Monday, August 20, 2012

The 5 Deadly Sins of Laundry Ownership

One of the questions I am often asked is this, "If Laundromats are so good, then why do some go out of business?"  It is a great question, so good in fact, that I shared my thought on this subject with the Coin Laundry Association and Planet Laundry Magazine.  Below is the article I wrote for the Planet Laundry Magazine.  The title of the article is "The 5 Deadly Sins of Laundry Ownership."

Comment below and let me know what you think.

"The 5 Deadly Sins of Laundromat Ownership"

When a coin laundry fails, what are the most common reasons for its failure and how could that failure possibly be avoided?

Reasons for Failure:
1. Mismanagement / Neglect

I believe the number one reason why coin laundries fail is due to poor management or neglect.  Often times, people who buy Laundromats do so with the belief that all they need to do is collect the money once every week or two.  Unfortunately, that couldn’t be further away from the truth.  Although these businesses can be, and many are, run part-time, they are real businesses that do require work to be performed on a regular basis.  Failure to perform this work will result in a loss of income.

There are several elements that all coin laundries need to have in order to be successful.  They need to be clean, well lit, safe, inviting, have a good selection of equipment, which is in good working order, have plenty of parking, and competitive pricing.  It is up to management to make sure that customers are happy with the quality of each of these elements within their control.  Lack of attention will negatively impact the customer’s perception and overall appeal of a store.

There are several ways an owner can monitor how their store is doing from a customer perception point of view.  Check online review sites frequently.  Sites like Yelp and Google Maps will give the owner unbiased feedback and point out opportunities for improvement.  Keep your machines in good working order and make sure that you keep your store clean.  Consider doing some promotions benefiting the community, like a revenue share for the local high school band or athletics department and have them promote it.  You would be surprised how much extra revenue you can get by giving back 20% to the school or church.

2. New Competition

One of the biggest fears that many coin laundry owner have is the possibility of a competitor opening up a store across the street and there is a good reason.  A new store will often times be larger in size, have better amenities, and have newer equipment.  Imagine having the same expenses, but losing half your revenue or more.  That would be enough to put most stores out of business.

The key to avoiding a new competitor taking aim at your business is to make your store an undesirable target.  That means keeping the store fresh and up-to-date, taking care of the customers, and having great reviews.  Don’t wait until all your machines are 20 years old before you replace them.  Most investors would rather build a new store to compete against coin laundries that are run down and mismanaged, than to have to go up against the neighborhood’s leader.

3. Lease

The lease is one of the largest single expenses that a self-service laundry has.  There are three big concerns when it comes to the lease, each of which can sink a business.  These include high rent, uncontrolled CAM expenses, and the unwillingness of a Landlord to renew your lease.

When the rent represents too large of a percentage of the gross income, it will eventually suck all the profit out of the business with rental increases.  The optimum time to take care of the lease amount is before you buy the business.  However, with the large amount of commercial vacancies in many cities, if you find your store’s rent exceeds 30% of gross income, it is worth the time to talk to the Landlord and try to renegotiate for a lower rent payment.

As for Common Area Maintenance (CAM) expenses, it is always best to negotiate into the lease a cap of 25% or less of the rental amount for CAM.  If you are considering buying a store without such a cap on CAM, you may find that CAM expenses can, in some cases, exceed the rental amount.  Remember, an expense directly affects the bottom line and leaving this one un-checked could wind up costing you much more than you bargained for.

The third prong of a lease that stings is when the Landlord refuses to renew a tenant at the end of their lease.  Again the best time to take care of this is in the beginning.  Always make sure that you have options to renew your lease with predefined terms, if possible.  When exercising an option to extend the lease, always make sure that you get a new option to replace the one you are exercising.  Even if you have to pay for an option, it is far better to have it than be without one.

4. Lack of Capital

There is nothing worse than spending the money to buy or build a business but fail to have enough starting capital to carry the business until profitability.  I wrote an article about financing a coin laundry with tips on getting financing.  It takes money to fill the change machines, pay deposits on utilities, and post the security deposit.  For a new store, it could be 6 months or more before it is profitable.  Even when buying an existing store, it will take a month or two before you have enough money in the bank to handle unexpected expenses, that is of course, if it is making money when you buy it.  Which leads us to…

5. Failure to properly analyze the business during the purchase process – lack of due diligence

It is critical to properly analyze the business prior to purchasing it.  You need to not only verify the seller’s claim of reported income, but also account for each and every expense the business generates in order to get an accurate picture of the business’ performance.  Far too often, buyers are mislead to believe the business they are buying is making more than it really is.  In the worse case, the store you thought was making money every month is actually losing money every month and you, as the buyer, need to come up with the shortfall, sell it, or go out of business.

The good news is that with the proper education, most people can learn how to properly analyze the business.  There are several good books and courses on the market that can teach you these skills.  My other suggestion would be to consider hiring an expert to go over the deal.  Since the value of a self-service laundry is based primarily upon the net operating income, even a small monthly shortfall of $500 could change the value of the business by as much as $30,000 or more.  The cost of an independent laundry consultant is far less than the cost of making a mistake.  Plus, they can give you a second set of eyes with an unbiased perspective.

Brian Brunckhorst

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