Laundry Lingo: TPD, NDA and Other Must-Know Terms

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Laundry Lingo: TPD, NDA and Other Must-Know Terms

ASAT.   Chromosphere.  Density Wave.  Energetic Particle.

Do you know what these mean?  Don’t feel bad.  Neither do we.  They’re rocket science terms.

But just reading them would make any normal person feel unintelligent.

The laundry industry was no different when we first began our research; there were many terms and acronyms that were getting tossed around.  We felt lost in a sea of acronyms like “CAM” and “NDA”.

Knowledge is power.  The more you know, the stronger you’ll feel going into purchase negotiations or lease discussions.

In fact, I still recall meeting with the broker for the first time when we visited what is now our first laundromat.  He knew we had never owned a laundromat (or any business!) before, and I could tell he was babying us a bit as we talked generically about incomes and expenses, etc.

At one point, he asked if we had any questions.  I quickly replied, “Yes, has the seller given you any information on his TPDs for this store?”

I caught him off guard, but the question was very intentional on my part.

I wanted to accomplish two things; (1) let the broker know I was familiar with that term, indicating I had done my homework and (2) I actually did want to know what kind of TPDs the seller was getting.

He told me no, he didn’t have those answers on him, but would reach out to the seller and get back to me.  But I immediately noticed a shift in how he approached our conversations.  At that moment, he realized we weren’t “tirekickers” just goofing around; we were serious buyers and demonstrated it.  If either he or the seller had even considered pulling a fast one anywhere, they probably would have thought twice at that point.

And in order to arm you with the same knowledge, we’ve compiled a list of common acronyms and terms you may come across during your purchase of a laundry, or any other business for that matter. By the end of this list, you’ll be the one that knows exactly what TPD is and will soon be asking for those numbers with confidence.

Let’s dig in!

 

  • Business Plan

    A document that in its simplest form, is a guide—a roadmap for your business that outlines goals and details how those goals will be achieved. Providing a business plan is a must if you intend to get lender financing for your purchase and/or will be working out a lease with a landlord.

    It communicates that you are a serious buyer, and displays your business acumen nicely. (We have crafted a complete business plan template that you can customize, and it is now available in our Online Store)

  • CAM

    This stands for Common Area Maintenance charges. In a commercial lease, this is the portion of the expenses for the shopping center that you are responsible for.

    It is usually a combination of several items; electricity for the center, parking lot maintenance, security guards, snow removal, etc.  Most often, the percentage of the shopping center you occupy determines your share of the CAM fees.

    Example: Your store is 1,500 square feet, which is 10% of the shopping center’s total square footage. Your landlord will then charge you 10% of the shared expenses for the center.  It’s important to get a history of the CAM charges when purchasing a laundry, you don’t want any surprises.

    Specifically, you should know whether the sewer fees are included in the Rent or CAM charges. Sometimes sewer fee expenses are overlooked, and they can be significant.

  • Cash Flow

    “Cash Flow”, also known as “profit”, is the gross income minus all expenses and financing costs.

    Example: Al’s Laundry Lair brings in $15,000 in gross income for the month. Expenses are $11,000 and his business loan payments are $1,500.

    This means that his actual cash flow (profit) is…

    $15,000 income (-) $11,000 expenses (-) $1,500 loan payment = $2,500 monthly cash flow.

    This is the figure Al would use to determine his Return on Investment (ROI), which you’ll get to later in this list.

    (We have created a plug-n-play cash flow calculator that is available in our Online Store.)

  • DCO

    This stands for “Dollar Coin Only”.  In other words, instead of using quarters, the store accepts dollar coins in their machines.   This conversion to dollar coins is often done as a convenience for customers; they can get tired of inserting 24 quarters, one at a time, for a washer that costs $6.00 to use.

  • Debt Leverage

    When you borrow money to purchase a business, you’re “leveraging” someone else’s money.  In other words, you’re having someone else (the bank or lender) carry some of the risk.  In contrast, when you pay cash for a business, your investment is fully at risk if the business doesn’t do as well as planned.  Some in the industry refer to it as debt leverage.

  • DTI Ratio

    This is a term you may be familiar with if you’ve ever financed a home or car. It stands for Debt-to-Income ratio. It’s the total of your personal monthly debt payments divided by your total monthly income.   In other words, the percent of your income that is dedicated to paying debts.

