Laundromat Valuation: EBITDA and Free Cash Flow Explained (Part 3)

Ian Gollahon 00:06

Hello and welcome to the Laundromat Ownership Podcast. Today is going to be part three in a four or five part series about laundromat valuation metrics. And I've been doing this series in cooperation with the CLA, the Coin Laundry Association, or previously the Coin Laundry Association, and their magazine Planet Laundry. I'll show you the episode that this is inspired from today.

So, this is for the August 2026 magazine. And if you open it up about right to the middle, we're going to see a picture of me with sunglasses on. And this is the article about EBITDA and free cash flow. And what does that really mean? But more specifically, what does it mean for a laundromat owner? And what can you do with those metrics? Why should you know those metrics?

And how buyers or sellers might use those metrics if you're trying to buy or sell a laundromat. And I'm gonna just do a real quick review before we dive into this episode, which is EBITDA and free cash flow. The first episodes, this is just what you might expect in a laundromat and how you might expect a nice laundromat to be valued. There's a million things,

That can influence this. And in fact, in episode one, we talked a lot about the lease and the assets, how Section 179 elections get used, lease terms, that kind of thing, how that affects valuations. Then we went into the first valuation metric or the first revenue metric, which was gross revenue. That's every single dollar that comes into the laundromat, And then we actually talked then about the second.

Largest circle typically in a concentric circle graph for those of you that are just listening. We have each circle is wholly in inside the larger circle. So you've got gross revenue. SDE or seller discretionary earnings is a percentage of gross revenue. And so just SDE is typically what people are using when they sell a laundromat or buy one. They're using a multiple of SDE.

A lot of times they'll call it adjusted EBITDA or they'll call it something else. But at the end of the day, what number they're really trying to get for you is what will be your total earnings as an owner? What will be your total benefit as an owner? And so a lot of laundromats that are high-performing laundromats, they are LLCs filing as an S-Corp. And so they will pay a

And we have a whole episode about this by the way. They will pay the owner a salary. And the reason you would pay yourself a salary is because then you get a tax advantage on all the earnings.

So why is that significant? Because well, SDE will include that owner's salary. So if you're paying yourself a $50,000 or an $80,000 salary, that number will include the seller's earnings, the seller's salary that they're paying themselves.

Anyway, broadly speaking, gross revenue is your top line revenue. SDE is a percentage of that revenue.

That goes to the seller as their benefit. So then what is EBITDA, which is what we're bringing to today? EBITDA is almost always, or I would say by definition, it is going to be less than SDE in almost every laundromat scenario. And earnings before interest, taxes, depreciation, and amortization. So why would we need to know?

Earnings before interest, taxes, depreciation, and amortization. You also might call this, you might hear some people call this EBITDA, or there's all kinds of different ways to pronounce it. I'm from Oklahoma, we say EBITDA. It's very similar to SDE, it's trying to give you an idea of what the business earns realistically.

In any given year. And that it's not including an owner's salary. So it's saying without the owner's salary, what is it really going to earn?

Let's say it's real estate that you're depreciating, and so you're reducing your profits by that amount, that amount will come out before net income. So EBITDA is saying it's trying to differentiate it from just being in your hands and saying, what does this business earn in the hands of anyone? Or what would this business ran the exact same way in the exact same year make a different investor?

And that is different from SDE and free cash flow. And I want to go over what the main differences are.

So I want to kind of look at it from the point of view of each letter in the acronym EBITDA, right? Earnings, right? So we know this is an earnings multiple by definition. This is something that the not necessarily top line revenue, it's something that is a more of a profit-driven metric, right? It's earnings. What did you actually earn, not what came in or went out? Earnings before, so

What are the profits before interest? Taxes, depreciation, and amortization. Let's take each one of those. Why would you want earnings before interest? Well,

Typically, the interest that they are talking about is the interest that you would be paying on your loans. Well, the next buyer, whoever's buying your laundromat, they may not have loans. They may be buying in cash. And so they wouldn't want the earnings after you've paid your interest off because, or after you've paid your interest payments, because they're not going to have interest payments. Or what if they have double the interest payments you have? So you've got it half paid off, you

Originally borrowed a much lower amount and now it's only half that a lower amount and you're paying or you're selling it for much more, your interest payments might be one quarter of what their interest payments are, or their interest payments might be zero. So you can see that the interest payments reduce net income by a value that is individual to the owner.

