How to buy a laundromat: Verifying Financials

21st May 2024

Making the decision to buy a laundromat is an exciting opportunity, whether it’s your first store or your tenth, there’s a buzz and sense of possibility that comes with any new venture. It’s a long-term investment in your future, and with the lure of a steady cash flow, it's a smart business move for entrepreneurs. But with the average cost of opening a laundromat anywhere between $200k - $500k, it's a big investment, and as with any investment conducting thorough due diligence is paramount before you commit. This guide outlines the essential steps you should take to assess the financial health of a laundromat, and ensure a sound investment.

Why Verify Financials Before Buying a Laundromat

You've decided you want to get started in the laundromat industry, perhaps you've decided the type of laundromat business you would like to run i.e a coin laundry business or full service business, and maybe you've decided that you will buy vs build a laundromat. Having made these business plans, you may be wondering how much due diligence you'll need to do, and if indeed it's necessary at all. We've all heard a story about someone who bought a store on a gut feel and made it a success. And that does happen sometimes, but it's a risky business strategy and more often than not will result in failure. The diligence process is important because it not only helps in understanding the actual value of the business but also in gauging the startup costs, its future profitability and any potential risks.

The Importance of Diligence in the Buying Process

Thorough due diligence is a big task and requires a deep dive into the many different elements that make up the process. While it is time consuming it is vital you do your homework before you make that initial investment.

Gathering Financial Information

Understanding the Potential Income and Costs

The first step is to get a detailed assessment and understanding of the existing income streams from all aspects of the business. This may include self-service or coin laundry services, wash and fold services, vending machines, and any retail operations. This data will ultimately form the basis of your business model and is therefore important to understand before you commit and buy a laundromat. Equally important is a thorough analysis of your operational costs such as utility costs, maintenance costs, rent, labor, and supplies. Create a spreadsheet which tracks all of this information and you'll have the foundations of the financial health of the business. Once you have all your income and costs you can then start to look at how profitable the laundromat is.

Evaluating the Profitability of a Laundromat

It stands to reason that you intend to run a profitable laundromat, but the road to profitability is certainly a lot smoother if the laundromat you are buying is already profitable. Profitability is influenced by three core factors:

  • Operational efficiency
  • Customer retention
  • Effective pricing strategy

In order to understand the true value of a laundromat and whether a purchase price is reflective of that value, you need to look at each of these elements individually and determine if the business can sustain its financial health long-term. But here's the rub, how do you know if you're looking at a profitable laundromat? If the goal is to sell, most laundromat owners will tell you the business is profitable, whether it is or isn't. It's a challenge many potential buyers grapple with, fortunately our guide provides a step by step process for potential laundromat owners to follow.

Examining the Current Owners' Financial Statements and Tax Returns

One of the most reliable ways to assess profitability is to ask the current owner for access to the financial statements and tax returns for the business. This provides insights into the business's revenue trends, expense management, and overall financial integrity. Interestingly, this is a step that many potential buyers, especially first-time buyers, neglect to take whether from a reluctance to be seen as too pushy or from a lack of experience in managing the diligence phase, however it's crucial to building up your understanding of the business. If you've built up a good rapport and the laundromat for sale has a fair valuation then the current laundromat owner should be happy to share some insights with you. Let's take a deeper look at the types of financial information available to you.

Checking Bank Statements and Payment Records

Having taken the time to speak to the current owners and understand the data you may feel that your work is done. But not quite! It's one thing for someone to show you information, it's another thing entirely to verify that it's true. There are many stories out there of potential buyers who have been burned by taking information from sellers at face value. Our best advice is to always verify that the data is correct. Verifying that the business finances presented by the current owner is accurate helps detect any discrepancies, prevents overpaying and lays a strong foundation for your investment's success.

Assessing the Cash Flow and Profit Margins

When it comes to asking for financial data, you need to be clear what you're asking to see. Key data to ask for include the balance sheet, cash flow statement or profit and loss statement. A thorough review of the Cash flow statements and profit margin analysis reveal the operational efficiency and financial health of the laundromat, and will tell you how well the business generates cash and manages its expenses. Look out for a reluctance to share detail at this stage - this should raise a red flag!

Examining Utility Costs and Expenses

There is no getting away from utility costs when it comes to running a laundromat, and so it's best to know what you're dealing with up front. Utility costs, including water, electricity, POS etc. can significantly impact laundromat profitability and can vary depending on location. Without doubt the most significant of these overhead costs is water usage.

As part of the acquisition process you should consider conducting a water analysis before you buy a laundromat. A thorough water analysis can provide reliable data as water usage in a laundromat will directly correlate with the number of wash cycles a business runs. The first step is to request water bills - ideally for the past two years if you can. If you can’t get two years' worth then request them for as far back as possible. You must get at least a year’s worth of data so you can start to understand monthly patterns and strip out any anomalies. To conduct your water analysis, you should do the following:

Calculate Average Usage

To get to this metric you need to determine the average water usage per cycle based on machine specifications. This data helps estimate the total cycles operated. You should be able to find the average water usage of a machine online if you’re not sure.

