By Bob Nieman | Jun 25, 2012
When it comes to how often businesses fail and how long it takes to fail, it's difficult to separate fact from fiction. Of course, if you listen to the experts, starting a small business seems to be right up there with shark-diving and base-jumping as a dangerous activity that’s best avoided.
The exact failure rate for small businesses is a hotly contested topic in business circles. Some experts believe that publicized failure rates are highly exaggerated, while others stand by their claim that the businesses included in most failure rate estimations only represent the tip of the iceberg.
Even so, most business experts conform to a “theory of thirds,” which generally states that, of all the new business startups, one-third eventually turn a profit, one-third break even and one-third never leave a “negative earnings scenario.” According to a study by the U.S. Small Business Association, only two-thirds of all small business startups survive the first two years, and less than half make it to four years. With numbers like that, it's no wonder so many would-be entrepreneurs think twice before taking the plunge.
But, although new business failure rates are relatively high, it is possible to determine what leads some businesses to succeed while others flounder.
“While we don’t disclose actual delinquency rate experience, we have experienced a notable improvement over the last 18 months,” said Jim Freeze, president of Dexter Financial Services. “We don’t have first-hand experience regarding default rates of other industries, but it’s quite plausible that self-service laundry default rates could be lower due to laundering clothes being somewhat non-discretionary. In other words, clothes need to be cleaned regardless of the economy, so the laundry business may hold up better in a sluggish economy than a restaurant, for example.”
“Default rates in the self-service laundry sector have been significantly better than default rates in other industries,” concurred Brian Grell, executive vice president of Eastern Funding. “When discussing why this is, the usual and customary reasons still apply: people will always need to wash their clothes; the population in the U.S. continues to grow, especially in urban centers; there is a growing lower income class and lower middle income class; more families have two full-time wage earners in the home relying more on drop-off laundry services; and during tough economic conditions, the purchase of home washers and dryers are deferred.
“While these are the obvious factors, we believe that achieving stellar loan statistics are a direct result of applying prudent underwriting criteria combined with substantial industry experience,” Grell continued. “Since its inception in 1997, Eastern has been fortunate and perhaps lucky, but our laundromat portfolio has performed exceedingly well with negligible losses.”
“Default rates are low in general,” added Scott Hawkins, president of Milnor Capital. “Most, if any, are a direct result of the employment markets and lack of operating capital to carry these small businesses through a weakened economy.
“Overall, general portfolio delinquencies are down from prior years. We attribute this to strategic capital purchase planning on behalf of business owners and closer overall credit review. Understanding the individual business sector, location, owner and tenure has helped mitigate delinquencies and losses.”
Clearly, the recession played a role in increasing default rates during and, for a period of time, after the recession. And while some of the business failures can be attributed to lower store volume, much of it was a result of a store owner and/or spouse losing a non-laundry source of income, Freeze stated.
The challenge to owning any business is that there are so many factors outside of your control, according to Jennifer Whitney, financial services manager at Alliance Laundry Systems.
“The mortgage crisis, immigration laws, utility costs, etc., had a significant impact on laundry owners,” Whitney said. “How those owners adapted to the external variables over time was a determining factor in who was able to survive. The ones who were impacted and stood by and did nothing, or dropped their prices because they didn't understand the underlying reason for the reduction in turns per day, suffered significant loss.
“The recession taught our laundry owners the value of staying on top of their business and in continually reinvesting,” she continued. “We have seen an increase in our replacement deal volume with our more energy-efficient equipment. We believe that operators understand now that the value of reinvestment outweighs the fear of the unknown.”
Alliance saw a decline in loan defaults from 2010 to 2011, and thus far that trend is continuing 2012, Whitney noted.
“Our portfolio manager just returned from the Equipment Leasing & Financing Association’s annual conference where they stated that default rates have declined to pre-recession numbers across the board in all industries,” she said.
“We have seen improvement in the default rates for a couple of reasons,” Freeze explained. “First, the economy and job picture have slowly improved, enhancing non-laundry income prospects for store owners. Additionally, many marginal stores were unable to survive the recession, so those remaining are the best performing and/or best capitalized.”
