How do you value your carwash?

[robert roman]

I’m trying to learn more about how carwash owners view the intrinsic value in their properties.

Please provide me with your viewpoint if you would like to respond.

An indication of market value for going concern business is normally arrived at using cost, income and market methods. Cost is straightforward math. Income approach relies on sales comparables (market).

However, without relevant sales comparables (soft market), income multiple or capitalization are used to value. The term “income” can mean gross sales (revenue), gross profit (gross sales less COGS) and EBITDA or NOI.

Experts who provide opinion of value suggest valuing 100% of a company and “business-only” for full-serve and flex-serve by applying a multiple against EBITDA whereas a multiple of gross sales (GIM) is used for express and self-serve.

However, commercial valuation software arrives at a value for business-only using adjusted cash flow (ACF).

If profit, depreciation and debt are held constant, results of valuation software shows different multiple values are used to value different business types. For example, ACF multiple for dry cleaners is 1.0, fast food is 2.0 and gas station is 2.8.

So, do you agree with the experts that different income terms and different multiple values should be used to value different types of washes? Why or why not?

As an alternative, do you believe a “gross profit” multiplier would be a more unbiased estimator of market value for a going concern? Why or why not?

Here, gross profit equals gross sales less cost of goods. Cost of goods is sum of credit card fees, chemical, utilities and labor (hourly wages, management salaries and payroll expense).

The reasoning for using GPM instead of EBITDA or GIM approaches is variability of COG, significance of labor and fact managers can exercise most control of over labor.

If GPM is unbiased, then value for 100% of the company would be GPM plus fair market value of real estate plus assets (building, FF&E) less depreciation.

 

[JGinther]

I guess I value my car washes higher than everyone else does. Thats why I still own them! In our area many washes are listed for sale, but not a single one on market is posted with cap rates, or has anything to do with revenue. Everyone claims under 'cost to build' - like that means something... IMHO, ANY car wash is an investment (almost always a bad one!). Since they are investments, you should be maximizing your net income. And since investments sell based on relative performance, a car wash should be based on a cap rate after all expenses associated with the business have been taken out (ebidta). There has been a couple of self serve washes that sold here within the last year based off of income. One was at 11% cap and the other at 13% cap. There has been no full, or flex sales in the state. The only express locations sold have been from the forclosure market with no books.

 

[Washmee]

Robert, I would love to be able to answer your question but your use of all those acronyms and my lack of knowledge of how a bankers mind works makes it impossible.

 

[Waxman]

I would add the value of land and buildings and factor in an income figure and then also use a multiplier for potential growth.

We have 3 sources of revenue, so carwash, detail and used car sales would all be included in the income aspect of sales price.

 

[Earl Weiss]

.. IMHO, ANY car wash is an investment (almost always a bad one!). Since they are investments, you should be maximizing your net income. And since investments sell based on relative performance, a car wash should be based on a cap rate after all expenses associated with the business have been taken out (ebidta). /QUOTE]

IMNSHO a Car Wash is not an investemnt unless you are the Landlord holding a triple net lease. In orderf r the Car Wash to produce Income I have to work for it.

My investments work for me.

 

[Emerald in NJ]

I guess I value my car washes higher than everyone else does. Thats why I still own them! In our area many washes are listed for sale, but not a single one on market is posted with cap rates, or has anything to do with revenue. Everyone claims under 'cost to build' - like that means something... IMHO, ANY car wash is an investment (almost always a bad one!). Since they are investments, you should be maximizing your net income. And since investments sell based on relative performance, a car wash should be based on a cap rate after all expenses associated with the business have been taken out (ebidta). There has been a couple of self serve washes that sold here within the last year based off of income. One was at 11% cap and the other at 13% cap. There has been no full, or flex sales in the state. The only express locations sold have been from the forclosure market with no books.

I have 1 question regarding this method. If you value the business with a cap rate of say 11-13%, are you using the resulting value just for the business and then adding in a fair market appraisal for the real estate? Or do you build the carry cost of the real estate into the expense portion of your formula? I ask because in markets where the real estate prices are high, I think it would result in lower cap rates if the carry cost is built in.
I agree with you that any business needs to be valued on it's rate of return of invested capital.

