Laundromat Valuation Metrics (SDE, EBITDA, FCF, etc.) — Transcript

Full transcript

1. 0:10Hello and welcome to Laundromat Ownership.
2. 0:12Whether you've just arrived or you've been here for 20 years, hopefully we'll have something useful for you today.
3. 0:17I'm your host Ian Gollahon Me and my business partner own three laundromats in the Tulsa, Oklahoma area, as well as Wash-Dry-Fold POS a laundromat point of sale company.
4. 0:27In 2025, our three laundromats will do about 2.5 million in top line revenue.
5. 0:32We'll provide 25 to 30 jobs in the local community.
6. 0:35And we also try and provide a
7. 0:37safe and clean space for families to do their laundry.
8. 0:42In our laundromat point of sale company, I've interviewed around 3,000 laundromat owners in the past 10 years.
9. 0:50And I've learned some really interesting things, some of which I'll be able to talk about on the podcast today, and some of which I vowed never to speak of again.
10. 0:58All right, so let's get into what we're talking about today.
11. 1:02What is your laundromat worth?
12. 1:04What should you buy a laundromat for if you're looking to buy a new one?
13. 1:07What should you sell your laundromat for if you're looking to exit?
14. 1:10What metrics are the best metrics to use and what do they mean?
15. 1:13This is a topic that I am very excited and passionate at the Christmas table, and my nephew were talking and we just kind of ran out of stuff to talk about.
16. 1:22he's 11.
17. 1:23trying to get him excited about investing in Pepsi or Coke, which are like two of the big brands that he knows about Coca-Cola and Pepsi.
18. 1:28And so we kind of started talking about, how would you even evaluate Pepsi or Coke?
19. 1:33Which one is the better value?
20. 1:34Which one should you buy?
21. 1:35And part of what we talked about was not just the stock price that doesn't really tell you much, but the price to earnings ratio, right?
22. 1:44That's a multiple, you know, at the time we had the conversation, you needed to own $23 worth of Coca-Cola to make $1 worth of Coca-Cola's profit.
23. 1:53So it was worth 23x its earnings.
24. 1:55And then for Pepsi, it was 27.
25. 1:57So you need to own $27 worth of Pepsi to have $1 worth of Pepsi earnings.
26. 2:02but we're not going to get super into stocks today.
27. 2:05We're going to talk about laundromats.
28. 2:07But what's interesting and the reason I even bring up stock valuations is because you are talking about something similar.
29. 2:13You're talking about a multiple of earnings.
30. 2:16What's different is the, you know, the multiple amount and then the actual earnings themselves.
31. 2:21You're not going to be looking at net profit for laundromat like you would for a public company.
32. 2:26So, before we get started on this, there's some of you that might be thinking, what a useless episode.
33. 2:32laundromats are asset sales.
34. 2:33Don't you know it's just the assets.
35. 2:34Asset sale is how you are buying the laundromat, not what you are buying.
36. 2:39And that's really if you're buying a real laundromat, that's a real business that's doing real profit and making real income.
37. 2:45Then you're going to be valuing it on the assets and the earnings.
38. 2:50So let's cover the assets first.
39. 2:52Most people will try and bundle these into the earnings multiple.
40. 2:57I'm gonna propose that maybe you shouldn't do that, at least not in your own head.
41. 3:01Even if that's what you agree on in the negotiation table is 4X earnings, but then you've got the assets wrapped up, fine, that's just communication But what you really should have
42. 3:13in your own head is a really good idea of exactly what the assets.
43. 3:16are actually worth to you as a buyer and even as a seller you should have this as well.
44. 3:22So why are they called asset sales then if you're buying the business and not just the assets?
45. 3:28It's because you're buying the assets new so that you can depreciate them from the value that you paid.
46. 3:35If you were to actually buy the
47. 3:37business quote unquote, you'd be buying the corporate structure behind it.
48. 3:40So if it's an LLC, an LLC filing as an S corp, a C corp, in those situations, if you took on that whole business, you'd have to take on their books as well.
49. 3:50And in their books, they've likely already taken the tax break, right?
50. 3:53Of the accelerated depreciation of the equipment in laundromats.
51. 3:57You're typically going to do a section 179 depreciation acceleration.
