Laundromats have long been seen as steady and reliable businesses. But if you’re considering entering the laundry industry, you’re likely asking, “Are laundromats a smart investment?” The answer, for many, is a resounding yes. Typically, see an ROI return on investment) of between 25-30% a year. In fact laundromats often outperform other investment avenues like real estate and the financial sector, which is why they're such a popular business investment, particularly with first time business owners. However, they come with significant upfront costs with the average laundromat costing between $200-$500k to open. In this blog, we’ll explore why laundromats are profitable, discuss the essential steps to opening one, and highlight the critical due diligence process to ensure you make a sound investment.
Why Laundromats Have High Cash Flow
Essential Service
Laundromats provide a vital service: they provide people with clean clothes. This basic necessity ensures a constant demand, regardless of economic conditions. People always need to wash their clothes, making laundromats a stable business venture. Even during economic downturns, the need for laundry services remains consistent, providing a reliable revenue stream.
High Return on Investment
The typical return on investment (ROI) for laundromats ranges from 20% to 30%. This far exceeds the average returns on other types of business ventures such a real estate (7-10%) and the financial sector (4.7% dividend yield). Such high returns make laundromats an attractive investment, especially for those looking for strong cash flow.
Simplicity of Operation
Laundromats are relatively simple to operate, they are typically viewed as a relatively low-maintenance business and you may even hear laundromat owners refer to their business as a passive income stream. This is because they require minimal inventory, customers pay upfront, and they usually need few employees, particularly if they're running a coin-operated laundromat. Moreover, modern tools like laundry business management systems like CleanCloud streamline operations, making it easier to manage day-to-day tasks and enhance profitability.
Potential for Improvement
One of the great aspects of laundromats is their potential for improvement. Adding new equipment, offering additional services, raising prices, implementing better marketing strategies, and using advanced management software can significantly increase cash flow. These enhancements not only stabilize a failing business but can also scale a successful one, providing more significant returns.
Leverage Opportunities
Laundromats allow for leveraging investments through loans for acquisition or equipment purchase. This ability to use leverage means you can amplify your returns, making laundromats even more powerful and profitable assets. Financing options can help spread the initial costs, making it easier to start and grow your business.
Why Some Laundromats Don't Make Money
While laundromats can be incredibly lucrative and a smart investment, not all succeed. Common reasons include:
Inadequate Due Diligence
Failing to conduct thorough due diligence can lead to purchasing a laundromat at an incorrect valuation, resulting in poor returns. For more details on how to ensure you pay a fair purchase price for your laundromat, see our guide on verifying the financials of a laundromat.
Unfavorable Lease Agreements
Renting or buying a business is a popular route into the laundromat business and in many ways this makes sense, you avoid construction costs and you may inherit an already loyal customer base. That's not to say that buying or renting is risk free. When it comes to signing a lease there are several factors to consider. Firstly make sure that the lease isn't' too high relative to gross monthly income, sounds obvious but when you don't yet know what your monthly income will be it's easy to sign a lease that is too expensive. Secondly, check the lease length - the shorter the lease, the less time you have to hit profitability. Finally, look out for hidden “gotchas'' which can significantly impact profitability.
Poor Management
Ineffective management can lead to operational inefficiencies, poor customer service, and ultimately, reduced profits. You'll often hear that one of the benefits of the laundromat industry is that it provides a passive income stream, which sounds appealing. The reality is, that just like any other business, running a successful laundromat takes time and patience. Proper management practices and the use of modern management tools are essential for success.
Opening a Laundromat: A Step-by-Step Guide
If you've done your due diligence and you you’re convinced that a laundromat could be a profitable investment, here are the steps to get started:
Conduct Market Research
Begin with thorough market research. Analyze the demographics, and the demand for laundry services. It's also worth considering the competition in your target area - bear in mind competition isn't necessarily a bad thing. It can be an indicator of demand and can also influence the services you offer, for example if the competition is a coin laundry business, you could offer wash dry fold or pickup and delivery. High-traffic locations near residential complexes, and apartment buildings are typically ideal as our college towns. That's not to say that without these you won't run a successful laundromat business, but it's worth considering before you make an initial investment. For a deeper dive into the importance of market research see our recent article: Understanding Market Research.
