Buying & selling · Valuation
Laundromat Valuation: Assets, Leases, and Real Estate (Part 1)
Why the price of a laundromat is set by the equipment and the lease long before anyone argues about a multiple of earnings.
- ●Roughly 99% of laundromats are bought through an asset sale, which resets the depreciation clock in a fresh entity instead of inheriting the seller’s used-up Section 179 elections.
- ●Net income is the number an owner is taxed on, not the number a laundromat is worth. Brokers and buyers work from SDE, or an adjusted EBITDA if the store is genuinely passive.
- ●Equipment does not go to zero at 20 years old. A one-year-old machine is worth close to what was paid for it, and old equipment with a short lease can make a profitable store unbuyable.
- ●Target a 25-year lease built as five 5-year terms, keep the personal guarantee capped at around seven months, and never sign unlimited CAM fees.
- ●The practical lesson: price the assets and read the lease before you argue about a multiple, because those two set the ceiling on what the earnings are worth.
Ask what a laundromat is worth and the answer comes back as a multiple of net income. That is the wrong starting point. Laundromat valuation begins with the value of the commercial laundry equipment and the stability, length and terms of the property lease, because those two can override every earnings number on the page. This article covers the asset sale, Section 179, how to value used machines, the 5×5 lease structure, personal guarantees, CAM fees and when owning the real estate changes the math.
This article is based on an episode
Laundromat Valuation: Assets, Leases, and Real Estate
Laundromat Ownership · Episode 9
Browse any industry Facebook group and you’ll see the same question: “I’m buying my first laundromat, what is it worth?” The thread that follows is almost always a race to the simplest possible answer — some multiple of net income. Laundromat valuation is more complicated than that, and starting at net income skips the two pieces that actually drive the price.
In a laundromat, net income is the number you get taxed on. Owners have strong incentives to keep that number low through reinvestment and accelerated depreciation. To find the real value, brokers and buyers use SDE (Seller’s Discretionary Earnings), or an adjusted version of EBITDA if you’re going to treat the asset as passive (which most owners can’t do for a while after closing). But before you even look at earnings, you have to understand the two pillars of valuation: the asset sale and the lease.
🔑 Insider Key
A laundromat could be highly profitable today, but if the equipment is old and the lease has one year left with no option to renew, that business is not worth buying. The lease and the assets can override every earnings number on the page.
The Laundromat Asset Sale: Buying Earnings, Not Books
In roughly 99% of transactions, a laundromat is bought through an asset sale. People hear “asset sale” and assume that just means buying the equipment, but that’s not the full story. You’re still buying the earnings — the asset sale is the legal mechanism that lets you do it.
If you bought the seller’s LLC instead (a corporate acquisition), you’d inherit their books — including every Section 179 election they’ve already taken. You’d owe taxes on the profit going forward without any of the depreciation benefits the seller already used up. That’s a foolish way to buy a laundromat.
Instead, you bring the assets into a fresh entity — an LLC, an LLC taxed as an S-corp, or a C-corp — and depreciate them at the price you paid. Every dollar of the purchase price gets allocated into a bucket: equipment, goodwill, trade name, or a covenant not to compete. The bucket each dollar lands in determines how fast you can depreciate it and how much it shelters your future earnings from taxes.
🔑 Insider Key
The asset sale is how you reset the depreciation clock. Buy the assets, not the LLC — that’s the move that makes the tax math work in your favor.
Section 179 for Laundromat Equipment
Section 179 is one of the main reasons the asset sale model dominates this industry. It’s a tax election that lets you expense the full cost of qualifying commercial laundry equipment in the first year, instead of stretching it over a 10- or 15-year straight-line schedule.
If you spend $300,000 on washers and dryers, you can take the full $300,000 deduction in year one. If you spend $500,000, you can deduct $500,000. That’s why net income at well-run laundromats often looks suspiciously thin — the owners are deliberately reinvesting and electing Section 179 to drop their tax bill.
