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SUDS-UR-DUDS - 1

SUDS-UR-DUDS - 1. 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.

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SUDS-UR-DUDS - 1

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  1. SUDS-UR-DUDS - 1 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. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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

  2. SUDS-UR-DUDS - 2 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)

  3. SUDS-UR-DUDS - 3 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?

  4. SUDS-UR-DUDS - 4 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

  5. SUDS-UR-DUDS - 5 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

  6. SUDS-UR-DUDS – Revenues, loads, and patron visits per dayQUESTION 1` 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). * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

  7. SUDS-UR-DUDS – Utilities EstimateQUESTION 1 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)

  8. SUDS-UR-DUDS – Vending ProfitsQUESTION 2 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 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ESTIMATED ANNUAL VENDING PROFITS Soap $2,920 Snacks $1,460 Soda $2,190 = $6,570

  9. SUDS-UR-DUDS – Revised Income StatementQUESTION 3 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)

  10. SUDS-UR-DUDS – Cash FlowsQUESTION 4 CASH FLOWS EBITDA + ANCIL INCOME $45,050 + 6,570 = $ 51,620 OR NET PROFITS + DEPRECIATION $39,620 + $12,000 = $ 51,620

  11. SUDS-UR-DUDS – ValuationQUESTION 4 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

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