NEW ORLEANS — Like every small business, a Laundromat must navigate its life cycle successfully to ensure long-term success.
At Clean 2019 this summer, the Coin Laundry Association enlisted Brian Brunckhorst, president of Advantage Laundry Inc., a company with six self-service laundries in Northern California, to discuss Laundromat life cycles and what’s involved when planning for the future.
His session explored equipment replacement and lease negotiations as well as tracking a store’s present value.
There are six stages to a business life cycle, according to Brunckhorst: seed/development; startup/launch; growth; expansion/shakeout; maturity; and decline/renewal.
He displayed a revenue graph to illustrate the sales flow from launch through decline or closure.
In Part 1 of this story, Brunckhorst broke down the life cycle stages and discussed a trio of approaches to business valuation before focusing on the income approach.
Factors that cause Store Value Multiplier (SVM) adjustments can include lease length and terms; equipment age and condition; the number of competitors and their vend pricing; customer/competitor demographics; competitor amenities and parking; and the local cost of living.
“Lease length is the most important adjustment,” Brunckhorst says. “The other one is the equipment age. How old is that equipment?”
A lease length of 15 years would have no effect on the SVM. A length of 16 to 25 years would cause the SVM to be adjusted upward. Leases of 14 years or less would cause the SVM to be lowered, with periods of three years or less causing the greatest subtraction. A lease with no time remaining, for example, would drop the SVM by 30 points.
Using this valuation approach, a store with a 15-year lease and no other adjustments would have a base multiplier of 50. If that store’s average monthly net operating income is $4,000, the store would be valued at $200,000.
“If you had a store with a lease length of seven years, you would be subtracting 4.5 points from the multiplier … and the value of the business would drop to $182,000, just because of the lease. If there were only two years left on the lease, your multiplier adjustment is minus 18, bringing your value down to $128,000. As you can see, the lease is pretty darn important.”
Lease negotiations take place in stage one. “If we know the length of the lease has a huge value on our business, it’s important to have a lease length to allow us to maintain the value of our business over the course of our Laundromat life cycle.”
Lease documents are lengthy and complicated, so Brunckhorst suggests hiring someone to assist you. At a minimum, have an attorney review the proposed agreement. Commercial leases are generally slanted to favor the retail property owner, he says.
When negotiating, keep your cool. Negotiations are always a give and take. Start with your “dream” lease terms (five years to start, with four five-year options, no rent increases and no restriction on property use, for example) and go from there.
“Remember, options give you power,” he adds. “The length of the initial lease gives them power.”
If you make concessions, get something in return, Brunckhorst says. And if you’re seeking concessions, give good reasons for your requests.
Brunckhorst recommends the following when negotiating a lease:
- Minimum lease length of at least 15 years, but preferably 20 or more, including options.
- At least one five-year option to renew the lease regardless of lease length.
- Rent increases no more than once every five years.
- Rent increases to be no more than the increase in the Consumer Price Index, with a 4% cap per year.
- Rent payments to begin at no more than 20% of gross revenue or $2 per month/square foot (including triple net, if any).
- Rent payments without any triple net.
- Right to assign the lease.
- First right of refusal to buy the building.
- Cancellation option in case the building is damaged.
- No personal guarantee.
- Performance clause that specifies if you can’t use the building, you don’t have to pay rent.
- Right to sub-lease the building.
- No limitation on type of use.
- Right to place any signage you want.
- Right to choose the utility companies.
- Exclusivity clause stating that no other business in the building or center can operate a Laundromat or wash and fold service.
- Rent payment includes the water bill.
Equipment carries a separate adjustment factor, Brunckhorst says: “In this particular adjustment, what we’re really interested in knowing is the average age of the equipment in the store.”
For example, multiply the total number of top loaders by their average age to calculate the total age of that equipment group. After doing the same for all other equipment groups (30-pound front loaders, 50-pound front loaders, and dryers, for example), by adding their total ages and then dividing that figure by the total number of machines, you arrive at their true average age.
Equipment age adjustments can add as much as 4.5 points or deduct as much as 10 points from the SVM, Brunckhorst says. The base adjustment for equipment that is 3 years old is zero. If the average equipment age is 2 years old or less, points are added. If the age is 4 years old to 13 years old, points are deducted.
WHEN IS IT TIME TO SELL?
The point at which an established business is no longer making money—decline—is a terrible time to try to sell, Brunckhorst says.
The expansion or shakeout stage is the best time to sell. It’s the point where sales are peaking; a laundry typically reaches that stage sometime between years two and four.
“Your lease length, if you negotiated properly, is still greater than 15 years at that point,” Brunckhorst says. “And the age of your equipment isn’t (greater than) three years, so you’re not getting hit with the two major things that could hurt your valuation. Another thing is that you’re at maximum profit.”
The beginning of the decline stage, somewhere between years seven and 12, is the best time to re-equip a laundry. Most business loans have been retired by that time, your equipment is still useful and has some replacement value, and advances in technology and reductions in utilities offset the cost of debt service, Brunckhorst explains.
“The technology keeps improving and reduces your utility costs … and it extends your life cycle,” he says. “When you re-equip, your expenses drop and you start a whole new life cycle.”
The renewal phase is also the best time to renegotiate your lease.
“You tell the landlord, ‘I’m going to re-equip my store and I’m going to spend all this money. I want to extend and get some more options.’ If you’ve been a good tenant and they see you’re going to put a lot of money into rehabbing the business, they’re very likely to extend your lease.
“It makes it all worthwhile. Then, you get to play the game all over again.”
Miss Part 1? You can read it HERE.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].