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Building from the Ground Up?

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(Photo: ©iStockphoto.com/buzbuzzer)

Howard Scott |

CHICAGO — An American Coin-Op columnist recently suggested that buying an existing business is always the way to go. “Why would anyone want to reinvent the wheel?” he asked.

Well, buying an existing business might be the way to go. Or it might not, depending on the terms of the sale, the marketplace, and your own inclination.

This column will look at the pros and cons of buying an existing business vs. building a new Laundromat.

Starting from Scratch

When you start from scratch, you get a brand-spanking-new facility. Everything looks new. All the machines come with warranties, reducing maintenance expenses. It’s true you have to iron out the kinks, but this is far better than buying an existing facility and finding out that the roof leaks or rusty water is entering your machines. Furthermore, people love to patronize a new store, to give a new enterprise a chance. Have a grand-opening celebration and gain a lot of publicity.

By starting from scratch, you create your own place. You are not limited by someone else’s vision about what a store should look like and how it can work. You start with a blank slate, and only have to fit your plans to the structure you rent or buy. This gives you maximum flexibility to do what you want to do. Sure, you could remodel an existing facility, but it might cost you a small fortune.

If you do it right, it will be cheaper starting from scratch. Generally, purchasing an existing business entails paying goodwill, the value computed by the seller for the going enterprise. Often, the terms of the sale are written so that you don’t even know that goodwill is included.

Even if the dollar amount is less for an existing store, you might have to replace equipment right away and spend extra money you didn’t count on. Or, there will be “invisible” problems that are costly. Certainly, you may get a “steal,” but perhaps there is a good reason that the sale terms are so inexpensive — namely that the store is in a bad location or that there is too much competition in the marketplace.

With a brand-new facility, you probably have a lower utilities cost. Most utility efficiency is accomplished by utilizing new equipment, owning high-efficiency equipment, selecting the best-fitting equipment, and engineering the system for peak efficiency. Yes, tap-in fees can be a concern, but, in the right situation, they can be dealt with over the long haul.

Typically, utilities are about 25 percent of your gross. If you lower that number to 23 percent, that means a $5,000 annual savings for a $250,000 operation. The savings are significant because it’s an annual reduction. It’s $5,000 every year.

Finally, building new means choosing your own location. This is probably the most critical decision one makes when opening a store. Demographics, area businesses, customer flow, visibility, adequate space, parking, ingress and egress, and the correct side of the street are all key considerations.

You can get all these aspects close to perfection, and then your store will have a better chance of winning the lion’s share of the market, even if there is long-term competition. For example, a good parking lot will attract patrons from a competitor lacking good parking. Many new patrons will want to pay you a visit if you’re a bustling business that many people frequent.

Business history is filled with newcomers becoming the dominant player. Consider Google and Yahoo! in the Internet world. A decade ago, Yahoo! was a major player. Now, Google dominates the market.

On the Other Hand

Buying an existing business may have its advantages. For one thing, you have a ready-made, turnkey operation that just requires you to unlock the door and you’re in business. You don’t have to order equipment and deal with comparing brands. If you’re lucky, you can retain the employees and reduce the chance of someone stealing from you. There’s no searching for an ideal location or negotiating with the landlord for a favorable lease. Some people prefer to enter the business this way.

You might also snag a bargain when purchasing an existing store. The owner might be desperate, and lower his price to fire-sale terms. In essence, the owner wants out and doesn’t even need to recover all of his investment.

Secondly, you might be able to purchase the store on favorable terms, such as a five-year payout. This will do wonders for your cash flow. In the past year, there have been plenty of these bargain-basement transactions.

Of course, you must work through the figures and make sure the price is lower than if you were buying everything new. If the business costs $200,000, and you could open the same store for $175,000, then you are paying $25,000 for goodwill. But if the initial investment in a comparable store would be $220,000, then you might be getting a bargain.

The equipment plays a key role in this process. If the washers, dryers and boiler are, on average, 12 years old, you need to consider the replacement cost because you may be replacing most of the machines in the next few years. Deduct that amount to arrive at the real selling price.

You could purchase a store that dominates the market, and is an effective block on competition. This is a major plus. An example of this is a Laundromat in a small, rural town. If there is one Laundromat in town, it is not likely that another will open up. Nor would someone travel several towns away to do their laundry. You can work with the customer base to increase your usefulness and win business, but you don’t have to worry about competition. So, effectively, you have a monopoly.

Whatever way you choose — starting from scratch vs. buying an existing store — make sure you know what you are getting into. Then roll up your sleeves and make your choice work.

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

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