Create a Business Plan
Fail to prepare, prepare to fail - without a detailed business plan your chances of success are significantly limited. Before you make any investment you should develop a detailed business plan outlining your business model, target market, marketing strategy, financial projections, and funding needs. This plan will serve as your blueprint and help attract investors or secure financing.
Secure Financing
As we've mentioned, a typical laundromat carries a signifcant upfront cost. Luckily there are many financing options which can help you better manage the upfront costs of opening a laundromat. Consider bank loans, SBA loans, or private investors. A detailed financial plan and a robust business plan will be crucial in securing these funds.
Find the Right Location
As with any business venture, choosing the right location is key to success. If you're in a city you'll want a location that ensures high foot traffic and accessibility. For more rural stores you'll want to think about parking facilities. Negotiate favorable lease terms, considering factors like rent, lease duration, and renewal options. A good lease agreement is critical to your business’s long-term success. Check out our recent blog for a more thorough exploration of what makes a good location.
Purchase and Set Up Equipment
Invest in high-quality, energy-efficient laundry machines and dryers. Design your laundromat for efficiency and customer comfort, including clear signage, good lighting, and a clean environment. Additional amenities like Wi-Fi and vending machines can enhance customer experience.
Implement a Marketing Strategy
Promote your laundromat through local advertising, social media, and community engagement. Offering promotions, loyalty programs, and referral incentives can help attract and retain customers. Not sure where to start? We've got plenty of resources to help you with your marketing plans.
Hire and Train Staff
If you need employees, hire those who are friendly and knowledgeable. Proper training in customer service and machine maintenance will ensure smooth operations and enhance customer satisfaction. CleanCloud customers will have access to a variety of training documents and resources including CleanCloud university, blog content and guides.
Verifying the Financials: Due Diligence Checklist
Thorough due diligence is essential before purchasing or investing in a laundromat. Here’s a checklist to guide you:
Review Financial Statements
Request the past three to five years of financial statements, including income statements, balance sheets, and cash flow statements. Consistent revenue growth and manageable expenses are good indicators of a healthy business.
Analyze Revenue Sources
Identify the primary revenue sources, such as self-service laundry, wash-and-fold services, and vending machines. Assess the revenue mix and growth potential in each area.
Examine Utility Bills
Review past utility bills to understand the cost structure. High utility costs can significantly impact profitability, so energy-efficient equipment is a plus.
Inspect Equipment
Evaluate the age and condition of the equipment. Older machines might require more maintenance and be less efficient. Factor in potential costs for repairs or replacements.
Assess the Lease Agreement
Review the lease agreement carefully. Ensure favorable terms and consider factors like rent, lease duration, and any hidden clauses that might affect profitability.
Check for Outstanding Liabilities
Investigate any outstanding debts or liabilities, such as unpaid taxes or vendor bills. These can affect the business’s financial health.
Evaluate Market Conditions
Understand the local market conditions, including competition and demand. Visit the area at different times to gauge foot traffic and customer behavior.
Speak to Existing Customers
If possible, talk to current customers to get their feedback on service quality, pricing, and overall experience. This can provide valuable insights into the business’s reputation and areas for improvement.
A Smart Investment?
So, are laundromats profitable? With high returns, stable demand, and opportunities for improvement, laundromats represent a promising investment. By understanding the factors that drive profitability and taking the necessary steps to mitigate risks, you can make a laundromat a lucrative venture.
For more insights and industry tips, explore resources like the Coin Laundry Association, American Coin-Op, and various forums on Reddit where experienced laundromat owners share their experiences and advice. By leveraging this knowledge and following best practices, you can ensure your laundromat investment is both profitable and rewarding.