An Investor’s Guide to Coin Laundries | The Power of Leverage | Chapter 5
We are proud to bring you this comprehensive book, ‘Investor’s Guide to Coin Laundries‘, compiled by Jay MacDonald, Vice President, Distributor Sales for Alliance Laundry Systems.
Alliance Laundry Systems is the largest manufacturer of commercial laundry equipment in the world and has over 50 years of experience in helping investors just like you, get started in the coin laundry market. This book is a compilation of experiences, ideas and input from hundreds of successful coin laundry owners and distributors from all over the world.
Taking data and industry knowledge, it is a road map to help you succeed. At the end of it, you will have a general understanding of the industry and what it will take to operate a successful business.
Begin the journey to coin laundry ownership and financial independence.
Chapter 5 : THE POWER OF LEVERAGE
So you’ve decided opening a coin laundry is for you. You’ve done the due diligence of investigating the industry and partnering with a reputable distributor. Now it’s time for the real work to begin.
For many investors, the cost of opening a coin laundry is often one they can not finance on their own and need to gain financial assistance from outside sources. You will rely on the business to generate enough revenue and profit to cover your fixed and variable costs as well as to pay off the debt from the financial sources you have borrowed money from. You are leveraging your capital. Leverage, if done in the proper ratio, is certainly not a bad thing. Consider the purchase of a home. The actual cost of the home may be $250,000 but you only have $50,000 of cash to put into the deal. You would then go to your local bank and apply for their financing on the balance of $200,000 that you would repay through your normal income/revenue. In this example, you have leveraged your $50,000 to obtain a home valued at $250,000. In order to secure the needed business loans, there are some steps you will need to complete.
STEP 1: Defining the Legal Structure of your Business
There are eight classifications your business can fall under. Before deciding on which structure is best for you, we strongly recommend consulting an attorney who specializes in business law. They will be able to go deeper into the classifications than the description of each below, as well as help you in following the proper procedures in establishing the formation of your business. For tips on hiring the right attorney, there is a section in Chapter 7 that will provide you with a guideline.
This is one of the oldest and most common forms of business ownership. In a sole proprietorship, a single business owner assumes all the benefits and risks of running the company. With a sole proprietorship, there is also no legal distinction between assets and liabilities of a business and the owners.
A general partnership is an unincorporated business with two or more co-owners. All of the owners take an active and generally equal part in managing the business and are jointly liable for any obligations of the business. They are also bound by any actions of the other owners.
In a limited partnership, the business structure combines the features of a limited company. Sometimes used as a tax shelter, there isn’t a legal entity separate and distinct from the businesses owners. In most limited partnerships, it contains at least one full partner and at least one limited partner. It’s the general partners that control and manage the partnership and are still jointly responsible for the business’s debts and obligations. In this partnership, the limited partner does not control or participate in the management of the business and are only liable up to the sum of money they invested. With a limited partnership, both parties — general partners and limited partners — benefit from any profits, capital gains, investments credits, etc.
Limited Liability Partnership
Similar to a limited partnership, with a limited liability partnership, no partner involved is liable for any negligent acts of any of the other partners.
Limited Liability, Limited Partnership
With this type of classification, the partnership agreement makes it so that no partner is personally responsible for any damages that may arise out of the acts of the other partners in the business.
Limited Liability Companies
Limited liability companies or LLC’s are a relatively new type of business structure. It combines limited personal liability with the single taxation found in a partnership or sole-proprietorship. The profits and tax benefits are split with the partners or any stockholders. The tax return for an LLC is generally filed with the tax authorities only. This is for the purpose of information and each shareholder files their own tax returns.
A C Corporation or C Corp is an economic system in which goods and services are exchanged for one another on the basis of perceived worth. Every one of these businesses will require some form of investment and a sufficient amount of customers that the product or service can be provided for or sold to on a consistent basis.
A type of business structure in which the company’s income passes through its stockholders in proportion to the investment made. It is taxed at a personal income tax rate as well. S corporations are allowed only one type of stock with a limited about of stockholders.
STEP 2: FINDING A LENDER
Once you’ve established which classification your laundromat will fall under, you will need to begin searching out funding options, of which there are four types. There is a private lender, a leasing company, suppliers and lending institutions, each with their own pros and cons.