    Typically, lenders want you to have a DTI of 36% or less. Example: Eddie has some credit card debt, a car loan and a mortgage, all adding up to $2,500 a month in payments. His income is $5,000 a month. $2,500 in debt payments divided by $5,000 income = 50% Debt-to-Income ratio (DTI).

    So, Eddie’s debt payments take up 50% of his income each month, which is too high. In order to fall under the 36% lending guideline, Eddie would need to either pay off some of his debts until the payments are lower, or increase his income until his percentage drops into an acceptable range.

  • DSCR

    This stands for Debt Service Coverage Ratio, and is in some ways similar to the Debt-to-Income Ratio mentioned above.  But instead of being based on personal finances, it is based on the financials of the business itself.  When a business wants to finance a major purchase, the lender will want to know how much cash flow the business has available to cover the loan payment.

    In short, the DSCR number reflects the ability of a business to cover a debt payment, based on the cash flow available.  Typically, lenders want a business to have a DSCR of 1.25 or higher.

    Example: Betty’s Laundry House has a monthly cash flow (profit) of $2,000 per month. The monthly payment of the loan she’s applying for is $800.  To get the DSCR, you would divide the monthly cash flow of $2,000 by the $800 loan payment, which gives us 2.5.

    Betty would very likely qualify for her loan in this example, as her DSCR is significantly higher than 1.25.  Her monthly cash flow of $2,000 can easily cover the $800 loan payment.  Some lenders will even approve for borrowers with DSCRs in the 1.15 range.

  • Due Diligence

    This is a general term that describes the investigation process to determine if a business is favorable for purchase.

    This often involves: reviewing the sellers records and statements to verify that the stated incomes and expenses are accurate, noting any competitors in the area, and reviewing the profitability history.

    This process usually occurs during the escrow period, after an offer to purchase has been accepted, and a Non-Disclosure Agreement has been signed.

    This review can include, but is not limited to: Profit and Loss statements for the prior few years, business tax returns for the prior few years, bank statements showing regular deposits from the business, a water bill analysis, review of utility bills (water/elec/gas), an equipment list (ages and model numbers), a copy of the existing lease, information on employees (where applicable) and current rent statements.

  • Gross Income

    The total income from all sources; washers, dryers, vending, wash-dry-fold services, etc.

  • Lease Assignment

    If the seller is in an existing lease contract with a landlord, then the lease will need to be transferred (assigned) to you, the buyer.

    In order to prove to the landlord that you are a good financial risk, they usually require a personal financial statement, and sometimes a credit check occurs as well.  This is also the point at which you would negotiate any new lease terms.

    If the landlord agrees that you meet the qualifications to acquire the lease in your name and an agreement is reached the new lease terms, then a lease assignment document will be signed by all parties.

    A fee (see Lease Assignment Fee below) often accompanies a lease assignment. However, it is important to note that you must abide by the terms of the existing lease until that term is up, at which time your lease terms will begin.

  • Lease Assignment Fee

    This is a fee that can range anywhere from $50 and a handshake to $10,000, charged by the landlord. The commercial leasing industry justifies this fee by stating that any time a lease changes hands it requires man-hours to review the financials, as well as the financial risk that comes with allowing a new lessee to take over.

  • Makeup Air

    Dryers need an adequate amount of intake air from behind in order to heat the air and dry the clothes as they tumble (it’s similar to a hair dryer; it pulls the air in through a vent, heats it, and spits it back out).

    But you want this air to come from outside, and not from inside the laundromat. To achieve this airflow, intake vents are placed in the roof that allow outside air to reach the backs of the dryers. This intake air required by dryers is called “makeup air”.

    You are bringing in outside air to “make up for” the air that is leaving the dryer.  If the intake vents are too small or blocked with lint, the dryers would “suffocate” and have no air to heat and dry laundry. When it’s time to inspect a prospective laundromat, ask if there is adequate makeup air, and/or if the vents have been cleaned recently.  (You can inspect the vents as part of your due diligence and check for yourself as well.)

  • NDA

    This stands for Non-Disclosure Agreement. It sounds scary, but it’s actually rather simple. It is a very common document, one that you may have signed during a home purchase and not even realized it. It is an agreement that you (the buyer) signs stating that you will not discuss any details of the business, financials or the purchase itself with anyone that is not involved in the transaction.

  • Net Income

    This is simply the gross income minus expenses (except loan payments). Nothing fancy here.

