By - Jeremiah Grant
Last Updated - February 8th, 2024 11:41 PM
Feb 08
Laundromats are one of the most profitable small businesses. In fact, they are also among the few sectors that not only survived COVID but also continue to grow at a steady pace.
Thus, from owners wanting to cash in and retire to entrepreneurs looking for a profitable investment, business sales and purchases are a common sight here.
However, the one question they all have in common, which I am sure you do too, is ‘How to value a laundromat business?’
After all, you need to know the fair market value of your laundromat in order to sell it at a reasonable price. And the same logic applies if you’re looking to buy one such facility.
In this article, I’ve detailed the methods and multiples that business valuation firms use to find how much is a laundromat worth. Also, I’ve explained which methods can give you a favorable outcome in different situations.
So, let’s dive right in and see how you can obtain an accurate laundromat valuation.
Before we see how a laundromat is evaluated, it’s essential you understand what a laundromat valuation is in the first place.
To begin with, a laundromat evaluation is simply the process of determining the present-day fair market value of a laundry center. Herein, aqualified business appraiserlike myself will utilize various methods and calculations to derive the total business value.
For instance, to establish the value of your business, I’ll take into account various factors such as the facility’s location, scale of operations, age of equipment, etc. Also, I’ll use an industry-accepted method and apply appropriate multiples to arrive at a valuation figure.
You see, the ultimate goal here is to figure out how much a willing buyer will pay to buy a laundromat.
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Coming to the billion-dollar question, i.e., how to value a laundromat for sale or purchase, there isn’t a standalone formula or industry-specific method for calculation.
Nevertheless, there are industry and business-specific multiples or factors that certainly provide uniqueness to the overall laundry center valuation.
For instance, when using the market approach-based revenue multiples for valuation, I’ll use the same formula that I do for other businesses. But that said, the multiples I’ll apply will be completely unique to your business.
And the same thing goes for methods based on the income approach, where I’ll consider the unique operating factors of your laundromat.
Wondering what these laundromat valuation approaches are all about and how they’re applied?
Well, let’s have a look.
1. Market approach to laundromat valuation
The market approach is by far the most commonly used method for valuing laundry centers. And it is based on a straightforward yet reliable strategy where evaluators like myself take into account the value of the recently sold similar business.
You see, laundromats are among the most common businesses you’ll find in almost every city or town. In fact, from small mom-and-pop stores to large nationwide chains and more, there are a lot of comparable businesses that sell on a regular basis.
So, when it comes to market based valuation, there’s always reliable and contemporary data from businesses like yours.
How to value a laundromat using market approach?
Talking about the practical application of the market approach for laundromat valuation, it is based on valuation multiples of the following:
A. Earnings before interest, taxes, depreciation, and amortization (EBITDA)
B. Seller’s discretionary earnings (SDE)
C. Revenue
For starters, valuation multiples are those ratios that showcase the suggested value of businesses in terms of their specific financial metrics. Also called the earnings multiples, you can think of these as a standard benchmark for comparing your business with other similar businesses.
Now, if you’re curious, here’s how valuation multiples are used for calculating the fair market value of laundromats:
A. Laundromat valuation using EBITDA multiples
The multiples of EBITDA or earnings before interest, taxes, depreciation, and amortization are highly sought after for valuing big-ticket laundromat businesses. Herein, valuators like me focus on calculating the ROI that a particular laundry center is expected to generate.
Let’s say you’re looking to buy or sell a fairly large-sized laundromat or a laundry chain franchise with a consistent cash flow. In this case, EBITDA multiples can give you a precise valuation number for the business.
So, how much is a laundromat worth as per EBITDA multiples?
Well, to calculate this, you need two things: the EBITDA of the business and the right multiple.
For instance, as per the latest market estimates, the EBITDA multiples for laundromats range between 3.4x and 4.8x.
Now, if the EBITDA of a business is $576,000, I’ll take 4.5x as the valuation multiple and multiply the EBITDA by it. This will give us a fair market value of $2,592,000 for the laundry.
EBITDA x EBITDA multiple = Fair market value of laundromat
The SDE or seller’s discretionary earnings multiples are very similar to the EBITDA multiples as they also factor in the total revenue before taxes and interests. Not to mention, like EBITDA, total ROI calculation is also the focus area here.
Nevertheless, SDE multiples are considered ideal for valuing smaller laundromats, unlike the EBITDA multiples.
For instance, suppose you run a family-owned laundry center with a decent cash flow but a limited number of equipment and staff. In this scenario, the SDE multiples are perfect for calculating an accurate business value.
Wondering how to use SDE multiples to calculate the value of a laundromat?
Just like EBITDA, you’ll have to multiply the seller’s discretionary earnings or SDE by the applicable SDE multiples.
Now, present-day industry estimates put the SDE multiples of laundromats between 3.10x and 4.25x.
So, if the SDE of a laundry business is $239,000, I’ll take 4.15 as the valuation multiple and multiply the SDE by it. This will provide a fair market value of $991,850.
SDE x SDE multiple = Fair market value of laundromat
$239,000 x 4.15x = $991,850
C. Laundromat valuation using Revenue multiples
When it comes to valuing laundries, revenue multiples are the least used, given the lower multiples, which reduce the overall business value.
However, if you run a laundromat that’s not profitable currently but has the potential to bounce back, you can use these multiples.
Talking about value calculation using revenue multiples, it is done by multiplying the total revenue by the applicable multiple.
