A PURCHASE PRIMER FOR FIRST-TIME
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
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
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
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
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