  • Net Worth

    If you will be applying for a lease or financing the business purchase, you may be asked for your net worth. It is a measurement of your financial means.  The formula is your Total Assets (businesses / homes / cars / boats / property, etc) minus your debts (business loans / mortgages / car loans / other loans / credit card debt, etc). This final figure (it may be negative in some cases) is your net worth.   The higher the figure, the better.  (We use and recommend a FREE tool at PersonalCapital.com to calculate your Net Worth. Click this link for more info.)

  • Personal Financial Statement

    This is a form often required by landlords and finance companies before they can approve you for a loan or for taking on a lease.  It is similar to a statement of your net worth, but in fine detail. It outlines your various bank and retirement accounts with the corresponding balances, includes an itemization of your assets and their values, as well as details of any mortgages or other debts you have.

  • ROI

    This stands for Return On Investment. It is a calculation that provides the percent “return” you are getting on your investment in the business after all expenses have been subtracted.

    This calculation can get fairly complex, but to keep the example simple, think of a savings account. You deposit $5,000 into a savings account, which makes 3% interest. The “return” on your deposit is 3% (or $150).

    To apply this to a business investment, a basic calculation can be made.  If you put up $30,000 in cash towards purchasing a laundry, and after expenses and loan payments you profited $15,000 for the year, your “return” would be 50%  ($15,000 divided by $30,000).  In other words, you would have already made half your money back in one year.

    As I said, this number can get more complex if you want to take into consideration depreciation, equity, etc, but the basic formula is sufficient enough for most of you to get a general idea of the return you’d be earning on your money.

  • Site Visit

    Any laundromat being considered for purchase will need to have a thorough site visit performed.  This is a floor-to-ceiling analysis of the condition of the store, the number and types of equipment, notes on décor, location, local competition, etc, etc.  (We have created a detailed, systematic site review walkthrough, and have made it available in our Online Store.)

  • Sole Proprietor

    A sole proprietorship is just a description of how you own the business for tax purposes.  Other options are a Limited Liability Corporation (LLC) or a C-Corporation, but for the “average Joe”, owning as a sole proprietor is the logical choice.  It is simple and easy to setup, and costs very little.  Only an individual or married couple can register as a sole proprietor.  (Most small businesses are sole proprietorships).

    One of the greatest perks to registering as a sole proprietor is that owners can file their business taxes right along with their personal taxes, with the addition of just a few forms.  However, we recommend consulting your tax attorney for further information on what is best for your personal situation.

  • TPD

    This acronym stands for “Turns Per Day”. It is used to understand how many times, on average, a particular type of washer is used. For example, a seller might say, “My 6-load machines run about 4 turns per day”. This tells you that customers use those machines 4 times a day, each. You can also use this information as part of your due diligence research.

    If you know that the 6-load machines are supposedly used about 4 times per day each, and there are 4 of those machines in the store, and they are priced at $6 per use, you can calculate: 4 uses (X) 4 machines (X) $6 per use = $96 in income per day from that machine type. Once you know the TPD for all the washer types in the store, you can at least get a ballpark figure for the washer income. This figure can be compared to other figures provided by the seller to see if estimates are consistent.

  • Valuation

    The estimate of value for a laundry business. There are multiple valuation formulas that can be used, which we will cover in a future article.

  • Vend Price

    This is just another way of saying “price”. If it costs $4.00 to run a washer, the vend price is $4.00.

  • Water Bill Analysis

    This is a method of verifying the washer incomes provided by the seller. At a basic level, it involves determining how many gallons of water each washer uses per cycle and calculating if the number of washes results in water usage similar to that stated on the water bill.  It can be difficult to do accurately, so its reliability is controversial in the industry.

  • WDF

    Not to be confused with WTF, this acronym stands for Wash-Dry-Fold, also known as Fluff-and-Fold or Full-Service laundry. This is a service some laundries provide for customers who want to drop off their laundry, have it washed/dried/folded and pick it up later.   Some stores even offer “red carpet service” and provide pick-up and delivery.  It can be a good additional income stream for the right store.

 

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About Laura Dobbins

Laura is the founder and co-creator of Laundromats101.com, and owner of two laundromats in the Sacramento area.  She’s a math geek (Calculus III was a breeze), and currently works as an Analytics Manager in the Healthcare Finance sector.  When she’s not busy analyzing something, she loves cooking French food and blogging.

 

3d_book_cover_bundleFor more in-depth information, we’ve created The Laundromats 101 Complete Coin Laundry Coaching Package, which includes an entire chapter devoted to determining if the self-service laundry industry is right for you.

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