Noobie looking for advice on buying an existing car wash

[Louey]

Hello. I am new here and am looking at the possibility of getting into the car wash business. I like self service and express washes due to low amount of labor needed to operate.

I have looked at two washes in my area. Both brokers tell the same story regarding the financials. It's mostly cash, not everything is reported, yada yada. While I expect that a lot of car wash operators don't report every dollar, I would still expect to get a decent financial report that shows enough information to reasonably estimate what sales and cost would be. So far, neither of the brokers I have spoken to have provided any documentation. One says the owner's CPA is working on it, the other says no documents will be provided. He says that a person with experience in the industry will be able to see the value of the business. One brokers says that about half of all car wash sales go down in this fashion. I have also read somewhere on line that sometimes the best deals go down like this and that you have to be ready to jump on a good deal when one is available.

This is a little frustrating. I am learning about the business as fast as I can. Any advice would be appreciated.

 

[Louey]

Oh, and another thing. One of the brokers says that self service washes (5 self serve 1 automatic) are going out of style and he highly suggests that I go with an express wash. Of course, he is representing an express wash. Any truth to this?

 

[tdlconceptsllc]

Any Decent operator trying to sell his wash could come up with a financial statement at any time. My friend I would stay away unless a bank foreclosed wash in a kick ass location and no competition for 15miles just saying others on here would agree with me I am sure. I know Personally if I was about to sell my wash I would keep up with every quarter for at least 3 years to make it look good on paper just saying keep your guard up. Might Shady sounds like. Go to both washes every friday and saturday for a month and Observe write down the car count. How much Competion is around you and whats the Town Population Count? Everything Matters.Are you Lazy? Do you like working 24/7 on call for emergencies. Are you going to hire a attendant are you mechanically inclined all this matters just a 1/4 of what you need to survive. Friend to Friend advice.

 

[MEP001]

From what I've gathered on this forum, the way the economy is right now you'd be crazy to buy a car wash in Florida for more than the value of the land.

 

[Jim L.]

MEP

Just like Texas, Florida has areas where car washes do well and some not so much. Be careful of making blanket statements about someone else’s state for you may end up with a dose of “foot in mouth disease”.

 

[Louey]

Any Decent operator trying to sell his wash could come up with a financial statement at any time. My friend I would stay away unless a bank foreclosed wash in a kick ass location and no competition for 15miles just saying others on here would agree with me I am sure. I know Personally if I was about to sell my wash I would keep up with every quarter for at least 3 years to make it look good on paper just saying keep your guard up. Might Shady sounds like. Go to both washes every friday and saturday for a month and Observe write down the car count. How much Competion is around you and whats the Town Population Count? Everything Matters.Are you Lazy? Do you like working 24/7 on call for emergencies. Are you going to hire a attendant are you mechanically inclined all this matters just a 1/4 of what you need to survive. Friend to Friend advice.

I have been going to both washes on a regular basis and noting how busy they are. They are both on a busy street (65K cars per day). They are in Fort Myers, Florida. I am an electrician by trade, but I will still hire an attendant to help out.

 

[Louey]

From what I've gathered on this forum, the way the economy is right now you'd be crazy to buy a car wash in Florida for more than the value of the land.

Did people in Florida stop washing their cars?

 

[Louey]

MEP

Just like Texas, Florida has areas where car washes do well and some not so much. Be careful of making blanket statements about someone else’s state for you may end up with a dose of “foot in mouth disease”.

What areas in Florida are known to do well?

 

[Earl Weiss]

"Proper" financials may or may not help. Person may not be reporting all revenue or they may funnel revenue from another business to boost the value.

A 15 mile no comp radius may be reasoneable in less developed areas, but in heavily populated areas thats an unreaseonable distance.

So, observations are key.

