Foreclosed Wash

[Hoosier Daddy]

I have the opportunity to pick up a foreclosed car wash at roughly 30-35% of the original cost, but I am wondering if I could ask a favor of forum readers?

If the previous (original) operator defaulted on his/her loan, how do I best do forensic accounting to determine his/her downfall?

My first thought is that the capture rates used with the traffic counts were unrealistically high which distorted the numbers in the first place. Blame there to Vendor? Is a half percent capture rate accurate? I think this entity's equipment vendor promoted capture rates of 4%.

Thought I'd also look at water, bills, credit card transactions, and the like, but is there a single item that should weighted the most?

The car wash wasn't in business that long, so it will be difficult to gauge weather/economic connections.

It may just be that for a million dollars the entity was upside down from day one, but for 250k, the numbers might be workable.

Thanks in advance for the insight.

 

[Bubbles Galore]

What kind of wash is it?

What kind of market is it in?

What is the competition like?

Is it a turn-key operation, or do you have to do fixes?

 

[Hoosier Daddy]

Details

Newer 4/1 with credit card capacity.

just off the main highway in a Rural Midwest Market but one that has seen a number of planned home communities, apts and manufactured housing come in with the last 5 years. Probably 2000 pop in last census, maybe 2500 people now within 3 miles

An older 3 bay SS further toward old part of town only competition.

Technical status is unknown at this point, but I know I've been to this wash within the last 6 months and it still looked like brand new. I think it has been there about 5 years.

 

[mac]

Sounds like you may have stumled upon a good deal from what you've told us. At 250K it's much easier to make the numbers work, and doesn't sound like much competition. If the place is built correctly (easy access and egress and good equipment) don't worry too much about what the previous owner did.

 

[robert roman]

Rural market with miniscle population base, one older competitor and new wash that took a dive, selling for $0.25 on the dollar. Sounds like you better do a lot of homework before jumping on this gem.

Capture rates don't support carwashes, people do. Where are people in this market getting their money from? Is there job growth in the region or are people moving in (all 500 of them over ten years) because it is less expensive to live there (i.e. retired)?

Just because a wash is priced at liquidation doesn't necessarily mean that it is a good deal. I would dig a lot deeper.

 

[rph9168]

I agree with Robert. You need to know more about why this wash was foreclosed on and have a better idea of the population makeup in the area. Without that you are taking a real risk even at the reduced price. Chances are that you will have to invest in at least some rehab work and possibly some new equipment. To revitalize a wash that has been closed can be a stiff challenge, especially if you do not know why the original owner failed.

 

[Waxman]

Um, WHAT???? a $1M carwash serving 2000 people????? Did you forget a zero and mean 20k? Must be.

You don't need any forensic accounting. The wash carried far too much debt to service with a terribly low customer base.

4% capture rate? WHAT???? That may be what was necessary to make the numbers work, but that number is CRAZY!!! I used 3/10 of 1% in my pro formas. Good thing, too!

The name of this here game is to estimate expenses high and make them increase over 3 years of proformas while you estimate income low!

This carwash never had a chance.

 

[I.B. Washincars]

"just off the main highway"

That's the part that gets my attention. In my mind I'm thinking that the location is sub-par. I can see a $1M wash making it in a town of 2K, but they had better get ALL of the pie. Even then, I don't think it would be a "killer" wash, but may make it. At 250K, I would definitely consider it, but proceed carefully.

 

[Waxman]

How could a $1M carwash make it in a town of 2000?

Please explain your logic. Thanks.

Also, as far as determining what income and expense were at this location, why not ask the bank that owns the place? Most banks require annual financial statement from carwashes they finance, so see if they'll play ball and give you the p&l's!

 

[Greg Pack]

Pictures might be helpful, including one showing orientation of the wash to the main street

The chemical rep may have an idea of the volume the guy was doing.

 

[Bubbles Galore]

As you can tell from the responses, you have a lot of work to do.

Keep us posted.

 

[Red Baron]

How could a $1M carwash make it in a town of 2000?

There is a dynamic that is difficult to factor in based only on population. One of our washes is in a town of 2100, but it is a bedroom community to a city of 200k just 15 minutes away. Citizens from 10 small towns on the opposite side make the trek to the bigger city frequently, coming thru our town.