When the equipment shows up on the balance sheet, you’ll see the original purchase price line item along with a corresponding negative entry for the Section 179 deduction. The machines technically appear at zero net value, but the line items still tell you what was bought and when. That history matters when you’re evaluating a store — it’s the closest thing you’ll get to a maintenance log.
How to Value a Laundromat’s Equipment
Commercial laundry equipment depreciation isn’t just a tax concept — it’s a physical reality. A modern laundromat typically has around $500,000 worth of relatively new machines in it, and those machines are worth real money even if the business itself is struggling.
A useful way to think about it:
- One year old: nearly what you paid for them, like a one-year-old car that’s been well taken care of.
- Twenty years old: not zero, but maybe 10% of the original price — and once you factor in uninstall, transport, and reinstall costs, the practical number can drop further. This is the “zombie mat” problem: the machines are technically there, but they’re a money pit.
When you walk a store you’re considering, write down what the washers and dryers are actually worth. Put a real number on it and keep it in mind through the negotiation. That figure becomes your floor — and brokers, buyers, and sellers all manipulate the earnings story up or down based on it.
🔑 Insider Key
Old machines are not worth zero. But once they cost more to move than they’re worth on the open market, they should not influence your offer. Don’t pay for equipment you’d refuse to inherit at someone else’s location.
Laundromat Lease Negotiations: The 5×5 Structure
If you don’t own the building, the lease is the single biggest determinant of whether your laundromat is worth buying. The format Ian recommends — and the one Dan Brinderson, who buys laundromats in the California market and owns Express Coin Laundry, walked him through — is the 5×5 lease structure.
A 5×5 is a 25-year total commitment, broken into a five-year initial term plus four five-year options to renew. It works on both sides of the table:
- Flexibility: If the location underperforms — a competitor opens next door, the demographics shift, the demand isn’t there — you have an exit at year five instead of being trapped for two and a half decades.
- Security: The renewal options belong to you, not the landlord. That’s the part most first-time buyers miss. The landlord cannot kick you out at the five-year mark just because they got a better offer.
Build a rent escalator into the contract while you’re negotiating the term. A 3% annual increase is below most measures of real inflation, it’s predictable, and it’s something most landlords will accept. The alternative — leaving rent increases unspecified — is what lets a landlord bump rent 10%, 15%, or more between years, and there’s nothing in the contract stopping them.
🔑 Insider Key
The renewal options must belong to the tenant, not the landlord. A 25-year lease where the landlord can opt out every five years is not a 5×5 — it’s a five-year lease with marketing copy on top.
Personal Guarantee: How to Limit Your Exposure
Almost every commercial landlord is going to ask for a personal guarantee. They want it because if your LLC goes bankrupt, they don’t want to be left holding an empty box and zero rent. That’s a reasonable concern. Where it becomes unreasonable is when they ask you to personally guarantee 25 years of payments.
If you can negotiate to zero personal guarantee, take it. Most operators won’t be able to. The middle-ground move is to negotiate a seven-month personal guarantee — sometimes called the “seven-month out.” It works like this:
- You notify the landlord that you’re closing the business.
- From that notice forward, you remain personally on the hook for seven months of rent.
- The landlord uses that window to find a replacement tenant. Once a new tenant signs, your obligation ends.
Seven months is roughly the lower end of how long commercial real estate typically takes to retenant. It’s a number most landlords will accept because it covers their realistic vacancy risk without exposing you to a multi-decade legal mess.
CAM Fees: Aligning Your Interests with the Landlord
CAM stands for Common Area Maintenance. It covers the parking lot, the landscaping, the exterminator, the lights in the shared corridor — anything in the broader property that the landlord is technically maintaining but that you, the tenant, are paying for through a pass-through fee.
The structural problem with uncapped CAM is that the landlord has zero incentive to keep costs down. If the lawn guys want to charge three times the going rate, that’s your problem. If the parking lot needs a $100,000 resurface instead of a reasonable $10,000 fix, that’s your problem too. You’ll write the check either way.
