How do I determine the value of a mat?

[anonymous]

I have checked out a couple of mats for sale in my local area, they have great location but each lacks something to make them profitable. I think that I have pinpointed most of the problems, but I can't determine if the properties are worth the asking price based on the information provided.

Let me explain, the mats are breaking even for the most part, according to tax returns, herein lies the possible secret. They may not be reporting all their income. However, they may be telling me there is unreported income to sell the mat. Either way, I can only assume that the reported income is the only income.

Each mat has some older machines, the dryers are really old, single units. One mat in particular is run down, dirty and just nasty looking. Just the kind that is good for turn around for profit. I just don't know if I should pay the asking price or make a substantially lower offer.

I would appreciate any input from some seasoned mat owners. Please help me to know what are some ways to come up with a "value" for a mat that breaks even every month. I know there is a lot of financial aspects one would need to know to make sure, but please take a look at these basics and give me your opinions. There is no reason to believe there is anymore income over and above expenses, I just can't see it.

Here are some quick highlights of the 2 properties:
Mat 1 -
-1200 sqft
-excellent local next door to major super market and salons, etc.
-run down, dirty, nasty looking.
-has clientel, but loosing some business to a smaller, newer mat.
-has dry cleaning drop off and lost most of it to a new dry cleaner nearby.
-water heater is toast.
-40% of washers are down.
-30% of dryers are down.
-10 Speedqueen toploaders 18#
-1 Speedqueen tripleload frontloader
-1 Wascomat Senior W125
-12 Huebsch Originator Loadstar II dryers
-Wash, dry, fold service
-asking $45K

Mat 2:
-2000sqft.
-good local in small plaza, no dry clean drop off due to next door dry cleaner.
-a much larger mat around the corner, has newer front load speedqueens of various size and about 24 stacked dryers, 56" TV and pool table etc.
-very clean, very nice
-20 Maytag toploaders, 6 are down
-2 Wascomat Giant W185
-2 Wascomat Senior W124
-18 Speedqueen single dryers, 4 are down
-no money changer
-no vending machines
-wash, dry, fold service
-2 small commercial accounts worth $300-400 monthly income
-asking $56K

[mike]

Well, I guess I'm the perennial pessimist, but:

both mats need major machine repairs at least, probably replacement because they have each already lost business to competitors, and customers may come back for new machines, but won't return for repairs.

They are both in rented premises.

Their owners (who know their businesses better than you do, have decided the businesses can't be salvaged)

When you figure in the machine costs, over the available lease life, (make it long) You should not offer, but if your dying to do it, lowball offer........the businesses are worth less money each day for the present owners.

Good luck.

[buddy]

I disagree with Mike. If location is good and equipments are maintained properly you may be able to get some business back specially if you vend your washers for quarter less than the newer MAT. You may have to put in little bit of money toward repair and upgrade.

The fact that many machines are down does not neccessarily mean they are not repairable. My guess would be the current owner has lost interest and neglecting the place. You can replace just about anything in these machines and refurbish them.

Remember you also have option to buy refurbished machines if some are not salvagable. Make it clean and have all machines in working order and keep competitive pricing and you will have many customers coming back.

I would not rely on reported income. When I bought my MAT the owner refused to show any books at all. I bought the MAT based on his word and two week trial. It's revenues and expenses are true to the penny of what the seller told me.

Good Luck

[Lar Hylobates]

Two points that I'm sure will cause an arguement, but are true.

1200 feet is not enough of a mat to justify the trip.

The asking price is never fair (to you).

[ajay]

what's your return on investment on two stores? How quickly can you recover the money put into the store? Take a look at the gross minus expense = net. How much are you netting from each store per month. rule of the thumb - 1 year gross is a good sale price of the store. another rule: pay rent 1 week, pay bills 2nd week, keep 2 weeks. how do the two stores compare with that? have you consider buying both? eliminate competition and greater return on investment. Two unattendant store require just as much attention as one. why not buy both, if the price is right?

[anonymous]

Thanks for the input. I am wanting to buy both store to "jump start" my business and double profits.

Ajay, my problem is that the reported NOI is break-even, although, I suspect that both mats are making a very modest NOI and neither is making what it should. Total for both is probably less than $1500/mo. net after loan payments. The ROI on them is good because I will be buying them 0 down, however, my investment costs will be in fix-up and clean-up, which could be as much as a down payment......unless I pad the loan and take out cash at closing........just have to make sure the payments aren't too high. I may be able to make up for it in a lower offer.

The 1200sqft store is in a small rural community about 15min. away, it is as big as it needs to be right now, but could use some stack dryers to free up some floor space for folding tables that are in the ailse now.

Looks like MAT#2 is paying rent in 1st week, utilities 2nd and salaries for the next week and a half, leaving half a week to pay the loan with. Hense, break-even at best. And asking $25K over annual gross.

MAT#1 is paying rent the 1st week, utilities the 2nd and salaries for the next week and a half, leaving half a week to pay the loan with. Hense, break-even at best. And asking $17K less than annual gross.

[Kitty]

Curious, how did you obtain financing with no money down, do you have experience in the business?

[anonymous]

Do you mean - How do I suppose to get 0 down financing?

I use some technics that I learned in real estate investment, some may apply to small business. I will not go through the SBA or a new equipment lease/loaning institution or large national banks.

Mostly, I use small local banks, they are more interested in supporting local businesses.

Also, 0 down doesn't mean I won't use other assets for collateral. 0 down could also be achieved with equity loans or signature loans to secure the down payment, it doesn't mean a down payment isn't made, its just not my money. Not my money = other peoples money = 0 down for me.

Does that answer your question?

[Kitty]

Well, then it is not zero down, you are getting investments, investors or using collateral to obtain the financing, you are simply keeping your cash? That make sense. However, do you have expereince in the mat biz? If not, how did you become interested in it?

