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  #1  
Old 10-08-2005, 12:37 PM
jtberbs
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Default Cash Flow vs. Purchase price

I have no coin-op laundromat industry experience, but a fair amount of sales, marketing, business management, wholesale, retail & self employment experience. My sellers business broker tells me all Laundromat businesses have non reported income.
IS THIS A TRUE STATEMENT?

I'm looking at a business that shows $60,000 TOTAL Annual Revenue with $40,000 in TOTAL Annual Expenses on the books. Owner and broker claim true annual revenue is $75,000 with A $35,000 cash flow ($15,000 get taken out without reporting) Sale Price $105,000.

My evaluation indicates expense are more likely $45,000 - $50,000 per year.

It would also seem foolish to me to allow for $15,000 per year in unreported income in my calculations, based on trusting the seller & broker, that this much cash is taken out without reporting it.

Am I thinking staight or should I count on more monthly revenue than what's on the books?

THANKS FOR ANY THOUGHTS & COMMENTS.

Last edited by jtberbs; 10-08-2005 at 06:34 PM.
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  #2  
Old 10-08-2005, 05:01 PM
IPSOTECH IPSOTECH is offline
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Based solely on what you are telling us it is not possible to tell you much.

It is not uncommon for someone to pocket some money and inflate expenses. In my opinion it doesn't mean much what he is reporting to the Govt. What matters is what is really coming in and going out and that is what you are going to have to find out. You will have to do some counting on a day by day basis.

Now others on the board will disagree with this but I say a tax return means little in evaluating this kind of cash business. It is only a small part of the big picture. It's easy to pocket some cash and expense out this and that.

You need to tell us much much more info before one could give you even a reasonable evaluation.
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  #3  
Old 10-08-2005, 06:22 PM
jtberbs
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Default Cash Flow vs. Purchase price

Thanks Marc,

It sounds like any purchase aggreement offered should include a contengency that requires 4 wks of meeting with the current owner whenever money is collected from each machine and counted. Of course seasonality effects the accuracy of any annual projection. ANY ADDITION SUGGESTIONS on effectively counting on a day by day basis to better determine what is really coming in and going out?

The numbers work for me, only if I can be confident of at least averaging
a $2,000 per month cash flow.


Additional information:

Gross $60,000 reflected on books, plus $15,000 Stated as Not Reported.

Cash Flow $20,000 reflected on books, plus the $15,000 Stated as Not
Reported makes the cash flow $35,000.

Total rent plus all utilities are stated at $3,200 per month. Repairs average $100 per month. This leaves only an additional $33.33 per month to hit the Total expense stated at $40,000 ($60,000 gross minus $20,000 cash flow) and we have not yet covered bookkeeping and maintainence.

There are no employees, current owner handles opening and closing facility, collecting money from machines and it is otherwise not staffed during the day. Owner states an average of just under 3 turns per day.

With a good location can a well maintained, clean, unstaffed laundromat do 5 turns? Opened 6:30 AM to 8:30 PM everyday on auto lock & unlock.

I appreciate any additional thoughts and suggestions.

Thanks,

John

Last edited by jtberbs; 10-08-2005 at 06:40 PM.
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  #4  
Old 10-08-2005, 10:08 PM
billyb billyb is offline
 
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what about insurance, advertising and janitorial service, unless you will do the cleaning. if the machines are older, then maintenance might be more than 100 per month. will any machines need to be replaced or upgraded.

at least you got to see some books. after i put a conditional offer on a mat, the seller and his fiance decided they don't want to reveal any revenue figures. can you believe that.

Last edited by billyb; 10-08-2005 at 10:15 PM.
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  #5  
Old 10-08-2005, 10:32 PM
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pete f pete f is offline
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There is much you are missing and this could or not be a worth buying.
How did your water and gas use analysis come out?
watching 4 weeks of collecting?
rent/utility ratio high, and will be much higher with the double gas prices we all are now paying.
Great location?
lease?
impact fees?
demos to support?

much of these has been discussed here, you can search.

I find it hard to believe a broker would make statements about unreported income weather is is true or not, it is just unethical.
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  #6  
Old 10-08-2005, 10:48 PM
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Coinwash Coinwash is offline
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Quote:
Originally Posted by pete f
I find it hard to believe a broker would make statements about unreported income weather is is true or not, it is just unethical.
Thank you Pete-- I didn't know how to answer this one by myself.
What kind of broker would make such a statementoops.
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  #7  
Old 10-09-2005, 01:31 AM
Anonymous
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One data point from a relatively new mat owner (me):

I don't under-report income. When I'm at home depot for mat stuff I'll occasionally toss in some home-related things too, therefore inflating expenses *a bit*, but in my case it isn't enough where it would effect the sales price on my mat.

My rationale is, someday when I sell I want to be able to show as much legitimate income as possible to a potential buyer.

Are you counting on going from 3 tpd to 5 tpd after you buy? That will probably be a stretch!

Beware too there are lots of little expenses the creep in. New mop for the cleaning lady. The fluourscent bulbs you are always replacing. Toilet paper. Garbage bags. Paper towels. All that little crap adds up.

I guess my point is, don't buy if you are on the edge financially with your projections. Need to have a bit of a buffer in there for the unexpected, oh like hurricanes killing gas prices for instance!

- John
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  #8  
Old 10-09-2005, 06:16 AM
IPSOTECH IPSOTECH is offline
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$100 a month for repairs, I don't thinks so. Either his equipment is new or he is stealing parts and service from somewhere. Does he fix the equipment himself? Will you? I would put in there at least $200 to $250 if you are doing the service and $300 to $500 if you are calling someone in to do service. Of course there will be months when very little or nothing is broken (rare) but I think this is a good average cost for repairs.

I fully agree with you 45k to 50k expense evaluation.

