Due Diligence on existing Mat

[rildin]

Hi,
I've been keeping up with this board for a while, and would like to hear your opinions on this matter:

We (wife and I) found a landromat that is not "actively" for sale, owned by a vietnamese gentleman. In our area, many (if not most) of the laundromats are owned by vietnamese. He has not advertised the mat for sale, we heard about it through a friend of the owner (who turns out to be the landlord of the building).

We have visited the shop several times, done many loads of clothes there, and done observations from across the street.

The shop is older (older than 20 years), in an established but slightly declining neighborhood. There has been a 5% drop in residents over the past 12 years. There is a major hospital approx 1/2 mile north of the store, on a major two-lane road. The road will be widened to 5 lanes in summer of next year. The hospital is expanding, and new retail has grown in the adjacent area. Around the laundry, there is residential, approx 45% of which is rental and apartments. The median household income is 34,500. This laundry is approx 3 miles from a university, although there is a mat outside the university.

The owner doesn't speak much english, so we visited him yesterday with a vietnamese friend of our son, who translated for us. The translator and owner do not know each other.

The owner sounds very firm at 45k for the store. We haven't made any offers, just getting info, but he's saying that while he would like to sell, he hasn't advertised the store, and if he doesn't sell it, he'll continue to work it (although he's older, and stated that he has no family help to run the store).

He won't give any financial numbers on the business. Our translator told us that his "official" reason is that he doesn't want to give any numbers and have the buyer come back on him and complain if he doesn't do the same business. From what we've seen during our research, I'd say there was another reason, but I don't know if it's appropriate to mention it here, basing it only on our observations.

So.... he did let us look at some of his bills. I saw that his water bill for last month was 92220 gals. I didn't think to key on the electric or gas bill, though.

When we got home, we called the water company, and found that the location's water usage runs from a low of 104 to a high of 156 units. One odd thing, the water woman said that there were 750 gals to a unit, although for the life of me I thought it was 748. But, it looks like the 92k gallons was a good number.

The shop has 7 new Huebsch TL (last year), 7 Speed Queen TL (2-3 years ago), 7 old Maytag (old), 6 Wasco 73, 1 Wasco 74, 1 Wasco 124, 1 Huebsch 35, 1 Huebsch 25 (both last year), and 2 Speed Queen FL (I didn't see a model #, but one has 2 baskets on the front, and one has 4 baskets on the front label).

There are 22 Loadmaster dryers, unsure of the age, but are older.

The shop does some WDF. There are arcade machines that are split 50/50.

The rent is 800/month, the shop is about 3000 sq ft.

I see potential with some work, the shop is somewhat run-down, and needs paint/cleaning/updating. It can be brightened, and there is room (where the owner has a large work-area, that a snack-bar can be taken from.

We used 34 gallons as a constant, and reverse-engineered to about 3000 gross/month in washing. How does that sound to you all? Have I gotten enough info, and if not, what else should I be looking for? Since we can get in the ballpark for sales knowing the water consumption, does his reluctance to give hard numbers remain a big issue?

Any and all opinions are welcome. I'm sorry this was SO wordy, but couldn't think of another way to give you what I have.

Thanks,
frank.

[mike]

I think you have just about got all the numbers you need.

He probably doesn't want you to know that the store runs at only a SMALL profit.

The equipment will have to be replaced in the not too distant future, (I would recommend minimising the types of washers in the long term. (for parts, and the general look of the store.)

The rent isn't bad, but you MUST have a 20 year lease, or at least a fixed formula for renewal options.

How many stores are competition ?

I suspect that you feel that the store would be doing better if owned by someone who "spoke english", perhaps your right.

If you are the only owner who "speaks english" in the area, you may have a small advantage for a certain slice of the pie.

It may have growth potential, but, don't grow it, and increase it's value over the next 10 years only to have the lease not renewed.

Any chance you could own, or get a fixed price option to buy at a later date ?

[rildin]

Thanks for the reply, Mike!

Actually, my impression (which has nothing to do with his race) was that he was skimming pretty heavily. I mentioned the need for the translator to explain why I didn't have any "feel" about his answers to the questions. The area (btw, I'm only using the demographics for 1 mile) is 63% white, 27% black, and 3% asian.