52. 4:01So if somebody goes and buys $500,000 worth of laundry equipment, they're almost always going to section 179, accelerate that, take the $500,000 hit on their net profit that
53. 4:11year, because then they don't have to pay taxes on that money, which is fair because they spent that money on the laundry equipment, but you don't then want to buy it for 300,000
54. 4:19and not be able to depreciate it.
55. 4:21because it's already been fully depreciated.
56. 4:23So you wanna bring it into a new corporate structure and have a fresh depreciation schedule.
57. 4:29And last but not least, their LLC, if they're anything like our 1200 plus customers of Wash Dry Full POS, it's probably called like Three Dudes NY2 Washing LLC or some crazy
58. 4:41acronym type of thing.
59. 4:42And you probably don't want that to be the name of your business that you own.
60. 4:47So it's an asset sale because you're buying all the assets.
61. 4:49But some of those assets are going to be what we call intangible assets.
62. 4:54They might be goodwill, which is just how you kind of account for a multiple of earnings.
63. 4:59They might be the name, So you might have, I know when we purchased our laundromats, we have a line item on our balance sheet about the name.
64. 5:06Now I did go ahead and get a trademark later, but even without the trademark, it's still worth something.
65. 5:11We did buy the non-compete just because that was something that um
66. 5:14the lawyers wanted us to do and is kind of a typical part of one of these agreements is that the previous owner isn't going to compete with you.
67. 5:21So some of these assets that I'm listing here, even though they do end up on the balance sheet, they're not really something you would pay for.
68. 5:28What you're really paying for is the equipment plus the earnings.
69. 5:31And so what you really want then is to have a good handle on what the
70. 5:37equipment and the land and the property if you're if you're buying like, know, two of our laundromats have property and buildings and so you just get those appraised and you value
71. 5:47those and then you just kind of have those over to the side and then you evaluate the laundromat and base the business on a multiple of its earnings.
72. 5:56So now that we have assets addressed and
73. 5:59put off to the side.
74. 6:00Let's get in to what I really love to discuss, which is valuation metrics.
75. 6:08So I made a little graph here, but em and I'm going to post this on washdryfoldpos.com If you look in the blog section, it'll be there.
76. 6:15it's what's called a concentric circle graph and you don't have to be looking at it to really understand what it is.
77. 6:21There's a large circle and inside that circle fully, fully encased in that circle is a smaller and then inside of it is a smaller.
78. 6:28Think of like one of those little Russian doll, you know, toys that you get a little smaller Russian doll each time.
79. 6:34That's really what we're talking about today.
80. 6:36And by the way, I looked everywhere for something like this because I did not want to build a graph.
81. 6:40But nobody else has this actually spelt out for you like this that I could find.
82. 6:45And then when I asked AI to do it, it just gave me like the most crazy gibberish ever, um even though I prompted it several times in several ways.
83. 6:51So I think this is something that is not widely understood.
84. 6:55And if you understand it, you will have the advantage in the negotiation of the laundromat in my view.
85. 7:02This is extremely important, not only for when you're buying and selling, but for when you're owning,
86. 7:06if you really want to understand how much equity you have in your laundromat and how big of your portfolio it is, you also need to understand this so you can give yourself a
87. 7:16market valuation on your laundromat.
88. 7:18There's one bigger circle, imagine, that goes around this whole concentric circle of valuation metrics, which is just operating revenue, right?
89. 7:27You could call it gross profit.
90. 7:29There's a few things you could call it, but it's essentially if the laundromat is profitable.
91. 7:33then we start at that very large gross profit number.
92. 7:37But the reason I didn't include that is because that does get whittled away quite a bit even before we get into this very first circle where we're gonna start with the very first
93. 7:46valuation metric that you might use.
94. 7:48Now, before you get to seller discretionary earnings, which is in my view the best
95. 7:55metric to use when valuing a laundromat.
96. 7:58even if you just dissect the name SDE, seller discretionary earnings, what that is describing is how much of the earnings is at the seller's discretion to spend or use.
97. 8:10And so you can use it for many things.
98. 8:13You could use it to free up your time.
99. 8:14You could use it to reinvest in the business or you could just pay yourself with it.
100. 8:20But maybe you're not paying yourself in cash.
101. 8:22Maybe you're just paying down your loan and decreasing your liabilities So there's a lot you can.
