LAUNDROMAT DUE DILIGENCE
Laundromats are purchased for a variety of reasons: a desire for business ownership, pride, self employment opportunities, employment for a relative, estate planning, potential tax benefits, cash flow, and equity gain are examples of these reasons.
You should carefully consider your resources and your reasons for making a Laundromat investment. The Laundromat business is an “all cash” business making absolutely accurate verification of income on an existing Laundromat difficult. Income and expense projection on new stores should not be taken as a guarantee of actual performance, but as a reference for comparison of investments.
Laundromat salespersons are not able to provide legal advice, accounting advice, or income guarantees. Never have a sales agent represent two sides of a purchase agreement until you are completely satisfied of the background and honesty of your broker. There are many “experts” who claim to be knowledgeable, some who have written books and articles but actually have limited useful experience in store and calculation of fair market pricing. Use your own judgment and have your own advisors assist you in any decision to purchase a Laundromat. You may want to consider some or all of the following in your analysis:
1. Meet the Seller. The most often used verification of income is the statements of the Seller. A sit-down meeting with the Seller will also provide valuable additional information on the current manner of the Laundromat operation, past problems with the Laundromat and expected requirements of the business operations of a new owner. You don’t want to hear about Landlord concerns about the Laundromat after you’ve purchased the store.
2. Utility Bills. Review the utility bills. Water bills are frequently used in a variety of formulas to give an indication of income. This water analysis method is less accurate than in years past but utility bills can be used to calculate the actual utility costs.
3. Books and Records. The last three years of written records and bank statements of the Seller can assist in income verification. Three years should reveal trends of income, either increasing or decreasing. A recent decline in income should inspire a detailed search for reasons.
4. Income Tax Records. There is no reason a serious Seller should not provide these for review. Only the Schedule C income tax forms should be requested, not the complete tax returns. Few owners over-report income on tax forms, but will include depreciation claimed and other personal expenses which are not to be used in establishing income for a new Buyer. If the amount of claimed income on the Schedule C are lower than claimed in other documents provided to you, at least you know you’re dealing with someone willing to cheat, including you.
5. Collection Period. You may feel comfortable requesting a period of joint collection of the coin boxes with the owner. Because Sellers can “Salt the Mine,” a practice promoted by some Agents, this collection should not be viewed as a method of income verification. This is one of the tricks that can be used by Sellers and Agents to encourage Buyers to purchase. It should only be used as a learning opportunity for a Buyer as one method of coin and paper money collection.
6. Store Site Observation. Observe business activity at the Laundromat at various times during the week and at different times during the day. Count the income for the entire day on at least two days (Saturday and Wednesday) to see the best day and one of the worst days of business income. Combining these two days income and dividing by two and then multiplying by thirty days gives a good indication of actual income for the month performed.
7. Competition Observation. Consider all the competition and the potential for additional competition. Laundry rooms in nearby apartments and nearby Laundromats should be visited to understand the quality and pricing of alternate laundry choices for your marketing area.
8. Building Records Verification. Check with local city departments for appropriate permits and licenses. Ensure the store has all proper permits on equipment installations, plumbing, zoning and a certificate of occupancy. Verify that no citations are have been issued or are pending on the premises. Also visit all commercial locations and local leasing agents for information on nearby vacant commercial space. One of the most frequently reasons for owners to sell is that they have discovered an upcoming new Laundromat is planned or in process within their marketing area.
8. Lease Review. Carefully read the entire lease agreement and all of the provisions. Consult an attorney if you do not understand your rights and obligations. Ensure all leases and addendums are signed. Experienced Consultants might have more knowledge on terms that should be avoided or included in any assignment of lease or in the creation of a new lease.
9. Research. Trade journals, magazine articles, repair manuals and books on the Laundromat business are available in many public libraries, or use the web for education information. Read the entire website of Laundromat123.com.
10. Trade Associations. National, state, or local organizations of Laundromat owners may have a variety of information available, including demographic data for the store location. CLA is a national association.
FINAL SUGGESTIONS: Talk to Laundromat owners, not in your immediate marketing area for information about the business and try to meet the owners of your nearest competition. You’ll find that most competitors are reasonable, friendly and often helpful to newcomers. The Buyer should review all information that is available. Although sales agents can be helpful and often provide useful guidance, the Buyer should ultimately consider the risks and benefits by using an experienced Consultant before signing any purchase contract.