Cap CAM fees in the contract — either as a fixed monthly amount with a 3% annual escalator, or as a percentage of monthly rent. Both options align the landlord’s incentives with yours, because once they’re capped on what they can pass through, they actually start shopping vendors.
🔑 Insider Key
A cap on CAM doesn’t just protect your margins — it changes the landlord’s behavior. Once they can’t pass every dollar through, they start negotiating with their own vendors.
The Stability of Laundromat Real Estate
There are very few existential risks in laundromat ownership. One is the building burning down. Another — and the more common one — is the landlord choosing not to renew your lease. When that happens, the value you’ve built in the business is extremely difficult to retain. The brand is portable, but the customer base is local.
If you can buy the property along with the laundromat, do it. Two reasons:
- Subsidized financing: SBA loans for real estate carry lower interest rates and longer repayment terms than equipment-only loans. The math is significantly better.
- Risk reduction: Owning the property removes the lease-renewal threat entirely. You can operate the laundromat on that property for as long as you want to.
Even when the deal forces you to take on a real estate loan you weren’t expecting, the de-risking effect on the business itself is usually worth it. Laundromat real estate has been historically stable, and the SBA financing structure is built specifically for this kind of acquisition.
Up Next in This Series
This is Part 1 of a four-part series on laundromat valuation, running alongside the printed series in Full Cycle Magazine. Part 2 moves into earnings — what SDE actually means, how brokers and buyers calculate it, and where the multiples come from. Part 3 covers EBITDA and free cash flow. Subscribe on your platform of choice to catch the next episode.
Questions owners ask
What is a laundromat asset sale?
A laundromat asset sale is a transaction where the buyer purchases the physical equipment and intangible assets — equipment, goodwill, trade name, covenant not to compete — rather than the seller’s corporate entity. This allows the buyer to bring the assets into a fresh entity and reset the depreciation schedule, enabling Section 179 elections and other tax benefits the seller has already used up on their own books.
What is a 25-year (5×5) lease structure?
A 5×5 lease structure is a five-year initial term plus four five-year options to renew, for a total of 25 years. The renewal options belong exclusively to the tenant, which means the landlord cannot force you out at five-year intervals while you retain the right to stay. This structure protects the long-term value and salability of the laundromat.
Should you sign a personal guarantee on a laundromat lease?
Most landlords will require some form of personal guarantee. The goal during lease negotiations is to limit your exposure rather than eliminate it. A common structure is a seven-month personal guarantee — you remain personally liable for seven months of rent after notifying the landlord that you’re closing, which gives them time to find a replacement tenant. Avoid signing a full personal guarantee for the entire lease term.
What are laundromat CAM fees?
Laundromat CAM fees (Common Area Maintenance) are property upkeep costs — parking lot repairs, landscaping, exterior lighting, exterminator services — that the landlord passes through to the tenant. Without a cap in the lease, the landlord has no incentive to control these costs. Negotiate either a fixed CAM with a 3% annual escalator or a CAM expressed as a percentage of monthly rent, so the landlord’s interests stay aligned with yours.
Ian Gollahon
CEO & Co-Founder, Wash-Dry-Fold POS®
Ian Gollahon is co-founder of Wash-Dry-Fold POS, a laundromat point-of-sale system built from the operating experience of laundromat owners, and co-owner of Liberty Laundry in Tulsa, Oklahoma. His commentary here draws on more than a decade of operator and customer conversations about laundromat valuation, asset sales and Section 179, equipment depreciation, commercial lease terms and CAM fees.
Full episode transcript
Ian Gollahon 00:08
Hello and welcome to the Laundromat Ownership Podcast. I'm your host Ian Gollahon Me and my business partner Brian Henderson own a chain of laundromats in Tulsa, Oklahoma named Liberty Laundry. In 2025, that small chain of three stores did $2.5 million top line revenue. But we are also the founders of Wash-Dry-Fold POS, which is the original point of sale system for laundromats.
