Archive for August, 2008

If you own a coin laundry or plan to purchase a laundromat business, you are in good company: there are over 16,700 such businesses in the US alone. The annual revenues for the industry as a whole are just under $2.2B. Yet the average coin laundry is a typical small business: it employs 3 people and grosses around $100,000 a year.

What creates business value in a laundromat

Coin laundries are cash businesses which are prized for their ability to generate steady income and show considerable resistance to recession. It is relatively easy to find a profitable niche in this industry and most laundromat owners experience only moderate levels of competition.

If you study coin laundry sales data, you will no doubt spot a number of factors that contribute to a laundromat business value – and higher selling price:

  • Stability of historic business earnings.
  • Location. Customer access, exclusivity arrangements and presence of a reliable anchor nearby are very important.
  • Rental expense within 10 – 20% of gross revenues.
  • Labor expenses within the industry norm of 10% of gross revenues.
  • Condition of equipment.
  • Additional value added services, such as an on-premises mart, game and video rentals.

Business valuation methods for coin laundries

Laundromats are a frequent acquisition target. So there is plenty of comparable business sales data to price your business. Typical valuation multiples for coin laundries are based on the discretionary cash flow, plus inventory. These businesses are also priced using  the multiples of gross sales. Again, the value of inventory is extra.

You can use ValuAdder business valuation Rules of Thumb to price a laundromat. Just provide the basic financial inputs about your business. Within seconds, ValuAdder shows you the business value range, median and average values.

Since coin laundry ownership is about cash flow, income-based business valuation is often used to price such businesses. For small shops, the Multiple of Discretionary Earnings business valuation method is a common choice. This method lets you determine the coin laundry business value based on the income and 14 essential financial and operational performance factors.

The Discounted Cash Flow business valuation method lets you determine the laundromat value based on the business income and risk. Since these businesses have a decent resale value, you can account for it directly in your Discounted Cash Flow business valuation.

If you plan to acquire a small business, a central question is what the business is worth. Business valuation is the key step to determine your offer price and terms.

Business value: what happens after you buy?

In addition, understanding the target business economic value is essential to address some strategic questions after the purchase:

  1. Which business value drivers are important?
  2. What can you do to continue increasing business value?

Knowing what creates business value helps you focus your precious resources on things that matter most to your business worth. Smart allocation of resources is what sets apart successful business acquisitions from failures.

Approaches and methods to valuing a business for sale

Regardless of your acquisition target, you have 3 ways to determine the value of a business:

  1. Market approach.
  2. Asset approach.
  3. Income approach.

Business Valuation using Three Approaches

To get a reliable, accurate appraisal of business value you should use several methods under each of these key valuation approaches. This strategy is adopted in all professionally prepared business appraisals. The reason is that no one business valuation method is better then the others. Each approach lets you see the business against the background of important economic considerations.

Market based business valuation methods let you compare the target business against similar businesses that sold recently. Needless to say, this is a very compelling way to estimate your offer price!

Asset-based business appraisal methods, such as Capitalized Excess Earnings, help you determine whether the costs of buying the business are consistent with its true economic value. Should you pay the business seller’s price or build a similar business – and save?

Finally, the income-based business valuation methods, such as Multiple of Discretionary Earnings, let you look at the core of business value – its earning capacity and risk. The power of income based business valuation is that you can determine what the business is worth based on your specific business ownership objectives.

Structuring a business acquisition deal – cash is king!

Determining the business value is one important step toward a successful business acquisition. To ensure that your business purchase works you need to structure the terms of your offer. The important questions your offer terms must address are:

  • Does the business throw off sufficient cash flow to cover all my financial needs?
  • Can the business service debt without difficulty?
  • Is there enough cash to fund important capital expenses going forward?
  • When do you get your down payment money back?

Structuing Your Business Acquisition

Debt service – margin of safety

The focus in your deal structuring analysis is on the business available cash flow. If you plan to fund the business acquisition with debt, whether from a lender or using seller financing, adequate debt service coverage is critical to your success. A key funding criterion by commercial lenders is debt service coverage ratio of at least 1.25.

Project costs – more than the business purchase price

Most small business acquisitions are so-called asset purchases. This means that you must account not just for the purchase price but provide for adequate working capital as well. You total outlay will also include the transaction costs of buying the business. The sum total of these three elements is your business acquisition project cost – which may exceed the contract purchase price by a hefty amount!

Can the busines pay the working owners?

Make sure that the business acquisition gives you a living wage. If a bank loan is involved in deal financing, your banker will certainly check if the business cash flow supports adequate salary for all new business owners.

Cash flow drain: deferred maintenance and equipment replacement

One key mistake to avoid is failing to allocate enough funds for new equipment purchases and other capital investments. You need to check the condition of business equipment and other hard assets and determine if they need to be replaced or upgraded in the near future. Unexpected capital expenditures can wreak havoc with your business finances!

