Laundromats & Laundry Services o T d e e N u o Y s g n i h T ! e ! h ! T W O N
Author: Samuel A. Maldonado, CBI
Major Expenses as a (%) of Sales
Major Expenses as a (%) of Sales
Lets Compare (%)s Absentee Ownership Possible Low Income location (High Poverty Level) Non English speaking (possibly) Buildings with inadequate Laundry Facilities Large families with kids.
Requires Owner Operator Mid to High Income/Higher Rents Customers have no time to do laundry Cash exposure Smaller families
Which One is for You???
What Will a US Tax Return Show You About The Profitability of a Laundromat!? If it’s a cash base laundry service the US Tax Returns will indefinitely tell an investor nothing in regards to the Laundromats profitability! The Utility Bills will reflect what was paid for the year and that may not be accurate (cash payments). The soap and Cost of Goods in connection with Dry Cleaning, Wash n Fold and any other performed service will most likely not be accurate because most of these expenses are paid for in cash. Payroll is skewed The only sales and expense figures that are verifiable are derived from the wholesale revenues generated by the Laundromat and all expenses incurred with providing services to the businesses it services.
LOCATION AND DEMOGRAPHICS Location is the first thing to consider when building a new coin laundry or buying a new or used coin laundry. A prime location is densely populated with lower income persons with large families. The coin laundry site also warrants attention. A well-lighted location visible from the street with signage, ample parking and easy access to the store is best. When it comes to a coin laundry, you can't have too much parking. Stores that are wide with lots of glass frontage do better than narrow dark stores. Ample seating and folding space for customers is a must. All things being equal, 80% of a coin laundry's customers come because the coin laundry is closest to their home. Therefore, it is important to identify the other stores in the area. For example, if your coin laundry site has a competitor store 2 blocks to the North, 2 blocks to the South, 2 blocks to the East, and 2 blocks to the West, then you can expect that 80% of your customers will come from a one-block radius of the store. Many coin laundry developers are happy to bring out the most recent demographic study, showing the population within 5 miles of their new store. In high density urban areas, the relevant market area is measured in terms of blocks, not miles.
COMPETITION Given that 80% of your customers come because your coin laundry is the most convenient to their home, what factors influence the other 20% to walk or drive by your competitor and come to your store? After convenience, the next most important factor is price. If other stores in the area are price competitive with yours, then it is not reasonable to expect to capture more than your market share of business. By all means, avoid areas where severe price competition is rampant. Other factors to consider, but with diminishing importance, are the competitors‘ hours, cleanliness, equipment mix and age, store size, restroom facilities and whether the store is attended or unattended. Remember, your competitor can not be expected to stand still. The competition can always change its price or remodel the store, too. Many localities now charge very high sewer hook-up fees, which tends to limit the amount of new competition that can come in.
THE LEASE When purchasing a coin laundry, you are really just buying a lease that generates revenue from walk-ins and the equipment. It used to be conventional wisdom that the longer the lease the better. But many coin laundries with leases executed in the salad days of the late 1980's are now at rents far in excess of the current market rate. Modern wisdom now dictates that a relatively shorter term lease, with several renewal options is more prudent. Leases should have a reasonable ceiling on cost of living increases. The lease should also allow the store owner the ability to generate ancillary income from vending machines, laundry product sales and food, etc. unless in a densely packed area. Retain your right to sell your business without the approval of the landlord. If the landlord refuses to grant this right, then insist that the landlord's consent to an assignment of the lease "shall not be unreasonably withheld or delayed". Most shopping center leases require the tenant to pay its share of common area and maintenance expenses (CAM). In some shopping centers this could add $.60 per square foot per month to the base rent.
