Buying a tunnel, opinions wanted!

[nyyankees3511]

Paper work is being produced as we speak on a deal for a 100' tunnel that im about to buy. I have been in the business for a long time and im very hands on. The tunnel is located on a busy road, about 28000 cars per day. And the tunnel has been there since the 70s. The tunnel needs to be ripped out and replaced. And the building needs some updating. His average yearly car avg is 30 to 35k cars which is decent for a run down tunnel. After months of negotiation im down to 900k. Land in my area is expensive and at the town the assessment is around 650k. My total expected cost would be about 1.6 million. Any insight is welcome! thank you.

 

[robert roman]

A decision that increases throughput, increases productivity or decreases operating expenses will generally be a good decision for the business.

Acquisition cost is $900,000. Decision is proposed improvements of $700,000, mostly for new tunnel equipment.

What you don’t want is this improvement to become supplier’s best friend and accountant’s worse nightmare.

For example, it may be possible to increase throughput (price minus COG) simply by reformulating wash recipes, re-pricing services and offering more products.

It may also be possible to increase throughput and productivity (throughput / operating expense) though cost controls via the management expertise you bring to the party.

By increasing throughput and decreasing operating expenses, the increase in net profit can be used to fund the improvements.

After all, the tunnel equipment is not functionally obsolete because it can still get the job done (i.e. this is going concern with 30,000 CPY).

To paraphrase Tom Hoffman, Jr. carwash is 20 percent splash and equipment and 80 percent how you treat the customer.

In other words, you can probably obtain a better ROI by first becoming a better carwash than first investing in equipment.

 

[nyyankees3511]

This is something I have thought about! My only concern is beating any new competition to the punch since this will be the only new tunnel in the area. decisions decisions.

 

[robert roman]

I can appreciate threat of entry. However, one attribute of buying a going concern is ability to support debt.

For example, typical FS 30,000 CPY can support capital expense of $120,000. $1.6 million works out to $102,000 based on standard finance. That leaves $18,000 for property taxes.

So, plan is to take going concern with normal profit and fully leverage it no profit.

Another attribute of wash is sustainability, the business and owner.

For example, when I started my consulting gig, I didn’t just springboard onto the scene.

For three years, I prospected consulting work from 9am to 4pm and then drove a limousine from 6pm till 3 or 4am, six days a week.

I’ve done what you are planning to do.

30,000 CPD doesn’t leave a lot of room for error. Squeeze some juice out of the business first and save some money for those rainy days.

 

[rph9168]

I agree with Robert. You need to honestly assess the performance of the wash before investing in all new equipment. Being hands on is really a plus for you. In reality there really has not been a great deal of change in equipment over the last few decades. Sure it looks better and the technical end of it has improved but it is the overall performance that counts. There are several guys on this site that are doing great work with older washes and equipment. Make sure everything is in good running order and make sure you use good chemicals that are being applied properly. Make sure you a getting the best results possible. Sounds like some cosmetic work needs to be done along with a strong marketing strategy. Without being able to see what it looks like or the performance of the wash it is difficult to suggest much more.

 

[nyyankees3511]

I appreciate all the inputs! My only concern is not all the machinery works. For example the top mitter isnt functioning and also one of the dryers. They are relying on the hand wiping process at the end to dry and maybe even get the rest of the dirt off. I know the car wash was washing much more in the past, possibly 70k cars. The current owner isnt the nicest with customers and just simply doesnt care, which is sad. My vision is to keep it a full serve and also have an express lane using 2 cashiers. Thank you all.

 

[Greg Pack]

Hows the roof height? Ive seen some older tunnels that were a little short for a lot of equipment.

 

[nyyankees3511]

I believe the height is 15 but i cant recall. I had one of the installers take a look and he said height is not a problem at all.

 

[Earl Weiss]

I appreciate all the inputs! My only concern is not all the machinery works. For example the top mitter isnt functioning and also one of the dryers. They are relying on the hand wiping process at the end to dry and maybe even get the rest of the dirt off. I know the car wash was washing much more in the past, possibly 70k cars. The current owner isnt the nicest with customers and just simply doesnt care, which is sad. My vision is to keep it a full serve and also have an express lane using 2 cashiers. Thank you all.

With Aluminum or Stainless Equipment a good cleaning will make it look nearly new. Some new cloth New color may be needed. If a mitter is not working, depending on make, model, age, a motor or gearbox can bring it back to life. That said I have had an old Sherman or 2 that needed replacement. Also, with the blower, depending on make, model and age a new motor may solve the problem. If it is a motor and impeller, than new may be the way to go.

 

[Robert2181]

You may want to find someone in wash service end of the business that would be able to give you a honest evaluation of the equipment without trying to just sell you new. I know that there is a lot of washes that still have most of the original equipment. ( 30+ years) and have been updated and maintained.

 

[nyyankees3511]

Thank you all. Looks like I need to do some more homework.

 

[nyyankees3511]

what would you guys assess this at if it does need rehab and minor cosmetic work? Do you think 900 is a little too much?

 

[robert roman]

Perform a sanity test.

Based on 30,000 CPY, I assume this is full-serve. So, test using average $17 per car and typical for low-volume wash, $14 average sales.

Less cost of goods and standard expenses, and not paying yourself, would yield NOI of $151,000 ($17) and $117,000 ($14).

Here, maximum allowable payment (MAP) for acquisition of $900,000 asset would be rounded to $8,400 ($151,000 / 12 months / 1.5 debt service coverage) and $6,500, respectively.

After deducting MAP, EBTD would be $50,000 and $40,000, respectively. So, acquisition cost of $17 scenario is commercially viable, $14 barely.

However, the bottom line is that each scenario is basically an expensive job and includes no capital improvements.

So, $900K might be a feasible price but not considering improvements.

 

[robert roman]

An alternative strategy, if seller won’t budge on price, is to offer to purchase business-only and pay triple net with option to purchase at end of year one or exit.

This will allow you opportunity to determine what the business needs or doesn’t need.

If the seller hedges, this will indicate the smell factor is probably too high.

 

[nyyankees3511]

thank you for all of your information! Ive tried leasing, and theres no way he wants out. He seems pretty miserable and its obvious that he doesnt want to be there.

 

[rph9168]

Would you want to be in his spot? He has a losing wash, probably losing money every month and no one to take it off his hands. This is not something I think you would want to get involved in. The wash probably should not have been built in the first place.

 

[nyyankees3511]

Well the wash was extremely busy years ago. he took it over and ran it down. So I guess there are two ways to look at the situation.

 

[rph9168]

Times change and what would you consider extremely busy. I have seen many successful washes go belly up due to changes in in the area or local circumstances like competition or high unemployment or loss of key businesses.