What are Self-Service Laundromats?
Self-service laundromats or coin laundromats are retail facilities where patrons get their clothes washed and dried with little or no professional assistance. Most self-service laundromats are in close proximity to population centers lacking access to their own washer and dryer. Some are also located near college campuses for students in rental units. Since self-service laundromats require minimal labor to operate, self-service laundromats are often absentee-owned businesses. As a result, many investors acquire multiple coin laundromats as a source of stable cash flow that does not need an active role for the owner. The equipment in self-service laundromats may be owned or financed, and should be well-maintained and showcased properly by an experienced business broker in order to maximize the purchase price for the seller.
Valuing Self-Service Laundromats
The median cash flow multiplier for self-service or coin laundromats in Florida is 4.5 x its annual cash flow or adjusted owner benefit. This means that if a self-service laundromat generates $400K per year in cash flow (excluding depreciation and interest expense), its average valuation is $1.8M (4.5 X $400K). The valuation range varies based on the growth rate of sales and earnings (both historical and projected), the lease, the current value and condition of the facility’s physical or tangible assets, and the general location. Some coin laundromats may not show all of its sales in the financials (such as tax returns). In that case, the owner should be prepared to show copies of their water and gas bills to prospective buyers that will substantiate the true volume and income of the business.
Self-Service Laundromat with Attached Real Estate
Some owners of self-service laundromats own the property – typically a stand-alone building – in which the business operates. When real estate is attached to the business, self-service laundromats are particularly attractive to investors seeking to own commercial property (which often appreciates over time). The valuation method for such income generating properties is assigning a fair capitalization rate (or cap rate). The cap rate is the net operating income of the laundromat divided by the purchase price. If the net operating income is $400K/year, then an 8% cap rate results in a $5M price ($400K/.08) for the property including the business. The cap rate must be put in context of comparable sales of similarly situated nearby commercial properties. Cap rates vary between 5-10 percent or so depending on interest rates, inflation, and market conditions.
Calculating Net Operating Income
When assigning a cap rate to a self-service laundromat with attached property, it is imperative to properly define and calculate its net operating income. The net operating income only deducts the regular operating expenses from the gross revenue. It does not deduct the depreciation, principal payments on loans, interest payments on loans, and capital expenditures. In practical terms, this measure of profitability does not include occupancy costs of the facility, since it excludes any principal and interest payments on the mortgage (if any). In contrast, self-service laundromats without attached property are valued by measuring its adjusted owner benefit. While adjusted owner benefit excludes depreciation as a non-cash expense, it does include rent or occupancy costs as a regular operating expense.
Absentee-Nature of Self-Service Laundromats
- The absentee-nature of self-service laundromats accounts for much of the premium in its median valuation multiple of 4.5 x annual cash flow.
- Consider that convenience stores – also a retail-related business – sell for a median valuation multiple of 1.8 x annual cash flow.
- Why is the valuation multiple for self-service laundromats so much higher?
- While the large amount of physical assets included in the sale of self-service laundromats accounts for some of this difference, buyers also assign a higher valuation multiple for businesses that may be run without the active involvement of the owner.
- When a buyer knows that their day to day involvement is not necessary for the business to run properly, they are willing to pay a premium for the fact that their labor is not required to generate profits from the business.
- An absentee-owned type of business additionally gives the buyer certainty that their level of profits will be maintained even after the change in ownership.
- This results in a lower required risk premium (or the difference in yield above a risk-free investment such as a U.S. Treasury bond) for absentee-owned businesses.
- While some businesses such as convenience stores are owned on a mostly absentee basis, self-service laundromats inherently lend themselves to absentee-owners.
- Convenience stores require active management to deter theft, ensure customers are serviced properly, and to order the correct level of inventory.
- In contrast, a self-service laundromat does need to service its customers (remember the customers serve themselves) or order inventory nearly to the extent of a convenience store.
- This distinction is key since it allows a self-service laundromat to function as a passive investment vehicle which results in premium valuations.
- In reality, owners of self-service laundromats should ensure that the washer and dryer units are properly maintained, and the premises are clean and inviting to its customers.
- Most owners are able to easily outsource these functions while still maintaining a healthy source of passive income.
The sale of self-service laundromats – with or without attached real estate – should be handled by a local and professional business broker in a confidential manner with no disruption to its operational activities. All potential buyers should be properly qualified so the seller’s valuable time and energy is not wasted. The valuation should reflect the properly calculated adjusted owner benefit (when real estate is not included) or net operating income (when real estate is included) of the business along with the absentee nature of self-service laundromats.
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.