[anonymous]

I became interested when 2 local coin ops came up for sale recently and thought I would make a recon call on them. After a little web research found that the business is one of the best to be in.

Besides, I look at it as a fine tuning project, I intrigues me to fix-up and make something worth more than it was, then sell it or keep it for passive income.

BTW - it is 0 down if it is collateral or whatever other than cash out of my pocket. Calculate all expenses including loans and interest to analyze the property's NOI, if there is no cash out of pocket its as good as 0 investment or 0 down.

0 down also indicates that any net profit made at all is an infinate ROI. Chew on that for a while:)

[MRH]

A word of caution... The coin-laundry business DOES NOT lend itself very well to much leverage! This is especially true for those that don't have any experience in the business. You could be looking disaster in the face, if you doen't have very deep pockets or at least 50% CASH (equity) in these stores.

[anonymous]

I am being very cautious of these mats, I don't like dishonest folks and if someone will lie to the IRS they won't hesitate to lie to me. Therefore, I don't plan to pay alot for these mats. I will feel better about the leverage if the payments are low enough.

[Lar Hylobates]

I also am 100%+ leveraged. I have been that way for two years and will continue to do so in the future. It's the only way to go.

Zero Down is no money spent as in if things go bad I walk away with no loss other than the expense of having to create a new financial identity to start up with next week.

I paid for my mats with a cashiers check drawn from my personal checking account, however I spent none of my own money as the week prior I tapped credit cards and personal loans. I currently carry about 250,000 in UNSECURED personal debt with the exception of my new dryers that secure a loan of 40,000 from Dexter financial. Furthermore I'd be willing to put my numbers against any claiming that it can't be done profitably as my mat nets 40-50% after all expense. This is indeed zero down and as Reign stated the ROI is not calculatable. If you can't grasp this concept I can't teach it to you. Once again there are wolves and there are sheep.

Definitely, this method is not for the weak hearted. There are times when things can get very hairy and scary, but if you keep the cash flow constant and available in a "down market" you have good chances of survival.

[CharlieS]

I'm with Hylo on this one. Both of my mats are 100% leveraged. Yes, I used other assets for collateral, but none of my own cash. Both mats make a decent income, above and beyond the payments that I make.

I always consider cash out of my pocket to be much more valuable than borrowed money. I require a minimum 25% return to invest my own money, which is usually only the minimal down payment I can make to create the (highly leveraged) deal. If the deal won't do that, I pass. It must be break even or positive cash flow, never negative, with a substantial build up of equity due to loan payoff. I always use conservative income and overestimate the expense (unless I screw up)

I pay only what the deal is worth to me. The asking price has validity only in the sense that it is the most I will pay. I offer my number, if its accepted, great, if not, have a nice day.

So far, this has worked well for me. However, I do work hard in managing my investments and am willing to put myself at risk. In reality, the risk is minimal, because I spend lots of energy researching the project and understand and control the risk up front.


The question you should be asking is not - What is the value of a mat, but rather, what is the value of the mat to you. Consider all factors, research thoroughly, crunch the numbers. Conservative income, liberal expenses. You have to make assumptions based on your goals. Your first question should be - what is my goal. Are you trying to achieve current income or future income (wealth). What is your time frame. You must crunch the numbers based on your needs and goals.

When you work your way through this process, you'll know if its a good deal. The hard part is learning to do this rapidly enough to act before the good deals are taken by other investors, then having the fortitude to put your energy into action. Always have a bail out plan if things aren't working out, that minimizes your exposure.

Most people want the benefits of self employment, real estate ownership, business ownership, etc, but won't take the action necessary to create them. They want a totally secure deal handed to them on a plate. Sorry, it doesn't work that way. If that deal exists, whoever already knows about it will take it.


Charlie

[Kitty]

Still chewing, but whether or not you personally have any money in the deal doesn't matter, as you will be responsible for the success or failure of the store(s).

As you state, you may not plan to pay much for these mats, but you may find, that these mats are not near what you thought they were. The suggestion is to simply read between the lines, find all information as you possibly can and look deep into the laundry industry. Its not a biz for everyone and not everyone makes any money.

[CharlieS]

One last thing - always remember - its about cash flow, not profit and loss. If you don't have the cash inflow to support the outflow, you will get into trouble quickly. For a while there, there was this thought that this did not apply to high tech and dot coms. They found out otherwise, didn't they. They thought investor cash inflow was the same as business income. Its not.

Whatever you do, make sure the cash supports it.

Most people are "plodders". They plod through life, doing the same thing, secure in their world and scared to take a risk. Most of my friends, and probably most of yours, are like that. My friends like that tell me that they could not sleep at nights if they had my loan payments. I sleep like a baby, because I know the cash flow to cover the payments is secure.

Cash is king, Cash flow that is.

Okay, I know that I will take heat on this P&L thing. P&L is an accounting and tax term, as is depreciation. Yes, items depreciate, but when you buy them and when you replace them, there are cash flow implications. That is how you consider them, by their cash flow implications, not by accounting implications.

Charlie

[Kitty]

Cash flow, must pay for the bills right? Say for instance Mr. reign, buys two mats, no money down. But has a morgtage of 85K, he finds that neither mat makes the money to repay the loan, update, nor enables him to gain market share. No money to pay a helper, no money because the note eats up all the income. He'll feel that sinking feeling fairly quickly. Whether or not you are leveraged, financed or somebody gives it to you, there still needs to be a certain amount made to pay expenses and stay afloat.

[anonymous]

The fact of whether or not you personally have any money in the deal does matter, particularily in regards to ROI.

No one wants a failed business, especially me! So I will be working at improving these businesses and making them profitable.