A private lender is exactly that. It could be a family member, a business partner or even investors. Keep in mind that a private lender might want more say in how you operate your business.
A lending institution is an organisation such as a bank, credit union or finance company that makes loans. They will look at both your credit rating and business plan with greater scrutiny.
A leasing company will purchase the equipment you require and lease or rent it to you. For the most part, the lease, like an automobile lease, will be done at a fixed rate and for a specified time period. At the end of the lease, you can choose to purchase the equipment or lease new equipment.
Some laundry manufacturers and even some distributors offer financing, but only if you are purchasing their equipment. There are cases that they might even finance everything including things like leasehold improvements or utility impact fees. The terms will be decided by the manufacturer. A benefit to working with Supplier Financing is that those involved in the credit decision are very familiar with the type of business you want to open. This knowledge and the experience to evaluate potential cash flow of the specific business may allow you to finance more than a traditional lending establishment would approve a loan for.
STEP 3: PUTTING TOGETHER YOUR BUSINESS PLAN
There are many different ways to put a business plan together. Some are lengthy, some are short and to the point. All include an:
- executive summary
- company description that focuses on your start-up plans, what your classification will be, the business history, your vision, values and mission.
- description of your product or service, focusing on the benefits
- strategic plan for implementation which has goals and tools of measurement.
- financial analysis which includes projected costs, a cash flow analysis, a ProForma, the break-even point and another that will demonstrate financial solvency.
Creating Your Vision
In the excitement of starting your own business, it’s not uncommon to get ahead of yourself. However, before you start deciding on the equipment mix, research the demographics, determine a location, and you will want to outline what your vision and values are for your business.
A vision statement is a picture of what your company will be in the future. It serves as a framework for any strategic planning. When you write your vision statement, you want to ask yourself a simple question: “Where do we want to go?” Keep in mind that while the vision statement will not tell you or anyone else exactly how you are going to get there, it does set the direction for writing your business plan.
Your values are what support your vision statement. They are your core beliefs. This will allow for your business partners, your lender and any employees to know what the priorities and goals are for your company.
Develop Your Budget
It’s often that the budget is confused with the actual business plan. It is a component of the business plan and one of the key essential pieces. Within this section of your plan you will want not only to create a budget but demonstrate financial forecasting. You need to have a clear picture of the industry, your potential customers, competitor’s and even market conditions — otherwise the numbers won’t reflect the reality of your world.
Get to Know Your Customers
As we progress in the book, you will see it mentioned time and again. You need to know your customers! Not only the demographics that define them, but what it is they want and need. Don’t be afraid to ask them. The information you gather will help to build a business plan that will speak to them and help increase your rate of success.
Know that there will be Risks
When you are writing a business plan, it’s important to have an understanding of the risks involved in opening your laundromat, as well as know how you will manage them. Your business plan should contain any challenges that you might face.
It’s important to be flexible, allowing for unexpected changes within your business plan. Leave some room for change and adaptation throughout it. This might force you to leave behind business practices that have worked well before, but you might learn something new in the process.
There is a lot of hard work, blood, sweat and tears when you own your own business. Within your business plan, there should be clear, well defined goals that go way beyond job satisfaction. These goals should be realistic, attainable and have a time frame for accomplishing them.
A second and third set of eyes can go a long way in writing your business plan. Take a draft to some of your business associates. Take into account their advice as they have experiences you may not have. They will be able to point out any holes in your plan or any areas that you may have missed. Extra opinions can only strengthen your business plan. Your distributor or lender should be able to provide you with a copy of a good business plan and there are many examples on the internet.
You’ve established your business classification, written a brilliant business plan and went out to look for financing. While these sections give you an overview and tips of what will be expected as you go through the process of opening a coin laundry, below are some commonly asked questions.
How much will a typical coin laundry cost to open?
It can range anywhere from $100,000 to $900,000 depending upon the size, the equipment list, ancillary services and so much more.
How much will I need for a down payment?
Most financial institutions will want to see that you are putting at least 30% of your own money into the cost of a new business. This gives them peace of mind that you will work hard to make the business successful. This equity stake may include equipment downpayments, partial or total construction costs, etc.
What information do I need to provide a lender?
