Laundromat Valuation Metrics: SDE vs EBITDA vs FCF vs Net Income

Understanding laundromat valuation metrics is the difference between knowing what your store is worth and taking someone else’s word for it. SDE, EBITDA, FCF and Net Income all describe the same laundromat, but they are built for different readers, and the gap between the biggest and the smallest of them on a real store can run into hundreds of thousands of dollars.

How Much Is Your Laundromat Actually Worth?

For private and public businesses of all sizes, there is a whole language and tradition around the pricing of productive assets. Laundromats are typically a combination of hard assets and positive cash flow, so many business people, especially those who manage a variety of private or public equities, already have the tools on their toolbelt to arrive at a reasonable market valuation. Let’s explore the most common metrics together and arm ourselves with the best possible understanding of how, when, and why each part of the valuation is used.

The Meaning of “Asset Sale”

An “asset sale” does not imply that only tangible assets are being sold. Almost every sale of a laundromat is bought and sold in what is typically referred to as an “asset sale”. An “asset sale” is not necessarily what you are buying – but it is certainly how you are buying it.

Laundromats are purchased in this way so that the new owner can start a fresh depreciation schedule and possibly take Section 179 expense elections. These GAAP standards and tax treatments dramatically reduce the amount of taxable income for the buyer.

Laundromats are not just valued as the sum of their assets. They can be worth much more than the machinery or (in the case of a bad lease agreement) even much less than the value of the equipment inside the building.

Lease or Real Estate

Most laundromat owners do not own the building in which they operate; they operate on a lease. This can be problematic since washers and dryers cannot easily be moved. Depending on the age and value of the machinery, they may actually be worth less than the substantial cost to have them uninstalled and reinstalled at a different location.

An ideal lease situation would be a 5 year initial term with at least 4 options to extend for an additional 5 years, for a total of 25 years.

Most landlords will require a personal guarantee, but it’s important to “dull the fangs” on this clause with a limit on liability. Landlords are often willing to compromise with a 7-month personal guarantee instead of a full 5-year guarantee. This gives the landlord enough time to find a new tenant without holding the owner personally responsible for years of a losing location.

CAM (Common Area Maintenance) is another issue where fees can get unreasonably high. It is a good idea to put a growth cap on these, which provides an incentive for the landlord to keep costs down.

Gross Revenue (and Weekly Revenue Multiples)

Gross Revenue accounts for every penny that comes into the laundromat. If you have no other information available, you could guess that a laundromat is most commonly worth 50 to 70 weeks worth of gross revenue. Even if this is true for 90% of laundromats, you won’t know if your location is the exception to the rule without more in-depth financial data.

That is also the first place a valuation goes wrong on a store whose books are thin. A weekly multiple is only as trustworthy as the revenue record behind it, so the laundromat reporting that ties self-serve, wash-dry-fold and retail back to one set of daily numbers is doing valuation work long before anyone thinks about selling.

Seller Discretionary Earnings (SDE)

SDE is the main earnings multiple used for transactions under $5M. It treats the owner’s pay and the business’s profit as one single pot of cash.

Seller Discretionary Earnings are the true amount of financial benefit that a small business generates for the seller on an annual basis. The SBA (Small Business Administration) and the IBBA (International Business Brokers Association) both recommend SDE for valuations of transactions under $5M for good reason. Besides being the most widely used valuation metric for a small business the size of most laundromats, it’s a metric designed to help the buyer understand how much value a business actually generates for the owner.

Pitfalls: SDE ignores the “free labor” of owner-operators and doesn’t account for the fact that machines need to be replaced approximately every 15 years.

EBITDA

EBITDA is more often used at the enterprise level for businesses that sell well over $5M and that are professionally managed by salaried employees.

While SDE asks, “How much can I make as an owner?” EBITDA asks, “How much can this business make as a fully managed asset in my portfolio?” EBITDA allocates a salary for management but doesn’t account for owner “perks” like home office deductions (which would be included in the SDE earnings).