Return of your investment

Smart business buyers and investors always want to see a return of their down payment. Make sure that business cash flow allows you to recover your investment within as short a period as possible.

As with successful business ownership, in business acquisition the golden rule is: cash is king!

When it comes to valuing a partner’s stake in the business, valuation of the business as a whole is the first step. The next big question is how to allocate this business value among the partners.

You may think that that the total business enterprise value should be divided in proportion to the partners ownership interests. Let’s say there are two partners, one owns 75% of the business and the other the remaining 25%. The overall business is worth $1,000,000. In the pro-rata allocation scenario, the first partner’s business ownership stake is worth $750,000 while the second partner has a claim on $250,000.

Control premia and minority ownership discounts

There are significant differences in the actual value of the two partnership interests though. The first partner, who owns the so-called controlling interest in the company, has a lot more say on how the critical decisions are made, including:

  • Timing and size of dividend payouts or partnership draws.
  • Hiring decisions.
  • Acquisitions and sale of business assets.
  • Raising equity and debt capital for business growth.

As a result, such controlling business ownership interest comes at a premium, quite often a significant one. You can watch the market for publicly traded company securities to see that. An acquiror making a bid for a controlling block of shares in a company tends to offer a price per share that exceeds the market price.

Translating the control premium to minority discount

If you study the control premia offered, you can also deduce the minority discounts that apply to non-controlling business ownership interests. In fact, the minority discount can be calculated directly from the control premium as follows:

Minority Business Ownership Discount Formula

Here P stands for the control premium, expressed as a ratio, and M is the minority discount.


Suppose that a group of investors wants to buy a 75% stake in a company. Current price per share of company stock is $10. The investors offer $15 per share. This means that the investors are ready to pay a 50% premium to get the controlling 75% ownership of the company.

Using the formula above, we can calculate how much minority discount applies to a non-controlling partner’s share who owns the remaining 25% of the business.

In this case M = 33.33%. In other words, each share of company stock held by the minority partner is worth 2/3 of a share held by the investors who own 75% of the company.

Valuing a partner’s business ownership stake for buy-out

In partner buy-outs, you can determine the value of a business ownership interest in three steps:

  1. First, calculate the total business enterprise value.
  2. Next, determine the pro-rata share based on the ownership split.
  3. Finally, apply the minority discount to establish the worth of the partner’s business ownership interest.

Using our earlier example, let’s say that the partner who owns 25% of the company wishes to depart. The total business value of $1,000,000 is divided into two pro-rata pots of $750,000 and $250,000. Applying the 33.33% minority discount to $250,000 gives the value of $166,675.

With increasing numbers of the baby boomers reaching retirement age, there is one skilled services sector that is sure to flourish – home health care.

Indeed, home health care services, classified under SIC code 8082, have been experiencing rapid growth recently. There are excellent opportunities for differentiation since a business can specialize in providing services to a targeted demographic.

With excellent earnings upside, low capital asset investment requirements, and net profit margins that can exceed 20% of revenue, mid-market home healthcare businesses are in high demand. Smaller companies need to focus on growth to reach the critical mass and establish themselves as the dominant presence in their market.

Risk factors that affect business value

While the industry prospects are good, there are some challenges that impact what a home health care business is worth:

  • Intensity of competition from new market entrants.
  • Exposure to litigation.
  • Difficulty in attracting and retaining qualified staff.

In addition, as the industry matures, consolidation pressures may force smaller operators to merge or be acquired by larger firms.

Business valuation methods for home health care companies

As many service businesses, the typical home health care firm has a relatively low asset base. Thus, business valuation focuses on assessment of the business earning capacity and risk.  You can choose a number of income-based business valuation methods to value your company.

For smaller, owner-operator managed businesses, Multiple of Discretionary Earnings method provides a great way to appraise a business based on its earnings and 14 key financial and operational performance and risk factors.

For businesses looking to expand rapidly, Discounted Cash Flow is a proven way to determine the business value based directly on the projected income stream.

Valuation of a Business as Multiple of its Earnings

Don’t forget to check the market place for actual selling prices and valuation multiples – especially if you plan to sell or buy a home health care business.

Typical valuation multiples for the companies in this service sector are:

  1. Based on gross revenues.
  2. Based on discretionary cash flow.

The value of inventory is added to the estimate you get using either valuation multiple. Since home health care businesses sell often, there is plenty of  market data to compare against – and make a fact-based decision on your asking price or purchase offer terms.

Calculate business value by direct market comparison

One way to do such market-based business valuation is to use ValuAdder Market Comps. ValuAdder provides coverage for 425 industries, including home health care businesses.

You can calculate your business value based on the actual sales of similar businesses in this service sector. All you need to provide is the business revenues and inventory – ValuAdder calculates the business value range, average and median values instantly!

Business Valuation using Market Comparison