Laundromat Due Diligence - Jordan Berry's 2 Cents

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 will tell you if a laundromat is thriving, stagnant, or dying.

Just as important as discovering the trajectory of the business is asking the question, "Why?" Why has business been growing, stagnant, or declining and what can I do to help it continue to grow after I take over?

 

Determining a Laundromat's Trajectory

1. Determine the Laundromat's Income Over Time

When you do due diligence on a laundromat, you 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. 

However, what if we introduce time into the equation and plot the monthly income? 

The average income for the year is $100,000, but it's not always reflective of how the business is actually performing when you take over. We could find that it has declined over the last year and the current income could be significantly less than the beginning of the year.

After plotting the income over time, our next task is to search out the "Why?" to determine the root cause of any growth, stagnation, or decline.

 

2. Determine a Laundromat's Expenses Over Time

Gross income is only one variable, however. The health of a business is not determined by how much money it brings in. 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.

To get a fuller picture of our example laundromat, we need to see what the expenses are doing during those times, too. 

What if it turns out that even though the income when down dramatically in June, so did expenses? In fact, the laundromat could have a net income that's greater in the last six months than in the first six months despite the lower income.

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.

 

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. 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, determining the laundromat's trajectory, is one of the most overlooked and potentially costly steps when buying a laundromat.

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