Pitfalls: EBITDA doesn’t account for the fact that machines need to be replaced approximately every 15 years (CapEx). It also makes no adjustments for any expenses that are unnecessary for operations like a daily driver for the owner or unnecessary family on the payroll.

Free Cash Flow (FCF)

FCF is primarily used by lenders to evaluate solvency for a potential loan. When owners say FCF, they usually mean Levered Free Cash Flow—the cash generated after paying all monthly bills, including interest on loans. Normalized FCF does actually account for CapEx, but it’s not a great multiple if you’re trying to figure out how much your laundromat adds to your net worth on an annual basis.

Net Income

Net Income is essentially not a valuation metric, but an accounting calculation that tells you how much tax you owe. It is the easiest number to manipulate because owners are incentivized to keep it low.

Let’s look at some rounded numbers from Liberty Laundry in 2024:

• ●Gross Revenue: ≈ $2.3M
• ●SDE: ≈ $1M
• ●EBITDA: ≈ $900K
• ●FCF (Normalized & Levered): ≈ $780K
• ●Annual Amortization and Depreciation: -$130K
• ●Net Income before buying new equipment: $650K
• ●2024 Section 179 Election on new equipment: -$300K
• ●Actual Net Income after buying new equipment: $350K

In case that all looks like gibberish to you, here’s what happened:

1. 01We took in $2.3M in revenue, but only around $1M (SDE) actually went toward increasing our net worth as owners, such as paying down loans on the business, paying our salaries, and distributions.
2. 02EBITDA was $100K less than SDE because it doesn’t include owner’s salaries and we file as an S Corp.
3. 03FCF reduces EBITDA mostly by interest paid on loans, business taxes, and CapEx, but on a normalized basis—assuming we need to buy $1M of new machines every 15 years to keep all 3 stores running well.
4. 04We have an annual $130K amortization of goodwill and other intangibles along with depreciation on buildings.
5. 05We spent $300K on new machines and took a Section 179 Election on that purchase, which drastically reduced our Net Income by the value we spent reinvesting in the business that year.

Using Net Income for 2024 would value the business incredibly low because of that reinvestment. Conversely, using it in a future year might over-value the business by neglecting the story of that massive CapEx spend.

In Summary: Net Income is a number for taxes and accounting. The only thing it can tell you about a laundromat is that all the other numbers (especially SDE) should be much larger.

Questions owners ask

Which valuation metric is used for most laundromat sales?

SDE is the main earnings multiple used for transactions under $5M, which covers most laundromat sales. The SBA and the IBBA both recommend SDE at that size because it shows how much financial benefit the business actually generates for the owner.

What is the difference between SDE and EBITDA for a laundromat?

SDE asks how much an owner can make from the business, and treats the owner’s pay and the profit as one pot of cash. EBITDA asks how much the business can make as a fully managed asset, so it allocates a salary for management and excludes owner perks. EBITDA is more often used for businesses that sell well over $5M.

Why is Net Income a poor way to value a laundromat?

Net Income is an accounting calculation that tells you how much tax you owe, and it is the easiest number to manipulate because owners are incentivized to keep it low. A year with a large Section 179 election on new equipment can push Net Income far below what the business actually produced.

What is a laundromat worth as a multiple of gross revenue?

With no other information available, a laundromat is most commonly worth 50 to 70 weeks worth of gross revenue. Even if that holds for 90% of laundromats, you will not know whether a specific location is the exception without more in-depth financial data.

Does an asset sale mean only the equipment is being sold?

No. An asset sale does not imply that only tangible assets are being sold. It describes how the laundromat is bought rather than what is being bought, and it is structured that way so the new owner can start a fresh depreciation schedule and possibly take Section 179 expense elections.

What lease terms should a laundromat buyer look for?

An ideal lease situation would be a 5 year initial term with at least 4 options to extend for an additional 5 years, for a total of 25 years. Landlords will usually require a personal guarantee, and they are often willing to compromise with a 7-month personal guarantee instead of a full 5-year guarantee.