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SUDS-UR-DUDS - 1

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A laundromat is for sale for $341,000.

Some facts and information…

It is open 365 days a year, and consists of 40 washers and 25 gas dryers.

Total revenues from washing/drying operations were $175,200 last year.

The owner estimates that direct utility costs were about $57,000*, and rent was $48,000 for the year.

He believes other expenses (indirect utility costs, insurance, repairs) were about $10,000* per year.

He also thinks he made about $8,000* profit on vending sales (soap + snacks)

Depreciation was $12,000 for the year.

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The owner believes that he should receive $341,000 or FIVE TIMES the annual cash flow, as the purchase price for the laundromat. (cash flow = net profit + depreciation => 5x[56,200 + 12,000])

* = guesstimates

More facts…

For each load of wash, the laundromat currently charges $2.00 for a wash and $1.00 for the dryer. Individual boxes of soap are sold for $1.00 each from two vending machines, and there are food vending machines that sell snacks and sodas for $1.00 each.

A friend in the laundry business says electric costs run about $.60 per each wash load, water costs roughly $.25 per load, and gas for the dryer runs about $.40 per load. He thinks you ought to check the accuracy of the utility costs quoted by the owner.

There are some additional laundry expenses that the owner “forgot” to tell you about…that you were told to include by your laundry friend. These cost estimates should be subtracted from estimated annual income to determine the true profitability of the laundromat.

Equipment repairs (allow about $50 per machine per year x 65 machines).

Insurance ($300 per month)

Indirect Utility Costs – Electricity (lights, etc…$100/month)

Indirect Utility Costs – Phone (about $500/year)

Miscellaneous supplies, etc. (about $50/month)

Questions…

1.Given the sales levels reported by the owner, estimate the number of laundry loads processed at the facility last year. Also estimate the number of patrons who visit the laundry during the year. Use these numbers to estimate the actual direct utility costs for electricity, water, and gas.

2. National statistics show that the average laundry patron runs about 2 loads of wash per week. We also know that 10% of patrons forget to bring soap, so they must buy soap from the vending machines for each load of laundry processed. We also know that 15% of the people who come each day will buy a soda, and 10% will buy a snack. You make a profit of $.50 on each box of soap, soda or snack that you sell. Given this information, estimate the number of patrons that arrive at the laundry each day, and estimate the actual profits from all vending operations for the year.

3. Prepare a revised income statement using the information you have generated.

4.What is the maximum amount you should offer for the laundry…using the “Five Times actual cash flow” rule?

Income Statement(based on owner’s claims)

Laundry Income

Washer & Dryer Revenues$175,200

Laundry Expenses

Direct utility costs$57,000

Rent$48,000

Indirect utilities, etc$10,000$-115,000EBITDA$ 60,200

Depreciation$ - 12,000

PROFIT FROM LAUNDRY$ 48,200

Vending Machine Profits (net)$ + 8,000

TOTAL NET PROFIT$ 56,200

Balance Sheet(owner’s numbers…not verified)

Assets

Cash$ 23,000

Inventory 300

Equipment (cost)$120,000

Less: Accum Deprec (3 yrs) - 36,000

Net Value of Equipment$ 84,000

Goodwill$ 0

TOTAL ASSETS$107,300

LIABILITIES

Accounts Payable$ 4,250

EQUITY

Paid In Capital$70,000

Retained Earnings 33,050$103,050

TOTAL LIABILITIES & EQUITY$107,300

Revenues

Divide annual sales of $175,200 by 365 days to determine daily revenues ($175,200/365 = $ 480 revenues per day)

Loads of laundry

If we generate revenues of $480 per day, and each load costs $2 to wash and $1 to dry…by dividing $480 by $3 (480/3 = 160) we determine that 160 loads of wash are processed each day.

This represents 58,400 loads of laundry processed per year (160x365=58,400)

Patron visits

If we process160 loads of wash per day, and the average patron has 2 loads to process, then (160/2 = 80) about 80 patrons visit the laundromat each day.

This represents an estimated 29,200 patron visits per year (80 x 365 days = 29,200).

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If 58,400 loads of laundry are processed in a year…

And utility cost estimates per load are…

Electricity = $.60/load

Water = $.25/load

Gas = $.40/load

THUS.....Estimated Utility Bills/yr are:

Electricity (58,400 x $.60)=$35,040

Water (58,400 x $.25) =$14,600

Gas (58,400 x $.40) =$23,360$73,000

Note that this estimate is $16,000 higher than what the owner reported ($73,000-$57,000=$16,000 difference)

We established that 80 patrons visit the laundry each day to process 160 loads of wash

(see calculations under the previous question 1)

This works out to be (80 x 365 days) = 29,200 patron visits in a year

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10% of patrons need to buy soap to do their wash.

Each patron has an average of 2 loads of wash, thus they will buy 2 individual boxes of soap. Soap sells for $1 per box, and costs us $.50. Thus there is a $.50 profit attached to the sale of each box of soap, and total profit of $1 per patron visit (2 loads x $.50 profit per box = $1.00).

Thus annual soap profits = 29,200 x .10 x $1.00 = $ 2,920

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10% of patrons buy a snack, and another 15% buy a soda. Profits on each are $.50. Thus, annual snack profits are = 29,200 x .10 x $.50 =$ 1,460, and

annual soda profits are = 29,200 x .15 x $.50 = $ 2,190.

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ESTIMATED ANNUAL VENDING PROFITS

Soap $2,920

Snacks$1,460

Soda$2,190=$6,570

LAUNDRY INCOME$175,200

Direct Utility Costs

Electricity$35,040

Water$14,600

Gas$23,360$73,000

Rent$48,000

Repairs$ 3,250

Insurance$ 3,600

Addl Utilities

Electricity$1,200

Phone$ 500$ 1,700

Misc supplies, etc$ 600$-130,150

Earnings before interest, taxes & deprec (EBITDA)$45,050 (.257)

Depreciation$12,000

Total Operating Expenses$-142,150

LAUNDRY OPERATING PROFIT$33,050 (.189)

Add Vending Profits$+ 6,570

TOTAL NET PROFIT$39,620 (.226)

CASH FLOWS

EBITDA + ANCIL INCOME

$45,050 + 6,570 = $ 51,620

OR

NET PROFITS + DEPRECIATION

$39,620 + $12,000 = $ 51,620

VALUATION

5 x CASH FLOW RULE

Owner’s Estimate (5 x $68,200 = $341,000)

Our Estimate (using derived cash flows = 5 x $51,620 = $258,100)

DON’T PAY $341,000 ... Offer something around $258,000 or less