“By setting the proper expectations on the front-end for any entrepreneur, it is rare for us to experience a default,” said Chris Michalek, senior vice president of operations for U.S. Capital Corp. “I can think of one in the past year, and it was due to one of our clients having a health issue.
“Because we take great care on the front-end of a finance transaction to ensure the long-term viability of every laundromat-owner client, it is rare for us to experience a default. This front-end due diligence ensures that our manufacturer and distributor partners can focus solely on new equipment sales for new and existing laundromats.”
The success of self-service laundries – the average “survival rate” of a laundromat after five years is virtually 100 percent according to some studies – can be the result of several factors, such as a predictable cost structure, no accounts receivable, a cash business model and the ability to receive upfront payment for services.
Nevertheless, some coin laundries do fail. Data from the U.S. Small Business Administration shows that the majority of startups in general go out of business within five years, and two-thirds are no longer operating 10 years after being formed. So, there are bound to be a few laundries in that dubious group.
Failure Is Not an Option
To keep your business out of the statistical graveyard, we asked some current and former laundry owners what they’ve learned from the other stores in their markets that have come and gone – as well as what’s truly required to keep the doors open:
Triumphe Leasing Network
I have financed many hundreds of laundries over the years, and the single biggest reason they succeed, underperform or actually fail is the old standby – location. You simply cannot overcome a poor location. This critical variable has to take into account both demographics and competition, in addition to the actual physical location and related amenities such as parking, egress and visibility.
An increasing second-tier variable that has become more critical in recent years is management. It used to be that you just needed to find a good location, install the equipment and open your doors with a little upfront advertising. This has not been enough for at least the past 10 years. As the size of the investment to open a laundry has grown, so have the business skills, time and attention to detail required to build and maintain a quality business; this includes having a well-trained and customer-oriented staff, maintaining a consistently clean store with well-functioning equipment and, lastly, boasting a state-of-the-art payment system. When an owner starts treating his laundry more like an investment than a business, profits will shrink and customers will move on.
Associated Services Corp.
I can safely say that in most of the instances where I have had a laundry fail it is due to the fact that:
A) The town I was operating in lost a lot of employment/jobs, which resulted in a loss of population resulting in the fact that the town could no longer support a laundry. This is a factor that is beyond my control and, even if I were to get a rent reduction, the town still would not support a laundry. I have experienced this in about five towns over the past seven years.
There is really no way to possibly avoid this, unless you decide initially to open and operate in towns that have a lot of people and are in diversified industries – the not-putting-all-of-your-eggs-in-one-basket theory.
B) The costs (mostly rent increases) have made it impossible to realize any profit. Discussing these rent increases with your landlord and attempting to get rent relief is a possible solution. In many cases, the landlord is seeing this in many instances and the "half-loaf better than no loaf" is appealing to many landlords. Of course, you will have to substantiate your claim by providing actual numbers, and I would have a proposal ready with a few options that would allow you to survive and in fact thrive in the future.
Pat’s Car Wash
1. Location means to have a spot where the customers are (low-income, Hispanic, apartments etc.) Also, be on a corner with north, south, east and west entrances. A cheap location will cost you a business.
2. Check your competition. Whatever they are doing, you do differently. For example, if the competition has all toploaders, offer 100 percent frontloading equipment.
3 Do not have a last-wash time, be customer-friendly. You are in business for the customers, so don’t run off any customer just for your convenience.
4. Run an attended laundry. Customers do not like unattended stores, especially at night. It will destroy your business and possibly your equipment.
5. Don’t run off a customer because you are right and they are wrong. They will tell 11 people what you did to them. And that’s bad advertising.
6. Avoid “price wars,” as they could cost you your business. Never offer free dry, and understand that it’s OK to be the highest price in town. Customers don’t compare pricing on frontloaders, only topload pricing.
Santa Clarita Laundry
Santa Clarita, Calif.
