Another Newbie-1st Post-Value of Existing Wash?

[Greg Pack]

I've had to personally guarantee all the loans.

Would it be wise for a bank to let somebody set up an LLC with no assets and let them place the financial liability there? If you find the banker willing to do that, send me his number. I've got a ton of mediocre business ideas I'm willing to take a shot at

 

[Greg Pack]

A simple GIM scenario using round numbers:

wash A needs no upgrades and does 100K/year revenue Expenses are at 40% of gross, which is low for most SS/IBAs, especially in northern climates


That leaves 60K to make the payment and income

Paying 3X gross(300,000) would be a 20% return on cash
Paying 4X gross (400,000) is a 15% return on cash
Paying 5X would (500,00)be a 12% return


If you paid 4X and put 30% down (120,000) and financed the balance (280K) for fifteen years at 6%, the annual debt service would be about 28K per year, leaving with you 32K net income. But I've had income swings of up to 20% in various years due mainly to weather. Do the numbers on a 80K gross year and the income after debt service drops to a level where you wish you worked as a wal-mart greeter so you could make the same money and turn your damn phone off at night

The real danger is if everything goes well for ten years, then competition comes in and cuts your business 30%. At that time, ten years into the loan , you still have an outstanding loan balance of 120K and your autos are worn out. So, you call up a local distributor and get a quote for one new auto for 150K or so. The new guy with his shiny equipment is eating your lunch, so you reluctantly agree to the reload. You're back in as much debt as you were on day one, and just struggling to make as much money as you did when you first bought the place. Scenarios happen like this more often than you hear about. The longer the amortization, the greater the risk IMO. Thats why I think longer term loans are a bad idea.

I guess the idela situation is to amortize over longer term with no prepayment penalty, but have the discipline to pay on a short schedule. That way you can scale back if lean times comes.

 

[rph9168]

I think the old saying "Timing is everything" applies to the car wash business. There are good times to buy. Good times to sell. Good times to keep what you have. The trick is to know when each time occurs.

 

[Waxman]

Banks make you sign personally on loans.

The current owner is being helpful and forthright because he is selling and it's in his best interest to show you the place runs itself and makes plenty of money.

 

[cwguy.com]

If seller is providing down payment and I am operating under an LLC, where does the personal financial liability come in?

It helps with taxes maybe? You would have to ask your accountant. It would also help with separating you from getting personally sued. But the llc (you) would have to rent the property from the owner (you).

 

[JGinther]

The formation of an LLC is circumvented when the bank makes you sign an unlimited personal guarantee as CFCW mentioned. Also, deciding not to pay the bank when you actually can (whether the money comes from a job or the car wash) is now criminal, so not paying is not an option. Basically, you have to make it work, or you get to have nothing (unless the bank is really nice and doesn't enforce their capacity to take anything and everything you have - or require a deficiency repayment).
However, I believe there is plenty of merit to your business plan if the location is a good one. We have several older locations and have been built on top of over and over with new fancy washes... Now we have bought several of them from the bank a few years after they were built. The key is being a top operator: cleaner, better, better value, friendlier staff, professional appearance, newest technology, all forms of payment, etc. etc. etc. If a new guy comes to town and does all of the above, you will split the pie and he will have make that work on a 1.x or 2.x million dollar deal. If you can't offer the best value around though, be prepared to loose everything...

 

[cwguy.com]

The formation of an LLC is circumvented when the bank makes you sign an unlimited personal guarantee as CFCW mentioned. Also, deciding not to pay the bank when you actually can (whether the money comes from a job or the car wash) is now criminal, so not paying is not an option. Basically, you have to make it work, or you get to have nothing (unless the bank is really nice and doesn't enforce their capacity to take anything and everything you have - or require a deficiency repayment).
However, I believe there is plenty of merit to your business plan if the location is a good one. We have several older locations and have been built on top of over and over with new fancy washes... Now we have bought several of them from the bank a few years after they were built. The key is being a top operator: cleaner, better, better value, friendlier staff, professional appearance, newest technology, all forms of payment, etc. etc. etc. If a new guy comes to town and does all of the above, you will split the pie and he will have make that work on a 1.x or 2.x million dollar deal. If you can't offer the best value around though, be prepared to loose everything...

I believe we are talking about different things? I already stated what you and CFCW did earlier? The question is what a LLC could be useful for in protecting yourself from liability. The answer is you can distance your personal finances if you get sued. There also might be tax benefits? Usually unless you are blatantly liable lawyers only sue for your max insurance policy though.... so it's kind of a moot point?

