What should my offer price be?

[Tom Donnelly]

Hey All,

I’m currently in due diligence on my first store and am at a bit of a crossroads.  The owners annual profit is equal to that of his expenses according to his P+L.  I believe he’s actually losing money because his machine maintenance costs are averaging $1k+ a month.  The store generates $159k gross, but needs some work.  It’s exactly what I’m looking for in a value-add store.  

Two questions:

1) How should I come up with an offer price if I’m not using a 3-4x multiple because profit is zero/negative?

2) There’s 2 years left on the lease and the monthly cost is cheap for the location.  The landlord isn’t thrilled on signing another ten years at that price because he may sell the building.  What would be a good way to structure the lease so the landlord will be open to another decade with a few options at the end of the term?

Best,

Tom 

[Jason Dodge]

If they have $159,000 in gross sales and $159,000 in expenses something is a miss. Expenses seam high unless this is an attended laundromat but then why are the sales so low? That kind of sales revenue is more in line with an unattended location. If its unattended then why are the expenses so high?

I wouldn’t buy unless you get at least a 10 year lease with two 5 year options. Building owner can draft a new lease with you and terminate the existing lease, or assign current lease to you and your new lease would start after that one expires.

This laundromat is basically an asset sale. It has no profit so you are not buying based on a return. Multiple is zero and you have to put numbers on all the equipment and infrastructure and that would be your offer. You are not offering on potential, you have to offer based on its current value.

Hope this helps a little

Jason

[Author]

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