Laundromat Valuation: Gross Revenue and SDE — Transcript

Full transcript

1. 0:05Hello and welcome to the Laundromat
2. 0:07Ownership Podcast. I'm your host Ian
3. 0:09Gallahan. Me and my business partner
4. 0:11Brian Henderson have three laundromats
5. 0:13in the Broken Arrow, Oklahoma area. In
6. 0:162025, those laundromats did 2.5 million
7. 0:19in revenue and we are also the founders
8. 0:21and owners of the original Laundromat
9. 0:23point of sale system, Wash-Dry-Fold POS.
10. 0:27Today is actually going to be part two
11. 0:29in a series about Laundromat valuation
12. 0:32metrics.
13. 0:33Um if you saw part one,
14. 0:36this is being done in cooperation with
15. 0:39Full Cycle,
16. 0:40uh the magazine from the CLA.
17. 0:43And in uh
18. 0:46the first edition,
19. 0:48we talked about
20. 0:51mainly two things,
21. 0:52that most laundromats are done what's
22. 0:55called via an asset sale,
23. 0:57um
24. 0:58but that doesn't mean it's necessarily
25. 1:00just the assets that you're purchasing.
26. 1:02You're definitely purchasing goodwill in
27. 1:04there as an as an intangible asset. So,
28. 1:06don't think you're going to get off
29. 1:07paying just for the machines.
30. 1:10And then we also talked about
31. 1:11negotiating leases and the benefits of
32. 1:14having real estate. So, the very first
33. 1:17two uh pieces of this uh four-part
34. 1:19episode was about the asset sale and uh
35. 1:23leasing versus real estate.
36. 1:26The second part, today's edition, which
37. 1:29is um
38. 1:30uh this uh the second um Full Cycle
39. 1:35magazine. These are quarterly and you
40. 1:38can get them from the CLA. They'll ship
41. 1:39them out to your house.
42. 1:41This one will have more information than
43. 1:43just what I go over, so it's still worth
44. 1:46having and reading, but it's going to
45. 1:48focus on the two first
46. 1:51um
47. 1:52earnings that you would see if you were
48. 1:54comparing the earnings in size, right?
49. 1:57With the biggest first being gross
50. 1:59revenue.
51. 2:00And then the second biggest being SDE or
52. 2:03seller discretionary earnings.
53. 2:06And SDE really is the most important
54. 2:08number when you're talking about
55. 2:10laundromat
56. 2:12selling or buying in my opinion.
57. 2:15So,
58. 2:16um
59. 2:18let's start at gross revenue.
60. 2:20It's a pretty easy number to understand
61. 2:23and it's actually pretty useful
62. 2:26for gauging roughly how much a
63. 2:28laundromat is worth. Now, you could you
64. 2:30could never make an offer based solely
65. 2:32on gross revenue and we'll go over why.
66. 2:35But, it's essentially every single
67. 2:37dollar of top-line revenue that comes
68. 2:40into that laundromat.
69. 2:42And the reason it's
70. 2:45useful is because laundromats typically
71. 2:47sell somewhere between 1 to 2x gross
72. 2:51gross revenue, a year's worth of gross
73. 2:53revenue.
74. 2:54And it's actually even what you'll hear
75. 2:56people say, I I read this on a uh
76. 2:59you know, some blog from Eastern Funding
77. 3:01from some time ago, but I I found it to
78. 3:03be pretty relevant, which is
79. 3:05that uh a lot of people will finance or
80. 3:08certainly Eastern Funding uh will often
81. 3:10finance you for uh 50 to 70 weeks of
82. 3:15that laundromat's revenue.
83. 3:17And that's kind of where they start with
84. 3:19valuation. Now,
85. 3:22it doesn't give you enough information
86. 3:24about the laundromat because it doesn't
87. 3:26tell you what the expenses are for the
88. 3:28laundromat. Um they might have an
89. 3:30enormous payroll, they might have an
90. 3:32enormous overhead for rent. Um maybe
91. 3:35they have a really bad lease and they're
92. 3:37paying a lot of
93. 3:38uh really high cost there.
94. 3:40Um they might have low prices and their
95. 3:43utilities are super high. There's all
96. 3:45kinds of things once we look under the
97. 3:47hood of the vehicle that we might find
98. 3:51um that gross revenue doesn't really
99. 3:53address.
