Laundromat Fraud
Any person with some experience in this industry can tell revenues and expected income of an operating coin laundry business by analyzing its utility bill. However, because of the fact that most people coming into the coin laundry business are inexperienced, many fall for scams and outright fraud. Coin Laundry Businesses are evaluated based on a multiple of net profit. This multiple will vary depending on the age of the equipment, conditions of the lease, and general store factors. But generally the range is from 4 to 6 annualized next profit. For example, if a store generates $35,000 in annual net profit and the machines are newer and has a good lease, the general going price would be 5 or 6 X $35,000, which equals $175,000-210,000.
Unscrupulous sellers will inflate income as much as possible to get the a higher price. And during the period of collections, these sellers will “salt the mine” or in other words add coins to the boxes when no one is watching to make income match claimed income. This practice is well known in the industry and any experienced broker will spot it. However, sometimes brokers are aligned with the seller and will look the other way when fraud is taking place. Therefore, as a buyer ALWAYS hire a third party broker or expert in the business to avoid over paying for a Coin Laundry Business.
As a rule of thumb, buyers should always do the following during while performing due diligence on a Laundromat;
- Demand four weeks of revenue verification
- Demand 2 years of water, electricity, and gas bills
- Check water meter usage and figure out how much does 1 HCF generate in revenue at the store. Extrapolate it to verify against claimed gross revenues.
- Hire an expert or a broker with no connection to the seller. Brokers who represent the seller receive commissions from the seller so they have a bias to help the seller NOT the buyer.
- Hire a lawyer to go over the lease
By taking the steps mentioned above, you will avoid becoming a victim of a costly fraud.
