for those who care to hear more, i've pasted the summary section from my paper on the dry cleaning industry...
Dry cleaners operate a fundamentally sound business model at the unit level that produces stable cash flows (~ $100,000 free cash flow/year) with predictable capital expenditure. The cost structure, consisting mostly of fixed assets with low variable costs, leads many store operators to test the possibility of scaling their business by adding more stores. Indeed, many of the immigrants who make up the dry cleaning industry have experienced a common process when attempting to add multiple stores, finding their efforts stalling out around two or three stores. Some of the very factors that enable their success in starting the business seem to hinder it when trying to scale it. In fact, many of these factors revolve around family and ownership issues.
When starting the business, the way first-generation Americans (FGAs) leverage their ethnic community to raise capital and learn the business greatly enhances their performance. However, it seems that later in the business lifecycle, family and ownership factors tilt the odds away from successfully running multiple stores. These family owned and operated businesses tend to rely on informal management mechanisms, such as leveraging familial capacity (i.e. the number of family members that can help run the store), personally handling customer claims, managing payables (taxes, vendors), and maintaining quality. These methods cost little, conserve cash, and are easily implemented. However, the complexity of running multiple stores eventually strains these control systems. Operators find it increasingly difficult to find enough talented staff, competition erodes prices, and the owner finds himself/herself spread too thin. In addition, family commitments, such as taking the kids to school, amplify the demands on the owner-operator’s time. Consequently, many FGA operators either avoid adding more stores or stall out in their attempts to do so. In comparing operators who have added multiple stores, three variables appear to predict successful scaling: appetite for some degree of formal controls, familial capacity, and access to smart capital.
In other industries, entrepreneurs seeking to scale their operations obtain smart capital from professional investors who can lend management expertise in addition to financing. Immigrant communities have in some ways recreated this market, albeit in a much more informal way, as entrepreneurs raise capital from friends and family within their ethnic community. These friends and family are often in the business (e.g. dry cleaning, gas station, motel) themselves, and will train the new entrepreneur, provide seed capital, and help him/her acquire a store. The quality of mentorship and advice that the entrepreneur receives varies widely and hinges on his/her personal network. In looking to increase the odds of FGA operators successfully scaling their business, this paper also examined a potential model for professional investors to get involved in the dry cleaning business. However, initial analysis did not reveal a viable way to inject traditional “smart money” through value-added investors (e.g. private equity roll up) to overcome these factors. A roll-up model may provide attractive returns on assets and invested capital in theory, but finding a suitable exit would prove difficult. While considerable opportunity exists to enhance performance, traditional investing models will need rethinking. Private equity investors do not typically write million-dollar checks—they simply have too much capital to effectively add value to their portfolio of companies unless they concentrate on the handful of most promising ventures. In contrast, perhaps future analysis should look for community-level investors who can provide value-added capital. As many FGA operators belong to the Baby Boom generation, they will retire en masse in the next 5-10 years, creating a significant purchase opportunity for those investors.