100. 3:54Um however, it does get you started and
101. 3:58in a typical laundromat, I would even
102. 4:01venture to say 90-something percent of
103. 4:03laundromats in the US,
104. 4:05you will kind of arrive at that 50 to 70
105. 4:08weeks as a fair market valuation. And in
106. 4:11fact, when we bought Liberty Laundry
107. 4:13back in 2023,
108. 4:15um we bought the operational part of
109. 4:18that laundromat, so not the not the real
110. 4:20estate, but the operational, the
111. 4:21business part of it. It was slightly
112. 4:23more than 1x revenue.
113. 4:26And now, we did buy real estate with
114. 4:29that purchase as well for two of the
115. 4:31three properties, and that really helps
116. 4:33justify
117. 4:34uh a little bit more of a premium price
118. 4:37on the business itself because you have
119. 4:38more security there long-term.
120. 4:41Um
121. 4:42but uh
122. 4:44it still fell in that 50 to 70 weeks
123. 4:47um worth of revenue, even though we
124. 4:49weren't looking at that at all to figure
125. 4:51out that price. So,
126. 4:53I give that to you if you if you know
127. 4:55nothing else besides gross revenue, you
128. 4:57actually still have a pretty good place
129. 4:59to start at what you think that
130. 5:00laundromat might be worth. Do not make
131. 5:03an offer based on just the gross revenue
132. 5:05because there might be things under that
133. 5:07hood uh that make that laundromat
134. 5:09essentially worthless. Um so, you don't
135. 5:12want to overcommit based on gross
136. 5:14revenue.
137. 5:16However, it's a really good place to
138. 5:17start, and what I like to use it
139. 5:20more with is in conjunction with the
140. 5:22second metric that we're going to look
141. 5:24at today, which is SDE.
142. 5:27Now, you could see if gross revenue is
143. 5:29all the revenue, SDE is a reduced amount
144. 5:32of that revenue.
145. 5:34And
146. 5:35most brokers um are going to use this.
147. 5:39Um the SBA
148. 5:41uh recommends this for small businesses
149. 5:43doing under 5 million in gross revenue
150. 5:45annually. They they recommend doing SDE
151. 5:48as the primary valuation metric, and
152. 5:51that's what they will loan based off of.
153. 5:53And even other laundromat owners, they
154. 5:56actually are using SDE, but they will
155. 5:58almost always call it something else.
156. 6:01And that's not um
157. 6:04because they have some great insight,
158. 6:06it's because they don't know the name of
159. 6:08the metric that they're using.
160. 6:10Uh in fact, a good example of this is I
161. 6:12was looking at a um
162. 6:14a sheet kind of put together for the um
163. 6:17the revenue of a laundromat
164. 6:20um for a prospective buyer.
165. 6:22And this [clears throat] particular
166. 6:24laundromat was an LLC filing as an S
167. 6:26corp, which is the exact same uh
168. 6:29corporate structure that Liberty Laundry
169. 6:31uses. And if you'd like to know more
170. 6:33about why that's the most tax-advantaged
171. 6:35structure for a laundromat doing
172. 6:37$100,000 plus in profits each year,
173. 6:41um I have a whole episode on that I'll
174. 6:43link to in the show notes.
175. 6:45But as far as the um
176. 6:49LLC filing as an S corp,
177. 6:51what they had in this little they had an
178. 6:53EBITDA sheet. Now, EBITDA is something
179. 6:56very specific, and we're going to talk
180. 6:57about that next episode.
181. 6:59It did give me the numbers that I wanted
182. 7:01though, and it did give a very good idea
183. 7:04of um it was essentially the QuickBooks
184. 7:07numbers, which is what I would probably
185. 7:08rather have anyway, so that I can figure
186. 7:10out my own EBITDA from that. Um but then
187. 7:13they called it adjusted EBITDA, which
188. 7:15adjusted EBITDA is just taking in and
189. 7:17out
190. 7:19one-time expenses.
191. 7:20Um so it wasn't actually adjusted
192. 7:22EBITDA. What they were adjusting it to
193. 7:24was SDE, which is seller's discretionary
194. 7:27earnings.
195. 7:28And how were they adjusting that? Well,
196. 7:31typically in a laundromat,
197. 7:33most laundromats are structured as LLCs,
198. 7:36and if they're profitable laundromats,
199. 7:37they're structured sometimes as LLCs
200. 7:40filing as S corps if they're highly
201. 7:42profitable.
202. 7:43And this laundromat was highly
203. 7:44profitable and was structured as such.
204. 7:47And when you're doing that, you have to,
205. 7:50as part of filing as an S-corp, pay the
206. 7:53owner a salary. So, the owner is an
207. 7:56employee of the company.
