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HOT TOPIC Dry Cleaning Business For Sale

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phlgirl

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A dry cleaning business with 4 locations – one plant (where the machinery is located but also for drop off/pick up) and 3 other drop off only locations. One site has an on-site tailor. All locations are within one mile of each other. Two are in strip malls, which are anchored by major grocery stores.

Asking price - 900k
Cash Flow - 290k

The stores are fairly new (the plant just over a year old and the drop offs are less). The existing owner built this operation up from scratch and (apparently) his business model is that he picks a location, builds a small monopoly and then packages the whole thing for sale, while he moves on to do the same in another location. He is currently working on his next location, which we have visited as well.

We have been to all 4 sites several times. We have dropped off product and spoken, casually, to the staff we encountered. They do a lot of things right but there is definitely room for improvement.

Currently, the plant location does not run 24 hours (more like 14) so there is room to handle additional volume (should you choose to add more drop offs). The area is high growth and caters to an income bracket which would use dry cleaning services.

Real estate is not included. Long term leases are in place.

We have asked for detailed financials (what we have received so far is very high level) and were told that in order to move forward, they would need to have an offer (obviously with lots of contingencies). Makes no sense to me but many brokers are trying to tell us that this is ‘how it works’.

We are not fixated on buying this business; however, think it is a solid place to start practicing the analysis process. Figured I would enlist you all to help me to come up with pros/cons, questions, suggestions. :)

Any thoughts?
 

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kurtyordy

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Just a word of advice. Apparently drycleaning places are known for having environmental issues and the EPA tracks the heck out of it. Just keep that in mind.
 
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phlgirl

phlgirl

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Thanks, Kurt. Good point.

You are right. Environmental concerns are huge with dry cleaners. I did ask and the equipment is all new and of the highest 'Green' standard (for now). Of course, I will have to verify that this is true and, over time, I would think that the equipment would need to be upgraded to comply.

**I also think that if we were to enter this type of business, I would strive to make it as green friendly as possible.

I have read that having bins inside/outside locaitons, for collecting recycled plastic/hangers is becoming popular. I, for one, HATE wasting all the plastic wrap/hangers every time I pick up my drycleaning.

I really think would be great if someone would manufacture a sturdy, cost effective, biodegradable hanger!!
 
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Merkin Man

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There is a guy over at the RD forums under the name HCBailey (I think) who owns or co-owns with his a father a dry cleaning business.

He has made several posts over the past few years about the business. I would check out those posts, and possibly send him a message if you desired. He's a long-winded writer, but his posts are generally pretty good.

Hope that helps!!! :smxB:
 

jganz

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i believe he actually owns a carpet cleaning business..

i just remember the long posts about his truck and trying to increase his business..

good luck
 

biophase

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The do make green hangers, they are called eco-hangers. I have a friend who owns a dry cleaners. He tells me the big box cleaners that charge $1 for pants and $0.50 for shirts make it very difficult for local ones to compete.
 

andviv

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I can only repeat what kurtyordy said. I too was helping my brother on his research for a business to buy and he was looking at a couple of dry cleaners. He desisted on that business as he found out that there will only be more pressure by EPA and 'green groups' about the chemicals used. I have no experience in the business anyway, just wanted to report what we found a year ago. He is now looking at a gym and a laundromat.
 
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phlgirl

phlgirl

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Thanks for the feedback, Biophase.

I should have stressed the 'cost effective' part of my statement. Do you happen to know how they compare to wire hangers in price? (I have an inquiry into the company now)

Are you saying that your friend finds it difficult to compete in general or to compete while using eco-hangers?

I, for one, take my dry cleaning pretty seriously. If I pay a good bit of money for a garment, I would not take a chance of trusting it to a rock bottom pricing shop, where the buttons will likely be melted off. :) My gut feel is that this would vary by location. If you were in a more affluent area, this would be less of an issue but in a borderline income area, the price would likely be a significant factor.

I guess the real question is, how does the rest of the dry cleaning population feel about it? Not sure. Point well taken.
 