With an existing store with a veteran operator, the reasons for failure are:
1. The owner has not kept up on his maintenance. It is an ongoing task to keep our equipment in working order. If you let it go a little too long, all of a sudden you're looking at a lot of out-of-order equipment and a tremendous amount of cash outlay that simply can overwhelm an owner. This are your so-called “front-of-store operation” – customers will see and react to the fact that you have so much equipment not in working order.
2. Not doing behind-the-scenes maintenance, such as regularly cleaning dryer vents, changing hoses, emptying drains, servicing water heaters, etc. These will cost you in higher utility costs and inefficient equipment operation.
3. Failure to update a store's appearance and becoming complacent. Through ordinary wear and tear, your store will become somewhat dingy and shabby. Not repairing and updating lighting, floors, bulkheads, folding tables, chairs/tables, walls, bathrooms, etc. will turn off your cliental.
4. Reacting to a drop in revenue by reducing all of the above costs, as well as reducing spending on supplies, labor, marketing, cleaning materials, etc. I've seen too many owners respond to a drop in income by starving their operations of needed funding and, therefore, further escalating the downhill slide.
5. Obtaining a reputation for poor customer service. This can happen in a number of ways, including the items discussed above, but also having untrained, rude and/or disinterested employees. Not getting to know your customers and listening to their needs and complaints. It used to be that you only had to worry about bad word of mouth, but in today's smartphone environment, a Yelp review is only a keyboard stroke away – and news of poor customer service doesn't take Paul Revere to get the word out quickly.
With new owner acquisition of an existing store, the reasons for failure are:
1. Not selecting a distributor or experienced broker and/or not utilizing the services of a distributor or a broker at all. I have seen and heard of many instances where a new investor has not used the services of professionals with expertise in our industry. Without obtaining their added guidance and wisdom, it is very difficult to fully understand and interpret all of the nuances of the laundry business.
2. Not spending the amount of time necessary to understand what is required of an owner to be successful. Too many people still retain the myth that all you do is show up and collect your quarters. Some of these individuals feel owning a laundry is a good additional hedge to their stock market or real estate portfolio, when in fact it is a business and needs to be treated as such.
3. Not spending the time to perform all of your due diligence with regard to lease, financials, competition, equipment and customer base. I have seen new owners who didn't know a brand new store just went up around the corner, did not understand there was only a few years left on a lease, what a bad lease looks like, the cost of equipment repair and/or replacement and how the customer base may have changed – never mind not fully vetting the financials for both inflated income and missing expenses.
4. Not having a complete plan of how you will operate and improve the business once you take over. So much time is spent on obtaining the targeted laundry that the new owner has not considered how to operate it once he or she has it. They have no plan, and in many instances, no budget for marketing, improvements or repairs, and no knowledge of how the store actually operates.
Laundry Properties, LLC
I have an 83-year-old father who started a florist and greenhouse business from nothing, directly out of high school. His favorite line is, "The best fertilizer on the farm is the farmer's footsteps." I think that applies to so many things in life, and it is certainly a factor in the failure of today's laundries.
Any factor you can name is a derivative of the owner being involved in that process – whether it be the choice of location or the attention to details, it usually involves the diligence of the owner's effort. It's often best to put your eggs in one basket, and then watch that basket very carefully.
Woodward Coin Laundry
Assuming the four key essential fundamentals – demographic validity, some trade area exclusivity, intelligently conceived management and marketing programs, and a wisely conceived financial overhead – are in place, the singular reason laundries fail is poor business skills by the owner. In other words, I bet on the jockey, not on the horse.
However, owners can avoid failure by regularly looking into a mirror and asking the following questions of the person they see staring back at them:
1. Am I honest?
2. Am I forthright?
3. Do I work hard?
4. Do I understand and respect the customer?
5. Do I understand and respect my employees?
6. Do I deal effectively and respectfully with suppliers?
7. Do I always attempt to view my laundry through the eyes of the customer?
8. Are my store hours arranged to satisfy the customer and not me?
9. Are my marketing programs effective and economically sane?
10. Do I think long term?
11. Do I avoid the use of the pronouns "I" and "me," in favor of "they" and "them?"
If the answer to any of the above questions is no, then failure is on the horizon. It's just a matter of time.
