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NEW YORK — Most family business owners expect their thriving enterprises to transfer to the younger generation with minimal fuss and bother. Reality, though, can be far different. Absent a carefully designed plan, misunderstandings and disputes can turn any business transition—including ownership of coin laundry stores—into a costly train wreck.

Parents must analyze the skills and proclivities of their children before assigning future management roles. While such assessments can help smooth the transition, even the best of such plans needs the support of legal documents that ensure power flows to the right people and sufficient cash is available to make everything happen on cue.

SETTING TERMS

Often the most important transition document is the so-called “buy-sell agreement,” which specifies how ownership will be allocated and how the sale of shares will be funded. “A buy-sell agreement is crucial to a smooth ownership transition for a family business,” says Gregory Herman-Giddens, a board certified specialist in estate planning at the law firm of TrustCounsel, Chapel Hill, N.C. “It allows for one or more of the children who are active in the business to buy out a parent who retires or dies.”

Buy-sell agreements typically cover an array of issues that go beyond the basic transfer of ownership upon the death or retirement of the original owners. They also typically cover how ownership will transfer when one of the children exits the business, either through death, disability or even a decision to go into another line of work. Will the business itself, as an independent entity, buy up the shares of the departing individual? Or will the remaining siblings as individuals have the right to buy up the shares?

Here are some other issues that buy-sell agreements often cover:

• What if one of the siblings desires to sell shares to an outside third party?
• Must the siblings be offered the shares first?
• How much time do they have to reach a decision?
• And what if a child wishes to withdraw capital from the business? How much money can an individual owner take out, over what period of time, and how much prior notice must be given to the other owners?

These agreements also often specify the methods by which internal disputes are resolved. Some issues will lend themselves to arbitration or third-party mediation. For those which can be resolved by voting, the agreement will specify who has the power to vote and whether a simple majority or super majority is called for.

Buy-sell agreements can be real lifesavers in sticky situations. For example, they can avert unexpected shifts in power to unqualified individuals. “Often one member of the second generation receives share of ownership, then gets divorced,” notes John J. Scroggin, a partner at the estate planning law firm of Scroggin & Company, Roswell, Ga. “That individual’s former spouse now owns the equity. Unreasonable demands can follow, and that can be a thorn in the side of the family.”

The solution, says Scroggin, is to draw up clauses in buy-sell agreements that anticipate common and costly events such as divorce or unexpected death. To do this, the document should mandate a “call right” on shares that are gifted to children. The “call right” is a provision that empowers remaining family members to buy out the shares of a non-family spouse who may survive the divorce or death of a family member who was in an ownership position.

PRICING THE BUSINESS

The buy-sell agreement will usually specify the method for determining the business’ value upon the death or departure of an owner. “Commonly, the plan may call for a valuation to be done by a business valuation expert or CPA,” says Herman-Giddens. “There may also be a tie-breaker provision: Survivors who disagree over the business’ value might be able to choose their own expert, and then either those two experts agree on a third expert or the two values are averaged.”

An alternative valuation system specifies a formula to be used, such as a multiple of earnings. This can be problematic, though, since economic conditions at the time of a partner’s retirement or death may differ substantially from those at the time the plan is put together, making a pre-set formula inappropriate.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an attorney or financial adviser for advice regarding your particular situation.

Tomorrow: Tips for avoiding the hidden pitfalls of family business transitions

ARDMORE, Pa. — Things go a lot easier when potential lenders, suppliers and partners can decide to take a risk based on a laundry business’ credit history and capability of repaying obligations. With strong business credit, a business can borrow at a lower cost, with more favorable terms. In fact, many small businesses with good business credit have discovered it is possible to get loans without an onerous and often embarassing personal guarantee.

Obviously, business credit is quite difficult to get. For any small-business owner, navigating the credit and lending world can feel like a vicious Catch-22. Most commercial banks and traditional lenders are reluctant to loosen their purse strings until would-be borrowers have proven themselves with a strong credit history. But it’s difficult to develop that good record when no one will lend in the first place.

IN THE BEGINNING

When a business issues or extends credit to another business, it’s referred to as “trade” credit. Trade, or business, credit is the single largest source of lending in the world.

Information about trade credit transactions is gathered by the credit bureaus to create a business credit report using the business name, address and federal tax identification number (FIN), also known as an employer identification number (EIN). The business credit bureaus use this compiled data to generate a report about a company’s business credit transactions. In many cases, those extending credit will rely on that business credit report to determine if they want to extend credit—and how much credit they’ll give.