208. 7:58So, when you're buying that laundromat,
209. 8:00if you think about it,
210. 8:02you're going to get, sure, all the what
211. 8:03you would call distributions. So, you're
212. 8:05going to get all the profits, the net
213. 8:06profits. Um again, net profit, I I
214. 8:10really just see that as a tax number,
215. 8:12but
216. 8:13a lot of people think about net income
217. 8:15or net profit as a
218. 8:17um operational number, but
219. 8:19the amount of money that that you're
220. 8:21going to claim with the IRS that is
221. 8:23yours to spend how you like, um
222. 8:27you're going to get that as
223. 8:28distributions and you're going to pay
224. 8:29taxes on that.
225. 8:31But, if you think about it, you're also
226. 8:32going to get your salary and you pay
227. 8:33taxes on that. And so, when you're
228. 8:37trying to calculate SDE,
229. 8:40you are going to include that salary
230. 8:42number
231. 8:44in SDE
232. 8:46because you, as the new owner, will pay
233. 8:48yourself that same salary if you're
234. 8:50keeping it as a S-corp. Maybe you're
235. 8:53just going to be an LLC and not an
236. 8:55S-corp. Well, then you wouldn't pay
237. 8:57anyone that salary. That would go
238. 8:58straight into your distributions.
239. 9:01Now, the interesting thing, I'm not
240. 9:03going to get super into EBITDA because
241. 9:04that's for a different episode and it
242. 9:06really does require quite a bit of time
243. 9:08to explain.
244. 9:10But,
245. 9:12the biggest
246. 9:13difference between SDE and EBITDA in a
247. 9:16laundromat is absolutely that uh owner's
248. 9:19salary.
249. 9:20And
250. 9:22in owner's salary, it's part of the
251. 9:24larger circle. So, that's why the
252. 9:25circle's larger cuz it has that salary
253. 9:27in there.
254. 9:29In EBITDA, it's not part of it because
255. 9:32when you're talking about EBITDA,
256. 9:34you are assuming that it's going to be
257. 9:36professionally managed and that that
258. 9:38manager is going to take that owner's
259. 9:40salary. One of the things we really want
260. 9:42to make sure that we understand about
261. 9:44SDE for a laundromat is what are the big
262. 9:46things to put in there and what are the
263. 9:48big things to take out of it.
264. 9:50So, the biggest thing by far is the S
265. 9:52corp salary.
266. 9:54You would add that back into that
267. 9:57earnings multiple, the SDE earning
268. 9:59earnings multiple. If you're not putting
269. 10:01that earnings multiple back in there,
270. 10:03then you're not really calculating SDE.
271. 10:05So, by definition, this has to go into
272. 10:07the SDE number.
273. 10:09Another good example to look out for is
274. 10:12unnecessary vehicles. Maybe these are
275. 10:14daily drivers that the laundromat owner
276. 10:16has, and I'm sure he buys some supplies
277. 10:18with them, he or she, um but it's not
278. 10:22really something that you're going to
279. 10:23keep on the um
280. 10:26on the balance sheet, and it's not
281. 10:27something that you're going to
282. 10:28continually pay the expenses for.
283. 10:30And so, uh the expenses for unnecessary
284. 10:33vehicles um could be added into SDE.
285. 10:36These are things that would make it go
286. 10:37bigger. What if they have um you know,
287. 10:40like a a trade show, for example, if
288. 10:43they went to the Clean Show, if they
289. 10:44went to the Excellence in Laundry
290. 10:45Conference, those can be thousands of
291. 10:47dollars, and they're paying for the
292. 10:49flights and the food and the and the
293. 10:52five-star hotel,
294. 10:53well, that was part of their seller
295. 10:55discretionary earnings, and as the new
296. 10:57owner, it's going to be part of your
297. 10:59discretionary earnings.
298. 11:02And so, if you're not going to
299. 11:04the Excellence in Laundry or if you're
300. 11:06not doing the Laundromat Millionaire um
301. 11:09conference or whatever it is,
302. 11:11either way, you would include that in
303. 11:14your SDE because it's going to be part
304. 11:16of your discretionary earnings.
305. 11:18And so, if it's in the expense bucket,
306. 11:21you want to kind of move it into the
307. 11:22bucket of what you're going to pay a
308. 11:24multiple on, and that's what makes the
309. 11:25SDE that the second biggest
310. 11:27um bucket, if you will, of of revenue.