Over the last 10 years in that company, I've talked to over 3000 laundromat owners and I've learned a lot of really interesting stuff. Some of which I'll be able to share with you on the podcast today and some of which I vowed never to speak of again. So this episode is going to be a little bit of a throwback to our first episode, which was on laundromat valuation metrics. And that episode got a lot of interest
The first article is out now on, we've made it into essentially a four part series in the Full Cycle Magazine. Now for those of you that aren't familiar with the laundry industry, Full Cycle is the laundry magazine of the CLA. It used to be called Planet Laundry, but it recently has gone from a monthly magazine called Planet Laundry to a,
essentially a quarterly multimedia brand called Full Cycle. And one of the reasons that this talk was kind of adopted into this, you know, it's going to be essentially an eight page four part series is because it is actually pretty complicated how you value businesses, right? You know, if you know anything about the stock market and how,
There's usually some correlation to earnings with the value of a stock, but we also know that that's not the only thing that values a company, either public or private. There are a lot of pieces of it. And so we're going to talk about how you arrive at a good market valuation for laundromat, whether you're buying it or selling it, or just trying to assess it in your own portfolio. What is it actually worth?
What's funny is if you go to someplace like, let's call it a Facebook group, sometimes see people post, hey, I'm buying my first laundromat. What is it worth? And it's essentially a race to who says, the only thing that matters is just take some multiple of net earnings,
But in a laundromat, your net income is
the amount that you get taxed on. And so there are quite a few incentives to reinvest in the business instead of claiming all of that revenue as net income. And we will go over that in depth, but I just wanted to address the first thing, which is everyone says, it's worth some type of multiple of net income.
If you don't understand the different levels of earnings, you're really not going to even know what number to start with to give a multiple. And so I'm going to just show you here based on the chart real quickly, you know, gross revenue. A lot of times you'll hear people say, you one or two times gross.
SDE is what most brokers actually use, it's seller discretionary income. That's typically when you buy a laundromat what it's based on. EBITDA will get into that, but it is typically a reduction of SDE because you're essentially saying, I'm gonna hire someone to run and manage this laundromat for me. I'm not gonna be the person that runs and manages it.
And then of course, free cash flow, that is really more of a banking metric that banks use. And then net income is what you get taxed on, right? And that's that little circle there. So we're gonna go over all these throughout the life of this series, but I wanted to really kind of pace it along with full cycle because
It's a great place that gives you news and articles and also inspiration about maybe ideas that you could implement in your stores and technologies. There's a lot of you know, when there's a big announcement about either an acquisition or new product or something like that. It typically ends up in full cycle.
I want to kind of walk you through what we're going to focus on today, which is the meaning of the asset sale and then how the assets are actually purchased and either depreciated or expensed on the balance sheet.
And we'll really talk mostly about that. And then we'll also talk a little bit about the lease or the property. Because again, you know, the laundromat could be making $0 in net income or negative amount in net income. But if you're on a $2 million piece of real estate, obviously the real estate is valuable too. And same thing, it could be very profitable. But if you have a terrible lease and there's one year left in it, it's worth zero. There's nothing that you should pay to buy that business. So
I am going to go through this stuff and kind of explain this is really where you start when you're trying to evaluate either your own property or a property that you want to look at purchasing. So again, just a quick review. There's a lot of different types of earnings and we're going to get into that. But first we're going to focus on assets. So anytime you buy a laundromat,
I say anytime, but it's probably 99 % of the times.
What you're buying is considered an asset sale. And people hear that and they think, that just means I'm buying the assets of the laundromat. Not really, no, you're still buying the earnings. The asset sale is how you are buying the earnings.
You want to be able to depreciate every asset at the price of what you purchased it. And if you were to go in and buy the company that owns the laundromat, right? And so that would be like a corporate acquisition. If you know, Liberty Laundry LLC owns Liberty Laundry. And so if you came in and buy Liberty Laundry LLC, which you would also be buying is all the books on Liberty Laundry.