 

[JGinther]

I am plenty experienced in purchasing car washes, and would not be slightly concerned about 'missing and opportunity' compared to paying for nothing. If an owner decides to take the short term gain on pocketing cash, s/he deserves to take the long term loss in that the business income value is only there for what sales are reported. As Earl said, some people have even faked income to push value up - so its impossible to know for sure. Most don't overpay the taxman in exchange for the possible upside of a business sale, but it would be wise to ask and verify that the owner doesn't currently have other income sources. I think what Mep is hinting at is that carwashes are not really worth anything except for income - don't base any decisions on appraisals on the cost approach - only the income approach. Use trending to value the wash - are sales going up each year? month? Are there many competitive lots with proper zoning where one may pop up and divide sales? Whatever you do, don't believe any brokers that tell you about the 'unreported cash' as they are obviously in it for themselves. There is a small chance that the seller kept 'good records' of the cash stolen, but I bet they would't be very willing to share that unless they 'needed' to sell - since anyone can tip off the IRS and (i've heard - not verified) receive some sort of kickback from it.

By the way, there is one operator in our area that sold a property with very good records and a top value - only to reverse 1031 exhange into another competing property. The new owner wasn't allowed to keep the name, and the old owner kept the name and 'migrated' most of the business to the other location. To me, this is tax evasion (depending on allocations - one could argue) and extremely underhanded... Watch out! By the way, I bought that wash from the second owner after the foreclosure....

 

[robert roman]

“….looking for advice on buying an existing car wash….like self service and express washes due to low amount of labor needed to operate….have looked at two washes in my area.”

There are several factors you should consider.

As an electrician, you have smarts but plan semi-absentee ownership and have no previous carwash management or ownership experience.

So, unless you plan to pay cash, it will be extremely difficult if not impossible for you to obtain external financing, conventional or SBA loan.

Alternative is seller-financing of which you probably have no experience with.

Despite these challenges, due diligence is the investor’s final responsibility even if there is no history available.

Many of the books written on how to buy/sell carwash are obsolete because the carwash industry was wrecked by collapse of mortgage lending and recession.

So, my advice would be to engage a broker or consultant that specializes in carwash buy/sell transactions.

 

[mac]

Louey, I might be able to help you with this. I have an equipment business there, have been here for 20 years, and know most of the washes pretty well. Send me a PM with a contact number. As the others have noted, be very careful. Keep your checkbook firmly in your pocket. Good luck.

 

[Louey]

“….looking for advice on buying an existing car wash….like self service and express washes due to low amount of labor needed to operate….have looked at two washes in my area.”

There are several factors you should consider.

As an electrician, you have smarts but plan semi-absentee ownership and have no previous carwash management or ownership experience.

So, unless you plan to pay cash, it will be extremely difficult if not impossible for you to obtain external financing, conventional or SBA loan.

Alternative is seller-financing of which you probably have no experience with.

Despite these challenges, due diligence is the investor’s final responsibility even if there is no history available.

Many of the books written on how to buy/sell carwash are obsolete because the carwash industry was wrecked by collapse of mortgage lending and recession.

So, my advice would be to engage a broker or consultant that specializes in carwash buy/sell transactions.

Sounds like solid advice.

Regarding financing, I could do the self serve wash without any bank financing. The express wash, I'd have to get 50-60% financed. So it might be out of range if a bank won't loan to me due to inexperience. I'd be willing to make my pitch to the bank if I decided the express wash was worth pursuing.

 

[Louey]

I am plenty experienced in purchasing car washes, and would not be slightly concerned about 'missing and opportunity' compared to paying for nothing. If an owner decides to take the short term gain on pocketing cash, s/he deserves to take the long term loss in that the business income value is only there for what sales are reported. As Earl said, some people have even faked income to push value up - so its impossible to know for sure. Most don't overpay the taxman in exchange for the possible upside of a business sale, but it would be wise to ask and verify that the owner doesn't currently have other income sources. I think what Mep is hinting at is that carwashes are not really worth anything except for income - don't base any decisions on appraisals on the cost approach - only the income approach. Use trending to value the wash - are sales going up each year? month? Are there many competitive lots with proper zoning where one may pop up and divide sales? Whatever you do, don't believe any brokers that tell you about the 'unreported cash' as they are obviously in it for themselves. There is a small chance that the seller kept 'good records' of the cash stolen, but I bet they would't be very willing to share that unless they 'needed' to sell - since anyone can tip off the IRS and (i've heard - not verified) receive some sort of kickback from it.

