Acquisitions and identifying true value

[Dan Vineis]

Hello everyone! I’m looking for some advice about a laundromat I’m looking at. There are 26 washers various sizes and 20 driers. 4 of the washers are down. He wanted $35,000 for it and he gave me his tax returns saying it made $124,000 in gross revenue last year and $15,000 in profit. The problem is he doesn’t have any pay stubs or financial statements to back it up. There is a lot of potential for the laundromat and I think I can add a lot of value to it. so I am still interested even though it’s a strange situation. I was thinking I would make him two offers. Offer one would be a cash offer for the value of the machines. If anyone knows of a good way to go about estimating machine values I’d appreciate it. The second offer would be $30,000 with him holding the note I’d put 10% down and it would be a none recourse loan so if the finances don’t add up I’d have minimal losses if I was to give it back. Any input would be appreciated thank you!

[Matt Humphries]

No pay stubs = no trust in his financials. That’s the way it works (unless you have inside info or other docs to source)

For estimating machine value – a few ways. You can look at what used equipment is selling at currently (there are resale cos via google) and apply broadly to the setup to give you an idea….obviously you want to discount this amount quite about due to markup from re-sale, etc. Alternatively, if you have the data, specifically the make/model/serials you can figure out approx when they were made and use some of the IRS depreciation schedules to find what depreciated value is per machine. These can give you an estimate of what liquidation value would look like.

Final thought….he wants $35k – this doesn’t mean he’s going to get $35k – spell your case out as to why you believe its not worth that. At $15k “claimed profit” that a 2.3x multiple which is on the lower end of ranges but could still be high depending on a variety of factors.

Final final thought – this could be a great deal if things were just mismanged and the financials are verifiable. He’s saying he’s running at a 12% margin, which at face value seems a bit lower than what a well run mat should earn (20%-30% ballpark). Need to look at why – competition, high rent, old machines, etc. These are critical to actually being able to implement a potential turnaround.

[Dan Vineis]

Thanks Matt Solid advice I appreciate it! All the machines are 18 year old wascomats except For one it’s 15 years old. I think I’ll have to go with the owner financing route to limit my risk. But thank you again for answering I am meeting with him again next weekend. So I’ll do an update post about how that turns out. I appreciate your time and insight!

[Dev]

Dan, Just curious any follow up to your offer? Thanks.

[Dan Vineis]

Hey Dev yes I am actually closing on the laundromat this week. I ended up getting him down to $20,000 but I am paying cash. I ended up figuring out my own way to source his income so I was fine paying cash. I used the fact he didn’t have any bank statements to talk him down in price a little bit. The way I figured out his income was I went to the water department. I looked at his usage of water over the past year. Then I looked at the average gallon per wash for each machine in the laundromat. Divided the usage of water by how many gallons per wash to figure out how many turns a year he was getting. Then I multiplied that by the vin price. I ran a few different scenarios and they kept adding up to around what he was saying the gross revenue was. The real value to this store was how bad it was managed. He was paying someone $75 a week to unlock the store and turn on the lights. He was paying someone $100 a week to turn off the light and lock it up at night. First day of ownership I have my lock smith set up to put a timed lock on the door and I’m going to install a timer for the lights. This will cost me between $900 and $1,000 to do depending on if I want to install the timer on the lights my self. Instant $9,100 a year profit increase. There is a lot of value add potential like that example that made me fell more comfortable moving forward with the deal. Any questions fell free to ask 9735132571.

[Jason Dodge]

How’s the lease Dan? Before you jump in, make sure that lease is proper. I would have an attorney take a look at the lease. I signed a lease I shouldn’t have, sold that business and I still have risk to this day because of that lease. The leasing manager told me one thing, the language in the lease said something different, when I sold the business the building owner refused to take me off of the lease even though I had a qualified buyer. The lease is a big deal, so treat it as such. It sounds like that location will be in need of equipment soon. The lender will require your lease to be longer than any loan term you take, just a consideration. Remember that laundromats can’t be moved, so you want a long term lease locked in.

Jason

[Dan Vineis]

Hey Jason thanks for the input. I did have my lawyer look at the lease and we changed some verbiage around. We did make sure that I could have a qualified buyer take over the lease at anytime. Also they want to sell sometime in the next 2 to 5 years so I have first right to purchase and I must be shown any offer the building gets and I have 72 hours to match. The lease is for 3 years with two extensions. I was going to go for 5 years with two extensions but since they where planning on selling in the next few years. I focused on the language that pertained to the sale of the building. My plan is to negotiate the lease again in three years and make it longer if I already didn’t buy it by then. Do you think 3 years with two extensions is long enough to get financing? There is also a good chance I’m not replacing the machines until year 3 anyway but in case I change my mind I didn’t think about that affecting financing options.

[Tom Maricle]

Side note from my other business purchases. I always try to get at list a minimum amount of Owner Financing not so much to reduce my cash outflow but so I’ll have some of their money in my pocket should some unexpected bills come in that they should have covered and/or material mistatements in their sales pitch that I can document.

For example I bought a bar about 15 years ago and had the owner finance part of it. A few months later a $1,300 bill came in that I just withheld from my next payment to the previous owner. Also had a friend in a similar situation where the seller of the business lied about expenses and so my friend documented it and let him know he was going to take a fair amount out of the debt the old owner was holding to compensate him for the loss in anticipated income.

[Jason Dodge]

Equipment is really expensive and can be financed up to 10 years in most cases. You would have to ask a lender about the 3 with two options, I don’t have the answer to be honest. A small laundromat could be $200k if you replace everything. That would be a hefty payment at 36 months, but the lender may consider the options and they most likely do consider those. The industry standard is a 20 year lease or a 10 year with two 5 year options. The rationale behind that long term lease is that it is very difficult and very expensive to move a laundromat. So you want a long term lease to lock in your time there. In most cases people just close up if they lose their lease. My lease did state that I can assign the lease to a “qualified” buyer but the landlord decided to stick it to me and be unreasonable in defining a qualifying buyer. I do have protections in place and if push comes to shove I think I have a legal case against the building owner. I just want others to learn from my mistake.

The right of refusal is smart, owning the building is the way to go if you can.

[Dan Vineis]

Thanks Tom I did present him with two offers one being owner financing. I pitched 90% owner financing but since he was leaving the state to retire he did want to hold that much of a note on the business. In case I changed my mind and wanted to hand it back to him wile he was no longer in the state. I didn’t even think to ask for a smaller amount like $5,000 in case there was any notable discrepancy’s in his earnings or expenses. It’s to late to apply that to this laundromat but I am definitely going to ask for some form of owner financing in my next business purchase thank you again.

[Dan Vineis]

Your old land lord sounds like a stand up guy Jason haha. I appreciate your input. I wasn’t aware that the standard lease was so long I will definitely make it a point to ask for a longer term lease once my first three years are up. I’ll probably use the inability to get a reasonable loan to ask for a longer lease. Thanks again man really appreciate it very helpful. I’ll definitely give a update after my first month or two of ownership to let everyone know if it blew up in my face or ended up being profitable.

[Tim Cheung]

Dan, Good luck in your venture.

Thanks for posting this information of the experience that you are going through.

I’m looking to purchase my first one, but have to get my ducks in line first.

Thanks,

Tim.

[Dan Arnett]

This was a great discussion and I appreciate the mention of at least a portion of owner financing. It is useful in unforeseen bills/incorrect info…….I also find it useful in keeping any promised “goodwill” flowing freely.

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