The major business credit bureaus that compile and provide copies of the reports are:

• Dun & Bradstreet (dnb.com)
• Experian Business (experian.com)
• Equifax Business (equifax.com)

Unfortunately, because information provided to the business credit bureaus is submitted voluntarily—no business is required to send it in—the credit bureaus may never receive much, or even any, information about a coin laundry business’ credit transactions. In fact, many businesses go for years racking up business credit without any of it being reported to the credit bureaus.

ESTABLISHING BUSINESS CREDIT BASICS

Fortunately, there are a number of proven strategies that can help establish the credit worthiness of any laundry business and gain recognition from the credit reporting agencies:

1. If not already incorporated, forming a corporation or LLC (Limited Liability Company) to operate the laundry business, and obtaining an FIN or EIN from the IRS should be considered. Corporations and LLCs afford business owners liability protection, and a business credit profile can be created that is separate from the owner’s personal debts. 

2. Every laundry business should be registered with some, if not all, of the business credit bureaus. Dun & Bradstreet (D&B), for example, is one of the main business credit bureaus and maintains its own business credit score. An established business with an EIN can begin the process by applying for a free DUNS number. The number is how lenders will determine the operation’s creditworthiness (most business credit card and lending companies will ask for a D&B number during the application process).

3. Apply for a business credit card. Although most major credit card companies require that cardholders be in business for at least two years before they will extend credit, there are many small, local banks that are more accommodating to small businesses. They may be even more accommodating if an owner or manager is savvy enough to set up a business bank account with them!

Even though the laundry business may not require more credit cards to finance its operations, it should still apply for more business credit cards. In business, the 5-3-2 rule is key—a business’ credit record is not considered established and solid until it has at least five trade accounts, at least three credit cards, and at least two small loans fully paid off.

4. Comply with all business requirements. Not being in compliance with local, state and federal rules, ordinances, regulations and laws can raise red flags with both credit bureaus and those who grant credit. Potential red flags include such things as a lack of a business license or a phone line. Many suppliers will not grant credit to another business that hasn’t taken the steps to set the operation up with the proper licenses or meet local, state and federal requirements.

5. Financial statements and a professional business plan are a necessity, particularly in today’s economy. These documents are also required by many credit grantors.

6. Finding companies willing to grant credit to the laundry business without a personal credit check or guarantee is also a good strategy. When a supplier grants a business credit, it is important to ensure they report the payment experiences to a credit bureau. This step can help build a business credit report as well as provide a financial foundation for the operation.

7. Manage debt so the laundry business, large or small, won’t experience trouble making payments, which will negatively affect its credit score.

8. Monthly payments to credit grantors will keep a business credit profile active.

9. Get a website. It may not seem like a must in building or maintaining business credit, but D&B now shows and lists websites on credit files. Many banks also use the fact the operation has a website as a positive factor in determining the creditworthiness of a borrower.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a financial adviser for advice regarding your particular situation.

Check back Thursday for Part 2!

CHICAGO — Fire, liability or a worker injury is a risk that a coin laundry faces every day. If the business doesn’t have the proper insurance protection in place, an incident could be difficult to recover from. In a worst-case scenario, it could even put it out of business.

American Coin-Op invited representatives from the industry’s major insurance providers to answer some questions that the average self-service laundry owner might have about protecting their business investment.

ACO: What specific coverages do you believe are absolute requirements for any coin laundry, and why?

Adam Weber, president, Irving Weber Associates: There are many coverages that are industry-specific, such as bailee coverage for operations that offer attendant service (as well as those that don’t) such as wash and fold, but may experience an equipment malfunction that damages a customer’s clothing while being processed.

Other important coverages are water damage caused by sewer system backups, signs, general liability, parking lots, and equipment breakdown (including equipment and/or boilers and machinery if present). Also, business property coverage should be considered not just for machinery but also folding tables, TVs, chairs, vending machines, computer systems, card readers, etc.