Any lender will want to know about you, your business and your goals. They will look at your credit, your assets and liabilities, your financial history and stability and many of the options will require a business plan that covers all of this information, along with financial projections.
Should I get pre-qualified for a loan?
YES! After you’ve written your business plan and started talking with lenders, if you can, get pre-qualified. Just like buying a home, this will show any property owners that you might lease from or any real estate brokers that you are serious and that the coin laundry opening can be accomplished. And you definitely want to complete this step before signing other financial documents like a building lease or equipment contract. The distributor can help you with this process, especially if they offer supplier based financing.
What if I need help writing a business plan?
You can start with the internet. There are companies listed that will help you write your business plan for a fee. There are also some free services that will aid you along the way including your local chamber of commerce, the Small Business Association (www.sba.gov) or S.C.O.R.E, the Senior Core of Retired Executives (www.score.org).
What could prevent me from getting the financing I need?
There are three things that could hinder your financing. Not being prepared to assume the responsibility of business ownership, a poor credit rating making you a risky investment or a poorly prepared or non-existent business plan.
Can I reapply for financing if I’m first turned down?
Yes, you can. You might have to do some repair work to your credit report or make some changes to your business plan. Also, there might be factors that are out of your control such as a lender whose asset-to-loan ratio is out of balance or the lender is restricting the amount of loans they take on. If that is the case, try another lender. Many times the lender may offer suggestions that would help you qualify. One example may be to add a new business partner or family member. Another may be to set your sights on a smaller laundromat for your first store.
What are some of the common terminologies I will come across when writing a business plan for my coin laundry:
Turns per day
Refers to the number of cycles (turns) that each of your machines will average each day. This will typically vary during a seven day week with Friday through Sunday being the busiest times. Calculate turns per day using total machine cycles for an entire week divided by total number of machines and divide that number by seven (days of the week).
Cash flow projection
An estimate of the time and amounts of cash inflows and outflows over a specific time period. The cash flow projection will show if your business needs to borrow money, how much, when and how you will repay the loan.
A ProForma is a hypothetical financial projection document based on previous business operations for estimate purposes: a ProForma balance sheet. The common objective of a ProForma financial statement gives an idea of how the actual financial statement will look if any underlying assumptions hold true. The ProForma is generated based on assumptions. You should list all assumptions made in your initial ProForma. This will be very helpful after your business has opened. If your actual revenues and profits are significantly different from those in the initial ProForma, the first place to look for answers to explain the variances is found in the assumptions. Because you are dealing with assumptions, I recommend that you create several different ProFormas, each with a slightly different set of assumptions. For example, one ProForma may assume 5 turns per day and another may only assume 3 turns per day and still another may calculate the numbers of customers and thus, turns per day you need at a minimum to reach a breakeven point.
Washer capacity is the amount or poundage of laundry that it can process during a load. With a washer, this is measured in dry weight. The actual amount of pounds of fabrics that can physically fit inside of a washer can vary depending on the density and weight of the laundry load.
The projected amount of utilities a coin laundry will consume. This includes electricity, gas, water and sewer. Your authorized distributor can provide you with the approximate amount of utilities that are consumed during a cycle for each machine type and capacity. This calculation is also very important when designing your store so that you will have enough gas and water pressure along with drain line capacity to support your store during peak periods.
Costs per turn
The costs associated with each turn of the equipment within a laundromat. These costs include utilities, maintenance, depreciation, etc.
The point at which a business will generate enough revenue and margin to cover all fixed and variable costs of the operation.
The various types and sizes of washers and dryers included in a coin laundry.
The amount it costs a customer to either wash or dry a load of clothing.
ABOUT THE AUTHOR
JAY McDONALD has been active in the laundry industry for over 30 years. He is the Vice President, Distributor Sales for Alliance Laundry Systems, the largest manufacturer of commercial laundry equipment in the world. He also served on the board of directors for the Coin Laundry Association and received the Distinguished Service Award “in appreciation of his leadership in furthering the welfare and best interests of the coin laundry industry” in 2009.
As your equipment distributor — the most important partner and most valuable resource you will ever have — we encourage you to get in touch so that we can help guide you through the exciting and financially rewarding industry of coin laundry ownership.