By the way, there is one operator in our area that sold a property with very good records and a top value - only to reverse 1031 exhange into another competing property. The new owner wasn't allowed to keep the name, and the old owner kept the name and 'migrated' most of the business to the other location. To me, this is tax evasion (depending on allocations - one could argue) and extremely underhanded... Watch out! By the way, I bought that wash from the second owner after the foreclosure....

Your concerns are duly noted. Thanks for the advice!

 

[Earl Weiss]

By the way, there is one operator in our area that sold a property with very good records and a top value - only to reverse 1031 exhange into another competing property. The new owner wasn't allowed to keep the name, and the old owner kept the name and 'migrated' most of the business to the other location. To me, this is tax evasion (depending on allocations - one could argue) and extremely underhanded... ..

Interesting - You consider 1031 Exchanges tax evasion?

I may be wrong but the term "Evasion" seems to imply an unlawful method.

 

[JGinther]

Interesting - You consider 1031 Exchanges tax evasion?

I may be wrong but the term "Evasion" seems to imply an unlawful method.

Um no... But in this case, probably:
Say you were to sell a property with a million dollar net capital gain. Next, assume that the same 1 million was all 'goodwill' in reality. Next, you built another property and exchanged into it. Now assume that the new property costs 1 million dollars more that the original property costed... Well you have used the 1031 exchange to defer a capital gain of 1 million dollars. Now 'allocate the original property as 100% 'real estate' instead of 'goodwill'. The goodwill $1million has now been changed into real property basis in the next property since it was allocated that way. Now add the fact that the original goodwill (customers) are now moved into the new property, and you have effectively 1. sold the goodwill, 2. kept the goodwill, 3. avoided taxes on the goodwill. Since this is the case, I think that would be tax evasion, and the seller could be held liable for the goodwill capital gain. But since the new purchaser agreed to the allocations of 100% real property only (land and building), I guess the IRS would have no argument right? Either way - yes, to me this situation seems unlawful... I think this is the reason that the IRS doesn't allow exchanges on goodwill. And since that is the case, how could car washes ever really qualify as a 1031 candidate, since they are not able to be separated as business and real-estate: they are both intrinsically tied as one....

Feel free to move this to a new thread if it sparks interest...

 

[Earl Weiss]

Um no... But in this case, probably:
Say you were to sell a property with a million dollar net capital gain. Next, assume that the same 1 million was all 'goodwill' in reality. Next, you built another property and exchanged into it. Now assume that the new property costs 1 million dollars more that the original property costed... Well you have used the 1031 exchange to defer a capital gain of 1 million dollars. Now 'allocate the original property as 100% 'real estate' instead of 'goodwill'. The goodwill $1million has now been changed into real property basis in the next property since it was allocated that way. Now add the fact that the original goodwill (customers) are now moved into the new property, and you have effectively 1. sold the goodwill, 2. kept the goodwill, 3. avoided taxes on the goodwill. Since this is the case, I think that would be tax evasion, and the seller could be held liable for the goodwill capital gain. But since the new purchaser agreed to the allocations of 100% real property only (land and building), I guess the IRS would have no argument right? Either way - yes, to me this situation seems unlawful... I think this is the reason that the IRS doesn't allow exchanges on goodwill. And since that is the case, how could car washes ever really qualify as a 1031 candidate, since they are not able to be separated as business and real-estate: they are both intrinsically tied as one....

Feel free to move this to a new thread if it sparks interest...

You have made some invalid / impossible assumptions.

1. You can't assume the $1 Million Profit is goodwill. Buyer and Seller have competing interests in how they allocate a Purchase Price between Real Estate, Depreciable items, and intangibles. They both fill out a coordinating IRS form for the allocation.

2. You can't assume the new property cost $1 Million more. To completely defer (Note - defer not avoid) recognition of gain and recapture of depreciation the acquired property cost must be equal to or greater than the relinquished / sold property sale price. Original cost or profit is not the yardstick.

3. When there is an ultimate sale, the cost basis used is the basis of the original property. Dying out of a property can avoid this subject to imposition of Estate taxes.

