A beginner’s guide to your laundromat’s business valuation
You may also be asking: “What is a business valuation?” At its core, a business valuation is simply the fair value of your laundromat given the current economic environment. While an estimate, it carries quite a bit of weight if you can support how you got to it. Speak to industry friends, insiders, distributors and even competitors to get an idea of how they value laundries. Every market has its own nuances, and there is no cookie-cutter method or math for a store’s worth.
That said, there are some basic approaches you can use, and a business valuation is vital for a business owner in several key instances, including:
- Before a sale – Having an up-to-date, accurate valuation of your laundromat will help ensure you get the best possible price when you do sell.
- During a major change – You will want to know the exact value of your laundromat when you sell, decide to alter your business model, introduce new services (like commercial accounts) or undergo any other type of change.
- Ahead of a major decision – A business valuation will shed light on your current financial situation. That information can then be used to make other intelligent choices, say if you’d like to expand or use the store’s equity to complete a new project
The types of business valuation
It can be incredibly beneficial to know a few details regarding business valuations, should you want one completed for your laundromat. At Eastern, we’ve written internal white papers that we use as a guideline for establishing approximate values.
There are three main types of business valuations. Each involve different methods of comparison that can impact that final value. Each one has merits depending on the type of business you operate.
The three types include:
1. Asset approach – Like this sounds, an asset-based valuation approach analyzes your laundromat’s existing assets to determine its value. Handelsman explained that this method can be overly simple. It is also not prevalent in the industry for existing stores because it overlooks other components of a business that can factor into value (like market share, community goodwill, etc.). It can be used for establishing value for new store projects and is often used for certain sales and liquidations. A key point for laundry owners to consider is that some assets aren’t visible to the naked eye. In markets with high impact fees, there is definite value in the cost, already paid, for those fees.
2. Income approach – The second approach is called the income approach, according to CPA and advisory firm Carr, Riggs and Ingram. As explained by CRI, this method requires valuators to look at your business through the lens of future income, net income and cash flows, among other elements.
This can be looked at two ways: gross income and net income. This method requires valuators to analyze your business through the lens of future income, net income and cash flows, among other elements.
- Gross revenue – You may say: “Why would I value a business based on gross revenue? I care about cash flow and income.” Well, the main reason would be to support or bolster a valuation based on net income. It can tell you how efficient you are. It can help as a comparison tool, because you may not know your competitors’ expenses, but you might have a very good idea of what they gross. We use a multiple of weekly revenue to get an approximate value. Our experience at Eastern is that on average stores, we’ve financed sale prices of approximately 70 weeks revenue. Smaller, lower volume stores with old machines could sell for 50 to 60 weeks, but this could escalate as high as 90 weeks on larger high-volume stores.
- Net income – A valuation on net income is far more common for valuing stores. Often expressed as a multiple of “earnings before interest, taxes, depreciation and amortization,” or EBITDA, values as a multiple of EBITDA range from three times to five times the annual earnings. Larger stores with newer equipment tend to sell for higher multiples than smaller stores with older machines. In some markets, laundries are commonly valued as a higher multiple of monthly net income. Either way, you are taking the cash flow of the store and translating into a manner that owners and investors within a given area expect to see. While the value you come up using both of these approaches may not match exactly, there should not be a dramatic difference between the numbers you come up with.
3. Market approach – The third approach to laundromat valuation is the least formal and is tied to what experts in a given market “know” about area trends and store values. Some markets place a high premium on store size, others may key more on the verifiable cash flow or costs as a percentage of income. Either way, the discounts or premiums on the value of your store are affected by the interests of others in your market.
How to improve your current value
Say you want to upgrade your existing business value – what can you do? Whether for a sale or simply to improve your laundromat, it is worth it to explore a few of the available options to boost your value, because all stores values can be affected by potential “discounts” and “premiums.”
The most common discounts/premium factors for laundries include:
- Premise lease – The premium is the long remaining term and is cost PSF low, while the discount is short term, no options and a cost PSF high.
- Equipment – The premium is new equipment, while the discount is older equipment.
- Competition – The premium is best in the market, with limited competition threat, while the discount is heavy competition.
- Location’s size – The premium is a larger store in a dense area, while the discount would be a smaller store.
- Net income – The premium is high profit with stable expenses, while the discount is a low-profit store
- Miscellaneous – The premium is impact fees, while the discount is weak demographics.
If you have machines older than 10 years and the potential to enjoy efficiency savings, it may be time to re-tool. If there are less than 10 years remaining on your lease and you’d like to re-sell the store, maybe the landlord will negotiate an extension today. Regardless of the size of your store, there is always something that can be done to improve cost efficiency, freshen up the look and make sure the customer experience is high quality.
Most importantly, you should look for a way to set your laundromat apart. Look to the industry association and make connections to figure ways to develop new methods to become more efficient or to implement another creative idea. This will make your laundromat more valuable than the similar laundromat down the street.
Overall, keeping a running valuation for your store or stores is a good idea because you’ll never know when a major life event, opportunity or situation will arise that will require you to act on that value.