There are only 3 machines in the shop now that are not working for mechanical reasons, and 2 with inoperable latches.

Besides the university laundromat, there is one other that is about 2 miles away.

Right now it's about a 2 to 1 ratio of washers to dryers. Is there a "right" ratio and size and numbers of machines?

We're figuring that he's netting about 2500/month.

[mike]

If he's skimming heavily, he won't be selling you the store, period !

I think his figures on his water consumption and your calculation of cycles show a guesstimate of $3,000. gross per month for washers, add say $1500. for dryers, (it may be less, if the washer to dryer ratio is 2 to 1)

So, your looking at $4,500. gross per month, NO ONE nets 50% of gross, (at least on a low volume store)

Subtract the rent, utilities, taxes, insurance, repairs, replacement and staff.
well, there isn't much left !

[rildin]

We're looking at this one because we think there's potential with some work, but how do you decide whether the price is "right". I don't mean "right" in the "if it feels good do it" sense, but rather in the "This seems like a reasonable return on investment" sense. One site I was looking at said that 50 times net was about right, but I haven't EVER seen anything like that.

[pete f]

I would pay 45k in a heart beat for a mat doing 80-95k gallon a month and $800 rent. Equipment would not be an issue. Just make sure the lease is good.

[rildin]

OK, sounds like 1 yea, 1 nay (or maybe). What does everyone else think?

[CharlieS]

I think your income estimate is low, but that depends on what you are able to charge per topload. The rent is good, size is great, seems like good potential, price is OK. The key is a good lease of 10 or more years, preferably 20.

Charlie

[rildin]

He's currently charging a dollar for tl and a dollar for the wasco 73s (and the one 74). 2.50 for the bigger fl's. 25 cents for 12 1/2 minutes on the dryers. He says he has them set at 12 1/2 minutes, tells anyone who asks they're 10 minutes, and so does not get any complaints on the dryer times.

[CharlieS]

You'd be giving money away in our market. $1.75 for tops. 7 minutes for a quarter is pretty typical around here.

25% is a pretty big giveaway to avoid complaints on your dryers.

If there is any potential for increase, you could do alright. Right now, its not much over operating expense.


Charlie

[Chuckels]

LOL

" He says he has them set at 12 1/2 minutes, tells anyone who asks they're 10 minutes, and so does not get any complaints on the dryer times."

Why not save the 20 +% in gas and really set them to 10 or even 8?

Chuckels

[SudsMan]

The lease is the most important thing here. The rent is very good for 3000 feet. New machines are in order, especially more dryers. BTW, to answer your question about the ratio of washers to dryers, we go with one 30# dryer basket for every two top load washers, one 30# dryer basket for each 30# front load, and so on up the line. This works well for us with very few times when a customer is waiting for a dryer. Of couse, you can never have too many dryers.

How does the potential for this store compare to the other mat that is 2 miles away? Forget about any business from the university. Unless of course you put something in your mat that students like that the close mat doesn't have and won't have.

I agree your income estimates may be low, but it's better to be conservative. All in all, I'd kill for a mat that had 3000 feet, $800 a month, an established customer base, strong potential for upgrades... Oh, one more thing, I really can't figure out why he's giving 2 1/2 more minutes than he tells the customers about. And, drop the time to whatever you have to in order to make a profit, especially if you add more dryers and new equipment.

[pete f]

LOL you got LA prices in Kansas, you probably have some room for increase... just more puddin' for your pie.. give them 12.5 and say it is 10? ¿ ? ¿ like drinking decaf coffee,, whats the point~

[Lar Hylobates]

Uhh hello people....

800.00 a month??? Come on now. Get it in writing before you waste anymore time.

[rildin]

Hi,

I have a copy of the current lease, and the building owner agrees to a long term lease (15 years). He'll go for 825 for 18 months (I told him I'd like that to cover the time of the street widening.

What types of language do you all use for after that period, to protect yourselves?

Also, any other language or tips for the purchase of the business? I understand and will implement the idea of the equipment being kept separate from the sale of the business "name" (if I understand that concept correctly).

You know, I really appreciate the camaraderie and candor of this board. You have all been so helpful in this endeavor.

