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: How might the state of the laundry equipment currently in use in the store for sale influence the buyer’s position?
Larsen: Age of equipment is often considered by buyers, but the level of use of equipment might be a better predictor of remaining useful life. Ten-year-old equipment installed in a Laundromat doing $10,000 per month will likely be in better condition than 7-year-old equipment installed in a Laundromat doing $25,000 per month. Top-load and “homestyle” small washers will have a shorter life than the larger commercial washers and dryers. Forty-year-old dryers are still in service in some Laundromats.
Steinberg: Laundromats are sold on a multiple of net income. This multiple moves up or down based on various factors. One of the factors is the age and quality of the laundry equipment. The newer the equipment, the higher the multiple.
Vassiliades: It should influence the buyer’s decision, particularly if it needs to be replaced within a five-year period. That will definitely affect cash flows. Usually, a store is paid for at the end of five years, so if the equipment will last five years or more, then the owner will be in a better position to pay for new equipment once the store is paid for.
Q: Is it important to find out what kind of labor the current owner is using to run the business? Why or why not?
Steinberg: The average owner spends a minimum of 4-6 hours a week on their Laundromat. This would entail collecting the store twice a week, setting attendant schedules and filling vending machines. It is important for a prospective buyer to not only understand the current labor the owner is paying, but also find out if the owner is actually working the store as an attendant. If so, an expense should be added to the hours worked by the Laundromat owner or anyone in his or her family who is not being paid.
Vassiliades: Sometimes, it’s better to impute what you think the labor should be going forward, because a lot of old-timers may have overpaid their employees. Going in, there might be an opportunity to put some new employees in at a lower rate. Key factors are to make sure they are legal, and that they are being paid the proper way, and that is by check and not as an independent contractor.
Larsen: In order to evaluate the current worth of a Laundromat, you need to know if the owner is working in the facility and doing his own repairs but not claiming these as expenses on his presentation sheet of income and expenses. You want to compare “apples to apples,” and how different owners detail their expenses must be adjusted. A part-time job of the owner working in the Laundromat should be valued and listed on the expense sheet.
You also need to avoid potential future problems by finding out if the owner is paying cash under the table for workers or claiming them as 1099 workers. The current definitions used by governmental employment departments will likely determine that all workers at a Laundromat are part-time or full-time employees and not independent contractors.
Q: What financials should a prospective owner request from the current owner and review before making an offer? How far into the past should they request documentation?
Vassiliades: Ideally, three years of tax returns if they’ve got it, P&L (profit and loss) statements if they don’t. I know some banks request balance sheets for three years. In addition to that, I would request at least 12 months of actual utility bills and a copy of the lease. Those are the basics, but you could always ask for more.
Larsen: The longer the glimpse into the past, the better the understanding of the business. You can determine trends in income and increases in expenses by viewing the history. The majority of the financials related to income and expenses provided by sellers should be viewed with caution. With the advent of TurboTax, a seller can provide a Schedule C income tax form you are unable to verify.
Steinberg: Twenty-four months of information is helpful, but you should get 12 months at a minimum. It should include collection reports, tax returns, utility bills, attendant labor payments and schedules, vending product expenses, repair bills, parts bills and any other applicable expenses. With regard to the collections, the more granular the details, the better: breaking out washer vs. dryer revenue, or even by machine type, for example.
Q: With the requested financials in hand, what kinds of numbers should the prospective buyer be looking for to justify making the decision to buy and how much to spend?
Larsen: The reason for the purchase should be considered but can vary greatly from buyer to buyer. If the purpose of the purchase is to get Grandpa out of the house because he is driving Grandma crazy after retirement, a location near his home might be more valuable than the cash return on the business. It is also helpful to remember the old adage, “If it looks too good to be true, it probably is.”
Steinberg: Laundromats are sold on a multiple of net income. This multiple varies by geography but generally is somewhere between three to six times yearly net income (before debt service). It is always helpful for a buyer to work with an experienced broker to help navigate the process. Brokers are knowledgeable about those things that can affect multiples and also can assist in the purchase process.
Vassiliades: The return on investment is really not as important as the total dollars you’re going to get at the end of the year. If you highly leverage your money and you get a return of 40%, that doesn’t mean you’re going to make enough money to keep you happy during the year. As opposed to knowing that you’re going to get $50,000 a year after all expenses are paid, and that’s before your loan payments. After your loan payments, you’re going to get $30,000 a year. Is that going to be enough for your time and effort in going into this business? That’s the real-world way of looking at it.
In Tuesday’s conclusion: Sources of information; common mistakes to avoid; red-flag warnings