The key to buying your first laundromat right the first time is doing proper due diligence. It is critical to have the right information about the business and make a proper valuation based on that information. Being off just $500 per month could mean overpaying by $20,000-$30,000. It's not hard to do.
So how do you do proper due diligence to ensure you are buying the right laundromat for you at the right price? You need to go through the 4 Pillars of Laundromat Due Diligence. The 4 pillars are:
- Determine the laundromat's income
- Determine the laundromat's expenses
- Determine the laundromat's trajectory
- Determine value-add opportunities
Pillar 1- Determine the Laundromat's Income
The first Pillar of Laundromat Due Diligence is determining the laundromat's income. We need to know how much money is coming into the laundromat.These are the three main methods of determining a laundromat's income:
- The utility usage method
- The coin count method
- The document method
The Utility Usage Method
The first way to verify a laundromat’s income is to use a water analysis. This technique is not precise but will give you a decent ballpark of how much money a laundromat is making.
Here’s the concept. Laundromats consist of various size washing machines. For each size of washing machine, you’ll need to determine how many gallons of water are used per wash cycle. You need to do this for each size of machine in the laundromat. It’s a little bit labor intensive but can help you determine the income of the laundromat.
Once you have found out the water usage, the next piece of information you need is the average number of times per day each machine is used. With those two pieces of information and the vend price, you can find out the approximate income of the laundromat. The formula looks like this:
# gallons used by machine size #1 X average turns per day x vend price = monthly income of machine size #1
Do this for each size of machine and add them together to get the total wash income. Multiply the total wash income by .35 (35%) to determine an approximate dryer income. This should be close to the reported income.
The Coin Count Method
The second way to verify income is through a series of coin collections with the seller. The concept of this method is that you will physically collect coins over a series of weeks to verify that the laundromat’s income is what the seller claims it is.
The Document Method
The third way to verify a laundromat’s income is through obtaining a paper trail from the seller. Documents you can request to help you verify income are the business taxes and bank deposit statements. The sellers may or may not give you access to this information but you can always ask. If they refuse to disclose those documents, it’s not necessarily a deal-breaker, but it is a signal to proceed with caution and be extra diligent.
Pillar 2- Determine the Laundromat's Expenses
Knowing a laundromat's income is only half the equation to determine the performance of the laundromat, or the net operating income. We also need to determine the expenses of the laundromat. There are 4 main things you should be doing when you verify expenses.
- Request bills and statements
- Request to see the lease and all amendments and addendums
- Verify expenses using a pro forma
- Utilize an experienced expert, such as another laundromat owner or consultant
Pillar 3- Determine the Laundromat's Trajectory
Once we have determined the laundromat's income and expenses and we have determined the NOI we need to look at the trajectory of the laundromat.
The trajectory adds a third dimension to our analysis that is critical to a proper valuation: time. We need to take a look at the performance of the laundromat over time. To do that, we need to look at 4 key metrics to see which direction(s) they are trending.
- Income trajectory
- Expense trajectory
- NOI trajectory
- Utility usage trajectory
Pillar 4- Determine Value-Add Opportunities
As a quick recap, laundromats are valued based on the net operating income, or gross income minus expenses. This means that looking for ways to increase income in your laundromat has a two-fold benefit to you.
- Your net income goes up. This results in more money in your pocket every month.
- You build equity in your business. This results in your net worth increasing.
There are four main categories of ways to add value to your laundromat. We'll go through them here, but there are many specific ways to add value (ie- increase income and/or decrease expenses) to a laundromat. The four main categories of value-add opportunities are:
- Improve Management
- Add Revenue Streams
- Offer New Services
- Trim Expenses
Laundromat Due Diligence
Due diligence is perhaps the most important step in your laundromat business journey. When you do proper due diligence you understand what you are buying and what it is worth. That sets you off on the right foot toward financial freedom through laundromat ownership.
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