Valuing a dry cleaning business requires isolating true owner earnings (SDE), evaluating capital needs (equipment, lease), and understanding buyer risk tolerance. Unlike asset-heavy industries, dry cleaning is people and location dependent—quality of owner transition directly impacts valuation. Start with SDE (Seller's Discretionary Earnings). Take last 12 months of financial statements. Begin with net income (profit after all expenses and taxes). Add back: (1) Owner salary (if below market, use market rate for comparable position), (2) Owner benefits (health insurance, vehicle, retirement), (3) Owner personal expenses the business pays (car, meals, travel), (4) One-time or discretionary expenses (owner's CPA, consultant work, excess distributions). Subtract: (5) Capital expenditures needed to maintain equipment (if you've deferred $30K in equipment replacement, subtract it now), (6) Actual debt service if buyer assumes debt (or assume it's refinanced). What's left is SDE—the cash a buyer would extract as owner. Let's work an example. A dry cleaner with $1.2M revenue and $95K net income adds back: owner salary ($85K, market rate), benefits ($12K), personal car expense ($8K), excess distribution ($15K), minus last year's equipment capex ($30K, normal maintenance). SDE = $95K + $85K + $12K + $8K + $15K - $30K = $185K. Wait—that seems low. Recalculate. If net income is already after $85K owner salary, don't double-count. Let me recalculate cleanly: Revenue: $1,200K Direct labor (employees): $280K Cleaning supplies and chemicals: $120K Utilities: $45K Equipment maintenance: $18K Rent: $36K Insurance: $24K Marketing/misc: $30K Owner compensation (salary): $80K Depreciation: $12K Tax provision: $150K = Net Income: $405K Now calculate SDE: Net Income: $405K Add back owner salary: $80K (but is this market or under-market? For a cleaner, market is $70K-90K, so keep it) Add back owner benefits not in salary: $12K (health insurance, 401k match) Add back personal expenses (car, meals the business paid): $5K Add back depreciation (non-cash): $12K Subtract normalized capex (annual equipment maintenance to keep fleet modern): ($20K) SDE = $405K + $80K + $12K + $5K + $12K - $20K = $494K Now apply the multiple. A dry cleaner with modern equipment, 50% commercial accounts (sticky revenue), a 10-year lease, strong retention, and clean environmental compliance trades at 2.5x-2.8x SDE. At 2.6x SDE: Enterprise Value = $494K × 2.6 = $1.284M. If the same business had (a) 3-year lease facing renewal, (b) 80% retail (high churn), (c) aging equipment needing $80K replacement in 18 months, and (d) 2 environmental violations (now cleared), the multiple drops to 1.9x-2.1x. At 2.0x SDE: Enterprise Value = $494K × 2.0 = $988K. The lease/equipment/customer quality issues create $300K+ valuation gap. Key adjustment: capital expenditures. If a buyer takes on the business with aging equipment, they face $80K in capex within 18 months. Savvy buyers will either (a) knock $80K off the purchase price, (b) holdback that amount in escrow, or (c) reduce the multiple from 2.6x to 2.1x (equivalent to a $247K haircut). This is why equipment age is THE single biggest valuation risk for dry cleaners. Lease terms are the second biggest risk. A lease expiring in 18 months with no renewal option is a strategic vulnerability. If buyer is an outsider unfamiliar with your landlord, they'll add 15-25% risk premium (require 0.3x-0.5x multiple discount) to account for potential rent increase, relocation, or failed renegotiation. If buyer is an existing dry cleaner with multiple locations and landlord relationships, they'll discount less because they can renegotiate more credibly. A 10-year lease with expansion options is a major asset—buyers will price it at a premium (add 0.1x-0.2x multiple). Customer mix matters. If 60% of revenue comes from 10-12 commercial accounts with 90%+ retention rates, that revenue is sticky. If 80% of revenue is retail walk-in with 40% annual churn, buyer must plan for replacement sales activity (assume 20-30% customer acquisition cost to replace churn). A buyer will model: 80% retail portfolio decays 40% annually, so I need $150K-200K annual new sales to stay flat. That's 2 full-time sales resources = $80K-100K cost. Deduct this from buyer's ROI assumptions, and multiple drops accordingly. Shift revenue mix from retail to commercial: every 10% shift toward commercial revenue (higher retention, higher margin) can add 0.1x-0.2x multiple. Environmental compliance is binary—clean or not. If you have environmental violations in your record, they must be disclosed and remediated or risk hitting the walk. EPA or state violations create buyer liability risk; even if you've "fixed" the issue, remediation costs or ongoing monitoring might be required, triggering holdbacks. Transition to modern solvents (hydrocarbon or CO2) before sale; this eliminates a risk factor and costs $8K-15K (one-time), but can prevent a 0.3x-0.5x multiple haircut ($150K-250K). Operational efficiency also signals quality. Calculate: revenue per full-time employee (FTE). A $1.2M business with 6 FTE is $200K per FTE (good). A $1.2M business with 10 FTE is $120K per FTE (inefficient). Buyers model post-acquisition synergies: if I consolidate this business into my existing operations, can I trim headcount and improve margin? Lean operations with high per-employee productivity show better quality and lower integration risk. Finally, consider the owner transition. Is the owner willing to stay 6-12 months for transition? Or a full exit day-one? A willing transition where