September 29, 2023
Adam Hoeksema
Valuing a business, be it a tech startup or a laundromat, requires a mix of analytical, financial, and industry-specific knowledge. For those seeking to buy or sell a laundromat, obtaining an accurate valuation is pivotal to ensure a fair deal. In this blog post, we’ll delve into various approaches to determine the value of a laundromat by answering the following questions:
How to Determine the Value of a Business
Business valuation involves a detailed examination of various facets of a company's financial and operational position. For a more comprehensive exploration, you might find insightful information by exploring our guide on 'How to Determine the Value of a Business’.
Various methods can be employed to achieve business valuation, each with its relevance depending on the business's nature and industry:
1. Asset-Based Valuation
This is the most straightforward method and primarily involves valuing the business based on its assets and liabilities.
Tangible Assets: These are physical assets such as machinery, real estate, inventory, and vehicles. Their market value can often be ascertained relatively easily.
Intangible Assets: These include non-physical assets such as brand recognition, patents, copyrights, and customer relationships. These can be more challenging to value.
Net Asset Value: Subtracting the company's total liabilities from its total assets gives the net asset value.
2. Income-Based Valuation
The income-based approach focuses on the profitability and revenue-generating capabilities of the business.
Discounted Cash Flow (DCF): A popular method, DCF predicts the business's future cash flows and discounts them to present value using a discount rate (often based on the perceived risk of the business). The sum of these discounted cash flows becomes the business's value.
Capitalization of Earnings: This involves determining the business's normalized expected earnings and dividing them by a capitalization rate (reflecting risk and return on investment).
3. Market-Based Valuation
This method involves comparing the business to others in its industry or sector.
Comparative Ratios: Businesses in the same industry often trade at similar price-to-earnings or price-to-sales ratios. By applying these ratios to your business's earnings or sales, you can derive a valuation.
Recent Transactions: Looking at recent sales of similar businesses can give insights into current market valuations. If five similar businesses sold for a price of 2x their annual profits, for example, that multiplier can be applied to your business.
4. Multiples Method
This method is a simplification of the market-based approach where businesses are valued based on a multiple of certain financial metrics. Commonly used multiples include EBITDA (earnings before interest, tax, depreciation, and amortization) and net sales.
5. Brand and Goodwill Valuation
In some industries, especially the service sector, the reputation or brand equity plays a pivotal role in valuation. This may encompass aspects like customer loyalty, brand recognition, and company reputation.
6. Future Growth Potential
Businesses that have a clear growth trajectory can often command higher valuations. Factors like expanding markets, product innovations, or scaling capabilities can bolster a company's value.
What Are the Most Common Valuation Methods for Laundromats
Laundromats, by nature, are often asset-intensive and cash-generating businesses, and selecting the right valuation method should reflect these characteristics. The following three approaches are commonly employed when valuing a laundromat business:
1. Asset-Based Valuation
Rationale: Laundromats typically involve significant investment in tangible assets, such as washers, dryers, and real estate.
Usage: This method can provide a floor value, ensuring that the valuation does not fall below the worth of its tangible assets. By calculating the net asset value, it allows a straightforward approach, especially relevant for a capital-intensive business like a laundromat.
2. Income-Based Valuation
Rationale: Laundromats are often steady, cash-generating businesses, and the future profit stream is a crucial aspect of their value.
Usage: The Discounted Cash Flow (DCF) method can be particularly relevant as it looks at the cash flows the business is expected to generate in the future and discounts them to present value. The Capitalization of Earnings can also be relevant by considering normalized expected earnings and providing a value that accounts for risk and ROI.
3. Multiples Method
Rationale: The multiples method can offer a quick yet insightful valuation, providing comparability with similar businesses and industries.
Usage: Applying a multiple, such as an EBITDA multiple, derived from similar businesses or industry standards, to the laundromat's own EBITDA gives a straightforward and commonly used valuation. This method often works well for laundromats due to their predictable earnings and is particularly useful when comparing against similar businesses in the industry.
