Frequently asked questions
Laundromat acquisition financing does exist! While “traditional” financing through a local or national bank is not a viable way to obtain financing for the purchase of a laundromat business, there are a few “industry specific lenders” who have made it their specialty. These lenders come from a laundromat business background and know how to quickly evaluate the business and fund a loan to close on your transaction.
Cash down payments will range from 30% – 50% of the purchase price of the laundromat. Typically the down payment cannot come from borrowed funds and must come from the buyer’s cash on hand or a liquid investment account. This is important for you to recognize in determining your overall price point (limits) of laundromats offered for sale (i.e. if you have $100,000 available to put down, you should be looking at laundromats offered in the $250,000 – $350,000 price range, and so on).
These loans are typically for 5-7 years and at interest rates between 8% – 9% depending on the current WSJ prime lending rate (at the time of this writing the WSJ prime rate is 5.5%), financial strength of the Buyer and strength of the particular laundromat business.
The business net profit after applying the loan structure plays a large role in determining the market value of the laundromat that is for sale. Each potential opportunity must be looked at through the lens of the financing terms and cash flow after financing debt payment.
Industry specific lenders can often provide pre-qualification letters that are helpful when pursuing an offer to purchase.
It can be noted that on rare occasion there can be SBA insured commercial loans available that can provide a longer loan term at a slightly better interest rate and slightly lower cash down. These are rare, and most laundromats do not meet the criteria for this form of financing.
We are well acquainted with all of the financing sources available and the lender criteria to help point you in the appropriate direction in regard to financing.
Yes, to a reasonable degree. There are several metrics we use to determine the credibility of the numbers that are being portrayed by a Seller. While no single piece of information is the answer to the question of definitive credibility, it is the aggregate of these metrics that can lead to high confidence or no confidence that the numbers are real and reliable. We are continuously building a profile of the credibility of the store numbers from 1st contact with the Seller and/or their Agent all the way through to the close of a purchase. We are very adept at sniffing out any questionable income/expense variants right from the start. This is a powerful tool in streamlining the process of determining whether the particular opportunity is worth any further consideration and moving rapidly through to find the right store. A lot of time is saved right from the start. If the initial vetting meets the smell test, we proceed with gathering additional information sufficient to make a formal offer to purchase that contains an extensive list of requests for documentation used to complete the rest of the credibility picture.
Here are a few examples of the metrics that are applied:
- Initial Broker created Marketing sheet
- Re-casting of any expenses omitted or underreported
- Looking at utility consumption as compared to sales revenue
- Applying information derived from comparative stores sold
- Seller’s P&L statements along w/ historical collection records
- Expense records and documentation
- Any known changes to the immediate market area of the subject store
There are several more aspects of income/expense verification that can apply depending on the amount of information and the transparency of what the Seller is able or willing to provide.
- How long is the current term (in years) of the business lease, not including option periods? This is important to establish how long is left for you to operate this business, get a return of your initial investment and set yourself up for continued enjoyment of the business profits. Also, the length of the term will be important to the future marketability should you decide to sell the business.
- Are there any options to extend the term of the original lease? Often there are additional option periods that can extend the original lease term. It is important here to ask if those option period rents are defined in the lease or potentially subject to negotiation at the end of the original term. Lack of defined rent during option periods are the equivalent of having no options at all. If the option period rents are not defined, doing so should be an important contingency contained in your offer to purchase. It is often suggested that the combination of the remaining original lease term, plus defined option period extensions combined, should be no less than 10 years total and the longer the better to extend the value of the business.
- Are there periodic increases in the rent? Most leases have scheduled increases to the base rent. Some are annual, some every few years. Find out when the next increase is to occur and how much the new rent will be. You should put that increase in expense of the business operation into your equation when determining expected cash flow.
- NNN/CAM expenses? Most leases are “Triple Net” (NNN) leases. The NNN expenses are the Landlord’s expenses associated with owning and operating the premises. They typically include the property taxes, building insurance, repairs, and common area maintenance (CAM) of the property. These expenses are passed through to the tenant in the form of “additional rent” in addition to the base rent charge. Ask what the NNN/CAM charges will be and add that to your total rent expense.
- Are there going to be lease deposits when the lease is transferred? Transfer of the lease from the old owner to a new owner often requires a security deposit held by the Landlord. The lease should spell that out, and it is worth asking to determine what additional amounts may be required from you at closing.
The initial “Offer to Purchase” is important to set the tone for a successful outcome to purchasing a laundromat. Making an offer after obtaining as much information as possible up front is often key to coming to an agreement with a Seller. Not taking some time to preliminarily investigate the business before making an official offer can lead to making an offer that never goes anywhere or takes you somewhere you don’t want to go.
Here are some things to do before making that offer:
- Get serious about what you can afford to invest. Determine how much money you can or are comfortable investing as a down payment and know that will determine which stores you take a serious look at
- Remember, lenders to the laundromat industry will require 35% – 50% of the purchase price as a down payment. You will also need on average an additional $10,000 – $20,000 in cash for closing costs, deposits, and business related starting inventory.
- Get as much preliminary detailed information about the business income and expenses you can. Sellers and their Brokers will likely not provide actual P&L statements or copies of the lease prior to an offer being accepted, but they usually have a marketing sheet or overview of the income and expenses that detail the categories of where the income comes from and a breakdown of expenses. Ask for whatever they are able to provide at this preliminary stage. Ask for an overview of the lease situation. How many years are left on the existing lease? Does this lease include option periods? How often is the rent increased and by what amount? Do the option periods include defined rent?