And if you bought those books, you would see that we've already taken all the section 179 elections on all the equipment. And so you now have to pay taxes on all the profit, but you don't get any of the benefit of all the money that was spent on the equipment. So that would be very foolish You want to buy the assets, bring them
into a new business entity, whether it's an LLC, an LLC filing as an S corp or an incorporated, whatever it is, you want to bring in fresh assets so that you can depreciate them at the value that you paid for them.
The first thing that people ask is like, well, how old are the machines? Why would you ask this? Well, if you have machines that are 20 years old or even older and they are breaking all the time, they are really not worth much because you are going to have such a hard time keeping those machines going. They're worth something, sure. But when you hear the zombie mat, a lot of times what they're talking about is the machines are just total junk.
So if we can all agree then that the assets are worth something aside from the business, no matter if the business is generating revenue or if it's negative in the revenue because of some mismanagement or some choice of management.
Machines are worth something, right? A modern laundromat typically has half a million dollars worth of relatively new machines in it. And so those are worth something, right? My advice to you as a buyer or a seller or as just an owner, understand what your washers and dryers are actually worth. Now they're not worth as much as the day that you bought them.
And if they're 20 years old, they're not worth zero dollars. But one year old, they're worth most of what you paid for them. And 20 years old, they're worth nearly nothing or they're worth 10 % of what you paid for them. Think about a one year old car. That's almost the same as a new car as long as it's been well taken care of. If you look at a 20 or 30 year old car, you know that thing is just going to be a money pit, right? So
going to break down all the time, it's going to cause more trouble than it's worth. One of the first things you'll look at is what are the machines worth? And I think you should write it all down, put a value on it, and then keep that value in mind because you're going to at least going to manipulate the earnings based on that. And that is what brokers, buyers, and sellers all do.
It's going to help you keep track of the transaction in your own head. So when we talk about a balance sheet and you might have a buyer ask you for your balance sheet, what they want to see are all the assets in the business.
But if you bought washers and dryers and section 179 elected to expense them out, which means instead of like a 10 year or 15 year straight line or accelerated depreciation, any of that, you're just saying, hey, these washers and dryers, that was a $300,000 expense.
And I want the full tax write off today. Great, that's what section 179 is for. It's the industry standard, it's widely used. But then you wanna maintain the value and the year that they were purchased on your balance sheet so you can see, these washers were $500,000 five years ago and now maybe they're worth 300,000 or something like that, but that won't be on the balance sheet. It would just show the original purchase price and then
probably show minus $500,000 section 179 deduction. And so that will be on the balance sheet to help you understand when the machines were purchased, even though they're technically have already been fully depreciated out of that business. So they're on the balance sheet as a record, but they're not literally worth anything on the balance sheet. But there's some other stuff you might notice on the balance sheet as well. Like you might see a trade name and why would that be on the balance sheet?
But it is worth something if you have a brand like in Tulsa Liberty Laundry is a great brand people go to. If one of our laundromats is closed, they'll go across town to the other laundromat under the same name and they'll pass five or six laundromats on their way because they have loyalty to our brand and our style of managing the business. They know it's safe. They know all the machines are going to work. They know there's kind ladies there to help them and they have the loyalty card from our store as well.
There's things on the balance sheet that you might see that are going to be depreciated. You'll see things like Goodwill or Covenant Not To Compete,
Let's say you get a lawyer involved and the lawyer wants you to break down all these assets that you're buying from the seller and she says, okay, you're gonna pay X amount for Goodwill. You're gonna pay X amount for Covenant not to compete.
You might see the trade name on the balance sheet. There's going to be line items that the lawyer is going to ask you to do and you might be tempted to say, well, I don't need to buy a covenant not to compete. The owners retiring whatever that's really not the point. The point is that you are buying the earnings, but you're buying the earnings through an asset sale.
And so every piece of that earnings has to be associated with an asset. And so the asset that you might be buying might just be goodwill, which is essentially just a bucket of saying, this is the earnings. We're going to put the earnings in the goodwill bucket of saying like, yeah, it's goodwill because I just assume that people will keep on coming to this laundromat. Right. It's kind of a.