311. 11:31Another good example to look out for are
312. 11:33family members that are maybe on the
313. 11:35payroll for the laundromat, but maybe if
314. 11:37they quit, you wouldn't be any worse off
315. 11:40for it.
316. 11:41And so if there's people that are not
317. 11:42going to still be there
318. 11:44once you take over the laundromat, again
319. 11:46this is typically a family member who's
320. 11:48on the payroll, but they're not really
321. 11:50um
322. 11:51maybe contributing as much to the
323. 11:53day-to-day operations or maybe their
324. 11:55role becomes redundant once you are the
325. 11:57owner.
326. 11:59Then I would put that payroll into the
327. 12:01SDE as well.
328. 12:03And then the last thing, and this is a
329. 12:04good one, there's a lot of times these
330. 12:06little lifestyle extras that people will
331. 12:09put and you'll see it on the expense
332. 12:11sheet as like um a good one for example
333. 12:14for us when we bought Liberty Laundry is
334. 12:16magazine subscriptions. And so there's
335. 12:17all these different kinds of music and
336. 12:19lifestyle magazines
337. 12:21um that the previous owner would have
338. 12:24for the customers of Liberty Laundry to
339. 12:26read.
340. 12:28They also happen to be the laundry the
341. 12:30types of magazines that he would want to
342. 12:32read.
343. 12:33And as the new owners, there's a lot
344. 12:35that we did, we kept the free coffee and
345. 12:36all that, but we did not keep all the
346. 12:38magazine subscriptions. And so when we
347. 12:40were making our um
348. 12:42offer and we were trying to figure out
349. 12:44how much revenue would actually go into
350. 12:46our pockets as the new ownership, we
351. 12:48were able to keep take that out of the
352. 12:50expense bucket and put it into the SDE
353. 12:53bucket.
354. 12:55Um
355. 12:56a few things that should not be put in
356. 12:58the SDE bucket
357. 13:00would be um
358. 13:02non-operating income,
359. 13:04right? That could be maybe they have
360. 13:07some cash on hand and they have it in an
361. 13:09investment account and that investment
362. 13:11account is generating some cash.
363. 13:14That's called non-operational revenue.
364. 13:16It's just interest they have on their
365. 13:18free cash.
366. 13:19That's not really part of the business.
367. 13:22You probably not going to buy that cash.
368. 13:24You probably wouldn't have the same
369. 13:26investments. So it just doesn't make
370. 13:28sense to include that. That's not part
371. 13:30of the earnings multiple that you're
372. 13:31buying.
373. 13:32A more important thing would be uh if
374. 13:35they sold some old washers and dryers,
375. 13:37maybe they replaced them recently, they
376. 13:38had some equipment that they sold,
377. 13:40that's going to be a one-time revenue
378. 13:42bump that should not be included in the
379. 13:45earnings multiple that you're that
380. 13:47you're buying based off.
381. 13:49And then lastly would be what we call a
382. 13:50windfall, cash windfall, which a lot of
383. 13:53times would be like grants from your
384. 13:54local city or state. We saw a lot of
385. 13:56that in the COVID era where
386. 13:59uh a lot of these laundromats had these
387. 14:00one-time grants to buy some equipment or
388. 14:04to update or to somehow uh invest in
389. 14:07their laundromat. And because you're not
390. 14:09getting that every year, you're not
391. 14:10going to include that in your SDE
392. 14:13multiple.
393. 14:14And so,
394. 14:16that's a really good example of things
395. 14:18that you do not want to put in the SDE
396. 14:21and things that you do want to put in
397. 14:22the SDE.
398. 14:23And so, getting back to uh
399. 14:26if you're going to value based on SDE,
400. 14:32usually in
401. 14:34the average well-run laundromat in
402. 14:36America,
403. 14:37if you were to take, "Hey, what's the
404. 14:39real amount of cash that it's up to me
405. 14:41to spend?"
406. 14:42typically 3x SDE or 3.something
407. 14:46um SDE is probably a good market rate
408. 14:51for that laundromat. You're not getting
409. 14:52it for a steal,
410. 14:54um but if you're paying, you know, 3x
411. 14:56SDE, you're not you're not being ripped
412. 14:58off, either. And a lot of times that
413. 15:01same number, let's say 3x SDE, it'll end
414. 15:04up being about 60 weeks worth of
415. 15:06revenue, which puts us right back on our
416. 15:08um gross revenue. So, these two numbers,
417. 15:12in my view, are the most important
418. 15:15numbers
419. 15:17uh for buying a laundromat, especially
420. 15:19if you are a
421. 15:20>> [clears throat]
422. 15:21>> one or two owners, maybe you're somewhat
423. 15:24like um me and my business partner, and
424. 15:27you're not some giant corporation.