MJ DeMarco

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The dry cleaning business is very cut throat and price competitive. These types of businesses are hard to scale due to competition ... there are cleaners on every corner. Therefore I think 3X+ earnings is far too much to pay. Interestingly, the owner seems to engaged in a fastlane plan -- build assets and sell, repeat.

I think that is the side you want to be on. Its pretty easy to uncover that Fastlane plans being orchestrated ... just follow the money all the way to the top of the chain.
 
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phlgirl

phlgirl

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Thanks, MJ.

I agree.... I really thought the model this guy came up with was clever. He is a civil engineer by trade, so he uses those skills to target where the growth/income will be headed.

I also agree that the business is overpriced - considerably. Would be an interesting negotiation, should we choose to move forward. This guy knows he has tapped into a great market and he is trying to get a buyer to pay for the Future. One thing I have learned is that, in business, you Pay for the past and Buy for the future. (Keith J Cunningham)

As far as fastlane, I am hoping that our plan is fastlane too. :) The plan is to buy an existing business, which is running well, but not at optimum performance. Improve the business, thus increasing the bottom line and the value of the asset as a whole. The concept is actually very similar to the value play in Commerical RE.

Management is in place for this biz and we will keep the managment so that we can focus on improvements. For example, we have thought of adding the following:
  • Additional Commercial accounts - owner has been so focued on building that he has not taken the time to address. There are several office buildings nearby.
  • Pickup/Delivery service - there is nothing like this in the area and a portion of the client base could certainly afford. I use a similar service myself.
  • Subcontract a shoe service and provide drop off at each location for shoe repair/polish, etc.
  • Additional income producers at each site - the leased spaces are huge and they are essentially empty except for the counter. We would add impulse buy items - gum, mints, drinks, greeting cards, lint rollers, etc. Things for people to pick up while they wait for clothes (similar to a car wash)
This guy has done a great job of building a small monopoly - as you said, these things are often on every corner. Two of the four sites are directly across the street (large 4 lane road) from one another. He has positioned himself well and, for now, there is no immediate competition. Of course, this will change, over time.

There is new construction EVERYWHERE you look in this area. People are moving into this location at a very rapid pace.

Our plan is to take advantage of the growth AND increase the NOI by generating additional income streams. After a few years of solid growth, sell the operation.

Does this make sense?
 

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kurtyordy

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to crank this up a notch fastlane wise, once you get in and learn the biz. start doing exactly what he is doing. Use the existing to build up in a new area and sell to a buyer and move one.

Once a person proves a fastlane exists in a sector, there is usually room for a few more people to fastlane it before it becomes saturated.
 
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phlgirl

phlgirl

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If I were a civil engineer, I would certainly think about it! lol

I think our primary focus will always be real estate; however, at this stage of the game, my husband and I have decided that we need an additional, consistant, stream of income and we are looking to meet this need via a business acquisition.
 

MrPink

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I keep looking at other areas for cash flow, but keep reading the 'fast lane people' say stick to one thing and do it very well. I haven't heard anyone chime in and say stay focused and won't be the first. I feel that money is money.

I guess the question that I ask myself is when are you spreading your time across too many projects?

Mr. Pink
 

andviv

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valid point, and also remember that Phlgirl is already very successful in her area of expertise (SFH rentals in Jacksonville). Once you get to a point where you actually have assets then (and only then, in my opinion) you should start thinking about diversification. As long as she is not buying herself a job and this becomes really passive then it makes a lot of sense.

To answer your question, my opinion is that you are too spread when you start letting the ball drop in one of the projects because you are busy working in the others.
 
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phlgirl

phlgirl

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Thanks for the feedback, MrPink.

Good question. I ponder the focus issue often.

We are currently very heavily involved in a real estate venture, which brought us to FL (from PHL). We have been buying up discounted homes, renting them out, with the intention of holding for a term of 5-7 years. The issue we are encountering now is that we are getting very close to maxing out the number of properties each partner can hold in their individual name (10).

We have been trying to obtain financing in the business name (blanket mortgage, which would take all propeties out of our name). I do feel that we will be successful eventually - but with the credit crunch and considering the 'youth' of our existing company, it has been extremely difficult so far.