102. 8:27It's at your discretion as the seller what these earnings, what you do with them and as a buyer, those are going to be your earnings as well.
103. 8:34So owner discretionary earnings, I've never heard that term, but it is one way to think about it because whoever owns the laundromat, this is going to be their money to decide
104. 8:43how to best use.
105. 8:45when you go from, you know, gross profit, which is just, you know, includes a lot of your revenue, right?
106. 8:51You know, you do have some other costs like salaries and even some of your overhead.
107. 8:57before you get to the seller discretionary earnings.
108. 9:00When you're at seller discretionary earnings, that really means.
109. 9:03What is the business actually making after it's paid for all the things that aren't optional?
110. 9:08And I'll give you a quick example.
111. 9:09You're like, well, what would it pay for?
112. 9:10Why would I pay for something that's optional?
113. 9:12When we bought our laundromats, not to bust John's chops here, but you need something for the customers to read.
114. 9:19John is a big a big music lover, as am I.
115. 9:23One of the things that he would buy for his customers to read was these kind of guitar and music subscriptions, these magazine subscriptions.
116. 9:30And that makes perfect sense because he gets to enjoy them and so do his customers.
117. 9:34When we bought the laundromat, we're not going to buy magazine subscriptions for our laundromats.
118. 9:39That's just not, we're just, we don't read magazines anymore, right?
119. 9:42So for us, you know, we still offer the free coffee.
120. 9:45There's a lot of things that we still offered for
121. 9:47customers, but we got rid of the magazine subscriptions.
122. 9:50Now, where does that money go?
123. 9:51It goes right back into the owner's pockets.
124. 9:54And so that's an example of something that would not really make it.
125. 9:57It's not really truly a business operational expense.
126. 10:00A better example is probably just a commercial vehicle,
127. 10:03That's probably what you're gonna see as something that you would pull out and say, okay, this is, it's called a business expense right now, but really it's seller discretionary
128. 10:13earnings because we don't need this sedan for the laundromat.
129. 10:16A vehicle would be a perfect example, assuming it's not like a delivery vehicle.
130. 10:21Let's talk a little bit more now about seller discretionary earnings, which remember, seller discretionary earnings is the the one that I recommend using the most.
131. 10:29It may not be what the seller wants to use.
132. 10:31And so we will address that and talk about what the seller might use.
133. 10:35But the seller discretionary earnings is the most important one.
134. 10:38It's also very debatable, right?
135. 10:40And you are going to be in a negotiation about what even SDE is because
136. 10:46you actually kind of want to keep it smaller as a buyer, right?
137. 10:50And so you might say, well, yeah, of course I need um this manager at this location.
138. 10:58And that's part of the real um cost of managing this business, And that's certainly what we did when we bought our laundromats and we have no intention of.
139. 11:07replacing any of the employees.
140. 11:09In fact, we've hired and promoted new employees.
141. 11:11But that's a good example of we looked at it and we were like, actually, it's too large.
142. 11:18We need to make it smaller because you're understaffed.
143. 11:21Right.
144. 11:22So as a buyer, we looked at it and said, you know, they don't have a facilities manager, but there's three locations that things are breaking all the time.
145. 11:29And there's a lot of things that are broken right now.
146. 11:31And so either we're going to be putting all of our time and effort.
147. 11:35into fixing all these things, or we're going to hire someone that will fix and maintain all the facilities.
148. 11:40Obviously, we chose the latter.
149. 11:41But so we actually then decreased that seller discretionary earnings.
150. 11:46We decreased the size of the circle
151. 11:47The buyer is going to want it to be small.
152. 11:49The seller is going to want it to be big.
153. 11:52SDE does not address in any way capex.
154. 11:55And remember we talked about just valuing all the assets independently of the multiples and not trying to put them in.
155. 12:01That's what SDE does anyway.
156. 12:05So, whether or not you want to try and throw the capex into the multiple, if you're doing that, you're just confusing yourself and everyone because SDE by definition, seller
157. 12:14discretionary earnings does not cover capex.
158. 12:18It does however,
159. 12:19Here's the real key point.
160. 12:21It includes the owner's salary.
161. 12:24Now, if it's an LLC, they might not have a salary.
162. 12:27Maybe they just take the profit from the business.