Many businesses are sold with real estate. Values are allocated per #1 above.

 

[JGinther]

You have made some invalid / impossible assumptions.

1. You can't assume the $1 Million Profit is goodwill. Buyer and Seller have competing interests in how they allocate a Purchase Price between Real Estate, Depreciable items, and intangibles. They both fill out a coordinating IRS form for the allocation.

This is beside the original point, but... If the actual cost of the construction and land was 1.2M and sold soon after for 2.2M based on its ability to cashflow, you would have to call that difference goodwill in reality. The cost of real estate or construction change was negligible during that period.

2. You can't assume the new property cost $1 Million more. To completely defer (Note - defer not avoid) recognition of gain and recapture of depreciation the acquired property cost must be equal to or greater than the relinquished / sold property sale price. Original cost or profit is not the yardstick.

This is beside the point also, but.... The 2nd property did cost a million dollars more than the other sold for (3.2M construction and land). Also, to completely defer the gain (the way I understand it), the second property doesn't just have to be same or greater value... You have to not receive the money (you have to retain the same amount of debt or greater, or you have to purchase a property that costs the amount of the original basis plus the gain or greater. Original cost would be the original basis.

3. When there is an ultimate sale, the cost basis used is the basis of the original property. Dying out of a property can avoid this subject to imposition of Estate taxes.

Right, so this is where it gets interesting to me. If the original basis was 1.2M, and the gain was 1M, but the buyer and seller agreed that the property when sold was 2.2M land plus building (no goodwill - even though in reality the 1M was all goodwill), and finally the second property 'ultimately' sold for 2.2M (which is where I think it would sell) he/she would have legally avoided the tax. However, if the property was allocated correctly originally, the goodwill would have been immediately taxed and due.

The point I was making is that by doing this, the IRS is shorted the tax revenue that should have been paid, and the buyer is stripped of the customer base that was purchased. But I guess.... Buyer beware right...?

Many businesses are sold with real estate. Values are allocated per #1 above

Of course, but car washes are a little unique (although not completely) in that you can't have one (business) without the other (building - special use). And since that is the case, how can you not have goodwill? Even if the business is performing at extremely poor levels, there is still a goodwill portion of the asset. In which case there would be a fixed land value, a small goodwill portion, and a possibly negative value for the building... Even right after the building was built. Given this, and the fact (I think) that you can't exchange goodwill, how can a car wash ever have a complete 1031 tax deferral? Don't get me wrong, I know that you just allocate and go from there... But IN REALITY, I don't think a car wash building (especially self serve) has any REAL value except if it is performing as a profitable car wash business.
BTW, sorry for the wordiness, but I was trying to keep it simple in the previous post for the purpose of the point. Now I feel the need to further the explanation and example.

 

[Earl Weiss]

Also, to completely defer the gain (the way I understand it), the second property doesn't just have to be same or greater value... You have to not receive the money (you have to retain the same amount of debt or greater, or you have to purchase a property that costs the amount of the original basis plus the gain or greater.
.

This is not correct. when the "Sale" occurs, Seller cannot have control of the $ (net proceeds) it is held by a Qualified intermediary, then the intermediary is directed to acquire the new property with the proceeds. The new property can be financed as well, and it ma have to have finacing to have enough $ to make up any difference for a higher price or if some of the original sale proceeds paid of a lon, but if you break open your piggy bank to make up the difference that is OK.

The situation you describe is no different than 2 apartment buildings built or aquired for the same price and 10 years later one is in a part of town that became gentrified and sells for double what the first one sells for. If that is done thru an exchange is it "Tax Evasion"

Is deducting mortgage interest, IRA's, 529 plans also tax evasion schemes.

What if the property was a real exchange, no money trading hands or the only $ was any funds needed to make up a difference in value. Would the lower cost property owner be evading taxes? Maybe the better word is "Avoiding"

 

[Earl Weiss]

The point I was making is that by doing this, the IRS is shorted the tax revenue that should have been paid, .

The IRS is very patient. They wait for the ultimate sale or the person dying out of it and it becomes part of estate tax calculations. .