The way our business model works, we make money when we purchase a property. If we are no longer able to purchase multiple homes each month, a significant portion of our income will cease to exist.

Without additional serviceability, we will soon hit a brick wall, as far as RE is concerned.

As I said, I believe we will find the right banking solution in time. We have a few leads even now but until I see something in writing, I cannot count on that as a solution. In the meantime, I feel like we must find another solution for an additional income stream.

We also don't hate the idea of owning another type of business. My husband and I will always be RE people but we wouldn't mind having a second business to eat up all those real estate losses and provide more tax free income. :) We love a new challenge and will need something to keep us busy when we get back to PHL.

Update on Dry Cleaning biz - we made an offer, with many contingencies for due dilligence, but it was too late! An offer had been accepted the previous day.
 
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phlgirl

phlgirl

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As long as she is not buying herself a job and this becomes really passive then it makes a lot of sense.
Thanks, Andviv. Great point - I think the above is the key.

We are not looking to purchase something that requires our daily interaction IN the business. We want something which has existing management in place and therefore allows us to focus on growing/improving the business at a higher level. Managing your people will always be part of that equation, but with proper 2nd tier management in place, it should not require daily interaction.
 

MrPink

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Thanks for the excite feedback. (I feel like I am getting on a tangent to the original post)

++speed phlgirl and andviv

phlgirl, you were looking at holding properties 5-7 years? By reading your numerous posts, I know that you are taking into account transaction costs, but why pay them at all - and not just keep the property?

The focus is on generating passive income. The method is whatever floats your boat.

Mr. Pink
 
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phlgirl

phlgirl

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phlgirl, you were looking at holding properties 5-7 years? By reading your numerous posts, I know that you are taking into account transaction costs, but why pay them at all - and not just keep the property?
I want to be sure that I understand your question before I try to answer. Are you asking why we don't just hold a portion of these properties without a mortgage - which would then provide additional passive income?
 

MrPink

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Yes. Why not hold cash flow properties forever? My guess is that you have better opportunites else where..

You don't have a mortgage on some of them? wow. Selling may cost 5k (some money, but 5k is just a total guess depending on many factors) for a real estate agent, closing etc..

Does that help?

Mr. Pink
 
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phlgirl

phlgirl

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I think I understand now, MrPink.

5-7 years is just the amount of time we think we will need to fully realize the growth/market turnaround for our Jacksonville market. The plan is to then carry forward gains and consolidate into fewer & larger projects, which will be closer to our home base. Who knows, if property management operations are functioning well and the market still looks strong, we may very well choose to keep many/all of the properties for an even longer term.

I agree with your point though - typically, I am an advocate of 'no need to sell'.

Thanks for the discussion. Let's see if we can get you out of parking.... +++
 

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M&T

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Phlgrl,
I was just wondering why a local bank in your area would not do a nice blanket for cash flowing properties?
 
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phlgirl

phlgirl

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Hey M&T -

Oh man, it is driving me crazy!!

I have met with 10-12 banks now and had phone conversations with probably 3 times that amount. When I meet with the bankers, it has been VPs, Presidents and just recently my first owner.

I present our business model, financial statements, rent roll, personal and business tax returns. Almost everyone I have met with seems to really like the model but the issues, I am told, are as follows:

  • Age in the company (we just hit 2 years in our FL LLC this month)
  • Lack of proper income - although our properties cash flow, it is not enough to carry the weight of 3 full time partner salaries (which is what we have). We make up the difference by cashing out equity from each property. This is a loan and NOT income.
  • Lack of seasoning in the properties
  • Credit crisis
I have learned so much. I should have structured my companies differently. I have been investing in RE since 1999 and had an LLC since 2003 - unfortunately, I was not holding any of the property in the first LLC's name nor was not applying for credit/loans in the company name.

