Valuation Guide: Dry Cleaners
May 16th, 2011
Summary of Valuation Approaches
There are four different types of valuation methods that can be used to value dry cleaning businesses, these methods are:
- Asset-based valuation
The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity. This is approach also sometimes referred to as a cost based approach where the value of the business is equal to the cost of acquiring its assets with the same utility.
- Income approach to value (capitalization of earnings)
This method is most the accurate for dry cleaning businesses, which usually have a constant growth of earnings. This method is equal to the cash flow projection for one year divided by the capitalization rate.
- Income approach to value (discounted cash flow)
The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business.
- Market approach to value
This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held dry cleaning businesses.
Description of the Industry
Dry cleaning is the process of cleaning clothes or other textiles using a solvent other than water such as percholoroethylene also known as perc. Dry cleaning is necessary for items that would otherwise be damaged by the process of cleaning with soap and water. Many dry cleaning businesses also offer traditional laundry services as well as folding, pressing and tailoring. The dry cleaning industry is highly fragmented; the 50 largest firms only make up about 40% of the industry’s business. There are several small regional franchises and chains within the industry. The largest national franchiser of dry cleaning businesses is Martinizing Dry Cleaning with 175 franchisees and 600 stores in the U.S. This industry falls into SIC codes 7211, 7212, 7216 and NAICS code of 812320. According to Dry Cleaning & Laundry Institute International (“DLI”) the industry has approximately 30,000 facilities in the U.S. with combined sales of approximately $20 billion. DLI also reports that the median annual sales for commercial drycleaner businesses are less than $250,000.
The dry cleaning industry is in the mature phase of its industry life cycle. Generally dry cleaning businesses are not currently experiencing high levels of growth in revenue or profits. The only exception to this is with facilities located in areas that are experiencing large amounts of population growth coupled with increasing levels of income.
While currently not faced with obsolescence, dry cleaning businesses are faced with several challenges which include but are not limited to:
- Dry cleaning businesses have been negatively impacted by the current U.S. recession. A large percentage of dry cleaning clientele are those that require the cleaning of work and professional attire. Increasing unemployment and job cuts in the U.S. have reduced the customer base of neighborhood dry cleaning businesses. In addition, in an effort to save money during a recession people forgo the non dry cleaning services that these businesses typically offer such as laundry and pressing services, opting to perform these tasks themselves.
- Several years ago Perc was classified as a hazardous air pollutant by the Environmental Protection Agency. Currently dry cleaners are required to dispose of used perc solvent as hazardous waste and conform to EPA requirements. In some states such as California, Perc will become illegal by 2023. The toxic nature of perc makes the threat of additional government environmental regulation very real and highly likely in the near future. Dry cleaning businesses will likely be forced to absorb the cost of adopting new technology to perform their basic services.
- New fabrics are continued to be developed that do not require dry cleaning or pressing. Many of these fabrics are currently being adopted by clothing manufacturers in business professional attire as well as business uniforms. These new products threaten to reduce the demand for dry cleaning services.
- Home dry cleaning kits have been available for quite some time. It is generally understood that these products do not perform as well as traditional dry cleaning services. However, there is always the possibility that these home dry cleaning options will become more viable in the future.
Some positive trends that the dry cleaning industry enjoys include:
- The move toward business casual has been reversing over the last few years. More businesses have been returning to business professional attire. The dry cleaning industry have benefitted from this move due in their dry cleaning business as well as their other services.
- Many dry cleaners are staying competitive by offering additional services such as free pickup and delivery.
Financial Benchmark Statistics
The following benchmarking data is based on studies from approximately 150 dry cleaning businesses ranging from $50,000 to 50,000,000 in annual sales and represents median performance.
Industry Organizations and Publications
- American Dry Cleaner
- Dry Cleaning and Laundry Institute International
Availability of Purchase Transactions
Since there are no publicly traded dry cleaning companies in the U.S., a valuation professional would need to place reliance on acquisition data for privately held dry cleaning businesses when performing their appraisal. One database that tracks dry cleaning acquisitions records 65 purchases dry cleaning businesses in the U.S. since 2002. The size of these acquired companies range from $46,000 to $29,900,000 in annual sales. From 2002 to the present, the multiple of:
- Market value of invested capital to Net Sales (MVIC/Sales)valuation multiples ranged from 0.2 to 2.1 times
- MVIC to earnings before interest, taxes and depreciation (MVIC/EBITDA) valuation multiples ranged from 1.3 to 12.7 times.
This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect dry cleaning businesses as investment opportunities. Specific factors that are unique for each dry cleaning business must be considered. Some of these factors include:
- The duration of the lease and landlord/tenant relations
- The proximity of the facility to highly populated areas
- The median household incomes of the neighborhoods within close proximity to the facility
- The condition of the equipment
- This history of the operation
- The competitive environment of the local area