163. 12:29They call that an owner's distribution and that's what they pay themselves every year.
164. 12:33And it varies wildly based on how much equipment they bought that year.
165. 12:36That's fine.
166. 12:37But any laundromat that is doing over $100,000 in profit, which I would say is most certainly most multiple.
167. 12:45multi-location store laundromats, you're probably going to have it file as an S-Corp.
168. 12:50LLC filing as an S-Corp is the most popular, most practical.
169. 12:55There's a lot of reasons why that's the best structure in my view to run a laundromat.
170. 13:01If you have outside investors, then you might need to do a C-Corp, but assuming you're not taking outside equity holders,
171. 13:07You're most likely gonna be an LLC with a tax filing status as an S-Corp.
172. 13:11Why is that relevant?
173. 13:12The SDE includes the owner salary.
174. 13:15So they're saying, OK, let's say the SDE for this laundromat chain, let's call it a million dollars.
175. 13:26Well, in that million dollars is at least $100,000 worth of owner salaries if there's multiple owners.
176. 13:33that SDE includes that owner salary.
177. 13:36I'm focusing on this because it's going to transition as well into this next one.
178. 13:40SDE is most commonly used for small businesses under $5 million.
179. 13:46So it is kind of the rule of thumb valuation metric.
180. 13:50to value a company under five million dollars of revenue annually.
181. 13:54What if it was over five million?
182. 13:56And what if the seller starts talking to you about EBITDA?
183. 14:00What is EBITDA?
184. 14:01Earnings before interest, taxes, depreciation, and amortization.
185. 14:04EBITDA also excludes capex.
186. 14:06So remember how we were talking about just value the assets, set them on the side.
187. 14:10EBITDA by definition does not include assets.
188. 14:14It's an earnings multiple.
189. 14:15So
190. 14:16Just in reality, and by the way, remember the concentric circle thing, we've gone from just operating revenue, we've shrunk that down into seller discretionary earnings, which
191. 14:25are like actually revenue that can benefit the owner of the laundromat in one way or another.
192. 14:30And then we've shrunk that down to EBITDA.
193. 14:33So remember our example, we said there's a million dollars worth of, you know, SDE.
194. 14:38Well, a hundred thousand of that was just being paid out to the owners in salaries, right?
195. 14:44So if you shrink it, then you arrive at that earnings before interest taxes, depreciation and amortization EBITDA.
196. 14:53that still excludes that a CapEx, but now it also now does not take into account owner salary.
197. 15:01So in the same example, it would be a $900,000 circle instead of a million circle because the million circle was like, well, what we're going to do with that $100,000.
198. 15:09We're going to pay ourselves, right?
199. 15:11Well, if you've already, if you're considering, well, okay, I'm not going to be involved in the laundromat at all.
200. 15:16So I'm to have to hire two new managers at 50,000 each.
201. 15:20Well, then maybe now you're
202. 15:22really looking at that EBITDA because you're not going to be involved in the management at all.
203. 15:27I would venture that's kind of a silly way to look at it because you are going to be involved in the laundromat whether you want to be or not if you own it and you're going to
204. 15:36need a manager whether you want one or not if you don't want to live there and be working on it all the time.
205. 15:41So I would say SDE is the more appropriate metric to use.
206. 15:49However, sometimes sellers will get confused and use EBITDA, which is really more for companies over $5 million
207. 15:57We're going to move one more circle in and this one is still very important for a laundromat because this is what anyone who's a financier, so whether it's an investor or
208. 16:09just a bank or the SBA, typically the SBA, they're going to be looking at free cash flow, FCF.
209. 16:16And just to review, had operating revenue, had seller discretionary earnings, that's the real true profit that you can then put in the different buckets.
210. 16:25EBITDA now takes the owner's salary out of that bucket and it shrank.
211. 16:30Now we're actually going to shrink it even further into free cash flow.
212. 16:35And why would we do that?
213. 16:37Because we want to evaluate
214. 16:38the business for solvency moving forward.
215. 16:41And obviously, if you're going to give someone a loan, that's what you would be most interested in is are they going to be able to make these payments?
216. 16:47Not whether or not it's going to be profitable to them, but would they be able to even stay afloat?
217. 16:52free cash flow is really a banking metric.