EQUIPMENT The mix of equipment in the coin laundry is important. Generally speaking, larger washers are more efficient per pound of wash. Therefore, profit margins are higher on the larger front loaders than the single-load top loaders. Areas with large families require having a higher proportion of large washers. It is important to have ample dryer capacity. To maximize revenues on busy days, such as weekends, you need to get the clothes dry and the customers out of the way so others can wash. The general rule is there should be one dryer per each front loader and one dryer for every two top loaders. EXTRACTORS: A coin-laundry extractor is a free-standing centrifuge that can squeeze water from laundry by spinning it at great speeds. Some models can attain speeds of over 1500 RPM. If heavy items such as towels or dungarees are squeezed in an extractor before being placed into a dryer, drying time can be cut by one-half. As reduced drying time translates to a need for fewer dryers, extractors are a common sight in Laundromats located in New York City, where real estate (and therefore rental space for dryers) is very expensive. Here follow some points on extractors: They must be loaded properly (otherwise, items can spin out of the basket). Accordingly, their introduction requires a commitment to doing customer orientation and training in their use. There are two basic types of extractor: direct-drive and indirect-drive. Indirect drive units have a transmission and friction resistance braking system; they are considerably more maintenance intensive than directdrive models, which have a three-phase electric motor directly driving the basket - and by reversing electrical polarity, direct-drive models brake using electrical energy rather than friction resistance.
EQUIPMENT cont’d Equipment age is also a consideration. Newer equipment is more energy efficient than older ones. And one should not forget depreciation. Washers and dryers wear out. The expected life of a new top loader is ten years, while front loaders and dryers can last 15-20 years before wearing out or becoming technologically obsolete. As equipment becomes older, repair costs increase. Modern coin drops make it relatively easy to change prices, while slides are expensive and time consuming to change. Washers and dryers aren't all that is necessary. A store should have sufficient change machines with a wide variety of dollar denominations, and always have more than one change machine. That way, if one changer jams or empties, you are still in business with the other. Every coin laundry should have a security alarm and the changers should also be wired to the alarm system. Other important items are automatic door locks, TV sets, stereos and vending machines.
PURCHASING THE STORE PURCHASING THE STORE Buying a new store is more problematic than purchasing an existing store. With no operating history, a new store is riskier. For a new store, review the seller's pro forma cash flow and compare the line items to the sample in this presentation. Get an explanation for any line items that may be missing or out of line. Equipment wears out and needs to be replaced, yet we have never seen a line item for depreciation on a listing sheet. Store developer's will usually tell a buyer, "This store is projected to gross $XX,XXX per month". Yet the purchase contract usually states, "Seller has made no representations as to the revenues...". Don't let the developer talk out of both sides of the mouth. If revenue representations have been made, then get them into the contract and negotiate a method to adjust the purchase price downward if the actual revenues don't pan out. If buying from a developer, restrict the developer's right to build another store within a reasonable radius of your store for a period of three years. A new store should have a warranty on the equipment from the manufacturer and a warranty from the developer for construction defects. For an existing coin laundry, get the seller's representation as to the actual revenues written into the purchase contract. You also need to independently verify income through tests of water bills and the seller's records. Ask for all the utility bills for the past six months. Is the usage trending up or down? Do some test collections with the seller before closing the purchase. Use an experienced escrow company and always insist on a Bulk Sales Act filing. This will help insure that you don't inherit some of the seller's unpaid liabilities.
Water and Fuel—The Only two items that matter!!! More information on the analysis of water usage is available from me, but you must remember that constantly leaking water will affect the accuracy of the analysis. Therefore, you must be alert for water leaks. Choose a time when there is no washing machine activity and check the waste-line outflow to ascertain that water is not leaking through the machines. As most machines sit idle with the dump-valve open, any water leaking into the machine (due to a defective watervalve) will pass undetected through the machine and into the waste-line. A more reliable, but more complex, alternative to water bill analysis is analysis of fuel usage. It is more complex because it involves more variables, but more reliable for two reasons: firstly, as fuel is never permitted to leak, one need not allow for leakage; secondly, as fuel is far more expensive than water, willful distortions are cost prohibitive to effect. When advising a purchaser as to the potential gross sales of a laundromat, I rely heavily upon analysis of fuel consumption.