[CharlieS]

Reign -

You are on the right track. On a fully leveraged mat, ROI doesn't really mean anything. The question becomes - is it worth my time and effort. While these mats aren't making anything now, you are right to think that they have good potential for becoming very profitable with a little TLC. I would prefer that approach over the cost of a new mat.

Charlie

[anonymous]

Good post Charlie, cashflow is the name of the game. I think that these 2 mats are not generating their potential cashflow and as Kitty says it will take $$$ to make improvements, some not so expensive as others but little by little, not all at once, I will make a cashflow machine out of these. There is a modest positive cashflow here, just not a good one (based on unreported income which to make the aquisition I will refuse to recognize).

Oh yea, did I fail to mention my wife works and can keep me alive while I keep the mats alive for the first few months till cashflow improves? Don't tell her I said that!

[CharlieS]

Kitty - You are also right. Someone once asked me if it wouldn't be great if someone gave me a nice $2million dollar turboprop like the one I flew.

My response was NO! I couldn't pay the insurance, the taxes, the hanger fee, the training, or the maintenance, much less put fuel in the damn thing to actually go somewhere!

Again, its all about the cash flow.


Charlie

[Kitty]

Homework, homework homework. Of course you want to jump if the deal does seem to be acurate and potential for increased biz, as well as revenue. But you be darned sure, that the numbers jive, and know why these sellers are selling. Search and find, look under the rug. If they will cheat the IRS, they will cheat you and your mother. Figures are very easy to manunipulate.

[mike]

Reignmaker, I was about to write that I thought you might be a little too starry eyed, and have a too positive attitude (if there be such a thing) but then you mentioned your wife.
She's your ace in the hole, go for it, if all else fails she can do drop-off in the store(s). I used wife financing and now she works 3 days a week doing drop-off. (I expect to get the loans paid off just before she turns 65, so it all works out !)

[pete f]

I posted a note way back when this board was fiest up, it was about wanting to be in the laundry business and needing CASH to do it. You are talking low volume stores, to which I have been associated with, so maybe I know better than someone with a 200k a year store..). If you try and leverage 100% a low volume store, particualry one that needs a cash infusion to upgrade it, weather over time or all at once, you may not get cash flow positive for years. The best deals I have done were 50% of my own money in, 5 year notes on the balance to the owners. It gave me cash flow to reinvest and make the stores better over time. 100% could work, if you have great volume, cash to back it up, and do not need any money from it. Rates are very low right now on home equity, 4.5% or so, that could be leveraged. You had included some remarks about debt service. That does not "count" as far as pricing is concerned. You need the debt, the store does not.
It becomes a now or later situation. It sounds like the mats have potential, and probably you should take a stab at both if you have the means. A fresh coat of paint, a few bottles of ammoinia, scrub brushes, repairs, and you might be able to turn things around. The crappiest mats are selling, or at least holding for, bigger prices than most of us think thye are worth, Low savings rates, bad stock markets, people wanting thier own business, high impact fees, these add to the upwards pricing. I have a couple mats I want to buy, we are at least 50% apart, the owners are not budging. One is asking 45k, nothing works, not even sure if he does 1500 a month, he wants 1200 mo rent, he owns the building. I offer 15k as a goodwill gesture. No interest.
good luck!

[Anonymous]

A broker in my area told me he is selling mats right now for 7 to 8 times net and they are moving fast - for all the reasons just mentioned.

As far a infinite ROI, you guys are kidding yourselfs. As Pete mentioned you may choose to finance with 100% debt, but to truly evaluate the mat you should analyze the ROA (return on assets) to really see how well it does as a business venture. Further, debt service should not be included as an expense in this analysis. If you take out a home equity loan and use that to fund the mat, then you really do have your own capital in the business. If it fails, you loose your business and your house.

[CharlieS]

Kirby -
While I understand the ROA number, it really has no relevance.

Example - I can buy 2 businesses for X$ down.
Each business generates before tax cash flow of 50K per year. It takes Y number of hours to manage each one.

One has assets of 100K, one 200K

Do I really care what the return on assets is? Why? All I care is whether the investment is worth the time, energy, and money that I actually have to risk.

OK, there is a reason. The one with the higher assets will generate a greater taxable depreciation and reduce my tax bill. However, the ROA is half that of the other. My after tax income will be higher even though the ROA is lower by half. In addition, the higher asset value, which I am paying off through loans, means that I will be creating a higher equity end value when all is said and done.

ROA means nothing. ROE, Return on equity, however, does mean something.

Charlie

[CharlieS]

Regardless of the source of my funds, whether I mortgage my home, another asset, or whatever, I always include those particular costs with the venture to which they are used. How could I do otherwise? I am analyzing whether or not to use a particular resource to create an additional investment vehicle. I don't care if its my house, car, dog, or whatever. I already put a personal guarantee on every loan I have and it waives all homeowner priviliges. If I'm not confident of my analysis, I won't make the deal.

And yes, I am prepared to live in a tent if it comes to that. I told my wife when I started 7 years ago, that there was a 95% chance we would retire very comfortably, but a 5% chance we would go bankrupt. Since then, I've increased our net worth over 700%, (we started with a dollar and a quarter) not bad for 7 years.

[CharlieS]

I guess I should explain my investment philosophy, which my brother in law calls wealth through debt.

I could take 10K and invest it at 8% in the stock market, or lets even use a historical 15%. In 15 years, at 8% (confident about that number are you?), you will have an investment of about $31K. At 15% (congratulations, well done!!!), about 81K.

I choose however, to find a piece of real estate, for about 100K with 10% down. After 15 years, it is completely paid off. I have now made $100K !!! Oops, except that this property has also been appreciating at about 4% a year on average and is now worth 180K. Maybe I refied in year 8, took the cash, and bought another property, so I now have 2 properties, worth about 360K, with about 50K remaining in debt.