My banker thought I was building way too much car wash and would only loan 50%. Since then he's admitted that he called it wrong.

 

[Waxman]

Okay, that makes more sense.

 

[Patrick H. Crowe]

Within a three mile radius the population is under 5,000, right? That's sufficient to support a total of 3 bays. You have double that number but apparently you discount the competition.

All you need do is determine the Fair Market Value. In two of the three approaches to the problem - - the most important two - - Income & Comparable sales - - the original cost plays no role at all, i.e. what someone spent means very, little.

In short, ignore the advice to look further into it. Run from the possibility. The demographics prove that any appraiser who knows how to evaluate car washes would have made it very clear the place was doomed.

Patrick H. Crowe

 

[MEP001]

In short, ignore the advice to look further into it.

There's no harm in looking further into it. Isn't advising to ignore others' advice a bit arrogant?

 

[rph9168]

Way too early to give up on this deal. You need to seek answers to the issues that have been brought up on this thread. If you still think it would work you need to negotiate with the bank. Obviously they haven't had any other takers at this point and they don't want to run the wash. You might be able to negotiate the price down and get a favorable loan.

If you are still not sure it is a good deal you might try to see if they will give you a six month trial period where you share the revenue from the wash with them. You might even be able to get them to work off gross profit. A lot depends on how badly they want to get rid of the wash. Make sure you negotiate the purchase price and terms before you attempt this option.

 

[dclark3344]

I would also look at the competing carwash and compare what they are offering at what price. Does the competing carwash owner live in that community and have a GOOD RELATIONSHIP with the people? I have seen National chains come into my community and build a beautiful new facility next to one of the community darlings to find themselves sucking hind tit here. We are a loyal bunch to a fault, most of us will even pay more for anything from a local.

 

[robert roman]

On the surface, this "deal" presents more questions than answers. It may warrant a thorough investigation if you believe there is potential. For example, it is possible to have a rural trade area that justifies boundaries extending beyond the typical 3 to 5-mile radius (i.e. 10-mile or equivalent drive time). This brings in more population to the equation but it may also bring in more competitors.

As for using an appraisal to evaluate business viability, let's get real. Appraisals contain relevant data to assess business viability, but their main purpose is to provide lenders with an opinion of value of the improved property. Business viability is determined with a study that should examine core dimensions of a business such including market, economic, technical, business model, financial and management viability. Lenders that rely on appraisals or distributor pro forma (feasibility study) to evaluate viability are usually the ones that end up owning a wash if and when it fails to produce adequate sales revenue.

Why is this so? Because none of the involved parties wants to be the bad guy. I can count on one hand the number of times I have seen a feasibility study (pro forma) produced by a distributor that determined the project as strong rather than commercially viable nor have I seen many appraisals that show a material difference between actual cost to build and opinion of fair market. Loan officers don't make commissions without making deals. Most investors are convinced they have a great site/cash cow on their hands and don't want to see their dream doused with cold water by some analyst. Loan committees are often oblivious to the facts because the members don't understand the carwash business and have to rely on the advice of experts.

You have not presented enough information to warrant a run-don't-walk. What you have provided suggests that you should dig a lot deeper before considering this wash.

 

[pitzerwm]

The way I would look at this is, what is the worse case. If you use cash, then your worse case is that your return is low, but you won't have to go BK. What is the land worth, what other uses are available? If you are borrowing the money, then everything you own is at risk. If your 25 and don't have much to lose, and you have a long time to recover, no problem, if you are 60 you don't have enough time to recover. Others are right that the info you gather are for the most part guesses, apparently you haven't been in this business before, so you are "relying on the experts". Some experts are wrong

 

[Waxman]

Yes, the experts like commercial appraisers can be quite wrong. My experience found a commercial appraisal filled with errors that skewed the final number substantially. I had to research it on my own and argue my case with a banker. The banker got quite irritated and 'put me in my place'. However, the scolding I received did not deter me and I was able to move forward with the project. Even seemingly concrete numbers can be 'open to interpretation' and 'flexible'.


I think you have to take it upon yourself to do your own research, fact finding, digging and investigating.