Buying Gas or Electricity from a Utility Also known as system or default supply, system gas or Standard Supply Service If you have not signed a contract with a deregulated marketer and are still paying the local regulated utility for gas or electricity supply, you are on what's known as system gas, or default supply electricity. The utility is by regulation required to simply pass through the cost to you with only their administration costs added. The cost is totally variable since it is based on the short term market rates, or the portfolio of energy supply that the utility has purchased. See Spot Market definition. The utility must get approval from the regulatory board for rate changes, but they can apply price increases retroactively if they can prove that it cost them more to supply the energy than they have charged. This is done either through an annual "settling up" when a balancing is done or through a surcharge on gas/electricity over the next 6-9 months. In a market of rising energy prices, this usually means you have to pay extra because the approvals tend to lag the market. In a declining market, it sometimes means a rebate to you.
Spot Market / Spot Price - There is a North American market for buying and selling electricity and natural gas. It's essentially a commodity market that trades like soy beans or pork bellies. The price is set based on supply and demand for immediate requirements. The spot price is, for example the price of electricity at one point in time on that market. The price varies extensively in times of extreme heat or cold. In 1999, the spot price for electricity ranged from 4 cents / kilowatt hour to $100.
Variable Rate This price is set monthly by a marketer based on the price they have to pay in the wholesale market, which is dictated by supply and demand. That price is passed along to the consumer, with admin costs and a profit margin built in. A few marketers offer a rate that is tied to a "Posted Monthly Wholesale Price", such as the Transco Zone 6 midpoint published in Inside FERC's Market Report. Consumers should look at a marketer's track record of beating the utility price before signing this type of contract.
Discount Rate, or % below Utility Price If a marketer is offering this type of contract, it is usually a price that is based on the utility regulated price, less a certain amount. For example, it would be stated in the promotional material and the contract as "Always 5% less than the utility". A marketer can do this by buying gas or electricity more cheaply than the utility, or by having substantially lower administrative costs.
Fixed Rate Contract This is a fixed price for gas or electricity supply for a fixed period of time. The price and the term are set out in the contract. Your price for Gas Supply will be fixed. The regulated charges from the utility may change if the regulator gives them permission. This type of contract gives you the benefit of knowing your energy costs for that period of time. If prices rise above your contract price, you benefit. The marketer is at no risk if prices rise because they buy a fixed price long term gas contract from the wholesale market. So for example, they buy a wholesale contract for 23 cents/M3 and retail it for 25 cents.
Rate Cap In this pricing plan, the ABM will supply natural gas or electricity to the customer at the best price it can. However, the ABM guarantees that the rate will not rise above a certain amount, regardless of the current market price. This protects the customer from extremely high prices, and allows them to benefit if prices go down. ABM - Agent, Broker, Marketer. These are the three names for any company or individual who is in the business of selling gas or electricity to individual homeowners or businesses. Typically, they sign up customers to an energy supply term, then source that gas in one or more contracts with a gas producer. They charge you only for the commodity itself.
Agency, Billing, CollectionTransportation ("ABCT") ABC-T is a relatively new service approved by the OEB and offered the Utilities. The Utility bills and collects the money for the energy commodity that an ABM has offered to the customers. The utility includes the cost of the energy supplied by the ABM, at the agreed upon price, in the monthly bill that it sends to its customers. Customers who have an ABC-T arrangement, see the name of their ABM and the price of their energy supply (the energy supply charge) on their Utility bills. The Utility collects the money from the customers and remits it to the ABM. The Utility guarantees payment of this money to the ABM, and charges the ABM a fee for the service.
