16 Mar Laundromat Prospects, Buyer Beware!

Education and due diligence are everything in any business, real estate or investment you ever make.  Laundromats hold a particularly special place in my heart when it comes to due diligence. When I decided to put this blog into action and start writing I mapped out a table of contents of over 50-70 weeks worth of content all at once and knew that as I wrote, things would happen in our life or something I was writing about would jog my memory to add a subject.  This post is about something that is happening in our lives right now, and since there’s a chance that someone could be google searching “how to buy a laundromat” or “how to due diligence on a laundromat” and find my blog potentially for its many references to the subject, I felt an obligation to write this post.  Laundromats are like the wild wild freaking West, and that’s putting it in the most family friendly terms I possibly can.  While you should read this post if you are seeking a laundromat, there are countless other industry specific places you should be reading, industry vendors you should be engaging with and blogs/podcasts that specifically dive into detail on the subject. To name a few, then we’ll get on to what drove me to write this post:

• The Laundromat Resource Podcast, Blog, Website, Forums
• com search “Laundromats”, there isn’t a lot but there is content
• Coin Laundry Association
• Planet Laundry
• Local Brokers (My goodness beware)
• Local Vendors & Distributers
• Other Owners, just call the phone number and ask to speak to them
• Anything else you can find

Oddly as I write this post while I’m incredibly frustrated with the transaction I nearly made yesterday (7/13/20), I’m also smirking because it pushed me to look harder for other locations and stumbled across the very first laundromat that we ever looked at, its for sale on Facebook Marketplace of all places, and the list price is $30,000.  I offered $20,000 about 6 years ago while it was listed at $60-80k and you can read all about that in my post titled “Our first look into laundromats”.  It’s a good read, I learned a lot, and yes I engaged the seller again last night on the marketplace, he hasn’t responded as of this morning so he either remembers me and is still hurt, is slow to respond to something he should take swift action on, or isn’t in that big of a hurry to sell.  So why am I so frustrated, allow me to itemize the things first and then we’ll break them down:

• Extreme Ownership: I missed something in the documents that lead me to be a 9 of 10 excited about the deal, and when I realized it, it brought me down to a 6 of 10 and knew negotiation would have to correct my thought process. Not terrible, but I wanted to take ownership.
• The broker has lead me astray (in my opinion) twice now, and I think perhaps is shady and just trying to pawn deals off on the uneducated or undereducated.
• There is a brand new, 4,000sq ft location from a powerful laundromat brand in town, being built .6 miles away from the location.

Got the gist? Here we go.  Yes, I misread the documents which really ends up impacting the situation in just a few ways.  First and foremost, emotionally.  I know it’s a business transaction and I shouldn’t get emotional about it.  The truth is that we’ve been trying really hard to find something to invest in and get going, we’ve looked at a few laundromats and they were big time fixer uppers that were more than big time over priced.  In fact they were anywhere from double to FOUR TIMES what they should be listed at, fortunately they are still listed and they haven’t found any suckers yet to buy them.  Finally I find a location that is newer, state of the art, very busy on each day I visited it, and the seller will finance 10% of the note which actually allows me to do the transaction without a partner.  It checked every box, until I received the letter of intent which I was asking for a few contractual changes on so I hadn’t signed it yet.  I was making sure things were written in that allowed me to get out without losing my earnest money but also ensure that I had several exit clauses.  While I was doing that I was trying to figure how much of my cash flow I should be setting aside for equipment replacement costs from a ballpark standpoint, and I noticed something I hadn’t noticed before.  The equipment evaluation provided said the equipment was 6 years old, when I visited the store the equipment looked good, clean, no dents, sure some machines were down, but that’s going to happen.  What I found was a date up in the corner of the document that I had never noticed, and the valuation was from the time the current owner purchased the location 4 years ago.  The equipment was 10 years old, this means I need to set more money aside for maintenance, repairs and replacement sooner than anticipated.  Frustrating, but whatever, it’s a negotiation point and something I can use to lower the purchase price.  I just went from being high in the sky to disappointed in myself for missing something so obvious and simple, that required more due diligence to ensure there was enough cash in this thing to keep it going when the time came for retooling the store.

Second, the broker.  This is a really disheartening situation because if you search laundromats for sale consistently over a period of time in my market, you’ll find that one guy holds like 85-100% of the listings at any given time.  I’ve talked with him a number of times and asked questions about this location or that location and only dove deep into 6-10 locations while others are too high of a purchase price for my ability to buy, or too run down for my desire to own.  Along the way there were small red flags that leave me feeling uneasy, and in this transaction, there is a huge red flag and one of my mentors said “well, they either withheld some really important information from you, or they are completely and utterly incompetent”.  Harsh, but maybe true.  Before I really break down and start venting, if you take nothing from this post make sure you hear this: No one is going to look out for you, like you.  No one is going to look out for your hard earned down payment capital, like you will.  No one will execute due diligence on your potential purchase, like you will.

