Big Business Thinking

I have been in the corporate finance world my entire career, and I find it shocking to realize that means about 20 years.  This is an unusual time, and I believe it is only the fourth inning or so.  Let’s talk about you and your store.

I am not an investment advisor.  Consider these ideas me talking to myself about what I might hypothetically do today if I were you.  Act on your own initiative and with your own broker’s advice.

First, move all cash in excess of $100,000 out of your local bank and/or into other accounts.  There are also different types of accounts you can experiment with, but I’m not versed enough to guide you on it.  However, I would not have non-FDIC insured cash in an institution that is not a bedrock and only have insured-level accounts, if possible.  For example, for myself, that is not possible, so I’m at JP Morgan, Bank of America, Oppenheimer, Schwab and the like.  I am not recommending them, by the way, but they’re better than your local bank.  In fact, I was planning on shifting out of all but one of those names just a few weeks ago, due to customer service and fee issues, but now I’m not as sure.

Second, take a hard look at the integrity of your money market accounts.  Making 2.5% with a 10% risk of losing 300 basis points versus an insured CD at your biggest regional bank is an easy choice right now.   As a side note, if you have any outstanding ARS try like the devil to have your bank redeem them at par right now.  Most of the majors should have done that for you already, but I’d double check.

Third, here’s what the papers haven’t spent enough time on yet: Your local bank is teetering on failure.  We’re not done.  Keep as much dry powder as possible.  It’s impossible to time the bottom with perfect intent, but it’s not impossible to time it well.  In my opinion, we’re not there yet.  Is WM a raging buy or a doomed Federal takeover?  Is this an all-time low for GS or is it going to show losses for the next 3 years?

Let’s move on to your business.  Do you have much exposure to credit swaps, the derivative markets or commercial real estate?  Me neither (sadly, on that last one, but I’m still trying).

And as to your business, that’s the point.  This credit crisis is a top-level one and will not impact your business today or tomorrow.  Your customers are largely immune from experiencing problems from this issue as they do not have, as a generality, any exposure to Wall Street.

Now, as for next month, it very well may impact your customers, when they lose their job, move out of your trade area, etc.  But if they buy less clothes, buy less washing machines, take longer to move out of a rental unit, and the like, then your business should do well.  This is a main reason why we call the coin laundry industry recession-resistant: a recession (nor a Wall Street meltdown) does not end the need to keep a family in clean clothing, but it does mean that it gets harder for many families to do so without using the services of a coin laundry. 

This leads me to where this week’s events are going to destroy value for you.  Your business just went down in present value.  This does not mean that it won’t go up again, or that if you don’t need or want to sell it you should even worry about it, but your laundry is now worth less than it was last week.

In the most recent time of economic crisis, I had the good fortune to lead a fantastic team in selling the most laundries to the most buyers in the shortest time ever previously accomplished.  This was because the falling market led investors to look for a new place to put money to work, and laundries, correctly, sounded like a great idea.

They still are.  So what’s changed?  Why my blanket statement about your value erosion?  Credit.

Just like the housing market — which really should be called the CMOs market — and the commercial real estate market, the laundry resale market of the past five years has been based on the ease of credit by buyers to borrow, and, in turn, by their lenders to lend to those buyers.  Now, that spigot is completely off.  HELOC’s are dead.  Local banks are fleeing small business cash flow loans.  Your buyer’s 401(k), assuming he still has one, is down significantly.  SBA might work, but it’s not an easy road and only a few stores and owners will qualify.

Who’s going to be able to buy your store?  Your store’s value is not a factor of its equipment, lease or net income; it’s a combination of those that results in a qualified buyer having the interest and ability to close on a transaction.  I predict seller financing is about to become de rigueur.

Lastly, the manufacturers are in serious trouble in being able to provide ongoing financing with their lending sources in trouble.  Their ability to source capital in the next few months will have a large impact on the health of the resale industry.

These are my thoughts of the day, written without editing but with much thought.  I wish you good luck the next few days.