RIPON, Wis. — “Plans are of little importance,” Winston Churchill once said, “but planning is essential.”
Of course, Churchill meant that plans are often not enough. Instead, you must plan for any situation that may come up. The same is true when deciding on an exit strategy or succession plan for your coin laundry business.
First, decide whether you want to sell the business outright, or perhaps have a child or other relative take it over.
SELLING YOUR BUSINESS
If you decide to sell it outright, you should start planning about five years out. Maybe you’ll decide to sell six stores and keep one or two to give you a steady income stream in your retirement. You need to think about which stores to keep and which to sell, determine when is the best time to sell and so on.
Coming up with an appropriate and fair selling price is an important part of the selling process. There are many factors that go into determining a fair price, such as demographics, store visibility, parking and competitors in the area, including new coin laundry businesses set to open since those businesses can have a big impact on your future cash flow.
But the three key factors that go into determining what is a fair price include the net cash flow your business is generating; the length of time left on your lease; and the age of your equipment.
Let’s look at the three main factors individually:
Cash Flow — Most lenders in the laundry industry do evaluations based off a Laundromat’s EBITDA, or earnings before income, taxes, depreciation and amortization. That gives you a good idea of the real cash flow the Laundromat is generating. Valuations are usually based on a variable of EBITDA that usually ranges from two to six times, depending on a variety of factors.
Lease Length — The length of a lease is the amount of time the buyer will have to recoup the purchase price. Thus, the longer the lease, the better EBITDA multiplier the buyer will pay for it since he or she will have longer to recoup their money. Ideally, buyers will want to purchase a Laundromat with a 10-year base lease and two five-year options. If your lease is nearing its end, as a seller you’ll need to allow yourself adequate time to negotiate and extend that lease, in order to increase your selling price.
Equipment Age — You’re also going to get a better multiplier of EBITDA if you have equipment that is newer. For instance, if your equipment is 4 years old, potential buyers know that the equipment should last them another 11 years. But if you are trying to sell the business with 14-year-old equipment, the new owner is going to have to replace that equipment almost immediately. And that can create a large capital expenditure for him or her.
In short, you need to think of the investor’s return on investment in planning your exit strategy, and you need to think long-term. Years before you’re ready to retire, you need to decide when to start renegotiating your lease or looking at getting options added to get you a better valuation for your business when you sell. You also need to think about replacing some aged equipment and putting in new equipment that will give you a better multiplier at the time of sale.
Check back Monday for the conclusion!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].