Choosing to Build New or Buy and Retool (Part 2)

CHICAGO — For today’s self-service laundry investors, one of the first — and most critical — decisions is whether to build a store from the ground up or purchase and renovate an existing operation.

Each path comes with its own mix of costs, timelines, risks and rewards. Market conditions, customer perceptions, financing options and operational goals all play a role in determining the right fit.

To examine the factors that can tip the balance and to offer insights to help operators make a confident, informed choice, American Coin-Op sought the input of several distributors and an industry-specific financing company; their responses have been edited for magazine style and length.

Q: How do the startup costs compare between building new and renovating? Are there financing or loan advantages tied more strongly to one approach than the other?

Tony Regan, vice president of sales and marketing for Eastern Funding: Financing for both new builds and retools is available. (Financing) retools is typically an easier process because manufacturer financing and independent lenders have the benefit of seeing cash flow when retooling an existing laundromat. From that, there is an expectation of an increase, which is then modeled into the future cash flow and debt service.

For new construction, there is a requirement for a larger cash investment from the borrower to cover a percentage of the cost, with lenders having to rely on pro forma cash flow to ensure the business meets expectations and is able to service the debt. Having lenders specific to the industry is paramount to understanding all of the factors that go into operating a successful laundromat.

Dan Schulte, sales manager for Laundry Solutions Co.: You can get a portion of your build-out financed through the manufacturer a lot of times. As you show a portion of skin in the game, say 30%, you do have some ability to pay for some of the build-out. Today, if you want to do a laundry right, you buy a piece of property, you build a building and you fill it with equipment. You’re going to be, conservatively, in there for a 3,000- to 3,200-square-foot store at $1.2 million to $2 million.

And then on the other hand, if you find the right retool place and do it right, knowing that you have the good infrastructure with utilities and stuff and you just don’t do the ‘lipstick on a pig.’ If you really go in there and upgrade to state-of-the-art washer-extractors, tumblers that can be started remotely with an app, it can be done and lessen the cost as far as your entry into the industry.

Andy Wray, sales manager at ACE Commercial Laundry Equipment: Startup costs are a “game-changer” when weighing retooling vs. a new build.

Assuming you own the building and are looking to install the laundromat, there are bank loans, SBA loans, hybrid loans where equipment is financed from one lender and build-out is provided by another. If you make renovations to your building, that could be seen as investment into the deal. If you are leasing the property, you’re not going to have the same speed and borrowing considerations, especially with banks or SBA possibly using a year getting paperwork seen.

In the end, not having to construct a building or bringing in serious infrastructure is going to have advantages.

Brandon Hoffman, salesman for Gold Coin Laundry Equipment: Have your entrance strategy into this decision as well as your exit strategy, because nothing is forever. If you’re successful, at some point you may absolutely consider selling or keeping it throughout your entire ownership period.

Whether to buy an existing store over building a new one will be determined again by your business plan and yourself. There are many different ways to achieve success in this business but how and when you renovate will be determined by you. Machines and equipment can be a cost that’s predetermined, but the aesthetics — which play an enormous role in a store’s success — is not a decision that a distributor or salesman can make for you.

How you renovate is a very similar conversation to building a new store. Determining and evaluating a market that you will target will absolutely be factored into how you build new or renovate existing. The two situations share the same goal of being better than your competitors, so both have variables that can fluctuate up or down depending on your choices.

Tommy Murati, director of marketing for Laundrylux Distribution: Building new usually means a bigger investment; between land, construction, utilities and permits, costs add up quickly. Retooling is typically more affordable and gets you up and running faster, especially if the infrastructure is solid.

From a financing standpoint, lenders often prefer retools because there’s less risk and faster revenue potential, especially when buying an existing store with a performance history. But with the right plan and support, funding is available for both paths.

Whether building new or upgrading an existing store, it’s a big advantage to work with lenders that specialize in laundromat financing. They understand the unique costs and revenue structure of the business, making the approval process faster and smoother compared to general lenders.

Q: Which option generally gets one to operational status and profitability faster? What common timeline delays or hidden hurdles can come with each approach?

Schulte: If you do a retool and do it right, upgrade how it needs to be upgraded, you can probably get in that much faster than you can with a new build. A lot of times, you may not even have to do any permitting if you’re just doing a retool, where the municipality just considers it replacing appliances. Contractors nowadays, it’s very hard to find good ones, ones that stay on (your) timeline. If I get a new investor and he asks me what’s it going to cost to build this out, I don’t even hesitate to say I can’t tell [him] what it is because it has changed drastically.

Contractors are notorious for trying to multi-task where they’re doing multiple jobs and they move from one to the other. It’s really important to stay true to your timeline and stay on top of those contractors and that’s where a good distributor comes in. We constantly work with contractors and take some of that headache away from the owner.

Wray: With a new build, you’re talking architects, engineers, planning commission. Sounds rough, right? Not having to dig a sewer line or bring in a new 4-inch gas line for the existing store is why laundromats rarely close up and leave. Just given the additional costs in utility build-out at a new location, the return on investment (arrives) a lot faster when a location has even the most basic of service. You don’t have to run out to the street to connect to the county’s electric pole.

Hidden hurdles — lately both on new (builds) and remodels — happen when either the city, utility provider or contractor is involved. There’s obviously less work on the retool but plan checks are more delayed, as are gas lines for new/upgraded laundromats.

Hoffman: A retool usually is a quicker path to positive cash flow, especially when you consider most finance companies allow for deferred or interest-only payments. There are fewer variables and it is easier to figure out an actual reopening date. When opening a new store, it can be way more challenging to plan that date with final inspections and variables that you cannot control.

Some new stores do take off faster than a retool once you open as the customer base doesn’t have a bad taste in their mouths from the previous owners or their employees’ bad habits. In a new store, everyone comes in excited to see what’s new to the market and it’s easier to say “Try us” instead of “Come back. We aren’t the old owners.”

Murati: Retooling usually gets you open and generating revenue much faster, sometimes in a matter of weeks, especially if the utilities are in place and the lease is solid. Building new takes longer because of zoning, permitting and construction, which can push timelines out several months or more.

That said, hidden issues can pop up in both cases. With retools, you might uncover plumbing or electrical problems once you start upgrading equipment. With new builds, delays often come from permitting or contractor schedules.

Regan: A retool is generally “easier” because typically all of the infrastructure is in place and the store can sometimes operate during the different phases of the remodel. While new equipment might have different requirements due to capacity, models, etc., having basic utilities and structure in place will benefit a faster turnaround. New construction might face delays in permitting, utilities, etc.

In Part 3 on Thursday: How the choices can differ strategically; zoning and permitting; and gauging customer response to a project

Miss Part 1? You can read it HERE