 

[JGinther]

I was replying to the original poster...

 

[robert roman]

“I find it insulting for you to say I'm not ready based on my questions.”

You have to have tough skin to make in the carwash business.

I started washing cars while in H.S. in 1968. How much experience do you have?

I say this because when you go to the bank to try and convince a loan officer and loan committee members to approve your loan request, they will expect you to know the carwash business as if you were already in the business.

Seller financing may allow you to sidestep this requirement but it is not a panacea for experience and knowledge.

“I'm not building a new business, I would be purchasing an established one.”

You are buying an income producing property. Intrinsic value of property is only the fair market value of the real estate. Building and equipment can be considered incidental if the business is closed, breaking even or running in the red.

So, preliminary value of income producing property is capitalization of adjusted cash flow (ACF). ACF is earnings before interest, taxes, depreciation and amortization and “discretionary expenses.”

“I can't afford 1.5 million to put up an ideal wash”

Based on what I’ve read, you would not need to spend anywhere close to $1.5 million to make this gem an ideal wash. More like $300K or $400K to have a killer wash.

Why don’t you research express, flex and quick-serve business models then you will understand.

Why by a “questionable” run-down business just to return it to mediocrity like a fixed-up old car?

 

[JGinther]

Why buy a “questionable” run-down business just to return it to mediocrity like a fixed-up old car?

Because Risk Adusted Cash flow is better than Cash Flow.

 

[Earl Weiss]

Dave - People on the forum know I often disagree with RR. But based on your questions and lack of knowledge he has a valid point. You have lots more homework to do before getting into the business. You were not familiar with basic industry terms, you thought an LLC would not make you liable for a loan, you don't know the costs of getting things operational or buying new equipment especialy if you need outside techs, business structure of LLC as property owner and an S corp as the operating entity and reasons why seem to be missing.

Perhaps Car Wash College or the ICA show would be a good educational investment.

 

[rph9168]

By now you can see that there is a lot to the car wash business that you may not have initially realized. The common thread in most of the responses here is that you need to be sure you know what you are getting into. From what we have been told so far it seems to be a decent deal if the price is right but you need to understand all that is involved. I think the suggestion that you try to attend the ICA Show at the end of March is a good idea. There are many educational seminars and experienced industry veterans that you can interact with there. If not that show try to go to a regional one. I repeat what I said before which others have said as well - take a deep breath - step back - and rethink the whole project before proceeding.

 

[Rudy]

There's one trap that hasn't been mentioned here. It's called COD....which stands for cancellation of debt income.

It's complicated....but suffice it to say.....IF, debt is forgiven, the IRS counts the "forgiven" debt as income. In many cases, this phantom income "flows" down through the LLC (Or LP) to the partners on a pro rata basis. As I understand it, simply "bankrupting" the LLC or LP doesn't avoid the COD income flowing down through the bankrupt entity to the member (partner).

What's especially sinister about COD income....it's NOT a capital gain....it's flows down as ORDINARY INCOME.

Ouch.

Just beware.

Read up.

 

[Dave1972]

Earl--I'm taking a little offense to your post but I'll give you the benefit of the doubt. I am not some dip$ hit that doesn't have any idea around business. Not that it matters, but I have a recent MBA and I do know the differences between an S Corp and LLC and SP. I also know how to calculate any sort of ratio related to business performance tools. I ask general questions here to get a better feel for the business and the industry as I have not owned a business before. I've always worked for "the man" in one way or another in both public and private sectors. I'm guessing that at age 16 or whatever age you started working whether it was for someone else or on your own--you've asked many of these questions. I understand risk, I understand commitment, I understand hard work---I also have a very good basic understanding of systems--mechanical and electrical anyway. Pneumatics and hydraulics are not something I've worked with a ton but is pretty straightforward at least in the car wash industry. I don't want to pretend I know anything--as all of you have more experience in this realm than I do. Unfortunately I can't attend the ICA in Chicago as I've already booked a family trip. I didn't say I didn't know an LLC would still require personal liability--I was looking into protecting my personal assets--not necessarily the same thing--I should have asked the question differently--my mistake. In terms of understanding what it takes to get things operational--I do have a pretty good grasp of the little things that it will take to make my "little gem," as someone so sarcastically put it, in operating condition. The purpose of a forum is to get feedback from others who have been in similar situations. I don't mean to ramble, but certainly felt the need to defend myself and my character. I do value the "free" advice of those who have already contributed as it helps to gain a "day-to-day" perspective of what this business would be like.

