Laundromats can be a great business for an entrepreneur or investor to get into. With the lure of relative simplicity, consistent cash flow, a high return on investment, and time flexibility, laundromats are incredibly attractive businesses. The two largest barriers to entry into the laundry business are a lack of knowledge and their high cost. You’re here remedying the lack of knowledge, so that just leaves the cost of buying or starting a laundromat business. So, how much does a laundromat cost?
The typical laundromat costs between $250,000-$500,000, however laundromats can be purchased between $20,000-$1 million+. Loans can be utilized to reduce the initial start-up costs of buying a laundromat, making it more affordable to acquire a laundry business.
In order to understand how much a laundromat costs, you need to understand how they are valued. Let’s explore that first. Then, I’ll show you how the variables involved in calculating a laundromat’s value each affect the cost of the laundromat. Finally, I’ll give you some options to reduce the high up-front costs of buying a laundromat.
When you start researching buying a business, you’ll hear something along the lines of “Buy on performance, not on potential” being thrown around. I want to define precisely what that means for you. When we talk about “performance” we are referring to a very particular number. This number is called the net operating income (NOI). The NOI is derived from a simple mathematical formula:
Gross (total) Income – Expenses (before loan payments and taxes) = net operating income
The value of a laundromat, and therefore its cost, is based on this NOI number. In order to determine the value of a laundromat from that number, a multiple is applied to the NOI. The average multiple that is applied to the net operating income to determine the value of a laundromat is 3.5-5 times. In a hot market, those numbers may skew a little higher. In a cold market, those numbers may skew a little lower.
The simple equation to determine the value of a laundromat, then, is:
Net Operating Income * Multiple = Value of Laundromat
Since the multiple will lay somewhere on a spectrum, we 3 main pieces of information about the laundromat to help us determine what the multiple should be. There is more that goes into fine tuning the multiple, but the multiple can be determined with surprising accuracy with 3 pieces of information.
Newer equipment is obviously more valuable than older equipment. Therefore, newer equipment will command a higher multiple. To give some rough estimations for you, equipment that is 0-5 years old will be around the 5x multiple range. Equipment that is 6-9 years old will be around a 4.5x multiple. Equipment that is 10-12 years old will around a 4x multiple. And older will command a 3.5x or lower.
These are just approximations to give you an idea of how machine age and condition will affect the value of a laundromat.
Lease length is critical to the value of a laundromat. If the lease is too short then the laundromat is at risk because it is difficult and expensive to move a laundromat if a lease is not renewed or is unreasonably raised. It’s important that you have enough time to recoup your initial investment and to sufficiently profit in order to make owning a laundromat worth it.
By way of giving you approximations again to help you determine how lease length affects the multiple, let me give you some benchmarks. Again, these are approximations.
A lease with 15+ years remaining on it will be around that 5x multiple. 12-15 years commands around a 4.5x multiple. And 10-12 years warrants around a 4x multiple. Less than 10 years is not advisable but could fetch a multiple of 3.5 or less.
Your rent amount is critical, especially since you will likely be signing on for a long-term lease. It is crucial that your business can support the lease amount. Therefore, when assessing a laundromat’s rent for valuation, the rent amount as a percentage of the gross income is the important metric to factor in.
Again, by way of example and approximation I will give you some rough numbers to help you determine how the rent amount affects the multiple. If rent is around 25% of the income or less, it would be reasonable for the multiple to be around 5x. If the rent is 25-30% a multiple near 4.5x is appropriate. If rent is in the 30-33% of gross income range then around 4x makes sense. And beyond that warrants a 3.5x or less.
Now that we have the 3 variables that comprise the multiple, we can combine them to pinpoint where on the spectrum the multiple lies. This can be as simple as averaging all three variables. However, you can also weight one or two variables more to adjust the multiple more appropriately.
If, for example, a laundromat has relatively new machines and a decent lease amount compared to the gross income but it only has 9 years left on the lease, you may want to weight that lower multiple number of the lease length heavier than the other two. You’ll need a lower valuation to make up for the shorter time to recoup your initial investment and to hedge against the risk of not being able to secure a new, fair lease when the 9 years is up.
This can all feel a little complicated, however, we have a calculator that you can try for free that will help you calculate the value of a laundromat and allow you to download a sharp pdf document with all of the relevant information on it. Give it a try!
Below is a table of laundromat values based on their net operating income and the multiple applied to them. Compare the values of laundromats with different net operating incomes but similar multiples to see how the income affects a laundromat’s value. Similarly, compare the values of the laundromats of similar net operating incomes but varying multiples to see how the multiple affects a laundromat’s value.
Continue reading below to learn how leverage can make buying a laundromat more attainable.
Net Operating Income (NOI)
Although the cost of laundromats can be a high barrier to entry into the laundromat business, this isn’t always a negative thing. It makes it more difficult for competition to enter your market when you buy your first laundromat, and that is a good thing. So, it is those who persevere to find ways to overcome the high cost of laundromats who will benefit from the high returns and flextime laundromats can offer savvy business owners.
There are many ways to overcome this high barrier to entry, including securing financing through a bank or credit union, through a laundromat-specific lender, or through a private loan. I recommend at least speaking with a laundromat-specific lender before you buy your first laundromat. They will be a knowledgeable and connected teammate for you as a new owner. And they will be motivated to help you succeed because when you succeed, they succeed!
Read about the 9 best ways to finance a laundromat deal below. You’re only limited by your own knowledge and creativity when it comes to ways to buy a laundromat. Get those creative juices flowing with the article below!
Read More: 9 Ways to Finance a Laundromat Purchase
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