CHICAGO — While purchasing a coin- or card-operated laundry can be a great investment, when a store comes up for sale in your area, how do you know if acquiring it will be the right move for you?
That’s where due diligence comes in. It’s important to research and analyze the existing business and real estate thoroughly before making the decision to buy or not. American Coin-Op asked three experts to weigh in on store acquisition and the criteria they would use to judge a store’s merits.
Larry Larsen, of Laundromat123.com, has more than 30 years of experience in the ownership, management and construction of Laundromats. He is a licensed real estate broker active in the sale of coin laundries.
Brad Steinberg is co-president of PWS, a California-based company that says it is the largest broker of existing and new Laundromats in the United States. PWS, established in 1968, opened its 3,000 Laundromat earlier this year.
John Vassiliades is CEO of Chicago-based J. Vassiliades & Co. With more than 40 years of industry experience, Vassiliades is a licensed business and real estate broker responsible for brokering the sales of over 1,000 coin laundries.
Q: Other than the current owner, what other sources might a buyer turn to in order to learn important information about a laundry for sale?
Steinberg: Brokers are always helpful in facilitating a transaction. Other helpful sources could be other Laundromat owners, and potentially an attorney for lease review as well as an accountant.
Vassiliades: Talk to what local groups are in the area, such as the Illinois Coin Laundry Association. … Another source would be to contact the other Laundromats in the market area and see how they’re doing. Another person to talk to would be a reliable broker or distributor.
Larsen: Meet the landlord. Discuss the Laundromat with the neighboring business owners. Visit the city offices to see if another Laundromat is being planned for the area. Talk with the customers currently using the facility. Call the telephone numbers on vacant rental spaces nearby to see if agents are working on leasing the site to a new Laundromat. Discuss the crime issues in the area with the appropriate police agency.
Q: What are some common mistakes that you see buyers make when evaluating existing stores for the purpose of acquisition?
Vassiliades: If they’re not working with somebody who really knows what they’re doing, and just wants to make a buck selling the store, they may get these people into a store with too little down. Everybody thinks they can buy a Laundromat for $5,000 down. That doesn’t happen anymore. The ideal down payment would be 50% down; that seems to get the attention of most banks and finance companies.
Some other things is not understanding the total amount of time required to run a business. A lot of people think a Laundromat business can be operated from their couch at home and just go to collect the money from the store. If they don’t have a minimum of 25 hours a week, then they should look very carefully about getting into the business.
They need to take into account all factors, not just the (purchase) price. I would rather pay more for a good store than pay less for a bad store. People make a big mistake in looking at the price only. I’ve seen people lose really good opportunities because they thought they couldn’t negotiate.
Larsen: A buyer should visit the neighboring apartment houses and nearby Laundromats to determine pricing in the area, type of equipment and condition of competition. The buyer should avoid representation by a dual agent (representing both buyer and seller) unless you are absolutely certain of the reputation of the broker. Search out your own “Laundromat Expert” on the Internet for help in due diligence analysis.
Steinberg: I really do believe buyers should bring in a broker to assist with the transaction. A talented broker that specializes in the Laundromat business understands the common mistakes and will be able to navigate around them. Not truly understanding the lease and failing to get accurate profit-and-loss statements are the most common mistakes prospective owners make when trying to complete a transaction on their own.
Q: If you were to examine an existing store for the purposes of buying it, what specific information would you consider to be “red flags” that would immediately end your interest in the property?
Larsen: A bad lease with high prices and bad terms for a Laundromat would be the biggest “red flag.” This includes “market rate” options. Also, any agent requesting a non-disclosure agreement should state your acceptance is contingent upon verification that the broker has a valid listing. Finally, any information provided to you that understates expenses or exaggerates income should be a serious red flag.
Steinberg: There are some “rule of thumb” metrics that act as a guide. These are certainly not set in stone, but there should be a good reason why a Laundromat’s financials would fall dramatically out of the following percentages:
- Utilities, as a percentage of wash-and-dry income: I like to see this between 18% and 25%. It certainly can be lower, but if that is the case, the equipment is normally new, water is inexpensive in the municipality where the laundry is located, or some of the utilities are passed through in CAM changers.
- Labor: 8-10% of total revenue. This is easy to verify by seeing an attendant schedule.
- Repairs and parts: Around 4% of gross income. This can obviously vary based on the age and quality of the equipment.
- Total occupancy costs: I like to see this number as no more than 30% of total income; my real preference is below 25%.
There can be many red flags in a lease, some of which include making sure the laundry has a long-enough term and options, the increases are reasonable, the lease is assignable, and the options are not personal.
Vassiliades: If it had a short-term lease and there was no way to extend it, I would probably take a walk. If there was a known shift in the demographics that would negatively impact the store’s income going forward. Too little parking for today’s business. And an unexplained downturn in sales records for the last three years.
If you missed earlier parts of this story, you can read them here:
Part 1: Reasons the store is available; legal/regulatory issues
Part 2: Market/demographic research; inspections; water/sewer situation
Part 3: State of equipment; labor; financials; target numbers
Have a question or comment? E-mail our editor Bruce Beggs at [email protected] .