Anne Hawkins, senior underwriter, NIE: At a minimum, every coin Laundromat should carry these coverages: 

• Building (when owned by the business owner) — If it’s an older building and you wouldn’t rebuild, insure for actual cash value. If you would rebuild, insure for replacement cost.
• Improvements and Betterments (when the business owner is a tenant) — You will need to replace the building owner’s property that is part of the building if you have a loss due to your negligence. This would include flooring, lighting, paint, wallpaper, etc.
• Business Personal Property (at replacement cost) — When you determine the replacement cost, be sure to include delivery, installation and taxes because these are included in the loss amount.
• Loss of Income (for minimum of three days) — This pays your profit and continuing expenses while you are out of business due to a covered cause of loss that occurs at your location.
• Utility Services-Time Element — This pays your profit and continuing expenses while you are out of business due to a covered cause of loss that occurs away from your premises, i.e. downed power lines due to windstorm.
• Utility Services-Direct Damage — This pays for damage done to your equipment due to a covered cause of loss that occurs away from your premises, i.e. when the power comes back on, some or all of your equipment is not working.
• Equipment Breakdown — Even if you do not have a boiler at your location, there are many other pieces of equipment that can fail due to an accident such as a power surge that is not caused by a covered cause of loss, i.e. power company equipment failure.
• Bailee — If you are doing drop-off dry cleaning and/or wash/dry/fold, you need to have coverage for your customers’ items that may be in your store overnight or for any length of time.
• Liability — Coin laundries have high liability exposure due to the volume of customers who enter their store and stay on the premises while doing laundry.

Larry Trapani, president, Brooks Waterburn Corp.: While a Laundromat owner needs many types of coverage, here are what I feel are the most important:

• Business Personal Property (AKA Contents) — This coverage protects your washers/dryers, vending machines, coin changers, basically all your stuff inside the building. Make sure the coverage is valued at “Replacement Cost” rather than “Actual Cash Value,” because if there is a claim, you want what it cost to get new machines, not the value of a 10- or 15-year-old machine. When you buy this coverage, think of how much it would cost you to replace all of your equipment if you had to buy it today.
• Tenant Improvements (AKA Build-out) — This is the cost that you put into the space you are renting. It includes electrical, plumbing, lighting, flooring, etc. Sometimes, these values can be $75,000 to $100,000. It is by far the most overlooked coverage when I review competitors’ policies.
• Liability — This covers slip-and-falls, children running into tables, or any other type of incident that might get you sued. Standard coverage is $1 million but some landlords require $2 million or more.
• Workers’ Compensation — The truth is, the Laundromat industry is a cash business. Many store owners pay workers “off the books.” The IRS is cracking down on small business. In most states, employers are required by law to carry workers’ comp insurance. And classifying employees as “independent contractors” will not fly. More than one of my customers has been caught doing that and paid significant fines. 

Steve Brodie, senior vice president, Wells Fargo Insurance Services USA: Key insurance issues are property coverage and adequate liability protection. Within these two broad segments, you want to make certain on the property side that you have full replacement cost for both equipment and tenants improvements, along with business income protection. Get your distributor involved by asking, “What would it cost to rebuild my store today?” Once you have that answer, discuss it with your insurance broker. Many times, fees (sewer hookups are a good example) do not have to be paid again.

On the liability side, review your lease as a minimum requirement, then discuss your own personal net worth, or that of the LLC, corporation or partnership that owns the store.

Last item of importance, but by no means should it be forgotten, is workers’ compensation. Laws differ in each state based on labor codes. Do not have a person in the store, even if advised by your CPA, that you call an “independent contractor” who is not covered by workers’ comp. If you have that exposure, take out a minimum premium compensation policy, evenif your CPA gives them a (Form) 1099 and classes them as independent. The only time this is questionable is if you hire another company (janitorial, for example). Make sure they supply proof of insurance and a “waiver of subrogation” from their workers’ comp carrier.

ACO: What are the biggest insurance risks in a coin laundry setting, and why?

Hawkins: The biggest risk is the liability exposure due to wet floors and/or damaged floor tiles from water leakage, plastic furniture that can collapse, lack of supervision of children, stools used to reach equipment controls, and improper maintenance of equipment. 

Burglary is another big risk. When someone burglarizes a coin laundry, they usually destroy the coin boxes on each machine and vandalize coin changers. This gets expensive and happens frequently.

Trapani: The biggest risks in a coin laundry setting can be broken down into two areas:

• Property Losses — The largest and most frequent claims are dryer fires. It usually has to do with not cleaning lint traps or ducts. As you can imagine, most fires cause significant damage because the dryers and washers are closely grouped together and the fire easily spreads. A good housekeeping procedure can help reduce these types of claims.
• Liability Losses — While trips and falls are common, lately, I see more children getting hurt in stores. Parents don’t always pay close attention to their kids, who run into things, pull down tables on top of themselves or fall from carts. I always suggest that a store owner bolt down tables to minimize some of the risk.

Brodie: Fire and liability claims are your biggest exposures to loss and cost the most when they happen.

