Selling A Dry Cleaner Business
There has always been a thriving market for the purchase and sale of dry cleaner businesses throughout South Florida. While the overall dry cleaning industry has been declining for many years due to the work from home trend and increasing environmental regulations, there remains a well defined niche for profitable and well established dry cleaners in South Florida. Dry cleaner businesses may be defined as having either a retail-oriented drop-off store and/or a dry cleaning plant where the actual cleaning occurs. Laundromats are a separate business category and are not included as a traditional dry cleaning business.
Dry Cleaning Drop-Off Store
A dry cleaning drop-off store is relatively inexpensive to open and fairly easy to run. It is a classic retail-oriented business that primarily does business with retail customers who drop off and pick up their clothes and items at the drop-off location. The cleaning is outsourced to a dry cleaning plant for the actual cleaning to occur. Usually, a drop-off store may be run by one or two employees (or the owner herself) and is located in a highly visible retail location. Without an attached plant, it is extremely important that the drop-off store has a reliable and cost-effective means of cleaning its customers’ items.
Dry Cleaning Plant
A dry cleaning plant contains the boiler, washing machines, dryers, and pressers needed to actually clean and prepare the customers’ clothing or other items. The plant may be located within a store-front drop-off location, but this results in higher occupancy costs. It is critical that the seller of a dry cleaning plant properly identifies the included physical assets in the sale. A dry cleaning plant will commonly have up to $250-$500K worth of physical assets – including the build-out costs necessary to outfit the plant and comply with current environmental regulations.
Owners of Dry Cleaning Plants Typically Also Have Drop-Off Locations
Most owners of dry cleaning plants also have drop-off locations where the customers’ items from the various drop-off locations are all periodically delivered for cleaning. This should lead to a cost-efficient business model since the cleaning is done ‘in-house’ by the same owner and same employees. It is very costly and time consuming to open and operate a dry cleaning plant, so the physical assets of a dry cleaning plant are of paramount importance when it comes time to sell.
Many dry cleaning businesses incorporate laundry routes into their business model. Laundry routes offer pick-up and delivery services to a set of customers within a specific geographic area. Some laundry routes may amount to several hundred customers and thus constitute a very large component of the overall value of the dry cleaning company. Most laundry route owners also own dry cleaning plants which makes their costs easier to control.
Laundry Routes with Low Churn Have High Valuations
A key metric that buyers use when valuing a laundry route is its churn rate. A laundry route’s churn rate is the annual rate of its customer losses or customer attrition. Conversely, a laundry route’s growth rate is the annual rate of its customer additions. A laundry route with a high growth rate (and low churn rate) will receive a premium valuation. Moreover, a growing laundry route will be viewed as having a high degree of recurring revenue, which also improves its valuation.
Valuation Factors Affecting Dry Cleaning Businesses
- A good start when valuing a dry cleaning business is determining its free cash flow.
- This measure of profitability deducts capital expenditures, or spending on capital assets (or long-term assets), while still adding-back depreciation as a non-cash expense.
- Dry cleaning plants often have a large degree of needed capital expenditures for equipment and improvements to the plant.
- Once the free cash flow is determined (adjusted for the owner’s salary and the owner’s personal expenses that flow through the financial statement), a multiple of free cash flow between two to four times is generally assigned in order to calculate the value of the business.
- Additionally, the currently depreciated value of the physical assets should be factored in to the valuation range.
- Many different attributes of a dry cleaning business may affect the multiple of free cash flow that buyers are willing to pay.
- This includes the location of the retail-oriented drop-off stores, the condition of the physical plant, the loyalty and competency of management and staff, the brand name, the growth rate of the overall business, and the local competitive environment.
- A closer inspection by the buyer during the formal due diligence phase will also uncover any environmental or regulatory challenges which may also affect the valuation.
Dry Cleaning Businesses and E2 Visa Buyers
The growing popularity of E2 Visa business buyers plays a large role in the sale of dry cleaning businesses. The E2 Visa program is, in short, a way for non-U.S. citizens living abroad to gain U.S. citizenship by buying a business in the United States. The criteria that make a U.S. business eligible for an E2 Visa seeker vary by the seeker’s country of origin. Generally speaking, the factors for an E2 VISA are whether the business is ‘bonafide‘ and legitimate, and whether the E2 Visa buyer is putting forth substantial financial or human capital toward the purchase.
Dry Cleaning Businesses Generally Qualify for E2 Visa
A dry cleaning plant has substantial physical asset that may only be used for business-related purposes. This by itself greatly strengthens the case that the business is ‘bonafide’ and thus qualifies for an E2 Visa. Also, a dry cleaning store or plant will have a commercial lease and is not a home-based business. This also helps prove that the business is ‘bonafide.’ Immigration authorities also look at the transparency of the underlying businesses’ financials when gauging whether the business qualifies for an E2 Visa. The financials (such as tax returns) must show that the business is in fact ‘bonafide’ with a sufficient amount of sales while operating with a profit motive.
Dry cleaning drop-off locations, plants, and related laundry routes all offer tremendous value to the savvy South Florida entrepreneur. Be sure to understand the many factors affecting their valuation prior to making a purchase or sale.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.