Leveraging Laundromats??

[Anonymous]

Hello!

What is everyone's opinion and experiences on using leveraging to purchase an existing laundromat? What about leveraging a brand new laundromat? How % should I put down? My goal is to establish a chain of laundromats over 5-10 years. Looking forward to your replies! Thank you for your time.

Sincerely,
John Kudlack

[Ken]

A lot people and companys tried this ,most or all of fail ,some even had a lot money to start,I don't think it is good idea.Talk to your bank and dealer,they can give you more info.

[Anonymous]

If you put less than 50% of your own money into it you should be in the process of studying the bankruptcy laws in your state - you will most likely need to make use of them.

[Gary C]

I disagree I have financed 2 mats almost 100% and things are going great. I will agree that is not the case all the time but if you pay attention and get the right place it can be done. Look through some old posts I think we have gone over this.


Gary

[mike]

Gary C,

I think that most mats here have an extra zero at the end of the price !
(more than what you & I are used to)

With the extra zero, you can't build business fast enough to stay afloat,
if fully financed.

[Gary C]

I don't know. If it helps to figure it out I have 300k into one and 285k into the other. Both have 23 washers and one has 24 dryers and the other 16 dryers. I own the realestate at both locations.

Gary

[Gary C]

I have seen Seans post on buying places with little or nothing down. I am agreeing with him it just does not happen every day and it takes some negotiating. But it can be done.

Gary

[Ken]

It could be done if you buy an old store with building,new store,new machines no money down,most people fail.How many large chain fail last 15 years?
You will have hard time to find money/bank anyway,try to get a biz loan first .

[Jim]

If the current mat owner will not hold part of the paper then I would recheck his books...I have found that an owner wanting to dump the place on someone will not hold the paper on it...

[RAM]

Yes it can be done but not thru owner but SBA loan,i had it done,
only if laundromat is making money and shown in tax return,bank will not give you loan if tax return is not showing any profit,bank like to see there monthly payment coming from profit,i have not seen any laundromat tax return that show profit in there tax return in NJ.
Finding good laundromat in NJ in not easy,i am looking to buy 2ed for past 7 years and have not found one laundromat for sale that really make money and one that makes money wants 7 to 10 time net income

[pete f]

If the real estate is the biggest amount of the investment than maybe a smaller amount down, becuase you can get a 15 -20 year note on it. A mat in a rented space will not get those terms, you need more money in the deal to make it worthwhile.

[Anonymous]

You just supported what I was saying - you cannot leverage a laundromat 100%, anyone that does is borrowing money from somewhere else. If you buy the building you are effectively getting a mortgage on that asset and then using the cash to pay for the laundromat - no difference than just paying cash for the business. Further, to make the numbers work you are probably paying yourself an imputed rent that is way below market.

The original question was about leveraging a mat, and it is damn near impossible to make the numbers work if it is highly leveraged. Just do the math. Borrowing against a building is a separate issue.

[Gary C]

Kirby, First you can leverage a mat 100% I have done it. Second it does not matter where the money comes from, credit card, credit line, uncle, etc. as long as you have to pay it back it is borrowed and part of the financing. Now I will say that 100% financing will reduce your net each month but who cares. I put nothing into them. I will take that any day so I can use my money in anoter biz I have that requires the cash. I still make a good profit each month. Could be better if I put 30% down but I now have two and am ending up with more net than if I had 1 with 30% down. I will continue to look for deals like that it works for me.
Being highly levereged just washes out that lower rent issue if you own the realestate so it really come out the same. Do the numbers and you will see.
Gary

[Anonymous]

Gary, of course you CAN leverage 100% (or more) but it is generally not a wise thing to do - especially if you have a market rate rent to pay. If you figure rough numbers that rent might equal 20% of gross, utilities 25%, employees 15%, insurance, maintenance etc... another 15% then you are up to 75% of gross income before you even start to pay for the equipment and the build out. If you add interest expenses and the requirement to payback what you borrowed it does not leave much in your pocket nor give you a cusion in case business falls off or other unplanned events occur. Can it be done, sure - and I certain some have done well doing it. But, it is highly risky and not a prudent move for most, especially those new to the business.

