CHICAGO — Understanding store valuation—determining the fair market value of a self-service laundry business—is key to the investor planning to buy or the store owner looking to sell. American Coin-Op spoke to three experts this month about the topic, including how the coronavirus pandemic has impacted store values.
John Vassiliades is a licensed real estate and business broker, and principal of John Vassiliades & Co., based in the Chicago area. During a career spanning more than 40 years, he’s been a multi-store owner as well as worked as a commercial equipment distributor, manufacturer’s representative, and executive director of an industry association.
Vassiliades says there are several valuation methods, and they’re relied on by different organizations. For example, the replacement value of a business is primarily relied upon by insurance companies. The depreciated value approach is primarily relied upon by banking. The market value approach is primarily relied upon by the real estate industry and is based off comparables in the market.
“We like to use the income value approach for evaluating businesses, because that really tells you what type of return you’re going to get for your investment,” he says.
Net income is annualized and then a return on investment (ROI) is calculated from the annual net income, says Carol Dang, whose California-based Elite Business Investments specializes in coin laundry brokerage services and equipment sales. She’s been in the laundry business since 1983.
“That figure can be anywhere from a 20% ROI to 40% ROI or more,” Dang says. “If the store is in need of equipment, that dollar amount may play a role in where the ROI will land.”
Larry Larsen’s more than 40 years of industry experience includes equipment sales, store development and multi-store ownership/operation. He’s a California-based real estate broker who’s acted as appraiser and consultant in hundreds of Laundromat valuations.
He believes that using a multiple of net income to determine a Laundromat’s value isn’t reliable.
“It is useful in the analysis of the purchase of residential and commercial income property, but not in the evaluation of an income flow,” Larsen says. “Its familiarity to many investors has been adapted for use by Laundromat salesmen looking for a simple method to be used in their sales presentations, but really is not appropriate to placing value on a self-service laundry.”
Larsen offers an example: There are two Laundromats, each of which nets $10,000 a month. Owner of Store A does his own repairs and cleaning, operates 15-year-old equipment and has a 20-year lease. Owner of Store B expenses all repairs and cleaning and operates 3-year-old equipment but has a lease that expires in two years and can’t be extended. “Based on a purely net multiple, how can both stores be worth the same?” he asks.
CONTRIBUTING FACTORS
What aspects of a laundry—the lease, equipment, level of profitability, the surrounding neighborhood, something else—tend to have the greatest impact on its valuation … or devaluation?
All of these play an important role in laundry valuation, Dang says.
“The lease is extremely important, it can make or break a store. It is important to look at the length of the lease and the increases in the lease as well as [triple net] charges. Equipment is also important. However, if the store is profitable and has a good long-term lease at a reasonable rent, then replacing equipment should only add value to the location and usually will increase the profit.
“Knowing the surrounding area is very important. You should know if there are any new laundries being built. Or are there stores closing, and why? Is the community thriving, or is it a community that has some issues with gangs?”
“All of the ones you mentioned actually have an impact and are weighted in the application of the net cash flow to determine what the value is of the business,” Vassiliades says. “For example, if you’re looking at the equipment, anything newer than 10 years would impact positively on the valuation. If the lease is less than 15 years, that would be a negative. Anything more than 15 years would be a positive.”
Larsen says the most important aspect of value is neighborhood demand or need for a Laundromat, often determined by a professional demographics study.
“Demand would be followed by the provisions and terms of the lease, adequate parking for customers (at least one unrestricted space for every 400 square feet of a store) and, finally, visibility,” he says. “Existing competition and planned competition need to be carefully included in any due diligence process.
“An often overlooked aspect of value of a Laundromat investment is potential; can the income be grown in a reasonable and likely effort?”
Check back Thursday for Part 2!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].