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.
“You’ll notice at the beginning, there’s really nothing. No business, no income. Then, the business starts to go up, it levels off, then it starts to gradually decline.”
The seed or development stage is the birth of the business. “For some reason, there’s some catalyst that drives us into business as entrepreneurs,” Brunckhorst says, citing the writings of The E-Myth and The E-Myth Revisited author Michael Gerber. “And we say, ‘We can do this better than somebody else.’”
Oftentimes, an entrepreneur is working at a job and becomes dissatisfied with what they’re doing or are looking for a new challenge, so they start their own business.
They analyze the industry, develop a business plan and do all the preparatory work leading up to the launch.
“I think of a launch kind of like a rocket ship almost, sitting on the launchpad. When the doors open up, it takes off,” Brunckhorst says. “But did you ever notice that when rockets take off, they don’t just go straight to the moon? They kind of just sit there for a little bit, barely moving, and they slowly start creeping upward, a gradual rise.”
And as they build momentum, there’s a resistance that they have to push through. “It’s like when a rocket breaks through the sound barrier. All of a sudden, boom! The resistance starts to fall away and the business starts going up, almost effortlessly.”
But then things reach a point where the owner is concerned their business might be growing too much, so their instinct is to pull back.
“They know for their business to really operate properly, it has to run on systems,” Brunckhorst says. “They want their systems to take over that operation and see how that goes. And they prepare for what’s next, the shakeout stage.”
It’s at this point that the owner identifies certain aspects of the business that aren’t working and revises their systems to compensate. Also, the owner has probably reached the point where they’re working less in the business and more on the business, enabling them to look into expansion of services and/or locations.
As the cycle moves from expansion into maturity, revenue is consistently high and ownership can take time off to enjoy the spoils of their labor. But soon, almost imperceptibly, sales start to fall. Owners might blame it on the economy, the competitor that’s retooled their store down the road, or demographic changes in the neighborhood.
“Whatever it is, they’re starting to run out of time,” Brunckhorst says. “When they run out of time, they realize it because the landlord comes by and says, ‘Hey, you’re out of your lease,’ takes back the space and you’re done. That’s the life cycle.”
KEY TO MAXIMUM ROI IS CREATING VALUE
So how do you set up your business to maximize your return on investment if/when the time comes to sell it? It’s about creating value, Brunckhorst says.
Business valuation is done in one of three ways: the cost approach, the intrinsic approach, and the income approach.
The cost approach to value calculates “the cost to build that business. If it’s a Laundromat, how much did it cost to actually build that Laundromat?”
The intrinsic approach to value, usually used for placing a sale price on a business that isn’t making a profit, takes into the account the amount of time remaining on the lease, the leasehold improvements, the utilities, residual value remaining in the laundry equipment, etc.
The income approach to value is based on how much income the business is producing, and is how the “vast majority” of operational U.S. businesses are valued, Brunckhorst says.
“When we talk about income valuations, there are a lot of different methods. One of the most finely tuned methods to the income approach is by using something called a Store Value Multiplier (SVM),” he continues.
The SVM uses the average monthly net operating income and a base multiplier of 50 adjusted up or down based on multiple factors. The typical SVM is between 45 and 65, and the store value is equal to the SVM multiplied by the average monthly net operating income.
Factors that cause 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?”
Check back Thursday for the conclusion!