[Gary C]

Kirby, As with many of us there is the 15% savings on employees we are unattended. Rent in our area will run 12 - 15 % That would be market. You are right it's not for everyone but I just don't think you should be so quick to tell people you can't do it. Just have to be careful in the process of doing it. Every deal is different. Some it will work and some it will not.

Gary

[Kitty]

Don't the numbers represent the percents to income? I have seen high grossing mats handle being 100% leveraged.

[mike]

I would love to see a poll of why mats failed !

Of course the problem is, that the people with failed mats are not here to do the poll.

[RAM]

Lets see if you buy building for 200K
Laundromat build outs$200K
Total $400K AT 7% for 10 years your monthly payment will be
$4648 and you are doing in your Laundromat $1500/wk,how you are going to pay for gas,electric,water,sewer,phone,payroll,insurance,s ecurity etc....
You can only leverage 100% if you are sure that your laundromat will generate more income than your leverage

[Kitty]

In my opinion 1500/wk is a low grossing mat and NO you could not leverage 100% based on this type of revenue.

[Gary C]

I would just sit down and cry if I had those #s. Kitty is right 1500 is a low gross mat and it would not support 400k. However it could support 200k no problem.



Gary

[pete f]

you guys missed the 200k for mat part, the mat numbers add up.
The mat is a renter now the mat owner gets to look at his tenant.
If using 25% for occupancy cost, then the $1575 a month is nice rent for a building that cost 200k, that is near 8% cap rate, but expense etc, apply here.

[Anonymous]

OK,Suppose some one buy a laundromat with 100% leverage and you are doing good ,lets say $5000/week,next thing you know distributer are building another store block from you to have slice of your pie,then what you do to make your payment
but if you had put down 50% of your money,your payment(expenses)will be 50%less than 100% leverage
Remember in business competition is just around the corner.Small business fail due to lack of money,if you want to stay open while your competition give outs free dry to get your customer and you need to stay open and wait for your customer to come back.

[Kitty]

Broken record...........you'd better know your market regardles of what you put into it. But even though competition can enter any market wee all know, a mat cannot go on just any street corner, contrary to the thoughts of many who have tried.

[Ken]

Just look into history of this business,how many large laundry chain went under in the last 20 years?
Spin cycle,Laundrymax,Luce any more?

[Coinwash]

Originally posted by EASY CARD
OK,Suppose some one buy a laundromat with 100% leverage and you are doing well ,lets say $5000/week,next thing you know distributer are building another store block from you to have slice of your pie,then what you do to make your payment
but if you had put down 50% of your money,your payment(expenses)will be 50%less than 100% leverage
Remember in business competition is just around the corner.Small business fail due to lack of money,if you want to stay open while your competition give outs free dry to get your customer and you need to stay open and wait for your customer to come back.
"Your screwed",

and that distributer well probably get a great price from you when you sell it to him. Because you don't want to lose you home, car, wife, ect...

[Anonymous]

Kitty,
It does not matter what market you are in right now so many people wanted to ether buy laundromat or build one,since i brought my store (two years)there are 4 more laundromat was build from ground up and they all are 5000sf and up cost over $500K,now if i did not put down 50% of my money i would have been out of business,all most every week i get mail in laundromat if i am interesting selling my store,when i go to buy parts from my distributer they have seminar ones week in evening for new laundromat,you could not believe how many people are there in seminar,most of this people do not know ABC about laundry business but they have lots of cash by looking at luxury cars in parking lot.

[kmdigital]

One thing that no one has mentioned is Return On Investment, or ROI. I think this is why we are in business in the first place, although not everyone understands time value of money concepts. What you are really concerned with is your overall IRR (Internal Rate of Return) which takes into account things like opportunity cost of the the money you invested (what you could potentially have made on the money if you had invested it in something else), the value of the business in the future, discounted at a specific rate, changing annual cash inflows, etc.

