RIPON, Wis. — This article is geared toward potential investors and will offer an overview of the industry as well as tips for entering the industy.
Walk over to your home laundry area and take a close look at the washer and dryer. Pay attention to the equipment size. Now drive to the nearest coin laundry and inspect the store’s washer-extractors and drying tumblers, noting their size. Customers are likely putting three, four, maybe even five-plus loads in a machine. Without hesitation, they’ll pay a premium price for the large-capacity machines. They’ll do the same when it comes time to dry these loads — choosing the largest drying tumblers to complete their task in the shortest time. And they’ll be back again in a week, or earlier, to repeat this task.
With this short trek, you’ve received a snapshot of why investors are finding great returns in the coin laundry business.
TURNS EQUAL RETURNS
Markets continue to be unpredictable, and with savings accounts producing minimal gains, many are turning to small business to deliver financial returns. The profits in this business can be great.
“When it comes to return on investment (ROI), coin laundries often are generating better profits than the market and some other investment options out there,” says Craig Dakauskas, vice president of CLEC, a Gulf Breeze, Fla., commercial laundry equipment distributor.
Dan Bowe, IPSO national sales manager, agrees and says the ROI, the stability of the market and predictable cost structure are catalysts in attracting the next generation of laundry owners.
“People are looking for low-risk investment opportunities,” Bowe says. “I think when you combine the high ROI with the low failure rate of laundries, this business is highly attractive.”
Rates of return, Bowe says, can average upward of 30 percent, well outperforming savings accounts and money market accounts. In addition, he adds, according the U.S. Small Business Association, the average survival rate of a laundry after five years is virtually 100 percent.
Evan Hirsh, who owns four stores in the greater Pittsburgh area, knows about the advantages of vended laundries in terms of profits versus other businesses.
“This business is so mature that you have a pretty good idea of what to expect in terms of returns,” says Hirsh, who recently received a Leadership Award from the Coin Laundry Association (CLA).
WHY SO SUCCESSFUL?
The success of coin laundries can be related to several things, including a predictable cost structure, no accounts receivable, being a cash business, getting payment up front for service, customers (in most cases) providing the labor and no franchise fees. The “necessity nature” of this service also builds the strength of the business model.
“Clean clothes are a necessity of life,” says Jay McDonald, vice president of product and brand management for Alliance Laundry Systems and a member of the CLA board of directors. “This helps insulate coin laundries from the swings other businesses might see as the economy rises and dips.”
Dakauskas agrees, and says this is key to investors. “Often we get investors who also are considering franchise opportunities in the restaurant market,” he explains. “I ask them, if the economy slows and finances tighten, are customers more likely to stop eating out or stop washing their clothes to save money? The answer is pretty simple.”
Franchise businesses often are less about the business owner and more about the company. “With franchise opportunities, it’s almost like the company owns you,” Hirsh says of franchise fees and ongoing expenses that can be part of the franchise structure. “When you purchase a coin laundry, you are the point person,” he adds.
The most common questions Dakauskas hears from new investors are “How much money can I make?” and “How much money do I need to start a business?”
“Normally, you need 30 percent of the project up-front,” Dakauskas says.
“It takes a little higher-caliber investor,” McDonald adds, referring not only to the capital involved but the involvement of the owner to ensure the success of a store.
Bowe explains the 30 percent equity position pertains to the project as a whole — build out, equipment and installation. He added that for an average size project of $500,000, the investor would need $150,000 in capital to start out.
Hirsh suggests during this initial stage investors carefully weigh their options, which include building a ground-up store, leasing space or buying an existing store.
“It’s very difficult to build a small project now,” Hirsh says. “You can make projections, but the day you open you are still starting from zero. Buying an existing store, you gain cash flow and you can always retool it.”
Whether building or buying, Bowe believes the key to success from the start is choosing the right location. Areas to look for include locations with a high percentage of rental properties or apartment complexes. Stores near college campuses can also be successful.
“Location will make or break a laundry,” Bowe says. “It’s important to not fall in love with a specific location out of the gate. Often what appears to be a great site may not offer the right demographics to be profitable.”
Lower-income areas generally have been solid locations, but laundries increasingly are drawing middle-class customers who own equipment. Large-capacity equipment saves time and is more convenient to use.
“While it’s definitely more convenient to do laundry at home, many are seeing even greater convenience and value in being able to reduce a half-day laundry task to an hour of work,” Bowe says.
Hirsh stressed that it’s crucial to work with a distributor who will assist in site selection and analysis of demographics to determine the potential of a site to tap into different customers.
“You can’t underestimate the importance of a good working relationship with your distributor,” Hirsh says. “But don’t stop there. Use all the tools available,” he adds, citing the CLA and Small Business Association as good sources of information.
And before moving forward, it’s paramount to be comfortable with projections and not overestimate for peace of mind.
“If it doesn’t look good on paper, it’s not going to look good in the ground,” Hirsh says, adding that the exception to the rule may be a large store entering a market served by many smaller competing businesses.
“That goes askew if you are planning a million-dollar project,” Hirsh says. “It creates such an impact that you actually change people’s habits.”
LOOK AT THAT LEASE
Because most projects will not fall into the million-dollar range and a majority of owners don’t own the building where a laundry will be housed, good lease terms can be almost as important as location.
“Lease is a big thing in this business,” Dakauskas says, adding that a goal is 10 years with a plan for a 10-year renewal. “With only a five-year lease, chances are not good for putting a laundry in.”
Investors will need to examine whether the location has the necessary utility and sewer requirements. This is where a distributor can be an invaluable resource in evaluating the location, its price per square foot and the rough costs of work to accommodate a laundry, as well as helping negotiate advantageous lease terms.
Bowe suggests negotiating a period of no rent, typically four months, while construction is occurring. “You don’t want to be paying rent when there’s no revenue coming in,” he suggests, adding that investors and their distributors may want to try and negotiate improvements such as lighting and flooring to be done by the landlord. While it may increase the rent, it will reduce the investor’s cash outlay.
FOCUS ON FINANCING
Getting the right comfort level will start with solid pro forma projections, but financing also will play a key part in the equation. Growth in the market has led to some manufacturers offering financing.
“The nice thing today is that there are far more options for financing than even just 10 or 15 years ago,” Dakauskas says. “Going through the bank is a hurdle...in many cases they just don’t understand the business.”
Financing through manufacturers, when possible, remains a beneficial option for new investors.
“What you gain in financing through a manufacturer is their understanding of the market, which equates to a willingness to work with customers on projects,” Bowe says. “The manufacturer often acts almost as an additional partner reviewing projections, demographics and other details to help ensure the project’s success.”
While banks may offer better rates, benefits of manufacturer funding may include advantageous terms such as interest deferral periods, interest-only periods, low loan fees, a faster approvals process and loans stay in-house from start to finish.
“Some investors also like the one-stop shopping nature of structuring financing through the same manufacturer they are purchasing the equipment from,” Bowe says.
Randy F. Radtke is a public relations specialist at Alliance Systems, a manufacturer of Speed Queen, Huebsch, IPSO and Cissell commercial laundry equipment.