National Clothesline

or years I have been saying that one of the great ironies of the drycleaning industry is that it is harder to get out of this business than it is to get into it. This has never been truer than it is today.

Thousands of cleaners are for sale all around the country and still new plants are being built every day. Why someone would start a new cleaning business with zero customers, zero pieces

and no cash flow is a mystery to me. But it is happening everywhere!

The biggest problem when trying to sell a drycleaning business is that most sellers have unrealistic expectations for the value of their business. The old formula that your drycleaning business should sell for one times annual sales no longer works — especially for high dollar volume cleaners. Cleaners doing over $400,000 in annual sales attract a more sophisticated buyer. These buyers are looking at what their ROI (return on investment) will be.

The true value of a business is based on how much return on sales ownership receives every year. That amount is referred to as Earnings Before Interest, Depreciation, and Taxes (known as EBIDT). That figure includes owner’s salary or draw; profits; and the other financial benefits that the owner receives. These other benefits include: a company car, life and health insurance, and personal expenses paid by the company. This is also referred to as “recast earnings”.

The drycleaners I work closely with have annual sales that range from $400,000 to over $5 million. The true value of these companies is not determined by their sales volume but by a factor that is multiplied times recast earnings. The multiplier is normally 4 to 4.5 times recast earnings.

The multiplier determines the return that the buyer will receive on his investment. A multiplier of four times recast earnings will provide the buyer with an annual return of 25 percent of the purchase price of the business (see Exhibit A).

Please note: In Exhibit A, when using a multiplier of 4, the ROI is always 25% of the purchase price. When the sellers recast earnings increase as a percentage of sales, the value of the business also increases.

Fact: Only when recast earnings reach 25 percent of sales is the business worth one times annual sales.

The multiplier of four times recast earnings is only realistic when the buyer can reasonably expect to generate the same amount of recast earnings. Many factors will have either a positive or negative effect on the multiplier.

A business is worth four times recast earnings only if certain conditions exist:

• The equipment is in good operating condition.

• The equipment has a life expectancy of seven years – the length of most business loans (other than real estate).

• A long-term lease is available to the new buyer.

• When the seller owns the real estate, the buyer has the option to purchase the real estate if and when it is for sale.

• The seller has maintained financial records that are accurate and can be verified.

• The business is located in an area that is experiencing growth.

• The company has a POS (point-of-sale) computer.

• Sales are increasing – not decreasing.

• No road construction or traffic changes are scheduled to take place in the near future.

• The employees of the business are being paid “on the books”.

For most cleaners, the bulk of their retirement will be funded by money they realize from the sale of their business and the value of the real estate they own. The above conditions are all issues under your control and are issues that you must begin to address now as part of your exit plan. Your mission is to maximize the value of your business before putting it on the market.

U.S. government statistics show that 30 percent of all businesses are losing money; 31 percent are bouncing along at break-even; and 39 percent are making money. Therefore, only the top 39 percent of all companies have any appeal to a serious, educated buyer.

Of all the drycleaners that are for sale today, how many fall into the bottom 61 percent that are breaking even or losing money? The vast majority! It is very difficult for people who want to own a drycleaning business to find one that is worth buying. These individuals are almost forced into opening a new business. The end result is that old drycleaners close every year and new ones open.

In order to protect your investment of time and money, you must be more than a professional drycleaner — you must become a professional manager. Educate yourself by reading and attending seminars related to business (I am currently developing a comprehensive management seminar for owners – stay tuned!).

Over the past nine years I have written numerous articles on the subject of management. I invite you to visit the library on my website www.bizbuilderonline.com. Here you can do a keyword search to find articles on specific topics relating to management: standards; labor costs; organization chart; policy manual; etc. Also, if you have any questions, feel free to e-mail me: alan@bizbuilderonline.com.

The year 2004 promises to be an exciting year full of opportunities. Take some time to kick back, relax and enjoy the holidays. Here’s wishing everyone a happy, healthy and prosperous new year!

In the game of business the more you know the better you can play the game.

Alan Robson is a private consultant dealing with the specialized needs of the drycleaning industry. Contact him by telephone at (941) 408-8819 or send e-mail to him at: alan@bizbuilderonline.com or visit the Biz Builder web site: www.bizbuilderonline.com.