I will guarantee you that the less money you invest initially in a business, the higher your IRR will be.

Think about this for a minute. As long as the business cash flows, any future payments don't really come out of your pocket, rather it is money you wouldn't have had otherwise, and your equity is increasing without any money coming directly out of your pocket. Therefore, your real concern is with how much you have left over after all expenses and payments (your net income).

Now consider these numbers. Say you buy a mat for $100,000, and you put 20% down. With terms of the loan being 8% and 10 years (all arbitrary figures just for purposes of this illustration), your monthly payments will be $970.62, and $11,647.44 annually. Now assume that your NOI (net operating income, which doesn't include any mortgage or interest payments) is $20,000. This will leave you with a net income of $8,352.56.

If you buy the mat for $100,000 in cash, your ROI is 20%, (20k/100K) but if you only put 20% down, your ROI is app 42% (8,352.56/20,0000), (20,000 because that was your initial investment). Now we all know that a 42% ROI is better than 20%, but obviously your risk has also increased due the possibility of having a negative net income (lower than expected NOI). And these figures don't include other relevent data that the IRR calculations would include, so your actual IRR will be closer to 50%, assuming that gross revenues increase app 1% annually and the value of the business appreciates by 1% annually.

As you can see, for the astute business person, there is a great deal more to consider than just how large your down payment should be. You need to consider how confident you are in your numbers, what you will do if revenues are less than expected, what the pros and cons are, what your potential risks are, how much risk you are comfortable with, etc, etc, etc, etc.

Any business person makes money only by taking risks, and the first law of investing is that the greater the risk the greater the potential reward should be. If you don't want any risk, don't be a business person, because there are some risks even with 100% ownership. Each person has to decide for him/herself what level of risk they are comfortable with.

That said, business is about taking calculated risks and managing risk. You will make a great deal more money buying five $100,000 laundromats with 20% down on each (using the above numbers) than you ever will with only one $100,000 laundromat. This is what leverage is about, and the key is to UNDERSTANDING the numbers and EVALUATING and MANAGING your risk.

Personally, I always take the worst case scenerio, and if I don't have a way (however painful it may be) of potentially dealing with the problem if it were to occurr, than the risk is too great for the potential rewards. Therefore, because everyone's personal financials are different (as well as their access to potential capital), the level of risk that may be perfectly acceptable to one person may be totally unacceptable to someone else. This is a very personal thing, and only you can decide what level of risk you are comfortable with.

[mike]

kmdigital,

Of course you are correct,

but,

Unfortunately, human nature being what it is, people reading your post do not see or understand that the converse of leverage is that failure is also swifter, and harder if cash flow is reversed, for whatever reason.

Most people buying or starting a new business, (ESPECIALLY this business, as people naively believe it is simpler than it is)
are NOT sophisticated enough to REALLY understand what you said.

They see, and retain in their brains, what they WANT to believe.

I hope this doesn't sound arrogant, because it's not meant to be, but I just hate to hear people who obviously (by listening to their questions) don't have a real grasp of what is involved, getting ready to throw their life savings and take a mortgage on their house to build a store which, (even money bet) will need more cash than they have, or are able to get.

Then what happens ? Personal disaster for them.

Sure, on your calculator, 5 stores for the same money down as one store will return more cash if the cash flow is positive.
But in the real world, the guy opening 5 stores all leveraged ISN'T going to make it.

He just isn't, that's a pipe dream encouraged by numbers which can be made to do anything !

You are correct.

I'm just afraid to tell people that.

[kmdigital]

And you are correct Mike.

I didn't mean to imply that 5 stores was a great idea, just that from a business stand point your potential reward as well as RISK is GREATLY increased.

That said, one of the problems with any small business endeavor is that too many people who don't understand what I was trying to explain are running businesses (or trying to). This incompetence drags down the entire industry due to things like trying to buy your way into the market, under pricing your services, lack of understanding your true costs of doing business, etc, and eventually folding or worse yet, just scraping by. This gives the entire industry a black eye and makes it harder for the good business owners to make a decent ROI.