218. 16:54It's not as much a valuation metric in my view, but some people use it.
219. 17:00It includes capex.
220. 17:02So remember, we took capex out, we set it aside, it doesn't just by definition, it doesn't touch SDE, it doesn't touch EBITDA.
221. 17:09When you get into free cash flow, you're saying, okay, there's that big circle of operating revenue.
222. 17:16And what you're saying with free cash flow is I want to know what actual
223. 17:21cash flow that is not accounted for already doing something else, how much of that is going to come out of the business?
224. 17:27Well, your CapEx, And CapEx is capital expenditure.
225. 17:30And so that means your assets, your equipment.
226. 17:32Someone's got to pay for that, right?
227. 17:34I think Warren Buffett says Tooth Fairy doesn't pay for CapEx, And so that is typically paid for on a monthly basis because it's typically loaned out, whether it's seller
228. 17:42financed or it's SBA financed, whether you did it through
229. 17:45Eastern funding or you know one of your local lenders, whoever financed it wants their money back and you're gonna have to pay them that money back on a monthly basis.
230. 17:55And so free cash flow is then saying okay you paid yourself a hundred thousand right that got you down to EBITDA but remember you still got to pay the equipment as well so how do
231. 18:05we get down to free cash flow?
232. 18:07To get down to that smaller circle of free cash flow, we took out the owner's salaries, right?
233. 18:11We did that to get down to EBITDA.
234. 18:12And then to go from EBITDA to free cash flow, we're gonna actually say, well, we have to pay for CapEx and that's gonna shrink it even further.
235. 18:18So that's free cash flow.
236. 18:20Now, if you owned all your assets outright, which is unusual, but I could see if you have one or two laundromats and you've had them for a while, maybe you just own all the assets
237. 18:29outright.
238. 18:30So I would say the primary thing is that the payments for the assets get included now when we're looking at free cash flow.
239. 18:36And that's what shrinks the circle.
240. 18:37And we've got one last metric to look at.
241. 18:41And it's actually where we started the conversation, which was when we were talking about Coca-Cola and Pepsi and their price to earnings ratios.
242. 18:48When you've got a large public company, you're not working with all these kind of funny numbers that are like, well, how much are the owners getting paid in their salaries?
243. 18:57you're looking at is something that is very standardized, very public.
244. 19:02It's called GAAP standards.
245. 19:03And it's what all public companies use to calculate their earnings.
246. 19:07If you were to say, okay, well, what are my earnings as a laundromat?
247. 19:11It would be your net income, right?
248. 19:12That's what these companies, these public companies are using when they say earnings, they mean net income.
249. 19:17So that is used for tax purposes as a laundromat owner.
250. 19:22So you are going to pay taxes on that net income.
251. 19:25So it is really a very official number.
252. 19:28It is very hard to, you can't just manipulate it based on some calculations that you're doing.
253. 19:35It's, going to be a number based on the decisions you've made that year.
254. 19:38And it's excluding everything we've talked about.
255. 19:42all the things in the free cash flow, but it excludes one more thing.
256. 19:46And when I say exclude, remember, I'm just saying that like it's to make it smaller and smaller.
257. 19:50We're saying, okay, what's the last, how do we make it one tier smaller?
258. 19:55Well, now we're actually going to do depreciation and amortization.
259. 19:58And that can really distort the earnings of a laundromat that year.
260. 20:04And I'll give you an example.
261. 20:05So let's say we had the seller discretionary earnings, right?
262. 20:10Remember we put that at a million and then we brought it down to 900,000 for EBITDA.
263. 20:14And then let's say for free cashflow for all those loans and asset expenditures that you have to repay.
264. 20:20Let's say that that brings it down to now 500,000.
265. 20:23So from a million to 900,000, but now we're repaying all our loans.
266. 20:27We could take it out of the company or you could use it on new equipment.
267. 20:31And if you use it on new equipment, let's say you take that whole $500,000 and you totally retool one of your stores.
268. 20:37Now your net profit is zero.
269. 20:40Your net income, excuse me, is zero.
270. 20:41And so your earnings, just like if a public company had public earnings of zero or they often have public earnings of below zero.
271. 20:48It doesn't mean that the company is not tremendously valuable or just insanely profitable.
272. 20:53What it means is they were able to make a large investment That's what they decided to use the money on.