The difficulty - you can't do this in today's market and create positive cash flow, at least in my neck of the woods. You can avoid negative, but you can't go positive and keep your properties in good condition.

So, what do you do. Hmm, fortunately, like raine, my wife makes a decent living. Or you can work a second job, like I used to or,
you can deviate and buy a laundromat!!!!

I don't lose sleep over debt, but I do cover my bases and make sure the cash flow exists. Actually, my laundromats were much harder than the real estate, because the cash flow is much harder to predict. The debt payments, both principle and interest, are always factored into the cash flow equations, regardless of how I actually created the funds. The question is not ROA, but whether using those same funds on another project will meet my goals better.

Goals must be established first. Why do you want an investment? Current money, future money, retirement, what? How you structure the investment will depend on these answers. You can make huge money on deferred income investments, like real estate, but its hard to make current money with nothing down.

Too many people buy businesses to create a job for themselves. If you invest 50K, work 40 hours a week at that business, and get back 50K a year, what have you achieved? All you did was buy yourself a job, one you will hate in 2 years and can't fire yourself from. This is a common laundromat scenario.

Charlie

[Lar Hylobates]

Charlie,

why do you keep repeating what I clearly explained earlier.

And kirby, ROI is a very nice judge of value.

The funny infinite idea is how do you calculate your return on a zero investment. I create an income where there was none and invest none of my money to do it. The positive cash flow then keeps me from having to work for a living. Go figure...or better yet chew on that in the meantime.

[Anonymous]

ROI is not the only thing to look at, neither is ROA, they all must be looked at together to get a complete picture. If you buy a mat with all debt for lets say $200K and then want to sell it at some point in time, someone else is going to look at the value based on the return on what they invest. If you are netting $50K from it then it has a decent ROA, if you only net $10K then the ROA stinks. If you have investing "someone elses money" and no equity in it then that $10K a year maybe a great return to you now, but you would be hard pressed to sell it because the return on the fully funded equity stinks. The point is, there are many yard sticks to use, there is no one measure that is correct by itself, they all give a different picture.

[Todd]

Reignmaker, it seems everyone else has already said what needs to Your approach should be what is it worth to you. One thing to look at though. It sounded like both mats had attendants and a miniature wdf service. Think about ditching the attendants and concentrate money on making the place nice.

[CharlieS]

Hylo -

It scares me that we seem to think alike in this regard!!!

:)

Charlie

[Fred50]

What is anything worth?

Whatever someone is willing to pay for it!

I can rack my brain with the best of them using ROI, ROA, ROE, IRR, etc, but it all comes down to what rate of return at your perceived level of risk that you are comfortable with. Just remember to look at a mat as an active, not passive investment.

[Matt600]

Charlie

Your analysis of shares v property highlights why one should not use ROI as a measure of what makes a good investment against a bad investment. Your example the you use (the 10k in shares) indeed does show that that your ROI in property is far superior to the return you would have gotten in shares. And if one were to looking at your ROI one would be rushing his money into property. Yet we know that shares have outperformed property over the long term not withstanding the recent poor performance. So what is wrong with the analysis, it does not take account of the risk of the downside. Or to ignore the risk of the downside for a moment, you could have financed the shares by borrowed money and the property by using your own money, you would have obtained a completely opposite result in your analysis, the shares would shown a higher ROI than the property, hence you would be rushing your money into shares. That is why you should use ROA in the analysis. So what is the risk of the downside?.

Imagine two investors want to invest $100,000 in a mat/mats. One investor buys a mat for the $100,000. The other investor thinks he might buy five mats by putting $100,000 (20%) and borrowing the extra $400,000. Now let's look at the financial position of the players if things don't go a well as things might. Sales are down by a couple of percent, flowing through to decreased profit and hence decreased valuation of the business. Let’s say the value of the business is now worth 20% less. The person who used borrowed funds has now no equity in his business and in effect, if he did manage to borrow the money with no collateral, the bank would be selling the business and he would have nothing. In other words a 20% decline in the value of his business has seen a 100% decline in his net worth. The player who paid cash for his business has seen 20% decline in the value of his business and a 20% decline in his net worth. One lost $100,000 the other $20,000 investing in a business with the same intrinsic risk and starting with the same capital. Using borrowed funds magnifies profits on the upside but also magnifies losses on the downside in so far as your return is concerned. Higher Return higher risk.

[Lar Hylobates]

Matt...well said.

That is why you see the little note about CASH FLOW behind such statements concerning High leverage.

In your scenario, the leveraged owner does not lose anything to the bank so long as he can make his payment, hence cash flow. Tomorrow is another day and the money is returned. (or it's not and you have to find a new name or start paying cash for everything)

I now realize that you and others may think this cash flow must come from the specific business in order to correctly fulfill these calculations. I appologize if I left this impression.

As long as I keep MY cash flow positive, no business of mine falls apart. I own three separate businesses, all unrelated, all hands on and I keep them all afloat, never allowing any of them to show any stress during the "dips" and catch it up and then some on the "peaks"

[CharlieS]

Matt - Your analysis of magnified profit and loss is absolutely correct.

You may have noticed that my approach to investment requires very conservative income projection and liberal expense projection. This approach minimized my risk in a downturn. In addition, I immediately start to improve my properties using the cash flow, and consistently work at increasing the rents. The highest risk is therefore in the first few years. Once you can get some buffer into the income, the risk of a downturn is minimal.

Unfortunately, I am just plain not smart enough to play in the stock market. If the professional managers in this arena can't figure it out, with their analysts, huge analytical software, and teams of researchers, I don't really have a hope.

In one of my prior lives, I was a real estate appraiser for 8 years. I admit that I have a lot of experience in analyzing property, and this gives me a much greater comfort level.

However, I do challenge you to find 100% financing for stock market investments, something I have been able to do routinely in real estate and laundromats.