Weber: Fire is probably the most common and easiest to avoid. Fires can easily begin in these businesses due to buildup of lint in dryers/exhaust vents, poor maintenance of heat-limiting safety devices (switches on dryers), combustible material stored near dryers or water heaters, washing materials soaked in flammable liquids such as gasoline, and buildup of oxygen agents (bleach, for example) through overuse.

Additionally, liability claims for alleged slip-and-falls are prevalent with this industry group.

ACO: How does the status of a store—unattended or attended—affect its insurability?

Trapani: The status of a store has a significant impact on insurance premiums. Unattended stores obviously are not as closely watched as attended stores. If something goes wrong, nobody is there to minimize the damage. Insurance companies know this as well and charge accordingly. The premium can be up to 40% more for an unattended store.

A note of caution here: If your store is unattended, make sure your insurance company knows it. If there is a loss, you may have trouble collecting because the insurance company can state that if it had known the store was unattended in the first place, it would not have written the account and thus deny the claim.

Brodie: They are both insurable; the attended store might get a little bit less premium based on someone attending the store during operational hours. Around-the-clock operations, as sometimes can be found in cities like New York and Las Vegas, pose different risks and must be 100% attended, usually with two people on duty at a time.

Weber: Unattended stores are at a higher risk of theft, vandalism and claims in general. Any time a business is left unattended, it is at a much greater risk of incidences that would require the use of your business insurance policy and generally are not as desirable to insurers.

Hawkins: It may depend on the individual insurance carrier. It’s been my experience that the unattended Laundromat pays more premium than the attended Laundromat due to the vandalism issue and the lack of a witness when someone reports an injury.

Check back tomorrow for Part 2!

JOHNSTON, R.I. — Are you prepared should a natural disaster strike your coin laundry? Would it be safe to be in your store? If you run an attended store, what do your employees think?

An overwhelming majority of Americans do not feel their employers are well prepared for, or might not recover quickly from, a natural disaster, according to research reported by property insurer FM Global.

The firm’s Business Risk Pulse Check finds 75% of U.S.-based workers feel their employer is not well-prepared for a natural disaster, and 72% of those polled would not feel totally safe in their workplace during such an event. Additionally, the study finds 71% of U.S. workers are not fully confident their employer could bounce back quickly. The survey comes on the heels of a record year for natural disasters in 2011.

The research, commissioned by FM Global and conducted by global research firm TNS, polled more than 1,300 U.S. workers nationwide to gauge perceptions about natural catastrophe-related risk in the workplace.

“Business resilience is more than just about getting back on your feet, it’s also about doing the right things to make sure you don’t get knocked down in the first place,” says Jon Hall, executive vice president, FM Global. “The findings demonstrate how critical it is that business leaders better prepare for natural disasters and ensure those efforts are understood within the workplace.”

CHICAGO — While buying Laundromat insurance may be a less-than-glamorous task, few things are as important to your survival as a self-service laundry owner as protecting your business. Your investment must be looked after. For example, could you afford to rebuild after a disaster? Gambling is for Las Vegas, not the self-service laundry industry.

Have you changed insurance carriers lately? Have you looked for a better deal? Do you know what questions to ask when shopping for insurance?

Take a moment out of your busy business life, and think about the last time you reviewed your coverage. Are the limits adequate? Think about the laundry. Have you made any changes to the store? Have you added any washers or dryers? All of these things have an impact on your coverage.

There’s another way to look at your insurance coverage. Has your carrier contacted you lately? If not, maybe you should ask yourself why. It’s never a bad idea to give a new carrier a chance. The worst thing that can happen is you get to compare prices and coverages. A new deal may be beneficial for your operation.

Before you rethink your coverage, be prepared. Larry Larsen, an industry insurance veteran, offers tips on how best to shop for Laundromat insurance.

Avoiding Key Mistakes

Insurance shopping poses a unique challenge, says Larry Larsen, a 30-year industry veteran and agent for Crusader Insurance Co., Woodland Hills, Calif.

“Everybody wants to save money in the Laundromat business, but when it comes to insuring your Laundromat, you have to be careful you don’t save so much money that you increase your risk,” he cautions.

The most common mistake Laundromat owners make is the failure to properly value their business, Larsen says. “The starting point of any Laundromat insurance policy is the evaluation of what it would cost to rebuild the Laundromat in the event of a total loss.”

Trying to save money by lowering the amount of your property insurance means there could be major problems if you experience a total loss, Larsen explains. “No insurance company is going to pay you more money than the face value of your insurance policy at the time of a total loss.”