Antioch Laundry Service, LLC
There are many reasons why a store fails. In a startup, the most common failure is undercapitalization. Often, investors calculate the monies required to build out and equip the new facility and assume “they will come.” (The customers, of course.) All too often, the unfortunate trend I have witnessed is that Investor No. 1 spends $600,000 on a new, 3,500-square-foot store and does not have the staying power to sustain the sometimes lengthy time it takes to change the washing habits of potential coin laundry users, and they quickly try to cut their losses by selling the store. Then, you have Investor No.2, who believes he or she scored big by buying the store at $400,000 and still has not considered the necessary projected sales and marketing needed to at least break even. Finally, someone comes in and grabs the store at $250,000, and the store succeeds because of lower debt service and now sales are at a sustainable level.
The other two major reasons stores fail are vend prices that are too low and stores that are too small. With respect to small stores, it's not to say that a 1,200- to 2,000-square-foot store located in a rural area (500 rental families and/or the majority of homes on septic) with minimal competition will not succeed. There is just less room for error. If the rent is low enough ($6 to $8 per square foot annually/50 cents to 67 cents monthly), one maintains a high enough vend price and can promptly address customer-service issues without an attendant, small stores can provide a decent return on investment.
That said, in the last 10 years, I have witnessed by far more small stores closing than larger operations (2,500 square feet or larger). This is primarily because the smaller stores located in metropolitan areas try to compete with the larger stores based on price alone and fail to keep the store clean and/or adequately address customer complaints. Often, I have seen stores begin to compete on price alone and, once they reduce their vend prices, it's the kiss of death. Now, with reduced revenues, they are unable to properly maintain their store, and they continue to decline until the store closes.
To avoid these pitfalls: Take care to not over-finance the project; carefully evaluate the cost of labor and your ability to maintain good customer service; realize that building up a successful wash-dry-fold business takes months and even years; avoid competing strictly on price; if planning on staffing the store, the demographics and equipment mix need to support the payroll and rent. (For example, 30 to 40 washers – varying in sizes –notwithstanding market-specific requirements. Typically, 25 percent toploading and/or double-load washers; 35 percent medium-sized, 30- to 40-pound capacity; 25 percent larger units, 50- to 60-pound capacity; and at least 15 percent mega-load, 75- to 125-pound capacity. Then, balance the dryers by matching the total wash weight with dryer capacity, plus 10 percent to 15 percent.)
I Do Laundry
There are three key factors:
Not keeping the clean store. If someone is coming to clean their laundry, that customer expects a sparkling clean facility. Many laundries are dark, dirty and uninviting due to inattention by the owner. Cleanliness is Rule No. for success.
Improper maintenance of the machines and building. It is not unusual to enter a laundry where many machines are out of service and the building itself also shows years of wear and tear and considerable deferred maintenance. The impression is that the owner doesn't care about the
Poor vend price strategies. You need to find the sweet spot, where all costs plus a reasonable profit are covered while still remaining competitive for your market. This is increasingly difficult, since utility costs and rents are consistently rising while competitors are slow in reacting to the escalating cost structure.
I think many coin laundries fail due to unrealistic expectations on the part of the owner/investor. They often think they can provide a higher level of service than the existing laundromats offer, while charging a lower vend price. They overestimate the depth of the market and fail to reach a break-even point.
Robert and Julie Bos
Walnut Plaza Launderland
There are several reasons a coin laundry can fail, but the main one is an owner that is not attentive. There is a lot of competition in the laundromat business, and if you think all you need to do is go in and collect, you will be losing out on a lot of business. A well-run laundry shouldn't fail. The way to do so is to make sure all of your equipment is in working order all of the time. Be sure the washers and dryers are clean and the floor is maintained. Get to know your regular customers and do something extra for them. For example, at one of our locations, we offer free coffee three days a week and sometimes provide free donuts as well.