Buy-Sell/Rebate Arrangement: This applies if you have been offered a rebate program by a marketer. This is a rather complicated sales option, but is essentially an offer from an ABM of a rebate on the regulated utility price. It could be a fixed percentage rebate, or the rebate might vary depending on the ABMs success at buying cheaper energy supply. In detail, it goes something like the following. An ABM purchases directly from a supplier (for example, a gas producer in Alberta, or an electricity generator in Ontario) on behalf of its customer. The ABM then sells back to the Utility at the OEB regulated 'buy' rate. The Utility delivers and resells the energy to the customer at the OEB regulated 'sales' rate. If the ABM has purchased the energy from the supplier at a price below the OEB regulated rate then the customer could also realize a benefit by getting a share of that savings (depending on their contractual arrangements with the ABM). These benefits will usually be in the form of a cheque sent by the ABM on an annual basis.
"Weather Protection", or Fixed Bill Contracts The ABM will guarantee that the customer won't pay any more than a fixed dollar amount for their energy for the year. This is based on the customer's usage pattern over the past year and adjustments for weather. This contract type transfers the risk of a long cold winter to the energy marketer. It's a form of insurance for which the customer pays a small premium.
Full Requirements Contract An electricity supplier agrees to provide all of a company's electricity needs at an agreed price. The supplier does not require that you buy a set amount or buy any electricity on the spot market. This type of contract is common for residential customers but rare for larger customers. Its also known as a "load following" contract.
Fixed Volume Contract In this type of contract, suppliers pass the volume risk and some spot market exposure to the customer. A customer estimates their monthly consumption based on past years and any expansion plans. The supplier then contracts for that amount on the customer's behalf. The customer is financially responsible for differences between estimated and actual use bought for them on the spot market by the supplier. This spot market buying and selling happens for each hour by comparing actual consumption with the electricity purchased for that hour.
Structured Block Contract Purchasing a series of blocks of electricity to match as closely as possible the consumption of a facility. Electricity trades in blocks of a number of kilowatts for specified periods of time: 7 × 24 - 7 days a week, 24 hours a day 5 × 16 - 5 days a week, 16 hours a day 2 × 24 5×8 5 × 24 They are stacked to meet the electricity needs.
Single Block Contract This is a buying strategy more than a type of contract. It involves the purchase of a single block of electricity (see Structured Block above) to cover the period of greates electricity need, or to cover the period in which electricity is expected to be most expensive. For example, it could be the purchase of a 5 x 16 block to cover week day, daytime.
Declining Rate Contract The rate declines each year of the contract. An example is a gas contract that starts at 31 cents for the first year, but declines to 30 cents in year 2, 29 cents in year 3, etc.
Blended Rate Contract A contract that is a combination of fixed and variable rate. Typically, half of the rate is guaranteed for the term of the agreement, similar to a Fixed Rate, and the other half of the rate is variable. The variable portion is usually reset periodically based on market prices. The result is some protection against price increases, but some opportunity to benefit if prices decline.
Volume Discount A type of variable rate based on amount consumed over a given period (like a month). An example is a gas contract that starts at 31 cents for the first 300m続 used, and drops to 29.5 cents for use over 300m続 in a month.
Price Forecasts Uncover Hidden Profits or Losses! Key Indicator
Outlook
Impact on Prices
Weather Forecasts: USA / CAN
Warm
Underground Storage Reports: USA / CAN
High
Decrease in winter Increase in summer Decrease
Electricity Demand Report: USA
Higher
Increase
Oil Prices:
Neutral
Neutral
Drilling Activity Report: Canadian Supply
Higher levels lower Productivity
Neutral
Economy:
Neutral
Neutral
Long Term Trend:
Up
Increase
Short Term Momentum:
2007 Volatility is up
Neutral
NYMEX Sentiment:
Volatile
Neutral to Up
Supply/Demand Tightening Outlook Report: Future Supply/Demand
Increase
What’s Happening with Fuel Costs!? What's going on with natural gas prices ? It's been wild. Gas prices followed oil prices up during the summer of 2005, then the hurricanes hit. That shut down significant natural gas and oil production and storage facilities around New Orleans. Short term prices spiked to a peak in December 2005 but settled through to a low in late September 2006. Since then we've had an incredibly warm start to the winter. There is more natural gas in storage than ever before at this time of the year. But, while that has brought short term prices prices the long term fundamentals suggest that prices will stay high, and gradually increase. Particularly as we lead into next hurricane season. Forecasts suggest that natural gas prices will track the just below the trend line shown above until late summer. Lower production from new gas wells and depletion of older wells. New electricity generation has, and continues to be, gas fired. The long term price trend is up due to fundamentals. Supply is flat and demand is up. Economic outlook is improving and this will increase energy consumption.