273. 20:59And that brought their net taxable income to zero or below zero.
274. 21:04So one last time for the example of this laundromat, say it does $2 million top line revenue.
275. 21:11A million of that is uh seller discretionary earnings.
276. 21:14we bring it down to EBITDA with 900,000 because we're going to pay our owners $100,000 salary.
277. 21:19And then we have to use all this stuff to pay back, we have to use all the money to do the loans or we're using several hundred thousand to repay the loans.
278. 21:26So that shrinks the circle one more time.
279. 21:28And then to get down to the smallest circle of net income, I'm showing my concentric circle graph here.
280. 21:34We are going to take that 500,000 that we had, we're gonna spend it all on equipment.
281. 21:39We're gonna take a section 179 deduction.
282. 21:42That is gonna bring us from $500,000 that we could have put in our own pocket, but because we wanna invest in the company and we actually wanna increase future earnings, we
283. 21:52reinvested it in the company we bought equipment and then that equipment reduced the net income down to zero for 500,000.
284. 22:00So you can see why this is a totally worthless metric to value a laundromat on or nearly worthless.
285. 22:06And the reason I say nearly worthless is because if it's zero, then it truly you don't know.
286. 22:11But if the net income is 500,000, that's the smallest circle.
287. 22:15And there's a huge incentive for the laundromat owner to keep that circle as small as possible because they've got to pay taxes on all that.
288. 22:22And so.
289. 22:23If the net income is 500,000 and that's the smallest circle, well, then you know the free cash flow is likely more.
290. 22:29You know, the EBITDA is likely much more than the free cash flow and then the seller discretionary earnings.
291. 22:35what is that owning that business?
292. 22:37What is that really?
293. 22:37If they had a net income of 500,000, you could maybe it would be a guess, right?
294. 22:42You would need to see the numbers.
295. 22:43But if someone said I had a net income of 500,000, I would assume their seller discretionary earnings are a million.
296. 22:49And that there's another 500,000 that they're paying themselves in salaries, they're reinvesting into the company, or they're paying off loans, maybe high interest loans that
297. 22:57maybe I wouldn't have if I bought the business.
298. 22:59So there are advantages to understanding all of these acronyms and all of these metrics.
299. 23:07And if you go into the negotiation of a laundromat or any other business,
300. 23:11and you really understand what net income is and you really know what free cash flow is and you really understand even if someone throws out EBITDA, which no one should be, but
301. 23:20they will anyway, you'll at least know what that is and how to either shrink it or expand it into seller discretionary incomes or you could shrink it down to free cash flow, which
302. 23:29are much more usable metrics for the valuation of a laundromat.
303. 23:34So just to review everything that we talked about today, we really looked at what valuation metrics should be used or even could be used in the buying or selling of a
304. 23:45laundromat.
305. 23:45But you also if you just have a laundromat, you've had it for 10 years, you're going to have it for another 10.
306. 23:51How much of your portfolio is it?
307. 23:53Is it half?
308. 23:54Is it 30 %?
309. 23:55Is it 90 %?
310. 23:56You don't know unless you can look at your assets, right?
311. 24:00And then
312. 24:01Calculate your SDE.
313. 24:02Remember that was that largest circle.
314. 24:04Give yourself a 3x multiple.
315. 24:05That's, you know, standard market rate on that that SDE then you're to have a pretty good market valuation for what your laundromat's worth.
316. 24:12You don't have to go and hire someone and it's going to change every year, right?
317. 24:16Your assets are going to go up and down on value based on what commercial real estate and
318. 24:21depreciation on the assets and all that.
319. 24:23So it does change over time and you can actually put together systems to track it.
320. 24:28I track ours every month.
321. 24:29So it's really been fun to talk about this stuff.
322. 24:31This is my favorite things to talk about because I love productive assets in general and anytime you have a productive asset.
323. 24:39and typically what people mean by that is a business, right?
324. 24:42It actually has some revenue.
325. 24:44You have to look at valuation metrics as well.
326. 24:47You need to know which valuation metric to use or metrics to use and you need know what they even mean.
327. 24:53And so if you've got this down, you're gonna be one step ahead of everyone else.
328. 24:57And so I hope this was helpful for you today.
329. 24:59Thanks for joining me.