Compare with Financials

Match the estimated number of cycles based on the calculated average against reported revenues to identify any discrepancies that might suggest financial misreporting.

If there is only one type of machine on the premises, then this should be relatively straightforward. However, if there are multiple types of machines then you will need to take this into account. The laundromat resource has an extremely detailed guide that will help you walk through a more complicated water analysis.

Additional Metrics To Track

In addition to water usage and hard financial data, there are a number of key metrics that every laundromat owner should track and which may provide more insight into the operational efficiency of the store. This includes detail on revenue by service type and the number of turns per day which can vary significantly store to store, with the IRS estimating anything from 3 to 8 turns per day. Starting to understand this detail at this stage will stand you in good stead when it comes to signing a deal.

Determine the Initial Investment and Return on Investment (ROI)

As part of the acquisition process you’ll want to figure out your ROI, or your pay back period. Your payback period is the amount of time it takes to recoup the cost of your investment. There are many tools out there to help you, but in its simplest form it’s the cost of your investment divided by your average annual cost flow

In the first section of this blog we looked at how to determine cash flow, and understand the financial health of the laundromat and while that does provide insight into how the store is performing, it doesn’t paint the whole picture. A more holistic approach is needed.

Evaluating the Total Cost to Purchase the Laundromat

Once you've understood the potential income and costs you'll want to weigh this up against the total cost to buy the laundromat. This includes the purchase price, any necessary renovations, and equipment upgrades needed to modernize the facility and enhance efficiency. A quick glance at any top 10 things to evaluate before purchasing a laundromat list will include a note to check the age of the laundry machines, but surprisingly this is often overlooked. However, it's well worth taking a close look at the laundry machines and enquiring about their age - if they're newer machines, you can be fairly certain that they won't need replacing in the near future. However, if they're 10+ years old they may need replacing within a few years which you may want to factor into your discussions and have reflected in the purchase price.

Evaluating the Potential for Extra Services

In addition to looking at the age and condition of the laundry machines you should also consider the feasibility of introducing additional services which can drive additional revenue streams. If you're looking at purchasing a coin laundromat, consider if there is an opportunity to add in services like wash and fold (fluff and fold), or if they're already offering wash and fold, is there potential for pickup and delivery? It's worth considering extra laundromat services even at this early stage. if you can increase the revenue quickly you'll find it easier to recoup your initial investment and see a healthier ROI.

Considering Finance Options and Business Loans

Whilst you're exploring the financials, you should also be considering the financing options available to you. There are many ways to finance a laundromat including seller financing, small business loans from the SBA and Home Equity Line of Credit (HELOC). Which option you decide to go with will largely depend on your goals, personal circumstances and to some degree your comfort with risk. Either way it's important that you research thoroughly in order to try and secure the most favorable loan terms possible as this can impact the overall cost of the investment and influence the payback period.

Considering the Location and Customer Base

Of course it is important to understand the financial makeup of a laundromat business before you buy it, but there are other data points that are indicative of the overall health of a store which are well worth exploring before you commit to a purchase.

Analyzing Average Household Income in the Area

Part of your due diligence should include a thorough examination of the local area. Ask yourself what are you looking for from your business location? This will vary depending on whether you're in a rural or city location but common considerations include:

  • Is the business location in an area that has a lot of footfall?
  • Do you have enough parking for potential customers?
  • Is there an existing loyal customer base?
  • What's the average household income of the area? This will help you decide on the services you offer and how you price them
  • How many other laundromats are in the area?
  • Are there specific zoning laws or business licenses you need to be aware of? 

There are many resources available to help you choose the right location before you buy including our previous blog Choosing The Perfect Spot For your Laundromat

You'll need this information when it comes to thinking about your business model and how you'll tailor your services and pricing to match the spending behavior of the local market.

Assessing the Competitive Edge of the Laundromat Industry

As mentioned above, understanding your competition is pivotal to success. Before you commit to buying a laundromat you should look at conducting a detailed analysis of the competitive landscape including the number of local competitors, their service offerings, and pricing strategies. Having this holistic overview of the local laundromat industry will help you better assess whether the laundromat for sale is the right business for you.

For a more detailed guide to market research see our blog post on Understanding Market Research.

Making an Informed Purchase Decision

Buying a laundromat is a big commitment, and involves substantial costs. Laundromat purchases should be approached with meticulous attention to the financial health, operational efficiencies, and market position of the store in question. By thoroughly verifying financials, understanding the local market dynamics, assessing the operational costs, and evaluating the competitive landscape, you can make an informed decision that maximizes your investment’s potential. Ensuring the accuracy of all financial information and considering the strategic importance of the location are paramount to business success.

Remember, the due diligence process is your safeguard against potential pitfalls and your tool for uncovering opportunities to enhance the business’s value. Take the time to analyze every aspect, consult with industry experts, and perhaps most critically, visit the laundromat to see it's day to day operations firsthand. Your goal is not just to buy a laundromat but to invest in a profitable venture that will thrive in its community and yield sustainable returns.

Armed with comprehensive data and a deep understanding of the business and its environment, you will be well-positioned to negotiate confidently, plan effectively, and realize the success of your new venture in the vibrant laundromat industry.

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