You know, an intangible asset that you would be purchasing, but you're not really purchasing it. You're really just allocating that part of the earnings to those intangible assets. So a quick summary on this laundromats are not just a value of their assets, but I do think the assets have value to them and you should calculate that value.
In the case of a bad lease agreement or in the case of, you know, there's certain situations where they might be less than the assets that they have. If the machines are worth $10,000, it would cost you $10,000 to move them. So they might be worth more or less than the assets. But finding the assets, I think that value is the first step to value in the laundromat.
Write down on the page what you think the machines and the assets in the building are worth. When we did this, when we closed on our laundromat, I got too focused on, okay, how much is goodwill? What is the covenant not to compete? What…
What value should we ascribe to each name of each asset? And then we're like, oh, the machines, maybe they're worth 200,000. Okay, so these all seem like arbitrary decisions in the moment when you're buying it because you've already probably agreed on the price. We'll get into how you agree on the price later. But then you break everything out through the asset. So you break out all the earnings, you apply some to machines, you apply some to Goodwill, whatever it is.
That actually makes a difference on your tax returns in the future because if it's machines, can section 179 deduct it and make your net income zero the first year, even if you've made a million dollars in profit, net income still shows zero because all that profit went into equipment. So kind of an edge case that might not happen often, but I'm kind of harkening back to why net income is not the thing that you should be looking at, when you buy or sell a laundromat.
The assets to which you apply the earnings to are important because they are all depreciated at different rates. So you might have a 15 year straight line so it takes that number away from your profit each year. So you pay that much less taxes each year. Or if it's equipment.
You recoup all that the first year with the section 179 election. So what I would do instead of obsessing about the names, I would actually research how fast you can depreciate something. And then you can kind of have an idea of how much do you want in each bucket. And then you can approach it from that perspective. So we haven't even gotten to the earnings yet, the different types of earnings you can get into. We've just gotten into the assets.
We're not actually going to touch on all the earnings today because the second thing that's most important is the leasing or the real estate. Right. And so obviously if you can buy the building in the laundromat, do it right. Because real estate is just one of the most stable, one of the best investments, but most importantly, you get a subsidized loan to buy real estate. So if you get an SBA loan,
they'll give you a loan at a lower interest rate just for the real estate than if you got an SBA loan for the equipment.
It's actually a longer loan that you can repay as well. If you can do it, do it as long as it's not totally unreasonable because that becomes clear because of what we're about to get into, which is the lease. Now an ideal lease, let's just start with, okay, what's a good lease? What's a bad lease? Let's just start with ideal lease when you're going in to buy a laundromat.
Ideally you want a 25 year lease, but it's not just a straight 25 year lease. It's in five arms of five years. My friend Dan Brinderson really helped me understand this. He buys a lot of laundromats in the California market. He owns Express coin laundry. Really nice guy, very knowledgeable. But the reason you would do five sets of five is because let's say you buy it.
You put the equipment in there and It just doesn't produce revenue. There's no demand. Maybe there's some big franchise store next door that you have to compete with that you didn't know was going to be built there. Who knows what it is, but you want to be able to get out in that first five years. You don't want to be stuck there for 25 years.
It is essentially a 25 year lease, but every five years there's an out for you. Now those arms are your option, not the landowners option. So it's not like they can kick you out every five years. That's not what we're talking about here.
So it's a five-year initial lease with your option to extend it four more times for a total of 25 years. That is the ideal lease that you're going after. Now I said that sometimes a laundromat is worth less than the assets in the building. Why would that be? Why would it be worth less than the assets? What if the owner of that building already has plans already has a contract in place?
Have a new business in that building that is the laundromat. If that's the case, then the laundromat owner now, he knows that he's gonna be out in 12 months, right? And the equipment in there is not really worth that much. Maybe the brand, if it's a single store owner, which is typical, maybe the brand really isn't worth much.
