Buying Full Service Wash .. Multiples???

[Patrick H. Crowe]

I'd like to make clear why I think car wash valuations based on "earnings" are apt to be questionable. I grant in advance that EBITDA is supposed to be well defined. It stands for earnings before interest, taxes (meaning income but not property or sales taxes), depreciation and amortization. Thus the reader is told four items not to list as expenses when he/she is deducting expenses from gross income in order to arrive at earnings.

Here is the problem I frequently find when I examine the income and expense statements of a given wash. What if there is no expense for management? What if the owner leases a new truck in the name of the wash and lists the rental payments as an expense? What if he does the same for his wife? What if there is no expense shown for any labor? What if the owner's salary for a 4 bay self-serve shows as zero or as $40,000? What if there are no accounting fees and no legal fees? What if there are almost no repair costs? What if there are no expenses for any sort of major expenses like repaving? The differences go on and on.

My point is simple: the determination of "earnings" allows owners all sorts of liberties and thus these "earnings" are often seriously questionable. That's why I tend to stay away from NIM's (net income multipliers). The solution is simple.

Use gross income multipliers. Gross income is far tricker to "mess" with. It can be done by owners of multiple washes by channeling income from another wash to the one that is for sale. It can also be done by claims that the financial records don't show a lot of the cash which the owner had been skimming. This admission of dishonesty should pur any buyer on alert that he's dealing with a dishoest seller.

Experienced buyers know they will need accurate income records to get financing; they also know about what percentage of gross they need to pay all the authentic and real expenses on a self-serve so what the current seller claims as "earnings" means very little to an experienced buyer.

In short beware of "earnings". Rely of gross income instead.

Patrick H. Crowe

 

[NewWasher]

The multiple of 4 is just for the business. The land and building would be nice to have if you own it out right but with the price of real estate in S. Calif. it puts too much stress on the monthly cash flow. Of course, if this was 7 years ago where S. Calif. real estate saw 100% increase in 3-5 years, sure get the land as well. The downside to not owning the land is that it might be harder to cash out unless you have around 20 years left on the lease at the time of sale.

 

[robert roman]

All appraisals are questionable to some extent because placing a value on a private business is not exact and it requires a lot of judgment. This means considering stuff like the nature of the sector, market potential of the trade area and the ability of the wash/owner to generate cash flow in the future.

Reconciliation is often necessary to resolve discrepencies that arise during the appraisal process. Similarly, when value is determined by capitalizing earnings, it is necessary to reconstruct earnings to reflect the new owner's risk. This means evaluating income and expense statements and making adjustments as necessary.

Determining value with an income multiplier requires using gross profit per SF for comparisons. How would you define gross profit? Is it revenue after the wholesale cost but before paying operating expenses or is it wholesale cost plus the overhead cost percentage? I believe this throws you into rule-of-thumb land and makes capitalization of EBIDTA more useful.

 

[Patrick H. Crowe]

NewWasher:

Is the multiplier you refer to, 4, a gross income multiplier? If it is then that should include all four portions of the wash, i.e. land, building, equipment and good will.

One reason appraising a wash is unique is that most (not all) car washes, unlike nearly all businesses in shopping malls, are not on leased space (land or building). The car wash owner also owns the land and is selling all four things, land building, equipment and good will as a package. Even so 4 is too high a gross income multiplier.

If the land under the wash is leased then the value of the wash depends heavily on the terms of the lease. That's not to suggest a potential buyer should never consider such a wash; rather it alerts the potential buyer of a wash on leased land to take an extremely careful look at ALL the terms and conditions of the lease.

When you mention land values being so high then what you really have is not a car wash appraisal problem but a land appraisal problem. Under these circumstances the car wash is only a tiny fraction(if any) of the total value. What this situation makes clear is that a car wash is not "The Highest & Best Use" of the land. This is a common situation as you can see. Why are there no self-serves in NYC? In Tokyo? Land is too valuable for them .

Evaluation is extremely tricky. It is a book length discussion and merits careful study. My book, The Car Wash Appraisal Handbook was recently reviewed on this forum. Please look at the review.

Patrick H. Crowe

 

[needle]

so if you find two washes and assesed land & blding values are 2,000,000, and combined sales are 3 million and ebitda is 600,000... "4 x is too much" ?? in this case 4 x is no where near enough. Right?

 

[Patrick H. Crowe]

GIM of 4? 4 x what?

 

[needle]

4 x ebitda, sorry

 

[needle]

so if you find two washes and assesed land & blding values are 2,000,000, and combined sales are 3 million and ebitda is 600,000... "4 x ebitda is too much" ?? in this case 4 x is no where near enough. Right?

 

[Patrick H. Crowe]

4 x EBITDA may be too much or may not be too much. The difficult with EBITDA is determining wheter all the expenses are listed, not listed and legitimate. I noted some possibilities in an earlier mpost.

That's why I prefer gross income multipliers. A GIM of 4 is too high.

Patrick H. Crowe

 

[NewWasher]

4 x EBITDA may be too much or may not be too much. The difficult with EBITDA is determining wheter all the expenses are listed, not listed and legitimate. I noted some possibilities in an earlier mpost.

That's why I prefer gross income multipliers. A GIM of 4 is too high.

Patrick H. Crowe

I was talking 4x ebitda. Gross income (total revenue) multiplier makes no sense at all in any type of small business.

 

[Red Baron]

FWIW, I have been trying to buy a 6/1 for the last 6 months but the owner refused to budge from his price. Recently I sat down with the Seller's realtor and used Patrick's handbook to build a case that the seller was being unrealistic in his valuation and suggested that his price was around $80,000 too high. I closed on that wash last Friday at $70,000 less than he was asking.

Thanks again, Patrick. Your book has paid for itself many times over.