Tell us what type of equipment it has how many of each. store size, etc...

I say offer 50k to 75k.based on the 15k to 25k so called profit.

Anything more than that is a bad deal.

Last edited by IPSOTECH; 10-09-2005 at 06:34 AM.
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  #9  
Old 10-09-2005, 06:33 AM
jtberbs
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Thanks for the comments, more are certainly welcome.

Additional information:
I did forget to list insurance of $1,000 per year (sounds a bit low).
Sounds like my total annual expense projection of $45,000 to $50,000 is more appropriate.

Broker suggests all my concerns can be addressed in contengencies included with written offer, after which I will meet the owner and review all of his records and spend a month meeting with the owner at the mat, when he collects money from machines. This is the listing broker, so he does work for he seller, NOT ME.

About the broker(Stanford business degree, Masters from Cornell).
Concerning another business, a florist with $30,000 of other income shown on a balance sheet provided by same broker. I inquired about what this "other income" is and the broker stated "he has about $50,000
per year of cash business that goes unreported and pays some people cash for deliveries ($20,000/yr) and nets the other $30,000 off the books.

I started a financial services business 12 years ago, with my wife which, we still own and operate. This business includes some tax returns which could be, mostly unreported income. However, we report all income. I also will purchase a few personal items each year, charging with the business charge card, but that's it.

Friday, when talking to the broker, I stated that while driving to other 4 surrounding mats (checking out the competiton) I could not get the $15,000 per year of additional unreported cash flow out of my head. I asked him "If the owner has been thinking of selling for over a year, why wouldn't he pay a few thounsand more in taxes to show the additional cash flow?" His reply was "Welcome to my world, John"
ETHICS CERTAINLY SEEMS TO BE AN ISSUE???

I certainly welcome more thoughts and comments. Thank you all very much, what a great web site & Bulletin Board ! John

Last edited by jtberbs; 10-09-2005 at 10:29 AM.
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  #10  
Old 10-09-2005, 09:43 AM
Anonymous 2
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Here is the simple test for unreported income:

If you can get the bank to loan you money based on the unreported income, then make the deal. If not, the base your offer on what the bank will loan against.

You can quickly see that you will not base your valuation on unreported income.

I liken it to "potential". A mat might be worth $100,000 today. But if you paint it, advertise, and keep it clean, the profit would rise and it would be worth $150,000.

How much should you pay? You should pay $100,000. If you realize the potential with your efforts, you get the reward.

Offer based on what he reports. If there is some unreported income there then it is yours to decide what to do. If not, then you won't get burned because you didn't assign any value to it.

I am willing to bet that it is a wash for the seller with regard to taxes vs. extra sale price. If he had it 3 years, he would have skimmed $45,000. If he was honest with his books, and you were willing to pay 3x - 5x net, you would have paid an extra $45,000 to $75,000.

Go figure.
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  #11  
Old 10-09-2005, 03:21 PM
Anonymous
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I cannot go along with what you are saying William. Just like you may choose to run a business differently than the current owner, what he reports really has no bearing on anything. If you use this approach you will miss out on buying most small businesses.

Further, things work both ways. I have been told by two different distributors that in parts of New York there are mats that are run by a certain ethnic group that significantly over-report (yes over-report) their income. They do this to convert unreportable illegal cash into legal money. They run water down the drain too to make things look like they are doing more business than they are. If you were to go by their reported numbers you might over pay more than 100% for these businesses.

The point is, you should not care what the current owner does, says nor reports. Do your due diligence and if it looks viable make an offer based on what you think the place is worth regardless of tax reports or owner statements.
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  #12  
Old 10-09-2005, 04:34 PM
Postit
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Russians..........
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  #13  
Old 10-09-2005, 06:04 PM
jtberbs
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More Details:

BASED ON MARC's POSTING:
"Tell us what type of equipment it has how many of each. store size, etc..."

1550 Sq. Ft. with No vending, No Change machine or Attendant.

Current owner does not advertise. Location is very good. But 2.7 turns seems like poor equipment utilization. Possibly due to no advertising, inadequate janitorial service, poor maintenance (waits for several machines to need work before calling his $30/hour repair guy).

How many turns are typical in a clean & maintained mat???

Equipment:
16 front load washers with 10 years estimated life remaining
15 top load with 0-3 years estimated life remaining
12 Dryers with 5-10 years estimated life remaining
13 Dryers with 10-15 years estimated life remaining

Again, I appreciate any additional thoughts and suggestions.

Thanks,

John
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  #14  
Old 10-09-2005, 09:12 PM
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Kitty Kitty is offline
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1500 sqft with that much equip seems kinda packed to me. No change change machine is a negative, convenience is a factor so I think you should give us an idea about the amount of space between the machines and the floor plan. Customers are convience driven these days as well as price driven. In this business cleanliness is next to God-ly-ness.... how clean is this store or how clean can you maintain this store without an attendant and retain a clientelle?

Who are the competitors in the market?
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  #15  
Old 10-09-2005, 10:46 PM
Anonymous
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No change machine, that sounds crazy for an un-attended store. I couldn't imagine it. If nothing else, having change machines makes for easier collections - you are taking out bills from the changer instead of heavy bags of quarters. I have 2 changers and get panicky when ONE of them goes down

My small mat averages 2.85 TPD. 5 TPD and I'd be dancing in the streets.

My insurance is about 1100 per year, your number might be ok. Are you going to budget for a cleaning person? Absolutely essential unless you want to be in there each day cleaning. Do NOT underestimate what slobs our clientelle is, most of the dryer sheets end up on the floor along with much else.

For cleaning I pay a lady $80 per week and it is worth every cent. I don't want my mat to 'own' me, i.e. I'm not on the hook for cleaning each day.
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