Our portfolio is very reasonable LTV wise and the 2 year mark seems to be the magic number. I had my third meeting with one smaller local bank last week - finally got to the owner (3rd meeting). They wrote a few days later to say they will be presenting an offer.... which is a first.... but who knows. With the mayhem in the markets right now, nothing would shock me. This is why we are actively working on our contingency plan. Cross your fingers for me. :)

Not to derail (although it hardly matters, as the business has sold) but how is the RE market in Hershey treating you?
 

M&T

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Hello,
Man it is ready to GO up here. Great properties are up for sale. I am chomping at the bit to buy. But I promised myself I would get to a certain point with the one's we have first then move on. Sort of a goal, and I did not hit it yet!!! It seems I can raise rents and still get people in and they are happy to be there.
We are finilizing a blanket right now at a local bank. It was going to be for 7% but the 3/4 % drop is going to bring that down! Thank God for that...I have been working on this on and off for 2 years. I will be glad when it is over.A Corona and a steak will be waiting for me when it is done!
One thing my attorney told me was this. " Banks need you more than you need them".When you talk to them make sure you carry that attitude.I'm sure you know that already.If you are eager you know what happens.I jumped on some deals that were not so good. Thinking I was not going to be in them long.Boy that turned out bad. So if their offer is not good keep shopping or negotiate!
Anyway, how many properties are you talking about if I may ask?
 
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phlgirl

phlgirl

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Congrats on the loan!! That is great news. +++ for the persistance!

Yes, I have been hearing good things about Hershey, from friends of ours who invest/live in Philadelphia.

We have just over 40 properties, which we are trying to wrap up in a blanket. The banks do finally seem to be coming around but, as I have said before, I will beleive it when I see it in writing!
 
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phlgirl

phlgirl

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Yankees -

Responding to your question:

I had tampered with the numbers I posted here for the dry cleaning biz, as to disguise the listing (signed a non-disclosure) but the percentages are the same.

We were told, by the broker, that the offer accepted was at approximately 9% below asking price. The buyer also offered to close in 2 weeks time. We won't ever know if this was the final price, after having been thru due dilligence......

Our offer was for a little less $$ and A LOT more time, so even if we had been more timely in presenting our offer, I am guessing it would not have been accepted over the other.

Great learning experience... on to the next deal!!
 

Yankees338

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Yankees -

Responding to your question:

I had tampered with the numbers I posted here for the dry cleaning biz, as to disguise the listing (signed a non-disclosure) but the percentages are the same.

We were told, by the broker, that the offer accepted was at approximately 9% below asking price. The buyer also offered to close in 2 weeks time. We won't ever know if this was the final price, after having been thru due dilligence......

Our offer was for a little less $$ and A LOT more time, so even if we had been more timely in presenting our offer, I am guessing it would not have been accepted over the other.

Great learning experience... on to the next deal!!
Thanks for the response! Very interesting. I just like to try and get a bit of a feel for how these things work.
 

randallg99

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a couple of points-

1. dry cleaning is competitive (already mentioned) but also becoming costly biz... chemical products have become extremely expensive

2. I used to wear suits but my attire has become more casual and I do not use the dry cleaners nearly as much as I used to... this pattern seems to be more prevelant, but this is only my observation. Hard data would be very important here....

3. NomadJanet and I were exploring some different businesses and helping the process was using different web sites like www.bizstats.com among others

4. I would probably venture the person that bought the biz either a) is already a propieter in dry clean biz or b) looking for a job for him/herself. (if you find out, let me know)

5. if economy does recede into recession, how strong will dry clean biz hold up?

6. who owns the real estate?

7. I am in complete agreement in expanding the portfolio. While it's great to be focused on the fastlane to $10-100 mil, it's just as important to protect the assets (whether they're $1mil or $10mil) we've already worked hard to collect and diversifying works as a hedge.
 

Russ H

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Phlgirl-

I'm late to the party on this, but it needs to be said: When you buy a dry cleaning biz, you are buying someone else's environmental waste problems. We own a property across the street (300' away) from where a dry cleaner used to be years ago. Tthe EPA do tests every 3-6 months on ground water contamination (they measure as far away as our driveway-- something that has us biting our nails, since a bad report would cause our property's value to plummet).

