Steve Erlinger specializes in assisting those buying and selling coin laundries in the Orange County and Inland Empire areas. He is an expert at navigating the many facets of finding, evaluating, and operating a coin laundry business.
I’ve been in a number of Laundromats to evaluate the business and have been asked by a customer or attendant ‘Are you doing an appraisal?’
Most of us are familiar with an appraisal. We normally relate that process to a person determining the value of a home by comparing it to similar homes in the same area. Then, based on recent sales, the appraiser comes up with the value.
So this is this the way we determine the value of a Laundromat? The simple answer is no…..and yes.
You would certainly compare the store you want to buy with other stores in the area but stores that are similar on the surface may not be similarly valued. To a large degree the net income will determine the value of a store. So you need, to the best of your ability, first determine the net income.
This starts the ‘appraising’. Evaluating various aspects of the store and its surroundings is how we determine the ‘multiplier’. We will then multiply that figure by the net income to find the value.
There are several items to evaluate to determine that multiplier:
Demographics– Is this store in an area that will support a Laundromat? A neighborhood that has many apartments or renters, multiple people per household and income below $35,000 is one example of a good neighborhood for a Laundromat.
The Lease– It will take several years to pay back your investment so make sure that many years are left on a lease or have that you have the ability to get a new long term lease. Additionally, and obviously, you want it as low as possible. Gross revenue is a factor, and if it’s high there is some wiggle room, but you want it at or below 25% of your gross revenue. (There are other things to consider in a lease which are beyond the scope of this article)
Age, condition and manufacturer of equipment– If the coin laundry equipment is newer and in good condition the multiplier should be higher. Commercial laundry equipment is expensive and can last for many years so if you don’t have to replace equipment for ten years or constantly fix equipment you are in good shape. The manufacturer should be considered too. Like clothing, cars or furniture there are laundry equipment manufacturers that are better than others. The better equipment will be more efficient, less likely to breakdown, last longer and therefore be a better value.
Utility Costs– Some cities or jurisdictions can have higher utility costs. Gas and electric tend to fluctuate less but water and sewer costs can vary and be quite costly. Flash! Laundromats use a lot of water.
Parking– Some neighborhoods are walker friendly but most will require a decent amount of parking. In short the more parking the better. However, beware, a lot of spots don’t mean a lot of available parking. If there is a nail and hair salon and a couple of restaurants in a shopping center there will be many patrons in need of parking and some using spots for an extended period of time. There is no exact formula as centers vary but be aware of this important benefit or liability to your stores success.
Visibility, Ingress and Egress– Make sure the store and/or sign is visible and from all directions. Ideally you want your customers to enter the parking lot from both or all directions. You don’t want customers to have to go past your store and make a U Turn to get back to it.
General condition of store– In what condition is the floor, the bulkheads and folding tables? Does it need new paint, furniture, ceiling tiles? Will it need new TV’s or security cameras?
Competition– If this is the only store in the area and it’s not likely competition could easily enter the market your multiplier will increase. And it should! The multiplier will decrease given more competition.
The base line for this multiplier in today’s world is 50. Once you have determined the value or lack of value based on evaluating the items mentioned you can add to or subtract from this base multiplier.
Let’s say, in one example, there are many positives to this store and you feel good about a multiplier of 60. The net income is $5,000 per month. This business should be worth about $300,000. In this case you are looking at a 20% return on your investment per year. Pretty good!
As another example a store needs some tender loving care, some new equipment and you will be fighting for business due to competition. A multiplier of 40 sounds better here. This store is making a net income of $4,000 so in this example the store will only be worth $160,000. Better deal, yes!? Maybe, but remember you will invest more money (and time) on top of the purchase price to increase the income. You buy some new equipment, do some improvements and advertise. This costs you $100,000-$150,000 but you eventually get the income up to $5,000 per month. In the end this example gives you a similar return to the first example you just got there in a different manner.
We all get excited about starting a new business; have high hopes for getting a great deal and making a high rate of return. All possible indeed but first, to the best of your ability, determine an accurate net income for the store then be as objective as possible in evaluating the items mentioned above so that you pay a fair price for the store and are fairly compensated for the investment of your time and money.