425. 15:29If you're a giant corporation, you
426. 15:30probably are going to be more interested
427. 15:32in the EBITDA number,
428. 15:34which really is a a little bit smaller.
429. 15:36That'll be our next series. We'll talk
430. 15:37about EBITDA.
431. 15:39And that really is the number you're
432. 15:40looking at it as if someone else was
433. 15:42doing everything, right? And so,
434. 15:45it's not really the same as the seller
435. 15:47discretionary earnings because typically
436. 15:49as a seller, they're either paying
437. 15:50themselves a salary or they're
438. 15:52contributing themselves to the
439. 15:54laundromat in some way.
440. 15:56And when you look at EBITDA, you are
441. 15:58going to need to replace everything that
442. 16:00they're doing, and you're going to have
443. 16:02it professionally managed because this
444. 16:03is one of 30 laundromats that you own,
445. 16:05not one of three or four.
446. 16:07And so, that EBITDA number, again, if
447. 16:09you look at the SBA guidelines on this,
448. 16:12they recommend EBITDA for 5 million and
449. 16:14up.
450. 16:15And so, that's why the SDE is really the
451. 16:18key number for a laundromat uh
452. 16:22doing less than 5 million in revenue if
453. 16:23you have an LLC or corp or an LLC filing
454. 16:27as an S corp. If you're under five
455. 16:29locations, 5 million in revenue, I think
456. 16:31SDE is most important. Once you get over
457. 16:33that, EBITDA probably gets more
458. 16:35important. We'll talk about that more.
459. 16:37Uh FCF, which is free cash flow, is
460. 16:40really more of a banking metrics.
461. 16:42And net income, because you got the
462. 16:44depreciation and amortization,
463. 16:47this is really what you're reporting to
464. 16:49the your IRS is or to to the IRS is your
465. 16:53net income.
466. 16:55And a lot of times, all these numbers
467. 16:57will line up pretty well to where,
468. 16:59you know, maybe 1.1
469. 17:02gross revenue is the same as 3x SDE, and
470. 17:05that's the same as 4x EBITDA, that's the
471. 17:07same as 5x free cash flow, and that's
472. 17:10net income
473. 17:11times six. Net income is the least
474. 17:13reliable. It might be net income times
475. 17:1510, depending on if they had a section
476. 17:17179
477. 17:19election and that would really reduce
478. 17:21their net income that year. So, net
479. 17:23income is the least
480. 17:25valuable if you are counting
481. 17:28amortization, depreciation, section 179
482. 17:31election in your QuickBooks. If all that
483. 17:33gets documented there,
484. 17:35uh then and net income specifically and
485. 17:37legally is what you pay the tax is what
486. 17:39you pay taxes on. And what you're really
487. 17:41trying to look at is
488. 17:43as the new owner of this business,
489. 17:47what amount of the money is going to be
490. 17:50discretionary
491. 17:52for me to spend. And you might spend it
492. 17:54on interest, you might spend it on more
493. 17:55vehicles, you might get rid of the
494. 17:57vehicles, you might pay yourself a
495. 17:59salary, you might not.
496. 18:01But it really kind of gives you a good
497. 18:03idea of how much profit, how much
498. 18:05operating profit is this um laundromat
499. 18:10going to be making
500. 18:12under my hands. And that's seller
501. 18:13discretionary earnings. And as the buyer
502. 18:15that becomes your discretionary
503. 18:17earnings,
504. 18:18um
505. 18:19once you take over the laundromat.
506. 18:22So, I hope this was helpful for you
507. 18:24today. If anyone ever says SDE or EBITDA
508. 18:27or gross revenue, you will know gross
509. 18:31revenue is the big one with all the
510. 18:32money.
511. 18:33SDE is what revenue you actually get as
512. 18:35the owner. And then EBITDA is like if
513. 18:38you had it professionally managed by a
514. 18:40large corporation, that would be how
515. 18:42much um
516. 18:44revenue you would expect to get out of
517. 18:45it. And of course, that's smaller than
518. 18:47SDE because with SDE most owners are
519. 18:49paying themselves a salary or are in
520. 18:52some way involved um that reduces that
521. 18:55overhead of of EBITDA. [music]
522. 18:57Um so, hopefully that helps you out with
523. 18:59all these definitions and you won't be
524. 19:01caught off guard. Thanks and have a
525. 19:03great week.
526. 19:07>> [music]