How Much Is your Laundry Worth? Part 1
In this multi-part series, we’re exploring the most common metrics together and arm ourselves with the best possible understanding of how, when and why each part of the valuation is used.
How much is your laundromat worth?
For private and public businesses of all sizes, there is a whole language and tradition around the pricing of productive assets. Laundromats are typically a combination of hard assets and positive cash flow, so many business people, especially those who manage a variety of private or public equities, already have the tools on their toolbelt to arrive at a reasonable market valuation. In this multi-part series, we’re exploring the most common metrics together and arm ourselves with the best possible understanding of how, when and why each part of the valuation is used.
#1: The meaning of “Asset Sale”
An “asset sale” does not imply that only tangible assets are being sold.
Almost every sale of a laundromat is bought and sold in what is typically referred to as an “asset sale.” An “asset sale” is not necessarily what you are buying – but it is certainly how you are buying it. Laundromats are purchased in this way so that the new owner can start a fresh depreciation schedule and possibly take Section 179 expense elections. These GAAP standards and tax treatments dramatically reduce the amount of taxable income for the buyer. We’ll talk more about this under “Net Income.”
We can all agree that a laundromat with brand new machines is worth more than a laundromat with 20-year-old machines. Much like a 20-year-old car, outdated machines can sometimes be more expensive to keep operating and repairing than they are to replace. Because of this, the value of the assets, specifically the washers and dryers, often become a central talking point of the valuation for any laundromat.
There’s a good argument to be made for calculating the value of the assets as a discrete part of the purchase price – even if that number mostly exists in your head. It’s true that the buyer and/or the seller often conflate the machinery and the earnings into their valuation multiple, but they’re also both aware that the machinery is adding or subtracting some amount to the earnings multiple. For this reason, it’s best to get a good idea of how much life is left on the equipment and get a decent appraisal on what the machines are worth.
Balance Sheets are designed to track assets and their depreciation or Section 179 deductions. If a balance sheet is detailed and in proper order, it should show all the assets of a business (both tangible and intangible) along with depreciation taken and depreciable value remaining. Because of this, experienced investors might ask for a balance sheet when you’re trying to determine the value of your assets.
As a buyer, the “earnings multiple” that you buy from the seller will likely end up on your balance sheet as a variety of intangible assets like “Goodwill” or “Covenant Not To Compete.” Focusing too heavily on the names of these line items can be a trap. These intangible assets are just how businesses account for and then depreciate the entire purchase price of an asset sale. The “Trade Name” and “Non-compete” may be worthless to you, but it’s likely that your lawyer and your accountant will insist that you include them as line items on the purchase price. This is standard practice and could be helpful in the case of an audit or any future scrutiny of the purchase.
Summary: Laundromats are not just valued as the sum of their assets. They can be worth much more than the machinery or – in the case of a bad lease agreement – even much less than the value of the equipment inside the building. Whatever the case is for your laundromat, the value of the assets is a major consideration in finding the true market value.
In My Experience: The values assigned to the line items on the “Closing Statement” are important because this document becomes the basis for building the buyer’s balance sheet. There are real tax implications for the number assigned to every asset. Because of this, you’ll want to understand which line items are most beneficial to be higher or lower for your situation. For Example: “Goodwill” typically has a 15-year straight-line amortization requirement, but “Equipment & Machinery” can take a Section 179 Expense Election and apply to the first year of tax returns, so the value applied to these line items in your Closing Statement can dramatically increase or decrease the amount of Net Income you’ll need to claim and pay tax on. Instead of focusing on the name of each line item, it would be more strategic to understand the depreciation options for each line item.
#2: Leasing or Owning the Real Estate
Most laundromat owners do not own the building in which they operate. Instead, they are operating on a lease of the building from a landlord. This can be problematic since washers and dryers cannot easily be moved from one location to another. Depending on the age and value of the machinery, they may actually be worth less than the substantial cost to have them uninstalled at one location and reinstalled at a different location. This is part of what makes the lease so important to a laundromat transaction.
My new friend Dan Brinderson, owner of 10-store laundry chain Express Coin Laundry in California, looks for the following lease situation: “A five-year initial term with at least four options to extend for an additional five years, for a total of 25 years.” This agreement is particularly useful because it gives both parties the initial five years that they need to even make the commitment, but then it gives the laundromat owner an easy way out if after five years the location performs poorly. A 3% annual price increase with the option to reset in value after the first 10 years is a good way to protect both parties from major shifts in the market, but the reset part of this clause is typically only used for major market shifts.
Most landlords will require some sort of personal guarantee, which is a clause that makes the owner personally liable for the lease, but it’s important to dull the fangs on this biting clause with a limit on this liability. Brinderson shared that landlords are usually willing to compromise on this clause with a seven-month personal guarantee instead of writing the guarantee for all five years. When enacted, this limit to the personal guarantee gives the landlords seven months to find a new tenant, which is a reasonable amount of time for them to find another willing candidate. In case the location isn’t working out for the laundromat, this is much more reasonable than being personally responsible for five years of a losing location. Perhaps most importantly, it prevents the landlord from a “not my problem” sort of attitude if things go poorly for the laundromat.
Common Area Maintenance (CAM) is another lease issue that laundromat owners have to deal with, especially with professionally managed commercial properties. CAM fees can get unreasonably high, so it’s a good idea to put some sort of growth cap or limit on these, which provides an incentive for the landlord to keep these costs down. If the parking lot needs to be resurfaced in the near future, this may be especially important.
You can probably see that there is plenty of room for things to go wrong for both the landlord and the laundromat owner in these agreements, so having trust already established with the landlord can be an enormous advantage going into the conversation. In the case that the commercial property is available, I highly recommend buying it, especially since the SBA offers a special SBA 504 loan that gives subsidized interest rates and preferential terms for commercial real estate transactions.
Summary: Lease terms can be a deciding factor for the value of a laundromat, especially if the lease isn’t long enough. Try to get 25 years (in five-year terms) and a limit on the personal guarantee as well as the CAM fees. If the property is available for purchase, consider owning it.
In My Experience: In my view, if you can own the property that your laundromat is located on, then you will substantially decrease the existential risks of your business and substantially increase your security for the long-term investment that is a laundromat. When we purchased our chain of three laundromats, the seller owned two of the properties and although they were appraised and priced separately from the laundromats, we were still able to purchase the properties and fold them into our LLC that files as an S Corp. This reduces the administrative overhead of having a separate holding company and its tax advantaged for owner operated businesses that regularly have large amounts of Net Income.