And so what we're trying to get with this EBITDA number is what is a less individualized or less subjective earnings? And what's a more objective earnings? What if you didn't have a loan? Right? What could I expect? And then I'll all calculate my own interests. Let's do the same thing for the next, you know, it's EBI interest taxes.

Taxes are for

They vary by the situation, by the entity type, by the owner, by the company, by the corporate entity that owns the laundromat. And so you wouldn't necessarily want to include the taxes. So for example, I own Wash-Dry-Fold POS is now an incorporated business, right? It is taxed as a C-Corp. And so it pays

Corporate taxes on its earnings, right? That's a that's our software company that we do. It's point of sale system. For Liberty Laundry LLC, which is the chain of laundromats that I own, they're an LLC and that's what's called a pass-through entity. And they file as an S-Corp. And so they're not paying a corporate tax. They still get hit with taxes here and there. So they're not totally tax exempt or anything.

But essentially the owners pay that taxes on their personal taxes. They pay the taxes for all of the net earnings of the LLC. So you can see why it wouldn't make sense to include taxes in this EBITDA number if they're saying, well, what am I really going to make out of it? Well, you don't know what they're really going to make out of it unless you know their interest, taxes, depreciation, and amortization.

And so because all that gets individualized to the person, you're taking all of that out. So we just took out interest, which is what they're paying on their loans, or maybe even what they're getting on their capital. But typically we're talking about what they're paying on their loans. We took out taxes, which again is going to vary from entity to entity. So we wouldn't want to consider that in our valuation multiple here. And then

Depreciation that also reduces your net income, which is really your taxable income. That's a tax numbers typically. So depreciation is maybe you bought some real estate and you are depreciating the value of that real estate over time, the building. Maybe you have some equipment that you're depreciating over time that you didn't do a Section 179 election on. There's a number of things that you might.

Depreciate out. And that is going to reduce that let's call it net revenue. It's going to reduce that number further into net income. You don't want to reduce it further because you're trying to give the buyer the picture of what this business is worth in their hands. And in their hands, they may not depreciate the exact same things that you are depreciating, but more often.

They're depreciating more because they're able to go in and buy all of your assets. That's one of the things we covered in the first episode here is that laundromats are typically bought and sold using what is called an asset sale. And so they're purchasing your assets and they're able to depreciate those from the value that they paid for them, versus you are depreciating still from whatever value you paid, right? So they typically come in with a larger depreciation schedule, oftentimes, and they're able to depreciate more.

Now, maybe they take a one section Section 179 and you did not. And so maybe they actually depreciate less. Again, these things all vary by the individual, and that's why we're trying to take all of these out of the number and give you the bigger number that doesn't have all of these deductions. So we've taken out, we want the total earnings before. So earnings not being touched by interest. It's not being touched by taxes.

It's not being touched by depreciation or amortization. What is amortization? Amortization is very similar to depreciation, but you use it for items that don't depreciate in physical value, but are more of like abstract items, like goodwill is something that amortizes, right?

So if you want to look up the difference between depreciation and amortization, you can. But they are for this conversation very similar in functionality

Whether tangible or intangible, it's being taken back out of the purchase price via that depreciation or amortization. And again, they're gonna have their own depreciation and amortization schedules that will be certainly they will be larger or smaller than yours. It's almost an impossibility that they would be exactly the same. And so again, why do we want this earnings metric

To be different than net income, well, because it needs to be a number that we can all agree on is this kind of earnings number that then we all know our individual situations, our own individual interests, our own individual taxes, interest payments, taxes payments, depreciation and amortization, all that needs to come out of that earnings multiple before we realize our own net incomes, which is really more of a tax number.

So then let's go on to the second part of this episode, which is the free cash flow part. In laundromats, that's not the main multiple you're gonna hear talked about. Usually when people are talking about free cash flow and they're talking about a laundromat, they are more centered around the ability for the laundromat to service its debt.