[pete f]

I have a street widen project going on now for over a year, and at least a year more to go. Costs me about 25% of my gross... just so you know. Maybe that is the real motive behind the seller..The lease should have any increase held to CPI, nothing higher.

[SudsMan]

Pete has a good point on the street widening. We went through the same thing with the New York State DOT. They took 3 years to complete what they had said would be an 18 month project. We lost 25 - 30% of our business, almost had to close the doors.

Rildin, not only check on the status of the widening project but also look into where the new turn outs and entrance/egress turns will be in relation to the mat. This was a problem with the project we were impacted by.

[rildin]

Thanks, I'll check those things.

Is there any "boilerplate" language for leases for mats, or things I need to make sure are in a lease or a purchase agreement? After my preliminary meeting with the building owner, a 15 year lease will probably be no problem, but I will ask for 20. I like the idea of the rent raises tied to CPI.

Anything else?

[Lar Hylobates]

Rildin, there are so many things that you will miss and learn later. A commercial lease is a very bad thing to learn about late. I hate lawyers and rarely use them, but this is the time to do it. Your landlord will tell you it is a standard lease agreement and you don't need a lawyer. Do yourself a big favor and get one.

#1...Most commercial leases will not assign the options to a new owner, rendering them useless and your mat unsellable.

[CharlieS]

Hylo is right. There are numerous ways to structure a lease. CLA has addressed this issue in seminars and last year had an article about it. If you are a member, you can get a copy of the seminar, and maybe one of the article.

Leases can be very one sided. I walked from one deal strictly over the lease itself. You must have adequate protections if you are to sink substantial funds into a business. Some examples - a clause putting you in default and allowing the landlord to cancel the lease without any notice whatsoever. Clauses which do not allow assignmnent of the lease, or which permit the landlord to cancel the lease if you request assignment.

Never, Never depend upon the good intentions of the landlord. Your current landlord may have good intentions, your next one may not, if the current landlord sells. Maybe his kids aren't as ethical as he is. Maybe he isn't as ethical as he tells you he is. The only thing real protection you have is the lease.

When it comes down to it, you must decide whether the lease is worth the risk, and whether you can control the risk. For instance, I have one lease which provides for notice of default of everything except late rent payment. I didn't like it, but so long as I hand deliver the rent, I know this won't be a problem, so I can control the risk. In another, the landlord would only go 11 years. I accepted, but must assume that I will walk away in 11 years with whatever I can sell the equipment for, which is not going to be much.

In my first mat, the property was recently sold. The new owner is good in some ways, but clearly an **** in others. He wants to install parking over the area where the underground propane tanks are currently stored, and says I have to move them. Guess what wasn't addressed in the lease I assumed? So now we have to work this out, and both of us are on shaky legal ground, since it is not even mentioned in the lease I assumed. The cost is under $1K, but its going to create some friction. One problem is that my lease is very cheap, and long term, and it is costing him, so he would love to find an out.

Charlie

[cesar]

I have a lease question about a mat I'm looking at. The current owner has been there 16 years. He says he just renewed a 15 year lease a year ago. But the lease is really a five year with two five year options. Is this a 15 year lease?

[mike]

Cesar,
It's only worth it if the lease increases are spelled out now, either in dollars or in a fixed % or a fixed formula (eg. CPI or CPI + 1%)

"to be agreed upon" does not even warrant a second thought !!

This does allow YOU to leave after each 5 year term.

[rildin]

Well, here's what I've gotten from the landlord so far:

He'll give me a 20 year lease. He said he's never seen one for more than 5 years.

850/month until the street widening is done. (current tenant is paying 800). 875/month after widening is complete.

He doesn't really like rent increase tied to CPI, but would like something that would take into consideration increased taxes & insurance.

He'd like to see rent increase every two years.

Any good ideas to counter on these? Nothing in writing, we're just batting stuff around trying to reach agreement.

[CharlieS]

Cesar - It is a 15 year lease if you have the option to exercise the renewal, and the owner cannot terminate without cause. I recently looked at a 20 year lease, 5 years with 5 year automatic renewals unless either the lessee or the lessor gives notice of cancellation 6 months in advance. That is only a 5 year lease from my perspective, and the landlord would not change the terms. However, he would give a straight 10 year lease. I took it.

Charlie

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Due Diligence on existing Mat

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