I mean, it really is the location in the store. The physical laundromat is where all the value is, right? And so if that's going away, if the physical location is going away, even if the machines in there are worth, let's call it a hundred thousand and there's 12 months left. I would say that is worth zero. And the reason I would apply no value to that is because you go through the whole transaction. You spend all this time.
Typically these transactions take like six months at least right? So it's not like you just buy it today and then you get the cash flow tomorrow. That's not what's good. That is not what is going to happen. So once you go through the whole transaction, then you've got the remainder of that lease to just get some recoup some of your cash and then at the end of it, how are you going to sell those machines? Maybe you can sell them for $20,000 because someone has to come uninstall all of them and then install them in a new location.
And they do break when you do that. So you're not going to, they're not going to be the same condition when they get in that situation, if you have old machines in a location that is not going to be renewed, there is no reason to buy that laundromat. I don't think you're going to arbitrage that deal. What happens in that situation is the owner just gets as much cash out of it as he can. Maybe he sells the machines before.
He's, has to get out of the building and that's how that winds down. There's, there's no way that you go in there and you somehow succeed there. So the lease is very important. So you want to understand to have an understanding and a contract in place with the landlord. So let's get into the caveats of that contract.
So when you look at the new lease that you're signing with the landlord, the first thing we talked about was the term, which we talked about a five year initial term with four options for the laundromat owner to renew another five years each time, which is a 25 year total
In that lease negotiation with the standard term plus the options to renew the landlord will want to have price increases to keep up with even just inflation. That's a very fair and normal thing for them to ask for. Go ahead and negotiate it now. Give them a 3 % price increase every year. That's probably below real inflation, right? And then it gives you some predictability on the location.
The last thing you want to have is no agreement on the price increase and then they bump it up 5%, 10%, 15%. They could bump it up 100 % if there's nothing in the contract against that. And so if you're committing to five years, you want to know what the price is on year two and three and four and five. So negotiating a 3 % annual price increase at the time of the agreement is a good way to go.
Probably the second place that you want to look after that.
Would be in the personal guarantee. And a personal guarantee is very common. Every landowner is gonna ask for it. What a personal guarantee is, to just explain real quick, is they're saying, okay, sure, your LLC, which, you know, let's take Washington's Laundry, So Washington Laundry LLC, you're gonna buy equipment, you're gonna get loans, you're gonna put in machines.
Maybe when the machine's already there, you're just gonna keep them up or replace and repair. But that LLC is going to be operating that building. And if that LLC goes to zero,
you still are responsible for some of the rent on the building because you can't just say like, hey, we're going bankrupt next month, sorry, we'll be out of the building and you'll have zero revenue to the landlord. They're not gonna like that. And they typically won't sign that kind of a deal. They're going to have you personally guarantee some amount on that space so that even if you do something crazy with Washington's Laundry LLC, you're still on the hook.
For the monthly payment of that rent. What they will do by default is just a full personal guarantee. What you should actually do is tell them, hey, if I need out of this, I'll give you a seven month personal guarantee. So once I notify you that we're going out, I'm closing the business, the LLC is going away. Even if that happens,
I'll stay on the hook for the next seven months worth of the rent. Now, obviously, if they take no personal guarantee, that's better for you. If you can go without a personal guarantee, do it every time. It's just a lot of times they won't accept that. And so you don't want a full personal guarantee, especially if you're not able to negotiate those options to renew. What if it's a 25 year lease, just 25 years straight, and then…
You're personally guaranteeing that whole 25 years. That's crazy. You don't want to be in that kind of a legal mess. And so what you want to do is give them a seven month out. And this is not a foreign idea. Imagine that you're renting a house and let's say that you just renew automatically every year in that rental house. But then when you're ready to move out, you have to give the landlord a certain time notice. Let's say it's 90 days. That gives them 90 days to find a new person for the house. Well, commercial real estate is harder.
