stores, Markets, Hotels, N CA

Yes itís true that Laundry businesses are 4X to 6X of net profit. The justification is that the Buyer does not have to work at the business (absentee ownership), but this justification become invalid if Buyer has to hire employees for wash & fold and other services. With respect valuing a laundry business, the Buyer should look at the Electricity and Water bills, because the sales are directly proportional these bills. You may want to look at other types of businesses if you want the ROI to be 2 to 3 years.

I tend to favor, in order, a mandatory minimum or some other fixed payout structure that is based on a secured (by the Company's assets/tangibles/intangibles) promissory note >>>>> payout based on gross sales >>>> payout based on net income. There are just too many variables that a Buyer, after closing, can inject into the Company's financials that would (theoretically) reduce net income and thereby reduce the proceeds of the sale to the Seller.

A payout on gross sales is fine so long as there is a strong track record and diverse sales pool that is not reliant on any one particular client for say, more than 10-15% of the performance of the Company. I would agree on a neutral, unaffiliated 3rd party accountancy PRIOR to closing that would do all bookkeeping and accounting so there's transparency for the parties on any gross sales payout arrangement.

A secured note is the best situation to protect the interests of the Selling entity b/c if the Buyer defaults the Seller gets the business back and keeps the monies paid to date. We have resold multiple Companies after a Buyer default, so this has worked out well for both our clients and our firm.

  Helpful Resources To Assist In Selling And Buying California Businesses
Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Steve Erlinger: Laundry Broker, Consultant - Southern California

I specialize in the laundry industry broker and consultant in Southern California. I assist buyers navigate the many facets of finding, evaluating, and operating a laundry business. I also help current laundry owners find additional stores, sell, evaluate an existing laundromat.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Chuck Post: Laundry Buyer Representation, Consulting, Due Diligence

Chuck Post has 32 years experience in the laundry industry, specializing in assisting laundry buyers (and entrepreneurs) with buying or starting up, building, re-tooling, laundries throughout California. Laundry buyer representation, consulting, due-diligence, lease negotiations, laundry valuations.

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