 

[JGinther]

.. IMHO, ANY car wash is an investment (almost always a bad one!). Since they are investments, you should be maximizing your net income. And since investments sell based on relative performance, a car wash should be based on a cap rate after all expenses associated with the business have been taken out (ebidta). /QUOTE]

IMNSHO a Car Wash is not an investemnt unless you are the Landlord holding a triple net lease. In orderf r the Car Wash to produce Income I have to work for it.

My investments work for me.

So, when you got your second location, you bought it because you wanted to work more? You didnt buy it to make more money? If so, then thats all i mean by investment. Doesnt really matter who does whatever aspect of the work, the result is just lower or higher incomes... which results in lower or higher valuation accordingly... If what you are saying is true, it would never make sense to have a second location, it would only make sense to work more at the first location. Someone or something is doing part of the work, and someone invested in those people or that equipment.

 

[JGinther]

I have 1 question regarding this method. If you value the business with a cap rate of say 11-13%, are you using the resulting value just for the business and then adding in a fair market appraisal for the real estate? Or do you build the carry cost of the real estate into the expense portion of your formula? I ask because in markets where the real estate prices are high, I think it would result in lower cap rates if the carry cost is built in.

I think the carry cost of the real estate needs to be built in... after all, what good is a car wash building when its not being used aa a car wash? Its a special use building, and there is tremendous refit costs to change a car wash to something else.... as far as expensive real estate areas go, i think the cap rate would be lower. Im not suggesting the same cap rate in all areas by any means. I was only giving a couple of sales examples that happened. From what ive seen, markets with expensive real estate always seem to have lower cap rates- its just supply and demand...

 

[Earl Weiss]

I agree with you that any business needs to be valued on it's rate of return of invested capital.

Does that rate somehow value your own labor that needs to be expended?

 

[Earl Weiss]

So, when you got your second location, you bought it because you wanted to work more? You didnt buy it to make more money? If so, then thats all i mean by investment. Doesnt really matter who does whatever aspect of the work, the result is just lower or higher incomes... which results in lower or higher valuation accordingly... QUOTE]

I submit there is a diference between buying and selling. When buyng it's easy to see what the labor cost is although a snake in the grass is whether Seller's expenses include their own Salary or one for a manager that you will need to hire as addittional labor if the Seller is their own manager.

In my case ROI on existing operations meant little since I was buying badly beaten dowm locations and I had to had a factor for potential albeit a small one.

 

[Washmee]

Having spent some time now researching all of Roberts acronyms, I'm not sure any of the methods would be able to accurately determine a selling price for my wash. I make a very nice income but I don't know a way to factor in the amount of time I actually spend on the day to day operations. When I bought it 28 years ago it was very run down. After a lot of hard work I am now able to spend more time away than I used to. At this point I only manage my key employees. My retirement plan is to sell to those key employees(husband/wife) and to act as the bank for a period of time. I guess using a CAP rate would be the closest way.

 

[cellardale@aol.com]

Pretty much all of the car wash sales in my state are based on a "cap rate". Usually 8 to 11%. Improvements, new motors, etc are nice but do not come into play on the final sale price.....

 

[Emerald in NJ]

Does that rate somehow value your own labor that needs to be expended?

Yes. If I work less and therefore have to pay a manager then my rate of return would be lower because of the added labor expense.

 

[Earl Weiss]

Yes. If I work less and therefore have to pay a manager then my rate of return would be lower because of the added labor expense.

Still confused. Are you saying your labor is worthless so it does not affect the rate of eturn?

The point I am trying to make is ROI on a passive investment is far different than ROI where you have to put in your own energy, sweat and blood.

 

[Emerald in NJ]

Still confused. Are you saying your labor is worthless so it does not affect the rate of eturn?

The point I am trying to make is ROI on a passive investment is far different than ROI where you have to put in your own energy, sweat and blood.

Earl,
I am in agreement with you. You have to put a value on your own labor. When you asked me, "Does that rate somehow value your own labor that needs to be expended?" I said yes.
I figure return on investment= income/investment. So if a hypothetical car wash makes 100k per year divided by 1 million investment then the cap rate would be 10% assuming the owner was the manager/operator.
If the same owner goes and pays a manager 50k per year and doesn't actively run the business then the profit drops from 100k to 50k so ROI= 50k/1million=5% cap rate. The rate of return as a passive investor in this case would be half of the rate of return of the active investor.