A PURCHASE PRIMER FOR FIRST-TIME LAUNDRY INVESTORS!

Over the years, I have had occasion to represent purchasers of coin laundries claiming they were defrauded by the misrepresentations of the seller and the seller's broker (who, by engaging in dual representation, frequently turns out to be the buyer's broker also).  In these situations, I find there is a direct relationship between how frivolous a purchaser approaches the concepts of due diligence and investigation, and the likelihood of purchasing a coin laundry with inflated profitability.  I hear expressions such as, "The broker seemed trustworthy," "The seller showed me income records that indicated the business was profitable," "I purchased a coin laundry through this broker before," "I made money at the other location I purchased," "The seller seemed successful since he owned other coin laundries," and "The seller assured me that the projections were carefully prepared."

I suspect many purchasers of coin laundries spend more time reading issues of Consumer Report in selecting a toaster than reviewing income and expense documentation regarding a $400,000 purchase of a coin laundry!  What document review and investigation should you consider in the purchase of a coin laundry?

Purchase agreements frequently represent the average gross monthly income for the coin laundry for the preceding six to twelve months.  Although there is a growing number of purchase agreements which make such representations for the previous twelve months, many  agreements continue to represent gross income only for the preceding six-month period.  Since the coin laundry business is cyclical (higher income in the winter and lower income in the summer), a purchase made in April representing the average income for the previous six months will be representing an inflated figure since the representation will not include the impact of summer income.

Many purchase agreements these days include a provision electing arbitration in the event of any dispute.  It is frequently asserted that arbitration will be quicker and cheaper than litigation in court.  It is true that it may be quicker, but it is not likely to be cheaper since arbitration fees can be substantial.  And most importantly, electing arbitration generally results in a waiver of most of the effective grounds for appeal available to litigants in court.  Given the opportunity, I would routinely strike such a provision from the purchase agreement.

Keep in mind that although the purchase agreement may be entitled  "Standard Purchase Agreement," it has most likely been prepared by an attorney customarily representing sellers or brokers.  Thus, the agreement should be carefully reviewed by a knowledgeable attorney of your choice.  You may rest assured that there will be other provisions which should be stricken or modified in the Agreement.

Purchase agreements will also frequently provide the purchaser with the opportunity to conduct a "coin count" during the period of escrow to "verify" income.  It is a misnomer to refer to a coin count as a "verification" of income since, notwithstanding the customary delivery of the coin box keys to the broker for safekeeping, one never knows if the seller has retained a set of keys for the purpose of "stuffing the ballot box" after closing hours or take advantage of other means to accomplish the same result.

Since there are utility-to-income ratios that exist in the industry, a seller enhancing the content of coin boxes may also elect to exaggerate usage of utilities.  Thus, checking utility meters before the opening and after the close of the coin laundry to detect movement is recommended.

Frequently, brokers representing sellers will include exculpatory provisions in the agreement or escrow instructions asserting that neither the seller or the broker has made any representation, guarantee of value, guarantee of past, present or future gross income, or the condition of the assets of the business.  Depending on the nature of the communications between you and the seller or broker, some modification to this language may be in order.

Many sellers and brokers will provide you with only one year of income and expense records; however, such records only depict a "snapshot" of the business for that year.  Always request three years of income and expense records so that you can determine the income trend.  Are you purchasing a falling knife?  How could you possibly know if you only receive income and expense records for one year?

Always request three years of Schedule C's because such records may be the most accurate record of income.  Most taxpayers don't inflate their income to the Internal Revenue Service.  The seller advises that he has no income records or Schedule C's?  Run, not walk, to your vehicle and drive away as quickly as possible!

Utility statements, income records and Schedule C's should be reviewed by a knowledgeable accountant familiar with the coin laundry industry.  A copy of the lease should also be obtained at the earliest possible time for review by an attorney familiar with leases and industry issues.

Is the coin laundry in a shopping center?  Engage each of the other tenants in conversation.  Ask about their relationship with the landlord.  Happy tenants or unhappy tenants will volunteer information which may prove useful to you in making your decision as to whether you wish to have such an individual or company as your landlord.

Retain the services of a good equipment service company to inspect the equipment and determine what type of repairs might prove necessary in the near term.  Is the equipment so outdated and in need of repair that new equipment must be purchased?  Have you factored the cost of purchasing new equipment in your determination of cash flow?

Spend time in your vehicle driving the neighborhood to be become familiar with the competition.  Are there any vacant lots where a new coin laundry might suddenly spring up?  Have you checked with the city to determine whether any permits have been secured to construct a coin laundry in your neighborhood?

Compare vend prices of the competition with the coin laundry you seek to purchase.  Are incentives being provided by competing coin laundries for business?

The moral of the story?  The purchase of a coin laundry is not a casual enterprise and should be treated with careful thought and investigation with knowledgeable advisors in your corner.

[This column is intended to provide general information only  and
is  not intended to provide specific legal advice; if you have  a
specific  question  regarding the  law,  you  should  contact  an
attorney  of your choice.  Suggestions for topics to be discussed
in this column are welcome.]


Reprinted from The Journal
Myles M. Mattenson © 2013