CHICAGO — Whether you are buying your second store or selling your fourth store, it’s easy to understand why your stomach is churning. Costly buying/selling mistakes must be avoided. A little bit of tossing and turning is par for the course, but one of the best ways to ready yourself for a key transaction is to get some professional advice.
In lieu of some antacid, American Coin-Op offers a host of buying and selling tips courtesy of industry veterans.
GET A SECOND OPINION
If you are buying a store or building one, having high-speed equipment is key, says Larry Larsen, a managing member of Laundromat123.com with more than 30 years of experience in the ownership, management and construction of Laundromats. Larsen is also a licensed real estate broker active in the sale of self-service laundries.
Get the help of a professional when it’s time to buy, Larsen advises. “Would you buy a used car without having a mechanic check it out?” A broker, distributor, etc., can see little things that you miss, he adds.
Larsen also suggests getting a fee-based second opinion. “For $300 to $500, you can get the view of someone who isn’t worried about getting a commission.”
Most distributors should have the necessary demographic information, he says. This information is also available online. Larsen lists population density, the percentage of renters in the area, and the age of the area housing as demographic keys.
Older housing means no laundry rooms or just small ones, which is good for self-service laundries, he says. “Your major competition will be people with home equipment, not other laundries!”
Don’t focus on population within a ZIP code, but instead look at the number of people within concentric circles of one-half, one and two miles in an urban environment, he advises. “ZIP codes can cover too large of an area.”
To avoid unpleasant surprises, Larsen urges prospective owners to visit city hall and pull permits, as well as ask around to see if any new laundries are going up. Urban owners should mainly focus on the laundries within a half-mile of the store they intend to buy.
“Drive around within a one-mile location of the store and look for vacant spots where a new store might go up. Ask other laundry owners about this. Do the work yourself; don’t rely on your broker to do the research.”
Looks can be deceiving, he warns. Get a copy of the water and other utility bills, tax returns and any record of income. “You also want to look at a store and decide how you can improve it. A store that needs work can turn into a more profitable investment.”
Larsen also believes that it’s crucial to get a woman’s opinion when you are examining the store. “Some men haven’t washed clothes in 20 years!”
When acquiring a store, not getting a fee-based second opinion and not studying the lease are the two greatest mistakes made, he says.
You also need the help of an industry professional when selling, he notes. “The pros know people in the business and can help you find a buyer. I’ve never seen a seller lose money in the long run by getting help. A good broker will help you get every possible dollar.”
Advertising the sale is part of the process. “Newspaper advertising has diminished. Instead, tell other industry members about the sale, go to association events, and use industry-specific websites that feature business sales. It’s also crucial to pass out flyers to other laundry owners within five miles of your store.
“If you have a real estate agent, he can put the store in the [Multiple Listing Service]. The information goes to other brokers who might want to sell the laundry and get the commission.”
When meeting with a buyer, you’ll want to know how much money he/she has and the money source. “I don’t deal with people who are putting up their home as a guarantee to buy.” It’s also important that the buyer knows how much money will be needed immediately after the sale for a deposit on the lease, insurance costs, and even quarters for the changers, he adds.
There are numerous ways to price a Laundromat. In California, multiples are used, Larsen says. For example, an owner can take the monthly net and multiply it by 50 to 60 or up to 75 to 80 to establish a price. When doing this, be careful about your income data and consider the expenses of the new owner. “For example, the new owner may do his own repairs.”
Don’t be surprised if you are asked why you are selling, and don’t be surprised if the buyer bolts if you don’t deliver a satisfactory answer, Larsen says.
“In this economy, people are looking for a good investment. A laundry is a good investment, and a fairly priced store will sell.”
STUDY THE LEASE
Do you like to purchase a store or build one? “With an existing store, you can get an excellent infrastructure,” says Dan Bowe, Speed Queen national sales manager. An existing store can also ease your water and sewer concerns, he adds. “The downside to an existing store is that you’re stuck with the layout.”
It’s exciting to build from the ground up and create your own look, Bowe says, while still having flexibility. The downside to building is utility-cost concerns.
Bowe also advises buyers to work with some type of broker, preferably an industry-specific one. A good broker knows all aspects of the business and can help you understand the lease, he says.
The ideal location should have a large number of renters, low- to medium-income residents and a high population density, Bowe notes. Average age of the rental properties is key.
Take a look at the laundry’s retail neighbors. Is there a good synergy among the businesses? Will their customers use your laundry? Will neighboring businesses impact laundry parking? The broker should play a key role in answering these and other questions, he opines.
Trial counts and trial collections can help establish the value of an existing store, Bowe believes. However, in order to get a fair count, he strongly suggests bringing in a third party to install new coin boxes.
Store evaluations can be tricky, he admits. For example, laundry business is seasonal. Visiting a store during the slow summer business period might cause a buyer to believe business is always bad. Bowe recommends focusing on whether the infrastructure can handle change, and if the visibility is good. Poor parking and bad windows are red flags. “Simply, if the owner hasn’t reinvested in the business, you will have to make improvements.
“The importance of the competition varies between markets, but everyone would probably agree that if there is no laundry near the store, that’s probably more of a red flag than if there is a laundry.”
The most common mistake made when buying a laundry is signing a bad lease. “Typically, you want a 10-year lease with two to three five-year options.” You also need to calculate what the maximum rent will be, he adds.
It’s important to use a qualified professional when you’re selling a laundry, he says. In some cases, a qualified broker may have a number of representatives trying to market your property. The broker can also assist the potential buyer with financing, Bowe adds. “You won’t save money or time if you don’t have a broker.”
Sellers want qualified buyers for creditworthiness and ones having enough cash, he notes. Do a credit check. Because of today’s credit situation, Bowe believes the days of the buyer getting cash by refinancing his house are pretty much over. It’s also standard for distributors and brokers to set the buyer up with financing, he adds.
When pricing your store, one common formula is to take true net sales, more importantly EBITDA (earnings before interest, taxes, depreciation and amortization), and use a multiplier of four to five. “People are looking for a 20 to 25% cap rate of return.”
The average store sells about every three years, he notes. “The best time to sell is winter when you have your best business.” However, a good industry-specific broker can navigate a summer sale and explain the cash flow through the seasons, he adds.
Bowe cautions sellers to avoid two key mistakes: taking on the task yourself to save money and misrepresenting the store income (potentially leading to court cases). “If you haven’t continuously reinvested in your business, you probably can’t expect to sell the store for what you paid.”
Check back tomorrow for Part 2: Know the buyer, and eliminate mistakes