When considering ways for a coin laundry to succeed, replacing outdated equipment makes a big difference. Putting in large frontload washers and larger dryers greatly increases your revenue. Also, providing snack and soda machines helps increase revenue as well. Having televisions for customers to watch is a good idea, too. And, if possible, offering a wash-dry-fold service can help.
Dennis E. Claussen
The Richden Companies
As the owner of two laundromats, I have always tried to follow the policy of making sure that each of our stores is maintained in a condition that I would be happy with as a customer. I believe that one of the biggest reasons for failure of any business is when the owner ignores this rule. Other reasons for failure might include:
Location – it is critical to have a good location within a reasonable driving distance to enough of a customer base to make a successful operation.
Cleanliness and equipment maintenance – keep the store and the equipment as clean as possible at all times. It is important to your customers and it is important to your investment. After all, laundry equipment is expensive, and it will last a lot longer if kept clean and maintained.
Otto-Matic Coin Laundry
I built my laundry 12 1/2 years ago, after the town’s existing coin laundry closed about two years earlier. Its reasons for failure:
1. Rural water was installed. Before rural water, customers had wells and cisterns and could not handle laundry demands.
2. Too much old equipment. It was the “standard set up” – topload washers on one wall, and big dryers on the other.
3. Approximately half of the washers were working at any time.
4. Divorce. His wife kept the business for the income, but she didn’t keep the equipment running.
5. Costs outweighed the income – therefore, closure.
Laundries in two neighboring towns also closed, for Reasons Nos. 1, 2 and 5.
Wash Day Laundry
The most common reason for the failure of a laundromat is most likely one of the following:
• Owners not keeping a close eye on financials, so they miss downward financial trends and do not adjust their strategy accordingly. Solution: Schedule regular meetings to review your financials.
• Lack of repeat customers. This may be due to a number of factors, such as poor customer service, equipment not in working order or an unclean facility. Solution: Be involved in your store and engage your customers.
• Poor location and/or lack of visible signage, including no advertising presence. Solution: It is free to have a minimal online presence. If you are not in an "A" location or have a small budget, look into free listings.
• Lack of market and store knowledge, such as not knowing when pricing needs to be adjusted or whether or not an employee needs to be replaced. Solution: Be the boss. Do not delay in making the difficult decisions.
If there is an area of running your business that is not your strength, outsource that function. Few owners are good at running all aspects of any business, so be self-aware and hire someone you trust to supplement your talents.
Sunshine Express Laundry Center
I’ve seen eight major reasons. Very simply, they are:
• Unrealistic expectations – over-investment, over-development.
• Failure to keep pace with technology/equipment updates and trends.
• Failure to secure a proper lease.
• Failure to closely track your finances. (This includes keeping your hands out of the money box.)
• Failure to market.
• Failure to be attentive to day-to-day matters.
• Failure to provide rigorous customer service.
• Failure to effectively compete, which includes all of the above, plus some.
Adrian Fabricare Center, Inc.
Over the past 50 years in the industry, I see most store failures resulting from a failure to reinvest in the business, including time, energy and equipment improvements. Successful ownership demands commitment to the long term and a stewardship to the business that sometimes requires that we look beyond current returns.
In the long run, there will come a time that requires a leap of faith, in terms of making an investment in the next generation of technology, making the "great leap forward" and leaving the competition behind.
Tulsa and Broken Arrow, Okla.
There are plenty of reasons a coin laundry might fail. For me, the question is which elements were under the owner’s control and which were not?
Changing demographics in a neighborhood over time, new competition being built causing oversaturation of the market or the inability to renegotiate a favorable lease are all factors that might cause a laundromat to fail through no fault of the owner.
But, mainly, failure is the owner’s fault. He didn’t care enough. He didn’t do enough due diligence. He chose the wrong location. He didn’t join the CLA and read the abundant information available to him. He didn’t realize how much cleaning was involved. He didn’t want to have to deal with customers. He didn’t know how to handle money. He didn’t know running a laundromat would be so much work!
Finding out how to avoid failure is not hard work. Doing it is.