M&As – Urge to Merge Still Strong, Despite Rising Costs

Consolidation in the linen, uniform and facility services industry continues to churn in the post-COVID-19 era, as it did before. What’s changed since the late ’20-teens is the fact that inflation and rising interest costs have complicated these transactions for prospective buyers. For a closer look at the impact of these trends, we recently interviewed Jim Gutheim, president of James Gutheim and Associates Inc., Encino, CA, a leading broker for commercial laundries looking either to buy or sell laundry businesses. Excerpts follow.

What’s behind the recent surge in laundry M&A activity?

There are numerous factors. One of the main ones is that most of the active buyers in the industry are public companies. Continued growth is a priority for public companies. But due to consolidation, there are fewer independent laundries to buy. Therefore, the value of these target companies has increased. In addition to the chains, many of the larger independent laundries are also feeling the need to grow and are purchasing smaller independents.

Why are independent laundries getting a premium on their “high multiples”(of weekly sales) at this time?

A lot of it basically comes down to supply and demand. As the supply of independent laundries goes down, their value increases. That’s not to say this is the only reason for the high multiples right now. There’s also the elimination of competitors, extended or increasing market penetration and increasing production capacity.

Is there any reason to think that trend of high multiples will moderate in 2024?

It’s difficult to predict the market, since there are many moving parts that potential buyers consider in determining the value of a company. However, based on recent conversations we’ve had with buyers, we expect multiples to stay high through the rest of the year. A word of caution though; the multiples for the industry as a whole are likely to stay high in the near term. But that doesn’t necessarily mean that each individual seller can expect to receive an increased bid for their company, or any bids at all. Industry consolidation has led to a decrease in the number of potential buyers, and as their size and market share has increased, it’s allowed them to become more selective about what potential deals they wish to pursue. To simplify, there are less bids coming in, but when they do, they are usually on the high side.

What impact are higher interest rates having on M&A activity?

Rising interest rates have disproportionately impacted our industry, mainly affecting smaller independent laundries rather than larger chains. The latter possess ample resources, rendering the rate increase less significant for them. When chains consider acquiring smaller laundries, a $10-$15 million purchase price is relatively inconsequential, resulting in minimal effects from rising interest rates. In contrast, smaller independent laundries, with fewer resources, experience a more pronounced impact when looking to acquire other companies. This isn’t deterring them from pursuing acquisitions; however, they are becoming more selective in their resource allocation.

If the economy should weaken in coming months, how will that impact M&As?

In a weakened economy, business valuations often decline. Potential buyers may be more cautious and offer lower prices, reflecting the increased risks and uncertainties associated with economic downturns. This can result in laundries receiving lower multiples, which is exactly why we always tell our clients that the best time to sell is when their business is thriving, not when things aren’t going well. For many owners it seems counterintuitive, but sellers get the highest multiples when business is good.

Laundry operators thinking about selling always want to know “What’s my business worth?” What’s involved in answering that question?

This is a question that we receive constantly, which is why we’ve written entire articles about it. To put it succinctly, I don’t know. Nobody does until a laundry is put up for sale because no two deals are the same. Now, I could tell you approximately what a laundry is worth (we do valuations for laundries all the time) but in order to do that I would need to look at a wide variety of factors and data points, way more than just their weekly revenue. Just some of the factors that determine a laundry’s value are EBITDA (earnings before interest, taxes, depreciation and amortization), location, product mix, pricing, profitability, wages, quality of customers, accounts receivable, competition, S-corp or C-corp, real estate, contracts, underwash, etc. It’s simplistic to think that a laundry’s value is simply based on their weekly revenue.

Readers seeking more information on the M&A market for commercial laundries may contact Gutheim at 818.784.7189 or jim@gutheim.com.