But again, it can't be emphasized enough that cash flow is the key. On this board we often see dreamers with pie in the sky projections, which are not based on much more than conjecture, feelings, and hope, along with a whiff of factual reality. Distributors love to sell tons of equipment and then point out the huge income if you just do 4 or 5 turns a day! Buy more equipment, the turns will justify it. This is, of course, great if the business actually exists, but that is often an analysis that is ignored. The tail ends up leading the dog.


Charlie

[Lar Hylobates]

I did really well in the stock market about 5 years ago. Each year I take my carried over $3,000 deduction! Seems I'll never wear them all out!!

[mike]

The quote below from CharlieS should be automatically printed for every wannabe or newbie !

If your thinking about opening a mat, read this !

If you still want to open a mat,

READ IT AGAIN !!!

"But again, it can't be emphasized enough that cash flow is the key. On this board we often see dreamers with pie in the sky projections, which are not based on much more than conjecture, feelings, and hope, along with a whiff of factual reality. Distributors love to sell tons of equipment and then point out the huge income if you just do 4 or 5 turns a day! Buy more equipment, the turns will justify it. This is, of course, great if the business actually exists, but that is often an analysis that is ignored. The tail ends up leading the dog."

[Matt600]

Just one comment about the skill needed to play the stock market. They had a contest here a few years ago between contestants trying to see who could get the greatest return over a 12 months period. A monkey won the contest by choosing shares by the method of throwing darts at a dart board full of the names of companies. So the story goes. This is not illogical because the share price of a particular share is representative of the collective wisdom of all the experts buying and selling shares at any particular time. This is why buying into index funds is one of the best ways to get into the share market. No skill, no analysis needed.

Charlie, with regard to your challenge of finding 100 % financing for a share market investment, I shall decline the challenge as I don’t think that I could, not in the true sense of the word, however, I would challenge you to show me how to get 100% financing on a Laundromat.. Because if you can please show me because I would love to get into the business without any risk. When I say in the true sense of the word, I mean debt that only has a charge over the particular assets in which the debt is invested. That is, if the share market investment fails (meaning is worth nothing) and/or the Laundromat failures the lender (not the borrower) has done his money. The lender has no recourse to any other of the borrowers assets and just importantly has not recourse to any of the borrowers future income or his wife’s future income if either of them have employment outside of the Laundromat.

In a public company there is not always a clearly divided line between debt and equity. For example, preference shares have elements of debt and some element of equity; same is true of convertible notes. This is also true for the sole trader, and I think that this is what Kirby was saying earlier. For example, I could say that I am financing my share portfolio by using the share portfolio itself as collateral. The bank will finance me 70% for one of the top 100 companies. The other 30% I could obtain by taking out a personal loan (would not even need any collateral). However, I would consider this loan has an element of equity to it, in that the bank has a charge over assets other than the assets in which it will be employed, namely my future wages. In other words the bank is not lending me the money on the basis of the business but in the stability of my job, etc. In fact, if I was on a million a year the bank would lend me 800% of the value of the investment.

Just one last thought on this and ROI, I may be wrong in regard to what I have stated above, it may not be impossible to obtain 100% finance on a Laundromat where the lender only has a charge over the assets in which the borrowed money is employed. However, what do you think the interest rate would be, I would guess at 25%, leaving a 0% return on equity? I.e. No profit which is only fair given no risk was taken.

I do agree that at the end of the day it all comes back to cash flow.


My two bobs worth

[anonymous]

I know right now that I can buy one of these mats with a down payment and owner financing the balance. I can borrow the down payment through several methods, either secured or unsecured.

I can finance this venture 100% and turn a modest profit, debt service will be paid through the business as an expense.

I may not be able to "live" off the net income, but this will supplement other investments, I don't need a job or my wife's job to do it. Is it easy or without planning? NO. But it can be done.

[Kitty]

Reign,

Don't think we are all pesimists, no one means to rain on your parade. Good luck with your venture, everyone wants to see all in laundryland succeed*!!


*with the exception of any mat located in the vicinity near any of us, where the pie slice is made smaller by competition..:)

[Anonymous]

Sure, it is possible to obtain borrowed funding (if you have a strong personal balance sheet) to make it appear you are obtaining the laundromat with none of your own funds. BUT as someone has already said, you are not doing this without risk. Thus, you can claim that you have a huge return on your investment, but with this huge leverage you also have a large degree of risk. Higher risk deserves higher reward - no questions here.


You have to be careful that you fully understand this risk. If you leverage this far, you may end up living in a tent. This is the same with other investments. Why do you think government bonds yield less than junk bonds. The other thing you must look at is that when you borrow against other assets, is the laundromat offering you the best incremental return given the risk, if yes then you should do it - if not then be careful.

The overall point is that you can finance from 0% to 100% (or more) but the business must be able to make a return. The best way to look at that return is the return on total assets - that is a measure that can be used to compare alternative investments.

[buddy]

By brrowing lot of money for business, you will be working at your MAT to pay interest & notes. With no hard cash flowing in your hand it would be very easy to neglect the place, lose motivation to maintain it and thus going deeper into red.

[anonymous]

Ok, you folks are the greatest, I never thought I could generate this much interest on a topic in a bulletin board! Just wish I could meet you all and discuss in person.

I hope you don't mind, I am using this board to help me understand all aspects of the business. There have been many varying ideas, all have merit and are note worthy.

Does anyone know how or where I can find equipment values based on Year/Make/Model? This will help me get an asset value for these mats based on equipment. I have tried the replacement cost and discount for age approach, but don't know if I am in the ball park with that one either.

Thanks.

[Anonymous]

There are several thoughts on the value of used equipment. Ultimately it is worth what someone will pay for it. Its principal value is inplace income generation, and some feel that if a mat were to close the equipment if it is more than a year or two old is worth close to nothing. If it is 10 years or older you may actually have to pay someone to haul it away. You could check the back on the Journal to see what some are trying to sell used equipment for.