Nonetheless, this is America, and anyone is allowed to try to run a business anytime they want. It would just be better for everyone involved if they would get some business training and have a better understanding of how to use and interpret the numbers before going into business.

Others may disagree with me, but I believe that any business manager without a good grasp of time value of money concepts is operating like a V8 engine running on only 5 or 6 cylinders, or at best 7. Sure, you can go somewhere and you can make money, but it is really hard (virtually impossible) to make the best business decisions if you don't fully understand the potential financial ramifications of the various scenerios.

[Kitty]

You guys are all correct it is so easy to fail at business, because of a variety of things. Most likely the things that the owner either doesn't calculate, won't admit to or simply does not know enough to consider is the cause of failure because they didn't account for something.

Fully financing a deal is not the ideal situation and the risks are overwhelming to consider but, there ARE markets that can and have sustained the fully leveraged laundromat owner. They are few and far between but it can certainly be done in the right market.


Disclaimer: NO I AM NOT CONSIDERING SUCH A THING!!! :)

[Anonymous]

These were all good anayses! There are some cavaets that need to go with them. There are many ways to measure return, and ROI is but one of them. While you may only invest 20K of your own money and get a 50% return you need to evaluate if the absolute return $10K is worth your time. Another measure that is useful to use is ROA or ROCE which measure the true return on the assets or capital employed. This is a much better way to determine the worth of an investment.

IRR has problems as it implicitly assumes that you reinvest the monies at the same rate of return, which rarely happens.

Bottom line, there are many financial measure used to evaluate an investment or business and each one has its pluses and minuses and what is the correct measure for one person may not be for another. Leverage can give you either upside reward or downside disaster and you cannot totally control which one you get. More risk does not guarantee you more reward, for if it did it would not be risk.

[kmdigital]

Very true Kirby.

You are right, in that there are many other ratios that need to be used to properly evaluate an investment. I realize that there are some problems with IRR, but IMHO it is still one of the best evaluation tools for evaluating a potential purchase. When used in conjunction with DCF and PV it provides you with several separate methods of determining the validity of an investment.

THe other methods are more commonly used after you have some history with a specific business to determine how well you are doing by a number of different metrics.

[pete f]

let's gol back to the 10 years at ?% I do not see this offered in many deals, unless a piece of RE is on the block. This takes out the whole ROI leveraged deal. IF mats were generaly financed for 10 years then your deal would work. however most are 5-7 yrs, so you need cash to enter this biz..

[kmdigital]

You are probably right Pete, except it is possible if you have excellent credit and a strong financial base. I was just approved for a 10 year loan at prime plus 2.25%, which currently makes the final rate 6.25%. Primary drawback is it is a fully floating rate, so there is some interest rate risk. This is an SBA loan, which isn't too difficult, but requires a lot of paperwork.

And this deal doesn't include any real estate. But I am probably going to pass, because the landlord is now changing the terms to only two 5 year options instead of the four 5 year options he had originally told me that he would do. So unless he goes back to 20 years, I am gone.

[Anonymous]

Prime plus 2.25% - they must have seen you coming. My local bank is offering money at prime MINUS 0.5% for 10 years!

[JBTcajun]

Kirby
Prime - .5%; you must have a lot of unused income and assets. Remember the more you have the easier it is to get more. My Mom has her loans at the CD-rate +.5% fixed for the remainder. I need my money to work harder than that for me tough.

[Fred50]

SBA is a royal pain in the a- -. They make you jump through a ton of hoops and they are far from the cheapest place to find money. They also charge points and other fees that local banks don't usually charge.

However, in some cases they may be the only way to get $$ for certain ventures.

[Highnthemnts]

We bought ours 6 months ago. We traded our equity in a rental for the down payment via a real estate group I frequent. It was creative and a great opportunity for us. Good luck!

[Laundry_king]

Leveraging Laundromats??

Very interesting Is there more information on this ?

How many of you did this?

Hope to hear from you