How to Calculate the Value of a Laundromat
For clarity and practical insights, we'll navigate through various valuation methods using a hypothetical business example, Sunny Days Laundromat:
Asset-Based Valuation Step by Step Process:
Step 1: Identifying and Valuing Tangible Assets
Sunny Days Laundromat might have tangible assets such as machines, real estate, and inventory. For instance:
- Machinery: $50,000
- Real Estate: $200,000
- Inventory: $10,000
Step 2: Identifying and Valuing Intangible Assets
Intangible assets like brand recognition, loyal customer base, or any proprietary systems or software in use contribute to its value, although they can be harder to value, and sometimes professional valuation services or industry benchmarks are needed. Suppose Sunny Days Laundromat has developed:
- Customer Loyalty: $30,000
- Brand Recognition: $20,000
Step 3: Calculating Liabilities
Identifying liabilities, like loans or debts, is crucial. Let's say:
- Outstanding Loans: $100,000
- Other Liabilities: $30,000
Step 4: Calculating the Net Asset Value
- Total Assets (Tangible + Intangible) = ($50,000 + $200,000 + $10,000) + ($30,000 + $20,000) = $310,000
- Total Liabilities = $100,000 (Loans) + $30,000 (Other) = $130,000
- Net Asset Value = Total Assets - Total Liabilities
- = $310,000 - $130,000 = $180,000
In this context, the Asset-Based Valuation of Sunny Days Laundromat would be approximately $180,000. Keep in mind, this method might undervalue the business if it has significant income or growth potential not reflected in its current assets. Hence, it's often good to consider various valuation methods and perhaps use a weighted average of several to derive a more comprehensive business value, especially when the intangible assets have a significant impact on income.
Income-Based Valuation Step by Step Process:
Step 1: Forecasting Future Cash Flows
Imagine Sunny Days Laundromat anticipates the following net cash flows over the next 5 years:
Year 1: $80,000
Year 2: $85,000
Year 3: $90,000
Year 4: $95,000
Year 5: $100,000
Step 2: Identifying the Discount Rate
Assuming a discount rate of 10% based on perceived risk and expected return, our valuation unfolds as follows.
Step 3: Calculating Discounted Cash Flows
Applying DCF for each year:
- Year 1 DCF = $80,000 / (1 + 0.10)^1 = $72,727
- ... and so on for each subsequent year.
Step 4: Estimating the Terminal Value and Bringing It to Present Value
If we hypothesize a perpetual growth rate of 3%, we compute the terminal value using:
- Terminal Value = [$100,000 x (1 + 0.03)] / (0.10 - 0.03) = $1,471,429
Discounting it to present value:
- Discounted Terminal Value = $1,471,429 / (1 + 0.10)^5 = $941,320
Step 5: Summing Up All Values to Derive Total Value
Presuming the total DCF for the five years is $400,000, then:
- Total Value of Sunny Days Laundromat = $400,000 (Sum of DCF) + $941,320 (Discounted Terminal Value) = $1,341,320
Sunny Days Laundromat, based on these assumptions and the income-based valuation, is thus valued at approximately $1,341,320. Bear in mind that various factors might influence the final purchase or sale price. Professional insights and a comprehensive review of all available valuation methods ensure the derived value is not just accurate but also reflective of the current market and industry standards.
Multiples Method Step by Step Process:
Choosing the Financial Metric
- Let's say Sunny Days Laundromat has an EBITDA of $100,000.
Determining the Appropriate Multiple
- Through research, you discover laundromats in similar locations and conditions are typically sold for 3x to 5x EBITDA.
Calculating the Valuation
- Applying the determined multiples to Sunny Days Laundromat:
- Conservative Estimate: $100,000 EBITDA x 3 = $300,000.
- Liberal Estimate: $100,000 EBITDA x 5 = $500,000.