[pete f]

Equipment is like a car, the price varies widely on the same depending on if you are selling, trading or are the dealer reselling.

Good working equipment has an intristic value per se, the installtion costs can be 15% or more of what the equipment cost brand new. You may be able to buy a nice rebuilt 18# front loader for $700, but having it installed can costs another $300.
A new 18# front is about $1700. Then there are tax, maybe shipping. An old mat full of old equipment that is working and producing income is sold on a cash flow. The real value of the equipment, if you tried to sell it all or trade it all in on new stuff, could be less than 30% of the price of the mat. In reality it is worthless. You are buying a great location, ready customer base and decent lease. The equipment is really secondary in value. If you come across a store that has 1 - 5 yr old equipment the sales price will reflect the newer equpment.

[anonymous]

Ok, so I am buying an old mat full of worthless junk, now I have to base the price on cashflow, of which I cannot verify because the owner did not report it all.

Hmmmmmm, the owner wants 45K for it, according to what was reported, the average gross income is 62K. All expenses and salaries look right, then there is the depreciation.....which is where to pad the expenses? The bottom line is - break even or little better.

[Anonymous]

Depreciation is a non-cash expense, so it does not come into play in looking a cashflow. Why not take a look at water bills and back calculate revenue, you should be able to get fairly close.

[Kitty]

Look at everything and try very hard to determine the actual revenue, as you have stated the seller is hardly trustworthy?

That measly 45K could be 3times what the mat is worth or possibly could handle debt on. Listen to all the advice here, as it is so easy to be swindled.

[CharlieS]

Hylobates - You made me laugh out loud when I read your comment about the stock market! Thanks!

Reign - You are now where the rubber meets the road. If these decisions were easy, every plodder out there would have already made them.

Consider replacing a significant amount of your equipment with new. Assume a modest or no increase in cash flow, but deduct the new payment you will be making for the equipment.

If your numbers still work, jump on it. Probably, the new equipment, along with other cosmetic improvements (read sweat equity), will help to lift your business and you will do great. However, if you can upgrade and break even based on current numbers, at least your downside is only a lot of work for little or no income.

All this assumes a good lease!

Charlie

[CharlieS]

Kirby - You are right. The big question is about risk, how much you are comfortable with, how comfortable you are with the potential downside, what your capability is to handle those possibilities.

When I was in college, I lived for nearly 2 years in a small one room shack, with a wood stove, an outhouse in the back, and a well 50 yards away. My rent was $10 a month, paid to a 94 year old black businessman/farmer who lived in the main house.

I enjoyed those 2 years. Its also been a source of comfort to know that I could live like that again if I had to.

As a pilot, I have a philosophy which I call "The life option". Simply put, it means that in every possible scenario, I need to have an option which provides for survival of all on board. This sounds simple, but I saw it broken on numerous and regular occasions. Kennedy is a classic example. Even though I am far more experienced than he was, I would never have made that fllight. Why? At night, in those waters, in a single engine aircraft, an engine failure meant certain death, because you would not survive the time in the water, even with life vests.

The same philosophy should be applied to your business decisions. What is the worst case scenario? What are you going to do if it occurs? How will you survive it! What is your plan to exit this scenario and provide for your economic survival.

This question is rarely asked and answered by most people getting into business, and often by those who are very experienced in business, but have been largely so successful that they never contemplated the possibility of failure.

This is why I continue to emphasize, run the numbers, use conservative incomes and liberal expenses. Downplay the upside and upplay the downside. If it still works, go for it. Its really not about ROI, ROA, or any of those types of numbers. Its really about managing your risk and surviving the worst. Then, when the real scenario turns out to be much better than you projected, you can think about things like ROA and other such stuff.

Charlie

[Matt600]

Reign

Your original post asked how to value a mat, you’ve got plenty of good advice here from Charles, Kitty, Pete, HyloBates, Kirby etc regarding what cash flows you might expect, etc , I shall attempt to show you how to value the mat once you have those cash flows. I have read of people on this site using the multiple of net operating cash flows method, this method will lead the inexperience to come to an erroneous value. I suspect that the people here who use that method intuitively take into account the other important factors. This is way they can’t give an exact multiple until they see the mat. Anyway, it is theoretically incorrect.

Some people use the multiple of net profit method, in this country mats sell for 3.5 times net profit (this is 28.5 % ROA or Cost of Capital - 1 divided by 3.5). This is the correct method if the depreciation expense actually equals the cash out flow on capital equipment. Say after looking at the mat you think that you will need to replace one or two machines per year and your expected cash outflow of say $10,000 actually equals the depreciation expense on P & L statement. Than if the net profit was say $20,000 the business would be worth $70,000. On a cash flow basis this 20,000 is made up of $30,000 net operating cash inflow (this is net profit but adding back all non cash expenses, usually only depreciation in a mat) less the cash out flow relating to the expenditure on the capital equipment or $10,000. Using the individual cash flow method the $70,000 is arrived at by discounting the $20,000 per year in perpetuity by ROA to arrive at the total Present Value. As in the following:


YEAR Cash Flow Capital Items Total YEAR Present Value
YEAR 0 $ 0 $ 0 $ 0 0 $ 0
YEAR 1 $ 30,000 $ (10,000) $ 20,000 1 $ 15,556
YEAR 2 $ 30,000 $ (10,000) $ 20,000 2 $ 12,099
YEAR 3 $ 30,000 $ (10,000) $ 20,000 3 $ 9,410
YEAR 4 $ 30,000 $ (10,000) $ 20,000 4 $ 7,319
YEAR 5 $ 30,000 $ (10,000) $ 20,000 5 $ 5,693
YEAR 6 $ 30,000 $ (10,000) $ 20,000 6 $ 4,428
YEAR 7 $ 30,000 $ (10,000) $ 20,000 7 $ 3,444
YEAR 8 $ 30,000 $ (10,000) $ 20,000 8 $ 2,678
YEAR 9 $ 30,000 $ (10,000) $ 20,000 9 $ 2,083
YEAR 10 $ 30,000 $ (10,000) $ 20,000 10 $ 1,620
YEAR 11 $ 30,000 $ (10,000) $ 20,000 11 $ 1,260
YEAR 12 $ 30,000 $ (10,000) $ 20,000 12 $ 980
YEAR 13 $ 30,000 $ (10,000) $ 20,000 13 $ 762
YEAR 14 $ 30,000 $ (10,000) $ 20,000 14 $ 593
YEAR 15 $ 30,000 $ (10,000) $ 20,000 15 $ 461
YEAR 16 $ 30,000 $ (10,000) $ 20,000 16 $ 359
YEAR 17 $ 30,000 $ (10,000) $ 20,000 17 $ 279
YEAR 18 $ 30,000 $ (10,000) $ 20,000 18 $ 217
YEAR 19 $ 30,000 $ (10,000) $ 20,000 19 $ 169
YEAR 20 $ 30,000 $ (10,000) $ 20,000 20 $ 131
YEAR 21 $ 30,000 $ (10,000) $ 20,000 21 $ 102
YEAR 22 $ 30,000 $ (10,000) $ 20,000 22 $ 79
YEAR 23 $ 30,000 $ (10,000) $ 20,000 23 $ 62
YEAR 24 $ 30,000 $ (10,000) $ 20,000 24 $ 48
YEAR 25 $ 30,000 $ (10,000) $ 20,000 25 $ 37
YEAR 26 $ 30,000 $ (10,000) $ 20,000 26 $ 29
YEAR 27 $ 30,000 $ (10,000) $ 20,000 27 $ 23
YEAR 28 $ 30,000 $ (10,000) $ 20,000 28 $ 18
YEAR 29 $ 30,000 $ (10,000) $ 20,000 29 $ 14
YEAR 30 $ 30,000 $ (10,000) $ 20,000 30 $ 11
YEAR 31 $ 30,000 $ (10,000) $ 20,000 31 $ 8
YEAR 32 $ 30,000 $ (10,000) $ 20,000 32 $ 6
YEAR 33 $ 30,000 $ (10,000) $ 20,000 33 $ 5
YEAR 34 $ 30,000 $ (10,000) $ 20,000 34 $ 4
YEAR 35 $ 30,000 $ (10,000) $ 20,000 35 $ 3
YEAR 36 $ 30,000 $ (10,000) $ 20,000 36 $ 2
YEAR 37 $ 30,000 $ (10,000) $ 20,000 37 $ 2
YEAR 38 $ 30,000 $ (10,000) $ 20,000 38 $ 1
YEAR 39 $ 30,000 $ (10,000) $ 20,000 39 $ 1
YEAR 40 $ 30,000 $ (10,000) $ 20,000 40 $ 1
- - - - - - $ 69,997


If the $20,000 was discounted in perpetuity, it would come to $70,000 not $69,997. Trust me. Using this method actually allows you to plug in the correct cash flow figures, especially for the capital equipment, depending on the actual business looked at. It also allows you to put value on mats if they need to be closed down as soon as the lease runs out. You would only run the cash flows to that date. Lets say you are looking at a mat and all the equipment needs replacing together right out the outset (Year 0) and it lasts in your estimation for 10 years than

YEAR Cash Flow Capital Items Total YEAR Present Value
YEAR 0 $ 0 $ (100,000) $ (100,000) 0 $ (100,000)
YEAR 1 $ 30,000 0 $ 30,000 1 $ 23,333
YEAR 2 $ 30,000 0 $ 30,000 2 $ 18,148
YEAR 3 $ 30,000 0 $ 30,000 3 $ 14,115
YEAR 4 $ 30,000 0 $ 30,000 4 $ 10,979
YEAR 5 $ 30,000 0 $ 30,000 5 $ 8,539
YEAR 6 $ 30,000 0 $ 30,000 6 $ 6,641
YEAR 7 $ 30,000 0 $ 30,000 7 $ 5,165
YEAR 8 $ 30,000 0 $ 30,000 8 $ 4,018
YEAR 9 $ 30,000 0 $ 30,000 9 $ 3,125
YEAR 10 $ 30,000 $ (100,000) $ (70,000) 10 $ (5,671)
YEAR 11 $ 30,000 0 $ 30,000 11 $ 1,890
YEAR 12 $ 30,000 0 $ 30,000 12 $ 1,470
YEAR 13 $ 30,000 0 $ 30,000 13 $ 1,144
YEAR 14 $ 30,000 0 $ 30,000 14 $ 889
YEAR 15 $ 30,000 0 $ 30,000 15 $ 692
YEAR 16 $ 30,000 0 $ 30,000 16 $ 538
YEAR 17 $ 30,000 0 $ 30,000 17 $ 418
YEAR 18 $ 30,000 0 $ 30,000 18 $ 325
YEAR 19 $ 30,000 0 $ 30,000 19 $ 253
YEAR 20 $ 30,000 $ (100,000) $ (70,000) 20 $ (459)
YEAR 21 $ 30,000 0 $ 30,000 21 $ 153
YEAR 22 $ 30,000 0 $ 30,000 22 $ 119
YEAR 23 $ 30,000 0 $ 30,000 23 $ 93
YEAR 24 $ 30,000 0 $ 30,000 24 $ 72
YEAR 25 $ 30,000 0 $ 30,000 25 $ 56
YEAR 26 $ 30,000 0 $ 30,000 26 $ 44
YEAR 27 $ 30,000 0 $ 30,000 27 $ 34
YEAR 28 $ 30,000 0 $ 30,000 28 $ 26
YEAR 29 $ 30,000 0 $ 30,000 29 $ 21
YEAR 30 $ 30,000 $ (100,000) $ (70,000) 30 $ (37)
YEAR 31 $ 30,000 0 $ 30,000 31 $ 12
YEAR 32 $ 30,000 0 $ 30,000 32 $ 10
YEAR 33 $ 30,000 0 $ 30,000 33 $ 8
YEAR 34 $ 30,000 0 $ 30,000 34 $ 6
YEAR 35 $ 30,000 0 $ 30,000 35 $ 5
YEAR 36 $ 30,000 0 $ 30,000 36 $ 4
YEAR 37 $ 30,000 0 $ 30,000 37 $ 3
YEAR 38 $ 30,000 0 $ 30,000 38 $ 2
YEAR 39 $ 30,000 0 $ 30,000 39 $ 2
YEAR 40 $ 30,000 $ (100,000) $ (70,000) 40 $ (3)
- - - - - - $ (3,820)