Always remember that in an existing business purchase, no matter the type or industry, it’s the brokers job to sell the sellers business and as a result draw a commission.  This isn’t like real estate where you get an agent to represent you and watch for issues, and they get an agent to represent them.  You share the same person, and that persons motivation is absolutely in favor of the seller.  I want to think the best of people, and give them the benefit of the doubt but when all you do is broker laundromat deals and you hold nearly every listing, you know what’s going on in the marketplace.  If you don’t know what’s going on in the marketplace and immediate surroundings of your listed laundry for sale then you are either too lazy to care, or have never listened to your prospects and clients along the way.

The brokers job is to help the seller arrive at a fair multiple of EBITDA based on a number of factors.  This is a super annoying price model by the way because even though the industry standard is 3.5-5.5x, I’ve heard from one banker “nothing goes over a 4 in the Midwest unless it does massive dollars per month” and another banker “oh yeah, they go for 4.5-5 all day, guys usually ask 6 but they almost never get it. I’ve lent on plenty around 4.75 in my day regardless of revenue”.  This location was listed at 4.6-4.8X EBITDA which fit in the window of industry standard and checked the boxes of having a mid-high multiple and seemed priced right.  Until I found the age of equipment issue, that would have brought it down some, and then my personal favorite, the brand new location being built down the road.  This place at best is worth 3x multiple on paper, drastically reducing the purchase price to make it fair for any buyer to absorb the risk.

Finally the 3^rd reason, to add insult to injury, not only did I have to discover the new build myself through preliminary due diligence, it’s the same brand that built a location right across the street from another laundry that I was looking at earlier this year.  Since I was considering buying this other laundromat I had access to 4 years of their P&Ls and this new laundry that moved in hit their revenue and boy did they hit it hard.  They put a 40% dent in his revenue year 1, and 30% each year thereafter. Ouch.  A 30% revenue drop in this location I was considering would probably not stay sustained, maybe 20-25% but in any case no where near supported the purchase price originally considered to be the negotiation starting point.  Had I never pursued this other location I’d be stuck trying to guess what kind of revenue impact a new location could have on me being half a mile away. I could have guessed really low, like 10-20% and possibly went through with the deal at a reduced purchase price and been hurt badly.  I could have over shot the estimate or let fear take over and walked.  Fortunately because I had some intel, I knew what it was going to cost and it was more than I was willing to risk in addition to the other information received.

Speaking of this former location I pursued by the way, circling back to the broker that I’m struggling to trust at this point, I mentioned being burned twice (I think anyway).  When I was pursuing this former location it was all positive, “it’s a great laundry”, “the loss has been absorbed”, it needs some paint, and more care from new ownership and it should do a good job sustaining customers.  Fast forward to negotiating this current deal and I mentioned the old location to the broker “yeah, I mean that place was really run down, needs $100k just to reface the driers, all new floors, paint of course, every machine needs to be deeply gone through and possibly every front loader needs to be replaced with front loaders and that’s a substantial investment”.  What happened to “it’s a great laundry?”.  This all gives me pause, and reminds me that no one will look out for me like me.

This turned into a long post so lets begin putting a bow on this thing.  I spoke in vary vague numbers above but here’s the numbers on this location I was about to sign an LOI on: Purchase Price: $670k, NOI $143k, Down Payment $67k, Seller Note $67k.  I intended to drive down the NOI claim through lack of expenses claimed that were obvious and clearly missing from the P&L which were insurance, credit card processing fees, payroll taxes (Payroll was listed but not taxes….).  While I don’t know the credit card processing fees I was estimating a couple thousand dollars, so I assumed at best the NOI was truly $138k but probably somewhere between $130-135k and planned to renegotiate the price to $598,000.  Then factor the equipment age, brings price down to $520,000.  Add in the competitor…. I honestly don’t even know but my best stab at it is $360,000 or the current estimated value of the equipment and maybe a bit more for the “goodwill” of the business.

Just like that you have a location that I was pie in the sky about, had lofty expectations for, was anticipating increasing drop off laundry service, in a couple years pursuing pick up and delivery service.  All those lofty plans shot down by an error on my part that could have been overcome by renegotiation, a potentially intentionally shady broker, and a major competitor moving in surely prepared to make a dent in the business.

While every experience is a learning experience, I ended up calling person in my network who has in turn pointed me to a guy that owns 7 laundromats, and has owned/sold over 20 in his past and built several for others.  Turns out not only did he own the laundromat I grew up going to as a kid (bizarre), he also owns one that I happened to walk into a week ago when I drove by it while in the area.

I’ve been stopping into laundromats just to look, get a feel, see pricing, machine mix, layout, customer mix, etc.  “Well, maybe I’ll sell that one to you, its over an hour away and I’m tired of driving there.  I only bought it because I own the building its in, it was going for sale and I didn’t want some idiot to buy it and I end up being out on rent.  Let me think on it and I’ll give you a price that might work”.  Who knows, if nothing else, I’ve got the ear of a guy that knows the business, distributers, and may just have an off market deal he hears of that could be potentially sent my way.  At best, maybe this massive let down of a transaction lead me to think differently and try and find the deals a different way.  Off market through word of mouth, to do so I need to know the people which I’ve already begun working on.

Look out for yourself folks, these same types of things can happen to you in real estate or any other business.  No one will look out for you, your capital, or your best interests like you will.  Do good due diligence, go into your deals eyes wide open, and prepare to walk away.