- Visit the store. Go look and see if this is a store you can envision owning and operating. Is it convenient enough for you to travel to on a 2-3 time per week basis? Decide if the area and neighborhood is too risky for your comfort level (i.e. gang members hanging around the store or tons of graffiti). Look around at the immediate competitor stores (typically in a one mile radius) to see if there are any aggressive promotions under way. Check for any closed down laundromats waiting for someone to remodel and re-open or a “Laundromat Coming Soon” sign hanging across the front of a retail space a block away.
- Get pre-qualified by a laundromat-specific lender. Know in advance if a lender will likely approve you for the purchase of store priced at the level of the one you are interested in. Having a pre-qualifying letter from a recognized industry lender will go a long way in having your offer seriously considered.
Opening a new store
The development of a new start up laundromat in the California market will cost anywhere from $600,000 (smallest of stores) up to $1,000,000 +. This includes construction costs, equipment costs, utility acquisition fees, plan and permit fees, as well as any unforeseen upgrades revealed through the permit process. The basis of a new start up development in regard to income/profit potential is traditionally done through income/expense “projections” (estimates). These projections are derived from multiple sources of data, such as area demographics, market area vend prices, strength of competition, etc. All of these and more are looked at to arrive at a determination of whether it makes sense to build a new store in a particular location.
Buying an established store
Purchasing an established laundromat business allows you to have a better idea of what to expect in the way of income and profits from day one. This is the typical way that most people enter this business for many reasons. Here are a few key reasons:
- There is much less risk associated with predicting income and profits
- The entry price can be much lower than building a new store
- Less risk of unforeseen costs of acquiring the business
- Knowledge of cash flow from the beginning
When purchasing an existing established store, you will have a documented history of income and expenses to go by, as well as an already operating business that will feel much more smooth and predictable from the beginning.
Of course, the purchase of an established laundromat will be a much less risky proposition when you know how to evaluate it properly during the purchase process. Knowing what to ask for and how to evaluate it correctly is highly recommended to minimize risk and know more precisely what you are getting.
Knowing what you don’t know is key.
When it comes time to put an offer in writing, you must remember to cover all of your bases in the language of that offer. Especially key items should be timelines of performance, contingencies of review of income/expense records, the lease document, lease assignment, financing, observation and coin collection verification, and disposition of earnest money deposit, to name just a few.
The Offer to Purchase is often prepared by the Seller’s Broker unless you have hired a 3rd party to represent or assist you in the transaction. It is important for you to know that unless you have done this many times and learned through trial and error that it will be likely you will miss key elements that are designed to protect you when entering into an Offer to Purchase. You can use your own level of judgement and comfort as to whether the Broker is covering all of the bases that are in your specific interests.
Each and every laundromat transaction is different subject to the specific circumstances gleaned from the preliminary information gathered prior to the Offer. Thus, each offer should be uniquely tailored to the specific subject of potential purchase (they are all different). It is highly recommended any new investor in the business obtain 3rd party guidance before and during the Offer process.
That said, here are some staple items that need to be included in all Offers to Purchase:
- Name of Offeror. While you may be using your personal name in the offer, you should anticipate as the transaction moves forward that you may create an ownership entity (i.e. “S” Corp., LLC, or other). Include language that identifies your ability to assign the contract to your new entity.
- A detailed list of records and documents to be supplied to you by the Seller for your review and satisfaction with income and expense verification and acceptable lease terms as a contingency of the transaction moving forward.
- Timelines for Due Diligence review, business observation, and coin collection verification.
- Timeline for “Opening of Escrow” and “Lease Assignment” applications.
- Specific contingencies and timelines related to ongoing lease negotiation with the Landlord to obtain extensions of term or amendments to current lease language.
- Financing related contingencies and timelines to produce a final letter of approval.
- Ability to cancel the transaction in the event of lack of verification and performance.
An important element to consider regarding Escrow is the timing of “opening the escrow” contained in the Offer to Purchase. Opening an Escrow prior to completing the Due Diligence process could put you in a potential dispute regarding the earnest money being held in an open Escrow. Should the verification of Seller records and documents during Due Diligence not match the original representation (which was the basis for the offer) and you decide not to move forward with the purchase, most escrow holders will require permission from the Seller to release your earnest money deposit back to you and cancel the escrow. We have seen circumstances where the Seller has asked to retain your deposit in the event of a unilateral request by the Buyer to cancel the transaction. While it is likely you could eventually recover your deposit depending on the circumstances, it is possible to become embroiled in a protracted legal argument to do so.
We have found the best way of avoiding such a potential scenario is to address the timeline for “Opening of Escrow” in the original Offer to Purchase. We typically recommend the Escrow be opened upon completion and satisfaction of the Due Diligence period. This timeline should be addressed in the original Offer to Purchase with very specific language.
Once Due Diligence has been satisfied, you will receive “Opening Escrow Instructions.” These instructions should reflect all aspects of the Purchase Agreement and give the Escrow holder written permission to begin the Escrow process. The Escrow holder will then proceed with many tasks such as, verification of title, notices to creditors, lien searches, outstanding EDD issues, etc. You can typically anticipate the escrow process to take approximately three weeks from opening to close unless it’s delayed in any way. Once the process has completed, the Escrow holder will issue the Final Closing Statement for review by parties. Once the final statement has been reviewed and affirmed by the Buyer and Seller, Escrow will begin the final collection of funds necessary to close and final documents needed for the transfer of the business.
It would not be unusual to estimate the entire transaction beginning with the original negotiation of the Offer to Purchase, completion of Due Diligence, to Close of Escrow and Transfer of the business taking approximately 45 – 60 days.
Expect the Escrow process and associated documents you will be asked to approve to be somewhat complicated and time consuming to many people who have not experienced the process of a Business Escrow. This is a time where 3rd party assistance is highly recommended to help you navigate the successful closing and transfer.