You can carry lower insurance amounts, he adds, when you have made the decision to close down and quit the business if you have a total loss. “This applies to people who only have a short term left on their lease, or are leasing on a month-to-month basis. If your store burns and is declared a total loss, your long-term lease may not be cancelled and it will be your obligation to rebuild the Laundromat.”

Confusion often exists when owners buy replacement-cost insurance with the belief that their store will be replaced regardless of how much face-value insurance they have purchased. It’s quite a “surprise” when an owner discovers that the insurance only covers up to a maximum of the insurance purchased, Larsen explains.

Do you know what it would cost to rebuild your store? Read your lease or look at your other building insurance (if you own the building), he says. “As a tenant, many of the items will be covered by the building owner if there is a loss. Absent a lease provision to the contrary, all fixtures you will be required to leave behind at the expiration of your lease may be covered by the building owner’s policy.” This can include the bathroom, water-heating system, water softeners, heating, air conditioners, swamp coolers, electrical panels, gas lines and interior walls.

The lease plays a crucial role in any shopping experience. No one can give you the proper assistance unless the lease is reviewed, Larsen adds.

“The valuation of your Laundromat is not the responsibility of your agent! Your agent probably has not seen your Laundromat, and is only as aware of the condition of your store as you have provided in answers to a few questions.”

Your agent may be the expert in Laundromat insurance, but you’re the expert when it comes to knowing the value of your own business, he notes.

“The second most common mistake is the failure of owners to take the time to understand their insurance. Most owners spend hours evaluating the income-and-expense potential of a Laundromat purchase, but only spend minutes evaluating their insurance coverage. Spend more time evaluating your insurance.”

How does an insurance “amateur” evaluate coverage? “Read the insurance provisions of your lease, learn the definitions of insurance terms, and discuss your potential insurance with your potential agent,” he advises. “A professional agent has allocated up to one hour for each new client to engage in a question-and-answer session. No question is silly, and any agent who avoids your inquiries should be crossed off your list of agents worthy of your business.”

If you have any questions or comments about this article, contact Larry Larsen at laundromat123@aol.com.

Click here for Part 1.

ST. LOUIS, Mo. — I’m no meteorologist, but I can see what’s been happening since the year began: We’ve been hit with record ice and snowstorms in places that rarely receive it.

And this troubling weather “report” doesn’t end there. The country has experienced more than double the usual number of tornadoes, record-breaking rainfalls and hailstorms, and flooding. And hurricane season only recently began!

Since we have no idea if these weather occurrences will continue or subside, it’s better to be safe than sorry when it comes to taking care of your self-service laundry.

Loss of Business

If you feel a bit lost when it comes to understanding insurance matters, you’re not alone. There are some items of coverage that most self-service laundry owners just don’t think about. For example, most of you have loss-of-business income, but that only applies when there is a direct physical loss at your location. When you are out of business due to power failure from a storm, you need a coverage known as utility services-time element.

If you’re a store owner in a coastal area, you are probably aware of utility services-time element coverage due to the probability of hurricanes. After a major hurricane, a city may be without power for weeks.

Utility services-time element coverage is an extension of your loss-of-business income due to damage that occurs away from your premises, like downed power lines or a damaged water supply. Again, this coverage is usually not that expensive, but it’s important not just in coastal areas, but in any area due to the variety of weather events that may occur.

Things may not improve when the power returns. You may turn your washers and dryers on and discover that some of them are not working. The equipment may be damaged by a power surge. To deal with this problem, you should carry utility services-direct damage coverage, which pays to repair equipment that has been damaged due to a loss that occurred away from your premises. This coverage is not expensive, and I believe it’s worth the investment.

Flood is an exclusion on virtually all commercial insurance policies. Flood coverage for building and personal property can be purchased through the National Flood Insurance Program. If you are near a body of water that could flood, ask your agent to get you a flood quote.

Earthquake is another exclusion, but it can be purchased from most insurance carriers. If you are concerned, simply call your agent and you should be able to get a price for earthquake coverage.

Think about your customers in these situations. If you have a true bailee policy, and not just personal property of others, the clothing in your laundry is covered for flood and earthquake. If you are doing drop-off service or farming out drycleaning, you should have bailee coverage included in your insurance package and not just personal property of others.

Bailee also covers the clothing when it is away from your premises, such as when it is being transported to the drycleaner you are partnered with. Personal property of others is only covered at your premises.

Most of you are probably aware of Mark Twain’s famous saying, “Everyone talks about the weather, but no one does anything about it.” That may be true, but if you give your insurance situation some thought and are prepared, you reduce the odds of weather getting the best of you.

Click here for Part 1.

Tomorrow: How the SBA steps in to help after disasters...