And the amount of cash that the laundromat is actually spinning off, the amount of cash that you're actually able to utilize outside of the operations of the laundromat.

Kind of the hidden thing in laundromats that not all laundromat owners fully understand or talk about

Is what's called CapEx or capital expenditures. You know, Warren Buffett has a great line about who do you think pays for the capex? The Tooth Fairy? The reality is the business pays for the capex. In a laundromat, what is capex? What we mean when we say capex is future capital expenditures.

So you will have to replace the machines in your laundromat at some point. That is when you will incur CapEx. So free cash flow is interesting in that it typically does take CapEx into consideration. In the concentric circle graph, it was only larger than net income, which it's not always larger than net income, but it usually is. And the reason for that, it being smaller than EBITDA.

But larger than net income, one of the differences there is that CapEx expenditure. So you are going to, let's just say we looked at free cash flow over the next 10 years in a laundromat that absolutely needed new machines into that 10 years. We would calculate the free cash flow by.

Removing the capex out of it. So whether you bought all the machines in one year, or whether you paid for them over 10 years, or whether you replaced only the washers in cash and then the dryers in cash. That's what we do at our laundromats just to avoid all the expensive financing bits of it. So however you pay for that capex and however you spend it, that is

What would otherwise be free cash flow. And so it is decreasing your free cash flow by that amount.

One of the things we talked about already is that the EBITDA is a number that you want to get because it depersonalizes the earnings. It's saying what would this business make in somebody else's hands? Maybe somebody who had paying less interest or somebody who's paying more interest, someone who has less equipment to depreciate, someone who has more equipment to depreciate. So it's taking out the interest taxes, depreciation, amortization.

Free cash flow is essentially not taking out those things. In general, it's looking at this on an individualized basis. And that's why it's so often used by banks to assess whether or not there is enough free cash flow to service the debt that they're applying for, whether they're trying to get loans out on machines or a building or goodwill to purchase the business itself. Whatever asset you're buying there.

Bank is saying, Well, do you have enough free cash flow? Because what if your tax liability is huge? Or what if your interest payments are going to be so substantial that you won't have enough cash?

Essentially the free cash flow.

Almost does the opposite of what EBITDA does in that it's making it subjective and not objective. This is what you are going to make with this long-term at in your situation with your loans, your tax situation,

It's basically saying, how much do you expect to make from this? And it is again after any seller's salaries. So if you have an S-Corp and you're paying out the salary to the owner, free cash flow, that circle does not take that number, does not make part of that circle. That seller's salary does not make part of that circle.

Because that's not cash flow that the business is spending out, spitting out. The business is spending that cash flow on paying the owner. And so owner salary does not make it into the free cash flow circle, but it does make it into the SDE circle, which is typically the number that is used to buy and sell laundromats. So again, it's really important that you understand the big differences in free cash flow and SDE.

SDE in a laundromat setting is typically going to be a much larger number. It's going to include all the benefits to the owner. Versus free cash flow is the cash that's left over after all that is paid out, including the owner's salary if it's an S-Corp. So free cash flow very often used as a solvency metric. Banks will very often be interested in this metric. And this is a metric that is going to be more personalized to you as a laundromat owner.

Versus EBITDA is trying to depersonalize the earnings.

We do still have net income coming up on the next valuation episode here, which would probably be the last. I so appreciate you joining me for this episode. Hopefully, some of the research I did here and some of the stuff I was able to share with you on this topic, and also personal experiences I've had using these numbers, hopefully it's valuable. Again, anytime I've seen a laundromat for sale, they're saying EBITDA or adjusted EBITDA, but they actually mean.

Seller discretionary earnings, or someone says, only look at the bottom line, and they're actually talking about EBITDA and not net income. So there is a wide amount of confusion on this topic in the laundromat industry. And what I'm doing here is try to take some clarity and try and take some definitions that already exist from outside the laundromat industry and really explain how they're being used in the industry and how you yourself could understand them if you were to buy or sell a laundromat.

Thanks so much for joining me. And please subscribe for the next episode and get tips and actionable information on how to improve your laundry business. Thanks so much. I'm Ian Gollahon signing off.