What costs make up my electricity bill? Electricity Supply The electricity commodity that comes through the wires. The rate is set by the utility, or the electricity marketer, whoever you buy from. Electricity supply is the only part of the electricity system that is deregulating. All others will still be regulated. Distribution The cost of delivering the electricity within your utility, to your home or business. This pays for the construction and maintenance of the wires and systems. It is a regulated rate payable to the utility. This is now identified separately by most utilities. Transmission The cost that your electricity supplier has to pay to the HydroOne to get the electricity from where it is generated to you. It is also a regulated rate payable to the utility. Debt Retirement This is a charge to help pay down the accumulated debt of the former Ontario Hydro. They accumulated this debt building the electrical system in Ontario, and is being paid through this levy. System Operation The cost that your electricity supplier has to pay to HydroOne to get the electricity from where it is generated to you. It is also a regulated rate payable to the utility. Customer / monthly charge This is a fixed monthly charge to compensate the utility for the cost of making sure that you always have access to electricity. It pays for the cost of connecting and billing.
Types of Machine Makes Wascomat American Dexter Laundercenter MayTag ISP Huebsch
Count Coins The only true way to make the entire picture of a Laundromats profitability come to light—COUNT COINS!!! It is essential that a potential Laundromat owner rough it out within a business for at least a two week period and count coins in order to verify the top line revenue. Wash n fold tickets must be counted in order to accurately know the percentages between both revenue makers and determine margins for each profit center.
Ways to Generate Extra Revenue Manicures Palm Reading Commercial Laundry Division Van Pick ups Restaurant Accounts Dry Cleaning Vending Convenience Store items LOTTO Bag Sales T-Shirts CDs DVDs Western Union ATMs Coffee
A Laundromat Owners Largest Expenses Rent Utilities Employees Loan Payments RE Taxes Maintenance & Parts Insurance
Up-Grades It will cost somewhere in the neighborhood of $20,000 to $30,000 to up grade a coin laundry to a card laundry. Video Security Systems will cost in the neighborhood of $2,000 to $6,000 dollars A Laundry Cart costs $175 each WOW! Softwares for Laundromat tracking $10,000 and probably the most important item that few laundries have
Sewer Connection Fees If you are considering Starting a Laundromat in the State of New Jersey, BEWARE! Sewer connection fees are expensive and are in existence to stop and deter competitors from opening in certain golden demographically rich areas, such as Union City. Some of these fees could range from $750 per machine plus a blanket start up cost to as much as $2,000 per machine. STARTING A LAUNDROMAT WILL COST YOU THREE TIMES AS MUCH AS ACQUIRING ONE AND THERE WILL BE NO CASHFLOW FOR 18 MONTHS PLUS.
RECAP There are Hidden values in energy costs Water and Fuel are the only important bills Buying a laundry is easier and less expensive than building one The lease has value above all except cashflow Machines are important but not that much Let the cash-flow of the business pay for everything including equipment replacement. Financing is available with little to no money down on new machines Keep the place clean. If a place is not clean and makes money—imagine what it could make if it was clean! Be familiar with energy contracts and hidden or lost profits based on poor expense decisions by the current ownership Know if whether you are going to run it or not because this will dictate the neighborhood and type of laundry you should invest in! Do not invest because the business is down the block from your house. Invest because it fits what you want!
The Only Items You are Investing In When You Buy A 1. Cash-Flow Laundromat 2. Lease 3. Equipment