A Buyer's Guide to Laundromat Due Diligence - Jordan Berry's 2 Cents

The key to buying your first laundromat right the first time is doing proper due diligence. It’s critical to have the right information about the business and make an accurate valuation based on that information. Being off just $500 per month could mean overpaying by $20,000-$30,000. It's not a difficult mistake to make.

Download our checklist to follow along and make sure that you don’t miss a step in your due diligence when buying a laundromat.

Buying a laundromat

Buying a laundromat can be a great investment, but it's essential to do your research and make informed decisions before making a purchase. Here are the general steps to buying a laundromat:

1. Determine your budget: Before you start looking for a laundromat, determine how much you can afford to spend. This will help you narrow your search and avoid overspending.

2. Check the lease agreement: If the laundromat is located in a leased space, make sure to review the lease agreement. Determine if the lease is transferable or if you need to negotiate a new lease with the landlord.

3. Check for permits and licenses: Check for any permits or licenses required to operate the laundromat in your area. Confirm that the current owner has all the necessary permits and licenses in place.

4. Evaluate the competition: Take time to assess the local competition and determine the demand for laundry services. Consider the proximity of other laundromats and the quality of services they offer.

5. Talk to customers: Talk to the current customers of the laundromat you're interested in buying. Ask for feedback on the services provided and any improvements they would like to see.

6. Seek expert advice: Get advice from a variety of professionals including an accountant, lawyer, other laundromat owners, and consultants to help you evaluate the financials, tax implications, and legal requirements.

7. Consider the four pillars of laundromat due diligence: This is an absolutely essential step to ensure that the laundromat you're buying is a profitable and sustainable business opportunity.

The four pillars of laundromat due diligence

So, how can you ensure you’re buying the right laundromat at the right price? You need to go through the four pillars of laundromat due diligence. This involves determining:

1. The laundromat's income

2. The laundromat's expenses

3. The laundromat's trajectory

4. Value-add opportunities

Pillar 1: Determine the laundromat's income

The first pillar of laundromat due diligence is determining the laundromat's income. We can find out how much money is coming into the laundromat with these three main methods: 

1. The utility usage method

2. The coin count method

3. 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 figure for how much money a laundromat is making.

Laundromats house washing machines of various sizes. For each size, you’ll need to determine how many gallons of water are used per wash cycle. 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 washing 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 estimate income is through a series of coin collections with the seller. Using this method, you’ll 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 determine a laundromat’s income is by 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 it never hurts to 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 determining the performance of the laundromat or the net operating income. We also need to determine the expenses of the laundromat. There are four 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 the wisdom of an expert, such as another laundromat owner or consultant.

Pillar 3: Determine the laundromat's trajectory

Once we have determined the laundromat's income, expenses, and 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 three key metrics to see which direction(s) they are trending:

1. Income over time

2. Laundromat expenses over time

3. Utility expenses over time

The slope of these 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 the business been growing, stagnant, or declining and what can I do to help it continue to grow after I take over?

1. Determine the laundromat's income over time

When you do laundromat due diligence, 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 monthly income could be significantly less than it was at 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 the laundromat's expenses over time

Gross income is only one variable and it doesn’t give you a reliable picture of the health of a business. 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 plot the utility usage over time. Typically, utility bills should be in the 15-20% of the gross income range. This is an essential step to ensure nothing is 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?"

This third pillar of laundromat due diligence is one of the most overlooked and potentially costly steps when buying a laundromat. Always remember: buy with your eyes wide open!

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:

1. Your net income goes up. This results in more money in your pocket every month.

2. You build equity in your business. This results in your net worth increasing.

There are four main categories in which you can add value to your laundromat:

1. Improve management

2. Add revenue streams

3. Offer new services

4. Trim expenses

How to start a laundry business

The work doesn’t stop with the pre-purchase due diligence. Practically guarantee the success of your new laundry business with our Laundry Business Startup Checklist. You’re just two checklists away from big laundromat profits.