This gives us a potential valuation range for Sunny Days Laundromat between $300,000 and $500,000. It's crucial to utilize a range as it provides a realistic scope, considering the potential variables and uncertainties in business operations and market conditions.
Considering Adjustments
Let’s say Sunny Days Laundromat is in a highly sought-after location. This could potentially allow for a valuation towards, or even above, the upper end of our range. Alternatively, if it requires significant capital investment soon (such as machinery replacements), we might aim towards the lower end of the valuation spectrum.
This valuation range provides a strategic starting point for either a buyer or a seller. The buyer wouldn’t want to pay significantly more than the estimated value, while the seller will avoid setting a selling price that’s considerably less than the calculated range, ensuring that the price is justifiable and market-oriented.
How to Buy a Laundromat
Laundromats can be a profitable and low-maintenance business, making them an attractive venture. Considering buying a laundromat? Here's a concise summary to get you started, We'll touch on some key points here but you can check How to Buy a Laundromat for a more comprehensive guide. Before buying a laundromat, see how a QoE Sniff Test can reveal the financial health and viability of your potential investment.
Laundromat Industry Overview
The laundromat industry is growing steadily, with around 35,000 laundromats in the US generating approximately $5 billion in gross revenue. Factors like changing gender roles, increased workforce participation, and the demand from various industries contribute to this growth. Laundromats offer low overhead costs, easy management, and potential for additional revenue streams.
Laundromat Acquisition Costs
Laundromat models are quite uniform, making cost estimates easier. When selecting a laundromat, factor in location, demographics, and market research. For a new laundromat startup, expect costs between $400,000 to $1 million, whereas purchasing an existing one can be more affordable. Generally, the purchase price is around four to six times the annual net revenue.
Choosing the Ideal Laundromat
Explore options through brokers, online listings, or direct visits to laundromats. Assess factors like machine quantity, space efficiency, folding areas, and potential for expansion. Identify opportunities to improve efficiency and profitability in the business.
Find Funding
Explore various funding options, including cash, bank loans, or attracting investors. Prepare a detailed laundromat business plan and comprehensive financial projections to present to lenders or investors.
Conducting Due Diligence
Verify revenue and expenses to ensure accurate financial information. Evaluate equipment condition, plumbing, electrical systems, and the quality of employees. Address any necessary repairs and adjustments in the negotiation process.
Closing the Deal
Negotiate the final terms based on your due diligence findings. Ensure you're comfortable with the financial aspects before completing the purchase.
How to Fund the Acquisition of a Laundromat
One excellent financing option is the Small Business Administration (SBA) loan. Laundromats are generally considered "active businesses" by the SBA, making them eligible for this type of loan. For a more comprehensive guide on securing funding for your laundromat acquisition, you can check out SBA Funding for Laundromat Acquisition.
To improve your chances of securing an SBA loan, it's essential to demonstrate active management involvement, highlight relevant industry experience, prepare detailed financial projections, and provide records of an existing laundromat's performance if you're buying one.
Using an SBA loan for your laundromat venture offers several advantages, including favorable terms and rates, higher loan amounts, flexibility in fund usage, lower down payments, and access to valuable business support and resources. Whether you're starting a new laundromat or acquiring an existing one, SBA loans can be tailored to your specific needs.
Creating Financial Projections for a Laundromat Acquisition
Each laundromat has unique operational limits, from machine count to customer turnover time. When creating financial projections for buying or selling a laundromat, focus on:
Gather Historical Data: Review past sales, expenses, and net profit.
Analyze Physical Assets: Assess the condition of machines and premises.
Forecast Revenue: Consider current trends and customer base.
Project Expenses: Estimate utilities, maintenance, and labor costs.
Determine Valuation: Combine all financial data, possibly using valuation methods like DCF or asset-based valuations.
Using a specialized acquisition financial template can streamline this process. This template integrate income statements, balance sheets, and cash flow forecasts. Armed with this detailed financial analysis, you're well-equipped to negotiate the value of your laundromat effectively with potential buyers or sellers.
