Principles of Valuation Theory : Coin Operated Laundromats

Abstract

Valuation is the process of assigning a monetary amount to an asset, or group of assets, that provides future benefits to the owner. The purpose of this paper is to rigorously describe that process for laundromats. Assigning a value to a business is an art that is based on extensive theory. The process relies on available data and the underlying characteristics of the business itself. Because of variability in available resources, there are a few different methods to valuation that are commonly used in business. Each method offers a balance between data requirements and theoretical legitimacy. In this paper, laundromats are valued using discounted cash-flow methodology, which is a three-fold process. The first component involves forecasting cash flows five years forwards by making assumptions about the growth that the business will experience and changes in its surrounding business environment. The second component involves estimating a terminal growth rate, which is an assumption based on the average growth that a business will experience in the long-run. The third component involves assigning the correct cost of capital, or discount rate. This rate captures the risk to which the business is exposed, or in other words the uncertainty in future cash flows. Discounting the future cash flows at the appropriate cost of capital using the present value equation will give a close approximation to the value of the business. In practice, the quality of valuation relies on making assumptions that are close to future reality. Good assumptions rely on a good understanding of the business. This means understanding the revenue structure, the cost structure, normal operations, the market they operate in, the competitive landscape, and need for investments. This paper is structured to provide the necessary theoretical backing for the valuation methods used and then the necessary business knowledge to make intelligent assumptions about the future development of a laundromat. There are eight case studies at the end of the paper which explain different situations that a laundromat may encounter and the techniques to properly treat those situations in the frame work of discounted cash flow valuation. The results of these case studies are explained in the context of multiples - the business value of a laundromat divided by some metric, such as cash flow or net income. The main result is the average valuation multiple for a laundromat is 3.2x net income and is contained within a standard deviation of 0.66.