Perhaps most important, THE PROPERTY THAT HAD THE DRY CLEANERS BIZ ON IT IS NOW A VACANT LOT, AND NO ONE WANTS TO BUILD ON IT. Because they don't want to incur the costs of cleaning up the toxic waste.

This was a classic dry cleaning biz, never did anything wrong-- it's just that the chemicals that they used 10-20 years ago are considered highly toxic today.

So, if you buy the business, you buy their problems. Even if you don't own the property.

******

Oh, and I'm not sure if you've tried to tap any more equity in the past 3 months for paying your salaries-- but secondary HELOCs have pretty much become extinct in our corner of the world (hard to loan on a property when the entire area is not appreciating).

We have done a smidgen of small biz loans--2 SBA loans, one a 7a for $600K and the other a 5 for $450K, and several small (600K-1.2K) loans for our businesses. Just on first glance, I'd say that where the banks are freaking out is your raiding the equity for your salaries. Most traditional businesses use their cashflow for salaries (and debt service, of course). And they use the appreciation to cash out/buy in to additional investment properties.

Again, we have very limited experience here (less than 5 years, and only about $4M in loans, with another $1M in the pipeline), so please take my comments w/and appropriate grain of salt-- I'm hoping you will get feedback from someone who has bought businesses w/local banks over, say, the past 10-20 years-- that's the person you will learn lots from.

How you look on paper is what they look at-- you need to ask every bank what, specifically, they were not comfortable with. This will allow you to hone your proposal, refining it with each subsequent presentation.

-Russ H.
 
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phlgirl

phlgirl

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Thanks so much for the feedback, guys!! :)

Randall:

The ‘business casual’ movement is definitely a concern of ours and we have discussed it with both the prospective sellers and our own dry cleaners (in FL & Philly). The general consensus seems to be that there was an initial hit a few years back, when the trend first became popular, but that it has tapered off since. Of course, the proof is in the numbers.

That bizstats.com is a great resource – either you or Janet had given me that site before in an previous thread. I use it all the time – thanks!

I am told that the person who bought this business is someone who is experienced in buying and selling businesses. I do not know specifically as to whether or not they are in the practice of buying and selling DCs but, it wouldn’t surprise me.

Dry cleaners are said to hold up well in times of recession – according to my research and more specifically, The Business Reference Guide (great resource, published annually).

Real estate in this case was all leased – each of the drop-offs and the plant were located in strip malls.


Russ:

I completely agree – the environmental aspects are/were a huge concern for me, when considering this business. The good news, regarding these specific locations, is that the sites were all brand new (less than 3 years old). The business is located in a rapidly growing area - not too long ago, it was simply raw land. The chemicals used in this operation were all of the latest ‘Green’ technology. Had our offer been accepted, environmental would have been one of the key factors on our DD list – we have much more to learn. I did read many horror stories about chemicals ruining the land.

As for the cash out loans, yes, we still have a couple products available – I actually closed one this morning. :) However, I think you might be a bit confused with our approach – these are not 2nds, they are 1st mortgages (even the HELOCS). We buy the properties cash and then use these products to do a cash-out refi, based on appraised value (not our discounted purchase price).

You are absolutely right about the equity pulls being a major concern for the banks. They want to see more REAL income on paper. This is why we have restructured our investor package to be front-end loaded, as opposed to our company getting a cut of the equity. We have also learned that we should have structured our business differently, from the get-go. Instead of just booking this as a distribution from the loans we take, we should have factored in an expense to each of our partners for the work done - a construction fee for my husband, a finance/legal expense for myself and a property management fee for our third partner. Even with all of these expenses, we still stay under 70% LTV but, unfortunately, I was booking it all wrong. (@##$^@#%#) Totally my fault…. have to chalk it up to BIG lessons learned.

We are also now working with a DKA referral, who hopes to be able to assist us in reclassifying our past. We shall see.

Thanks again guys for taking the time. Really appreciate it.

This month, we have been looking at a car wash and a beer distributor….. if it gets beyond being more than just a preliminary glance, I will be looking for more advice! :)
 

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