To find a new tenant and so you need to give them about seven months is usually the typical minimum that they would accept. Let's say you've got a seven month personal guarantee, you know the location is not working. Let's say you're 24 months into it, So obviously you're not gonna take any of your options to extend the lease, but you're two years into it and you're saying, man, this is just a nightmare.
So I'm going to notify my landlord and I'm going to tell him, hey, I'm invoking the seven month personal guarantee clause. I'm going to cover the next seven months through the laundromat, right? You're still personally guaranteed, but I need you to start looking for another tenant now. And if he finds that tenant in month two, you got to get out of there once he has the new tenant in there that that releases you because what it really is a promise that someone will pay that.
Rent. If you're not there as a business, typically they're not going to ask you to pay for it. So what you would essentially do is say, hey, I'm giving you your seven month notice to find a new tenant and that reduces your personal liability on that business because most landlords will want to pierce the veil. They will not care that, you know, your LLC is making a deal with them. They want a personal guarantee on top of that and that's very standard.
Especially in places like California. The next thing, so we talked about the length of the agreement, five year initial period with four options to renew another five years. So 25 total. Then we talked about limiting the personal guarantee to a maximum of seven months. The third gotcha to look out for is called CAM. You always talk about people call it CAM, CAM. And what that is, common area maintenance.
And so maybe you're not the only tenant in that the landlord has to take care of the parking lot, right? That needs to get resurfaced. They got to take care of the shrubs and the bushes and they got to mow. They have to maintain that property and they're going to pass those costs on to you as the tenant.
So the cam fees you want to either negotiate these as a flat rate that maybe has a price increase just like your rent does or you want to negotiate it as just a percentage of the monthly fees. So let's say you're paying $5,000 for the location. Let's say you want the cam to be no more than $500 a month. That's pretty reasonable thing to put in the contract. The lower you can get that the better. Obviously it's going to depend on the region.
The requirements of that building. Maybe you're in a really high traffic area and there actually is a legitimate reason to have a higher cam. That's okay. But what you're wanting to do is putting something in the contract that protects you from the landlord making your cam ridiculous, right? Because if you're paying for the cam, they have no incentive.
To make sure the lawn guys aren't charging them three times as much, to make sure the exterminator isn't charging them three times as much. The parking lot, when that gets resurfaced, that's really expensive. And so if that's gonna be $10,000 versus $100,000, you want them to be aligned with your interests and getting those things done for the lowest price but best quality possible. And so a good way to align those interests is to put a cap
either as just a fixed rate that increases every year or you do it as just a percentage of the lease and the lease is increasing annually anyway.
So just to summarize when we talked about the lease, you want to get at least 25 years for a new lease. The way you want to structure that is an initial term of five years with four extensions of five years each. You want to lower the personal guarantee of the lease as much as you can. If you can get zero personal guarantee, congratulations. Most of us can't. So you want to lower that to maybe a seven month personal guarantee.
Don't personal guarantee the whole 25 years. And then the third the third thing is the cam or the common area maintenance. You want to put some kind of cap or some kind of clause in there that aligns your interest with the landlord so that they're not using the most expensive guys for every single thing and then passing all of that expense on to you.
You want a 3 % annual rate, go ahead and negotiate it now. And then same thing with the cam. Let's say it's a 3 % annual increase, negotiate it now.
There's very few existential risks of owning a laundromat. One of them is that the laundromat burns down. But one of them is that the landlord just doesn't renew your lease. And when that happens, it's very hard to retain the value that you've built in that business. And so if you own that property, even if you have to take out a loan for it, not only will the value of that real estate likely increase historically, we can go back and say, yeah, real estate is a pretty good investment. But also it
it substantially de-risks your business. I would say more than anything else. You just buy the property and then you can own a laundromat on that property for as long as you want to. I will have a link to this and we'll do three more episodes about this. But next time we are going to start getting into the earnings multiples.
And really trying to figure out besides the assets, besides the lease, the earnings and what does that add to the value of the business, whether you're buying it, owning it or selling it. Thanks so much for joining me today and I'll see you next time.