RPH9168--your signature line sums things up nicely...also sums up people . Life and work would be boring if we were all the same right?

Anyway--dip$ hit newbie--over and out.

 

[robert roman]

“Because Risk Adusted Cash flow is better than Cash Flow.”

This is not necessarily true because this buyer hasn’t provided any income history.

Look Dave,

I would say most of the advice given here comes from people who know what they are talking about.

No one here has criticized your I.Q.

During my career as a consultant, I’ve had the opportunity to speak with people having vast experience and knowledge of the carwash industry.

One guy told me early on during his career as a carwash owner/operator how miserably he had failed.

He made bad decisions regarding fundamentals of location. Thought he knew everything about customer service. There were also coincidence, bad circumstances and very lousy weather. He didn’t make it.

He told me he remembers the worse. About three days before having to vacate the property, he ended up leaning against a control panel in the mechanical room shaking and crying a river of tears about how bankruptcy was going to devastate his young family.

In the final analysis, he wanted no pity.

He pulled himself up by the bootstraps and today he is one of the most successful carwash operators in the country.

Carwash can be a very rewarding vocation and it can also kick you squarely in the ass.

I wish you great success.

 

[Earl Weiss]

Earl--I'm taking a little offense to your post but I'll give you the benefit of the doubt. I am not some dip$ hit that doesn't have any idea around business. Not that it matters, but I have a recent MBA

FWIW I grew up in the Car Wash business. Still, the amount of experience / knowledge I have is directly proportional to the number of things I fracked up.
After getting my bachelors in Business admnistration and debating some professors about there textbook ideas and formulas (i.e. How health of a business measured by inventory turnover was irrelevant to Gas Stations) my opinion about the value of some schooling versus the real world fell in line with this.

http://www.youtube.com/watch?v=YlVDGmjz7eM

Other than as a resume builder I felt going for the MBA would be about as useful as "Mr. Mellon" felt.

I did go on to get another terminal degree as well. Again, experience and input from others was much more valuable than textbook info on things like corps. and LLCs

 

[MEP001]

Earl--I'm taking a little offense to your post but I'll give you the benefit of the doubt.

FWIW, Earl is the last person on this forum that I'd take offense to his comments. He has no agenda with anything he says. He's only trying to help, whether it's straightforward advice or a reality check.

I understand risk, I understand commitment, I understand hard work---I also have a very good basic understanding of systems--mechanical and electrical anyway.

Trust me, you don't understand what you're planning to take on. I'm not saying you can't learn, but this its own little monster. I didn't see you mention how much time you have to put into it, but it will take a lot in the first few months. If you have a 40-hour-week job now, it will probably consume all your spare time if you want it to succeed, and by the way it sounds it won't make money for a while (as in a year or two).

 

[rph9168]

I agree with Bob and Earl. I, too have advanced degrees, none of which are related to our industry. What I learned through trial and error was much more important to success than any college course or degree. I think you realize from what advice has been given that this business like many others is not for the faint at heart. Challenges both small and large happen almost every day. Personally I think the most important qualities for a successful operator in this business is perseverance and the ability to recognize and correct mistakes. In reality nothing can fully prepare you for what you will face if you proceed with your plans. Good luck in what ever you decide to do.

 

[mmurra]

Dave1972- Do yourself a favor. Please stop reacting to comments from blog members. Your life will go better here if your simply respond "thank you" to any response and then just ask your next question. This is a great group here and you may not get the responses you want but you will always get the responses you need! Enjoy and learn. I sure have! Mark

 

[Dave1972]

Mmurra and others-please go back and read the thread-I've been nothing but appreciative. I've pushed the thank you button and said thank you in many of my posts. Mmura-your post here is a "reaction"-I don't know any of you from a hill of beans-and I honestly value the feedback as I don't know what I'm doing. I'm not a 24 year old punk kid that mommy and daddy put through college. I remember parachute pants, vanilla ice as a singer, and Michael Jackson when he was black.

I'm ranting about this because it IS a public forum and I AM new-I don't know that Earl is the Carwash Czar. Do I need reality? Of course I do-but I've been extremely grateful to everyone that has posted information I can use and learn.

So back to the issue at hand-if it's so hard, time consuming, no money, relationship breaker, etc. then why are any of you in it? As somewhat of an outsider looking in, it surely doesn't sound like there is enjoyment. Can anyone enlighten me on why you have your wash and why you continue in this declining business?

Earl- sorry if I came to an incorrect conclusion about your original post on this thread.