For instance, contemporary revenue multiples for laundromats range between 1.15x and 1.18x. So, if your business’s total revenue is $425,000, I’ll take 1.16x as the valuation multiple and multiply the total revenue by it.
Now, this calculation will give me a valuation figure of $493,000.
Revenue x revenue multiple = Fair market value of laundromat
$425,000 x 1.16x = $493,000.
Who should use the market approach for laundromat appraisal?
As I said earlier, the market approach is indeed the most used method for valuing laundromats. So, any business with consistent revenue generation and a decent margin of profit can go for this approach.
For instance, while large profitable laundry chains should go for EBITDA multiples, I suggest smaller players with a steady income use SDE multiples.
However, notwithstanding the size of your business, if you’re profitable or have a constant cash flow, I’d suggest you not use revenue multiples. That’s because, for successful businesses, a valuation based on a revenue multiple can result in a lower and unfavorable fair market value.
That said, if you’re experiencing a crunch in terms of low customer footfall or losses but you expect a turnaround, revenue multiples can still provide you with a favorable valuation.
A yet another popular method of evaluating laundromats is the income approach, which calculates business value based on future income potential. And this method is perfect for such startups or established franchises that have just operationalized a laundromat.
You see, if you’ve started off with a laundry business recently, then there’s a good chance that your cash flow and overall profitability are weak. After all, it takes time to acquire customers and become an established market player.
But that doesn’t mean you’ll not be profitable in the future. In fact, if you’ve strong fundamentals, there’s a good chance you can have a consistent cash flow in a year or two.
Now, the income approach in valuing laundromats takes this future potential as the base factor.
How to value a laundromat using the income approach?
Talking about the practical application of income based valuation, there are two methods you can use, namely:
A. Discounted cash flow
B. Capitalization of cash flow
Let’s see how both of these methods work.
A. Laundromat valuation using discounted cash flow (DCF)
Discounted cash flow, or DCF, is the most reliable method in income based appraisals. Herein, business valuators like me project the cash flow that a laundry center is likely to generate in the next 4-5 years.
Also, we calculate a discount rate, which is usually the amount of capital required to run the business for the next 4-5 years.
Now, I’ll divide the cash flow by one plus the discount rate (WACC) raised to the power of the period number. This will give us the net present value or fair market value of the laundromat.
DCF =CFt/(1 +r)t
For instance, let’s say you’ve recently started a laundromat business with a projected cash flow of $2,678,000 in the next four years. Also, let’s assume that you’ll need a capital expenditure of $780,000 to operate your business during these years.
Now, using the DCF formula, the value of your business will be:
$2,678,000 / (1 + $780,000)4
B. Laundromat valuation using capitalization of cash flow
Another popular method of income based valuation is thecapitalization of cash flow. And this is particularly favorable for such laundromats that are expected to have a consistent annual cash flow in the future.
For instance, let’s say your laundry business is expected to generate a reasonable amount of revenue consistently for the next five years.
Now, valuators will divide this cash flow with a capitalization rate, which is based on the expected ROI. The resultant number will, thus, be the total fair market value of your business. Cash flow/capitalization rate = Fair market value of laundromat
Read also: Top 10 Reasons for Business Valuation in 2024
What factors determine the income based value?
When it comes to determining the fair market value of a laundromat using the twin income methods, there are four main factors that influence the overall value. And this includes:
The location of your establishment: This is one factor that can make or break your business and, thus, has a say in the overall valuation. For instance, if your laundry is located close to a huge residential cluster or commercial zone, the potential income and subsequent valuation are likely to be high.
The equipment in your laundromat: The type of equipment you’ve in your laundry also determines the projected income and value. That’s because the newer and better the equipment, the more customers you’re likely to attract.
The competition: Suppose yours is the only laundry facility in a neighborhood. In this case, your competition will be far low, profit margins will be high, and the valuation figure will be higher, too.
Overall financial planning: Your financial planning, budgeting, and revenue generation plans also affect the income forecast and business value.
Discover Your Laundromat Business’s Value Now!
Whether you’re scaling, investing, or prepping for a sale, use our expertise in laundromat business valuations and receive tailored insights.
Last but not least, we’ve got the asset approach to laundry valuations, where the total value of a laundromat is determined by the value of assets minus liabilities.
Wondering how to value a laundromat using the asset approach?
Well, it’s very simple; all you’ve got to do is calculate the value of all tangible and intangible assets of your business. This includes the property, equipment, furniture, trademark, licenses, etc., to name a few.
Thereafter, you’ll need to calculate the value of liabilities such as debt, interests, financial obligations, etc.
Now, you can subtract the value of liabilities from that of the assets to obtain the fair market value of your laundromat.
Laundy businesses generally have a lot of assets but might become unprofitable at a certain point. And if you own one such business, you should definitely go for an asset based valuation.
You see, even if your business is incurring losses right now, asset valuation can still provide you with a favorable fair market value. This, in turn, will help you sell your business at a reasonable price.
As you can see, when it comes to the question of ‘how to value a laundromat business?’ there are multiple methods and multiples you can opt for.
Nevertheless, I suggest you choose your valuation method very wisely after factoring the pros and cons of each method based on your business’s present situation.
Or you can get in touch with us to know the right approach and strategies.
At Arrowfish Consulting, we are seasoned business valuators with 200+ years of combined expertise. You can book a free consultation with our team and learn how to make the most out of your laundromat valuation.
Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.
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