January 11, 2021 at 11:56 am #3147
I’m researching getting into the Laundromat business and have quite a few quick questions.
First, I keep reading that this is a 25-30% profit business. Is this reality? Does this cover the equipment depreciation? It seems to me that this is a huge fixed asset cost business and depending on longevity of equipment I could easily see accruing of that cost eating a good chunk of the estimated profit over time.
Second, on equipment, how long do commercial machines last? I’ve seen figures from 5 years to 15 years? This could dramatically impact expected return.
Third, I’ve heard & read that many deals are suspect as it’s common in the industry that revenue figures aren’t very reliable (even with using water usage to estimate sales). I’m a little worried that I’m going to be sold a business with a 25% estimated profit at 100k/year that ends up being a 10% business with end-of-life machines and an actual revenue point of 80k/year vs 100k. Any tips or warnings?
Is it worth it to just bite the bullet and start with new machines? Are there any synergies there? Or, would you recommend just replacing existing machines as they wear out?
January 13, 2021 at 5:27 pm #3179
Let me see if I can answer a couple of these Tom. Yes this business can be a 25% to 35% ROI business and in some cases you can keep 25% to 50% of the gross sales as net profit. And in some cases you can lose 25% to 35% every month. It’s like any other business. If you run it lean and mean, the profits are great. If you think this is a passive income type of business, well then you may lose some cash. There are way to many reasons either way to quickly type out and my typing sucks to be honest.
I believe that depreciation is a bonus and I never count that into any proformas. I need to be able to profit with or without depreciation.
Small chassis washers like top loaders or small front loaders that are not bolted to the ground tend to have a shorter lifespan. I would guesstimate at 5 to 10 years on those. But the older ones that are 20 ish years old are tanks and as long as you can get parts they do last. That’s my opinion at least.
The hard mount larger front load, that are bolted to the ground, can last 20 years or more if you are handy. That being said most 20 year old hard mounts need to be replaced simply for the amount of water they use. They are not efficient at all. Considering that your only real “cost of goods” are utilities, you should try and keep that expense below 15%. To do that you need newer equipment.
Buying an existing laundromat can be tough. You need to really do your homework and find ways to verify income. You need multiple ways to verify, utilities (older equipment could be 20% to 30% of laundry sales and newer equipment 13% to 19%), P&L’s, taxes, deposits, bank statements, do laundry in the store, ask to go on collection days with the owner, and ask for 2 or 3 years of collection sheets. Use all these tools, not just one. If they all make sense, or they don’t all make sense, then you can make a decision.
As far as replacing equipment. That depends on what’s there. Maybe replace a row or maybe all. That’s a more complex discussion. Some people like to replace all and start with a fresh new store, some don’t. And I’m pretty sure if you ask Jordan he would have a similar response. He retooled and rehabbed a store and it never performed as promised. So you need to be realistic on the expectations and make sure you can break even on 2 turns at least.
I hope this helped a little.
January 14, 2021 at 6:58 am #3194
Awesome feedback, thanks.
The reason I bring up depreciation is to see how it is commonly reflected in reported income. My concern is that if you’re getting a Cash Basis report of income it could be substantially below what you’re really making. For example:
Let’s say you have 200k in brand new machines that will last 20 years. This mean roughly you’re losing 10k a year in Asset value that you’ll eventually have to replenish. So if you are getting report of let’s say $50k/year in income yet that $10k depreciation isn’t included, then you’d really only be making $40k/year.
Probably sounds nit-picky but the thought of making 25-30% on my money with almost no work at all makes me really skeptical. I mean why would someone ever sell one?
Again I appreciate the answers in your post. They’re really helpful.
January 14, 2021 at 6:24 pm #3216
This part of your comment raises my attention, “with almost no work at all”. Contrary to what most people not in the industry believe, this is not a passive income type business. You actually have to work at it. You will be taking phone calls at all hours, going there unexpectedly, fixing machines, advertising, doing office work, cleaning when the cleaner doesn’t show up or if attended, taking entire shifts when an employee doesn’t show. Don’t get me wrong, some people are really good at running several laundromats with little input. I personally don’t know any of those owners and I know a ton of owners.
When evaluating the numbers, you will most likely be looking at a profit and loss statement that doesn’t show depreciation. When you make an offer you will ask for a due diligence period and you will ask for a handful of documents that support that P&L. One will be the last 3 years tax returns, then you can see the depreciation. In my experience I haven’t heard of any laundromat owners showing depreciation as income when it comes time to sell. Usually they sell when the business is at its lowest point and someone will have to come in and clean up the laundromat and retool the laundromat. Every once in a while you can find a profitable location for sale. I’m speaking from personal experience in my city, other cities could be different however.
You are right in that laundry equipment loses value and has to be replaced. Equipment is really expensive and needs to be considered. I think once you get in some deals you will be amazed at how little information they have to verify sales data. I often have wondered how some of these owners have been able to make it so long knowing so little about their own business.
January 15, 2021 at 7:41 am #3219
The “almost no work at all” is more of a reflection of my availability. My wife and I both have full time, career-type jobs and so can’t/won’t be able to spend our days at the site but answering e-mails, texts, making appointments etc is totally anticipated. So most of our focused attention will be nights and weekends.
SIde note, I’m sort of hoping my son will jump in and learn the business and possibly take over the management of the Laundromat(s) after we get them settled in.
You did hit on one of my concerns on buying an existing laundromat, which is the motivation to sell a successful business right as the equipment is getting ready to fail or otherwise need replaced. I would hate to buy a $200k laundromat only to have to buy another $150k in machines over the next few years.
Odd side question, is there a resource that could teach you how to fix the Washers/dryers? All I’ve seen so far on videos is to shadow the repairman when you call them out and just learn from them.
January 16, 2021 at 7:21 am #3272
There are some videos on YouTube and some manufacturers have really good repair manuals. When you buy the laundromat you will want all manuals the owners have. If they repair their own machines, work in a period of time they can show you how to repair. Otherwise shadowing a repair man is helpful, going to any distributer events with service schools is also helpful.
January 18, 2021 at 10:09 am #3439
Good stuff, thanks.
February 12, 2021 at 9:03 pm #3974EmersonParticipant
Tom you raise a good topic on being prepared to reinvest in equipment.
To your point when the ratios are quoted it may not factor in that equipment will need to be replaced.
I am familiar with this in a different industry where people start off doing well but then do not account for or prepare for the need to buy new equipment.
When the time comes to buy new equipment they may not be in a. position to do it or may not be willing to do it. Suddenly the previous 5 to 10 years are not as profitable as they thought.
At this point they often turn to a partnership with an equipment supplier that provides the equipment for roughly 50% of the revenue. A common technique is to offer to buy all the old equipment ( a big relief) then to provide all fresh new equipment at no cost to the business, but for roughly half of the revenue.
Perhaps what I am describing does not relate directly to your question but I think the similarity is if a business is not planning for the equipment replacement of machines that have a generally known lifespan it may be over estimating the % of profit.
Most of the valuation formulas or approaches for a mat factor in the age/condition of the equipment, but I would guess it is possible in the face of a decent cash flow to be tempted to overlook that factor as a buyer if we don’t curb our enthusiasm.
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