In this scenario you would be asking the previous owner to give you $3820 to take the mat off his hand. What if the previous owner has just replaced all of the equipment so that it will not need to be replaced for another 10 years than:

YEAR Cash Flow Capital Items Total YEAR Present Value
YEAR 0 $ 0 0 $ 0 0 $ 0
YEAR 1 $ 30,000 0 $ 30,000 1 $ 23,333
YEAR 2 $ 30,000 0 $ 30,000 2 $ 18,148
YEAR 3 $ 30,000 0 $ 30,000 3 $ 14,115
YEAR 4 $ 30,000 0 $ 30,000 4 $ 10,979
YEAR 5 $ 30,000 0 $ 30,000 5 $ 8,539
YEAR 6 $ 30,000 0 $ 30,000 6 $ 6,641
YEAR 7 $ 30,000 0 $ 30,000 7 $ 5,165
YEAR 8 $ 30,000 0 $ 30,000 8 $ 4,018
YEAR 9 $ 30,000 0 $ 30,000 9 $ 3,125
YEAR 10 $ 30,000 $ (100,000) $ (70,000) 10 $ (5,671)
YEAR 11 $ 30,000 0 $ 30,000 11 $ 1,890
YEAR 12 $ 30,000 0 $ 30,000 12 $ 1,470
YEAR 13 $ 30,000 0 $ 30,000 13 $ 1,144
YEAR 14 $ 30,000 0 $ 30,000 14 $ 889
YEAR 15 $ 30,000 0 $ 30,000 15 $ 692
YEAR 16 $ 30,000 0 $ 30,000 16 $ 538
YEAR 17 $ 30,000 0 $ 30,000 17 $ 418
YEAR 18 $ 30,000 0 $ 30,000 18 $ 325
YEAR 19 $ 30,000 0 $ 30,000 19 $ 253
YEAR 20 $ 30,000 $ (100,000) $ (70,000) 20 $ (459)
YEAR 21 $ 30,000 0 $ 30,000 21 $ 153
YEAR 22 $ 30,000 0 $ 30,000 22 $ 119
YEAR 23 $ 30,000 0 $ 30,000 23 $ 93
YEAR 24 $ 30,000 0 $ 30,000 24 $ 72
YEAR 25 $ 30,000 0 $ 30,000 25 $ 56
YEAR 26 $ 30,000 0 $ 30,000 26 $ 44
YEAR 27 $ 30,000 0 $ 30,000 27 $ 34
YEAR 28 $ 30,000 0 $ 30,000 28 $ 26
YEAR 29 $ 30,000 0 $ 30,000 29 $ 21
YEAR 30 $ 30,000 $ (100,000) $ (70,000) 30 $ (37)
YEAR 31 $ 30,000 0 $ 30,000 31 $ 12
YEAR 32 $ 30,000 0 $ 30,000 32 $ 10
YEAR 33 $ 30,000 0 $ 30,000 33 $ 8
YEAR 34 $ 30,000 0 $ 30,000 34 $ 6
YEAR 35 $ 30,000 0 $ 30,000 35 $ 5
YEAR 36 $ 30,000 0 $ 30,000 36 $ 4
YEAR 37 $ 30,000 0 $ 30,000 37 $ 3
YEAR 38 $ 30,000 0 $ 30,000 38 $ 2
YEAR 39 $ 30,000 0 $ 30,000 39 $ 2
YEAR 40 $ 30,000 $ (100,000) $ (70,000) 40 $ (3)
- - - - - - $ 96,180

The mat would be worth $96,180. You will note that these last two examples are effectively the same. The first scenario the seller is giving you money to take the mat off his hand but than you give the equipment supplier $100,000, net result is $96,180. The second scenario you give the owner $96,180.

One important point, loan repayments never come into the analysis, if you enter the loan repayments into the equation will be discounted back using the banks cost of capital and will pay too much. You risk starts the moment you become the legal owner of the capital equipment and the total amount should be entered than. This is why you should also run a cash flow statement besides the valuation (a good deal with respect to the valuation does not mean that you have the cash to operate the business, that will depend on how much you have to borrow and how quick you have to pay it back).

Anyway, all this can be set up on a spreadsheet in 5 minutes and gives you a much better picture of what a business is worth and allows you to enter in the cash flow when you think they will actually occur.

Hope I don’t get kicked from the forum for the length of this post.

Matt



My two bobs worth again. That’s six bob now.

[Lar Hylobates]

Time to kill this thread.

Thank God most people are peasant plodders.

[Fred50]

Matt wins the award for the longest post ever! If you have time to read his post completely, then it is time to get over to your mat and clean up, or something more substantial even. :-)

Good luck!!

[Andy]

as with many things, viewing from several perspectives will bring the big picture into focus,thanks matt