So you want to buy a laundromat business, but maybe you’re afraid that you’ll buy one that is failing and not know it until it’s too late. They are cash businesses, after all, and it can be difficult to verify how much money a laundromat really makes. You’ll definitely want to know exactly how to verify how much income a laundromat is making and how much its expenses are. But, if that’s all you do, you may miss facts that prove to be catastrophic to your business.
It’s important that you determine the trajectory of a laundromat business in addition to its income and expenses. In order to do this, you must look at the income, expenses, and utility usage over time. The slope of those numbers over time will tell you if a laundromat is thriving, stagnant, or dying.
Verifying a laundromat’s trajectory is the third pillar of laundromat due diligence. All 4 pillars of laundromat due diligence are crucial for buying a laundromat successfully, the right way the first time. You can learn about the first pillar and second pillar of laundromat due diligence and come back to this one if you haven’t done that yet.
Just as important as discovering the trajectory of the business is asking the question, “Why?” Why has business been growing and what can I do to help it continue to grow after I take over? Why has business been stagnant, neither growing nor declining and what can I do to jump-start growth after I buy it? Why has business been declining and what can I do to reverse the trend, level it off, and begin growing it again if I buy it? The “Why?” question is critical.
Determining a Laundromat's Trajectory
Below is a video of the things to be looking for in a good laundromat. We’re trying to determine if your laundromat is a good one, a bad one with potential, or one you should avoid. That video will be a huge help in doing that. But on to determining the trajectory of a laundromat.
1. Determine the Laundromat’s Income Over Time
When you do due diligence on a laundromat, you definitely want to verify how much income a laundromat is making. But verifying the income only gives you the big picture. We need to introduce the element of time into our laundromat analysis.
Let’s consider a quick example. Let’s say you get financials from a seller that says that the laundromat made $100,000 of gross income in the last year. Maybe the net is $20,000. It’s a solid, though not perfect laundromat, and we determine the proper multiple is 4.5. Accordingly, we offer $90,000 ($20,000 x 4.5 multiple). Sounds like a pretty solid deal.
However, what if we introduce time into the equation and plot the monthly income? Notice the following income:
You can see that the average income for the year is $100,000, but it’s not very reflective of how the business is actually performing when you take over.
In this scenario, I would probably take the last 6-7 months and extrapolate the income for a year from those numbers.
However, that’s only half of the battle. Our next task is to determine what happened around June to make the income decrease so dramatically. There are a variety of reasons that could cause this, such as a new competitor, the owner getting sick, an owner’s death, loss of a key employee, and more. The point is, we need to search out the “Why?” Once we’ve determined the root cause, we can make a determination as to whether or not we think we can overcome those reasons. If we think we can, it’s time to put a plan into place as to how we’re going to do it.
2. Determine a Laundromat’s Expenses Over Time
Income is only one variable, however. The health of a business is not determined by how much money it brings in, despite what the gurus tell you. Gross income can be a great number to brag about, but the only number that really matters is the net income. In order to determine the net income, we need to also determine the expenses over time.
Let’s take our previous example of a laundromat that brought in an income of $100,000 over the last year but saw a steep drop-off of income in June. To get a fuller picture, we need to see what the expenses are doing during those times, too. For example:
The plot thickens again! It turns out that even though the income when down dramatically in June, so did expenses. In fact, the laundromat has a net income that’s greater in the last six months than in the first six months.
That’s great news for the laundromat! However, we need to follow through with our due diligence and find out “Why?” the expenses dropped so much compared to the income. Perhaps they decided to go from fully attended to partially attended or from partially attended to unattended. We don’t know (mostly because I made this up), but the point remains, we need to find out the “Why?”
3. Determine the Utility Expenses Over Time
A final step in the third pillar of laundromat due diligence is to plat the utility usage over time. Typically, utility bills should be in the 15-20% of the gross income range. It’s good practice to plot the utility expenses to ensure there is nothing amiss. It’s fairly easy to do. When you request the utility bills, just plot those numbers into a spreadsheet and make sure they follow the general trajectory of the income. If they don’t, it’s time to pull out our old trusty tool, “Why?”
Buy With Your Eyes Wide Open
This third pillar of laundromat due diligence, determine the laundromat’s trajectory, is one of the most overlooked and potentially costly steps when buying a laundromat. Don’t make the mistake. Take the time to plot the data you receive over time and see which direction the business is heading. It will help you determine your offer price and your strategy once you take over.