05 Sep A Look into Laundromats

While I’ll probably never remember what shoved me the direction of considering laundromat ownership, I definitely remember my first look at one that was in our purchase price range and what that process looked like.  We had some cash after the sale of our town house and getting settled into our new house was done, and we wanted to accelerate our income and savings toward retirement.  I began reading a bit about laundromats and there really wasn’t much out there for information on how to buy them, where to buy them or how to really know if it’s a good deal.  Most of that still rings true today, however there are some people out there starting podcasts and websites to help prospective buyers get into the industry with some more clarity and transparency.

We didn’t know anything about financing or writing a business plan, we just knew we had bought houses and got loans so we figured we would be bankable, and all would be well, so I began searching for affordable laundromats.  If you’ve ever looked into laundromat purchases before, they seem to be listed in a few different general price points for low, mid and high-priced locations.  The lower price range locations are anywhere from $40-100k to purchase a smaller store usually around 800-1,200 square feet with thirty or fewer machines that are probably dated but the current owner is keeping it alive through maintenance and some cashflow.  The mid-tier tends to be somewhere between $200-300k on the low end and as high as $650k purchase price which will get you a bigger location, forty machines in newer condition that are often credit card only or dollar coin converted and higher cash flow.  Additionally, these will often be attended laundromats meaning there is an employee there all the time to help with things, clean, and sometimes offer wash/dry services or potentially a dry cleaner.  Finally there are the monster juggernaut locations which begin around $800k and I’ve seen prices go up over $2,000,000.  What you get in this range are huge locations boasting 4,000 square feet and a pile of machines that are in great shape hopefully, and every bell and whistle you can think of.

We were in the low-price range search based on our cash on hand for down payment and found a location in St Paul listed at $80,000 that had previously been listed for $100k and lowered.  It was for sale by owner and we made contact and discovered the LLC that owned the location also owned the building and several others on the block. The location was roughly 1,500 square feet and the equipment was clearly worn down visibly, the space looked tired, and the P&L demonstrated high maintenance costs which was to be expected but gave us pause on the longer-term equipment replacement plans using the cash flow leftover after debt service.  Before debt service the net operating income was in the ballpark of $18,000 or so, which left very little for the business to buy some new machines each year to eventually replace everything.  With new machines and better service, our expectation would be that we would raise the cash flow, but we were unsure how much that might amount to and if the risk was worth it.

I did some research and learned more about how to value laundromats by multiples of net operating income and how to adjust that number up or down based on quality of equipment, strength of location, competitors nearby, and how many turns per day the location logs.  Turns per day is the industries fancy way of saying how many times per day on average each machine will be used.  In doing some rough math and self-evaluating the business plus a call with my financial planner for any potential words of wisdom, we went back to the owner and said we’d be interested in further digging into the deal if they’d consider $60,000 as a starting point for negotiation.  We didn’t provide a letter of intent, we hadn’t talked to a bank, we just had some general conversations, visited the location, and saw the balance sheet on the business. The owner opened up a bit and wasn’t thrilled with the potential of an offer at that price after just a week prior having been listed at $100k, but he was of the impression we may find the purchase price of $80k to be an appropriate value and if that was the case, we’d offer something higher than that.

We dove in from that point and spoke with the repairman that had done the vast majority of the repairs at the laundry and received his impressions.  I went and visited the location a couple times on weekends and a week day to see what kind of traffic was there and who the clientele was.  We spoke to a bank and got an understanding of how they would finance the deal, which I found interesting as you hear all these stories about people getting laughed out the door by banks, yet when I called and just asked genuine questions they answered them and were glad to work with us through the process.  I called my father in law after I’d put all the pieces together in my head and thought we could offer $50,000 or so on the place and run it as-is for a couple years with high maintenance costs and then begin replacing some machines over the years to see how it improved cash flow and then potentially do a renovation overhaul after proving the concept.  It turns out my father in law had a close friend that owned a mega-laundromat in Rochester MN and was a lender on potentially dozens of laundromats in the state.  He got me connected and we discussed the details of the deal, he was very weary of the deal from early on in the conversation ended up having a friend swing by the location to give him some information.  He called me after that visit and said, “Mitch, you’re going to be really glad you called me, I wouldn’t pay or advise anyone to pay any more than $30k for that location and honestly I’d offer them whatever last year’s NOI was and see if you can land in the middle.”  He probably heard my jaw hit the floor over the phone and after some conversation back and forth I came to understand that the equipment was nearing worthless with it being as old as it was, and our only option to replace equipment and make any money was likely to be purchasing used equipment which is a large risk.

With that, I decided to call the owner and front loaded that he wasn’t going to be happy with our offer but after the effort both parties had put in to get to this point, we wanted to put it out there.  I gave him a brief explanation of our valuation and said we’d like to start out by offering $18,500 which was a couple hundred dollars over last year’s NOI.  I don’t know if the pause was three seconds or three minutes, because it felt like a life time before his booming laugh came back.  That was okay however, I had planned and prepared for a moment such as this.  Had he accepted that offer, I might wonder if I had offered too much after all.  We went back and forth a bit and eventually I told him my advisor said nothing higher than $30k, but I was willing to break his rules and go for $35k if we could make a deal work.  We never spoke again, and that’s okay.

What came out of analyzing this deal were a number of things, first we learned there are not many laundromats that come up for sale under $200k, and if they do, they often are either complete dogs or they are out of market in smaller towns.  We learned some fundamentals of evaluating laundromats and that we probably needed to spend closer to $300k which we weren’t equipped to do at the time.  We put ourselves out there to my father in laws friend that not only turned into a resource but tried to bring me in on a deal with him, but it was just too large of a transaction that I wasn’t in a position to be involved in. We’re currently evaluating two laundromats in 2020 at the time of writing and we’ve learned how to not trust the numbers provided without further validation and to ask good questions.  While I hope we can make a respectable offer on one of the two, that is a win for our long-term planning. I’m prepared to walk away from a bad deal.  While real estate can be significantly sexier and turn more heads at parties, laundromats carry the potential to create significantly higher cash flow, for similar down payments as real estate, with some more effort involved that can really pay off.  We hope to find one in the future that is a good fit for our family to pull the trigger and begin closing the gap toward FI.