5 Money-Saving Minimum Deal Standards
Before buying your first, or your next, laundromat, it is very helpful to establish your minimum deal
standards. What I mean by that is that it is helpful to write down exactly what you’re shooting for when purchasing a laundromat to give you a standard by which to judge potential deals. If a potential store falls below your set standard, you know right away to not waste anymore time on it. If it meets or exceeds your standards, then you know to pursue it further.
This helps take some of the emotion out of the process. Emotion can convince you to buy a store you shouldn’t or pass on a store you should pursue. This is why it can be so valuable to write out what you’re looking for before you begin looking for a laundromat to buy.
Outline your standards and commit to them. Do it while you’re not emotionally attached to a location or emotionally repulsed by a store. This will help keep the important metrics in the forefront.
Use the free minimum deal standards template to help you both establish, and stick to, your minimum deal standards when looking for your next laundromat deal.
For the purposes of this post we’ll assume you’re buying a laundromat for cash flow. Flipping laundromats is a viable business plan, but most people buy laundromats to access the cash flow potential. We’ll focus on that.
1. Cash Flow
With that said, the first standard you’re going to want to set is regarding how much net cash flow you want to receive each month from your laundromat. If you want to net $7,000 per month of cash flow then you can rule out smaller stores. They just don’t have the potential to net that much each month.
Once you have established your net cash flow goal you can work backwards to determine what that is going to cost you. Then you can plan how to come up with the capital it will take to achieve that. You can buy a business that is performing at that level currently. Or, you can buy a business that you intend to raise to your net cash flow standard. Establishing a cash flow range will help you rule out those that are out of your budget range. One word of caution, be sure you have enough money to cover not just the acquisition of the business, but all of the other costs that you will incur along the way. Read about the acquisition costs of buying a laundromat in a post in the near future.
3. Return On Investment
With your desired cash flow and budget set, you can calculate your return on investment (ROI). This simple calculation will tell you what percentage of your investment you can expect. By extrapolation, you will know how long it will take you to recover your initial investment. Here is the simplified calculation:
Total annual profit ÷ Total cost of the laundromat= ROI (as a percentage)
For example, if your goal is to have a net cash flow of $7,000 per month from a particular laundromat, that is $84,000 per year. Let’s say you found a laundromat that you were confident produced that amount of annual cash flow for sale for a total, after all expenses, of $375,000. Your ROI calculation would look like this:
$84,000 ÷ $375,000= 22.4% ROI
It’s your job to decide whether a 22.4% ROI meets your standard or not. If you’re looking for a higher return then you will either have to outline ways to increase the net cash flow each month and/or negotiate the cost of the laundromat down. In fact, even if the 22.4% ROI meets your standards you should go into the deal with some ideas on how to improve the business. And you should always negotiate the best price possible.
After setting your standard for cash flow, acquisition cost, and ROI, you need to think about the kind of area you want to be in. In other words, what locations meet your standards? Do you want to be within a certain radius of your house? Are you willing to own and operate a laundromat in a low income area? Do you want to work in a college area? Are you trying to provide a service for a wealthy urban area? Think through some of these questions and write down in the minimum deal standard template your location criteria.
5. Value Adds
Think through how much work you want to put into your store in the beginning. Do you want to buy a turn-key store that needs little, if any, work done to it to start? This might cost a little more but you don’t need to invest extra capital and time into renovating and improving the store.
Do you want add value to the store by buying one that needs some improvements that could increase the customer base once done? You might be able to buy a store like this at a discount, but it will be more work up front. This is called building sweat equity.
Do you want to find a store that needs to be gutted? Or, do you want to find a location to build a new store? This route, obviously, will be the most labor intensive. It will also be the riskiest investment as you will have no existing customer base. You will have to build it from scratch and woo customers from existing laundromats. But, it can also be the most profitable strategy.
When I’m looking for a store to buy, I’m always looking at simple ways to add to the income and decrease expenses. Both adding income and decreasing expenses are great ways to not only put more money in your pocket each month, but to also add to the value of your store. I have created a Value Add Checklist that I go through each time I am evaluating a store to help me find ways to add value to a store if I purchase it. I want to get into the deal with a plan in place already.
Sample Minimum Deal Standards
An example of a minimum deal standard might look something like this:
I will purchase a laundromat that nets me $5,000 profit per month and will pay no more than $250,000, for a minimum ROI of 24%. This laundromat will be no more than 15 miles from my current residence, in a strip mall in a low income neighborhood that I can help improve by making improvements to the store. Finally, I would like to be able to immediately improve the NOI by $500 per month by finding ways to increase revenue and cut costs of operation.
As you can see, writing out my minimum deal standard in clear terms by using the minimum deal standards template helps me focus on the important characteristics of a store and to quickly and easily dismiss any stores that don’t fit my minimum standards.
Patience Is the Key
Complete the worksheet to the best of your knowledge and start browsing around online at laundromats. Use the minimum deal standard worksheet to get a feel for how difficult it will be to achieve your standards. Don’t be discouraged if you’re having difficulty finding a store that meets or exceeds your standards. It might take a little work to find the right deal. But, ALWAYS honor Rule #1- Always, only buy the right deal. Be patient, and keep learning.
If you find deals right away that meet or exceed your minimum deal standards, your standards might be too low. Consider raising them or tweaking them in some way to get the best deal possible. You don’t always know what surprises or expenses could lay around the corner. Buying right is the best protection against a bad business purchase.
The most important takeaway here is that you need to know exactly what you want before you start looking for it. Write down your minimum deal standards. Keep them handy and utilize them as you begin your search to buy your next laundromat. And utilize them as you practice analyzing deals online.