Valuation Guide: Dry Cleaners

|||Valuation Guide: Dry Cleaners

Valuation Guide: Dry Cleaners

 

Description of the Industry

The dry cleaners industry (SIC 7211, 7212, and NAICS 812320) provides full service laundering and dry cleaning for consumers and commercial clients.

The growth of a dry cleaning business depends on consumer spending, operating efficiency, and favorable locations.  The dry cleaning industry is highly fragmented, with the 50 largest firms accounting for less than 10% of revenue.[1]  The dry cleaning industry is in the mature phase of its industry life cycle, and are not currently experiencing high levels of growth in revenue or profits.  An exception is with facilities located in areas with high population growth and increasing levels of income.

There are several small regional franchises and chains within the industry.  Some of the top dry cleaning franchises include the following:[2]

  1. TexCare
  2. Dryclean Depot
  3. Tide Dry Cleaners
  4. CD One Price Cleaners
  5. Bizzie.com

Industry Trends

While currently not faced with obsolescence, dry cleaning businesses are faced with several challenges which include but are not limited to the following:

  1. Dry cleaning businesses are highly susceptible to economic fluctuations, as cleaning services are generally deemed luxury expenditures.
  2. Technology has brought in new concepts to the dry cleaning industry.  On-demand dry cleaning services emerged in major cities, like New York, San Francisco, and Chicago.  Such services typically fulfill customers’ orders through mobile apps. Customers are able to schedule pick-up and delivery according to their schedule.  This new trend allows small business operators to reduce the costs and reach out to more customers.
  3. Regulations from environmental authorities could be a potential threat to dry cleaners.  Environmental Protection Agency (EPA) has proposed to block certain uses of toxic chemicals, which are not mandatory under the current regulation.  The process to roll out the new law will likely to take years, however, states can still restrict the usage of chemicals absent EPA’s regulation.

Key Performance Metrics

The following are performance metrics that dry cleaners use to benchmark their performance to other in the industry:

  1. Repeat Customers
  2. Total business customers
  3. Customer Acquisition Cost
  4. Customer Lifetime Value
  5. Operating Profit Margin
  6. Net Sales

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when  valuing dry cleaning businesses.

  1. Asset-based valuation:  This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost-based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets.
  2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have an established record of operations.  The business value under this method is equal to the cash flow projection for the next year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. 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.  This method works generally works well for both established companies with low growth rates as well as new companies with higher rates of growth, and requires forecasting future cash flows.
  4. 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.  The financial metrics of public companies or those of private transactions, such as P/E, P/S, and EV/EBITDA, can be used to generate valuation multiples that are then used to calculate business value.

Financial Benchmark Statistics

The following benchmarking data is based on studies of U.S. dry cleaning businesses:[3]

 

2016

2015

2014

2013

2012

Operating Profit %

5.4

8.8

8.3

8.0

7.0

Sales/Fixed assets

4.7

5.4

4.8

5.1

6.0

Current ratio

0.9

1.2

1.0

0.9

1.3

% Officers’ Compensation/Sales

5.2

4.9

4.2

5.7

4.7

Before using for a specific valuation, appropriateness of the benchmark data should be evaluated.

Industry Organizations and Publications

  1. American Dry Cleaner
  2. Dry Cleaning and Laundry Institute International

Availability of Private 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.  Fulcrum identified 107 purchases of dry cleaning businesses in the U.S. from 2012 to 2016.  The size of these transactions varies greatly, both in terms of annual sales and price multiples paid.  The multiple of:[4]

  1. Market value of invested capital to (MVIC) to Net Sales multiples ranged from 0.11 to 1.77, with a median of 0.62.
  2. MVIC to earnings before interest, taxes and depreciation (EBITDA) multiples ranged from 0.38 to 754.72, with a median of 2.79.

The 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.  Varying industry economic conditions also affect the prospects of dry cleaning businesses as investment opportunities.  Additionally, specific factors that are unique for each dry cleaning business should be considered.  Some of these factors include:

  1. The duration of the lease
  2. The proximity to highly populated areas
  3. The median household incomes within the proximity
  4. The condition of the equipment
  5. The competitive environment of the local area

Fulcrum Inquiry performs business appraisals for dry cleaning establishments as well as other businesses.

[1] Dun & Bradstreet, Hoovers

[2] Franchise Rankings, Best Top 10 Laundry & Dry Cleaning Franchises.

[3] Risk Management Association, Annual eStatement Studies.

[4] Pratt’s Stats

 

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