Help first Car wash Purchase w/o RE

[Brian147m]

Good Afternoon,

First post, love the info on this forum. I'm looking to purchase a local car wash in my hometown. It's an existing 4 bay SS with 2 IBA's, that's been open for about16 years or so. VERY WELL maintained, and I was told by the distributor it's one of the most well maintained, nicest washes around. The Touchless is an Oasis Typhoon that was put in all new in 2020, the soft touch is an older Ryko that is original. Owner is retiring and is looking to sell. This would be my fist car wash but I have a strong business background and have financing in place. Strong cash flow and excellent financial history on the business.
Purchase price is $600,000 which is about 3.5X earnings.
2 issues I'm struggling with: #1) A new Express tunnel wash just open up literally across the street q4 of last year. Q4 numbers were down 25% year over year on this wash (I was told the new wash was giving away free washes initially), and it's still down 9% in Q1 of 2022, but I'm not just sure of the long term effects of this new wash.
#2) The lease. This is located just off of main street in a booming and growing part of town that's right in the path of progress. Lot's of new building within a few miles of this great location. Existing rent has been about 25-28% of gross sales, but the new lease I would have to sign (15 years) would be 32% of gross and will likely go up from there, as it's tied to the Consumer price index and we all know what inflation is doing right now. This concerns me greatly as we may be moving towards a recession and rates will most likely keep climbing for a year +.

I'm looking at overall thoughts on this deal from those with lot's of experience. Is 3.5x to high without real estate? Experience with competition being so close? What else should I be looking at? I can provide more info as well.

Thanks in advance!

 

[traveler17]

I would NEVER purchase a business for 3x’s gross without the real estate. I just spent 3.5x’s the gross on my 2nd wash w 2 acres. Most washes like ours are going to take a bump w a tunnel. I understand everyone can’t but I’ve never been a fan of any sort of leased business. It’s like renting an apartment, spend all the money and zero to show for it in the end because you’re going to spend a chunk of money on upkeep and replacing/repairing equipment. I don’t know how others feel but if it were me I’d ask the owner if he’s on meds. that’s a joke. Hard pass here!! Keep us posted

 

[Brian147m]

I would NEVER purchase a business for 3x’s gross without the real estate. I just spent 3.5x’s the gross on my 2nd wash w 2 acres. Most washes like ours are going to take a bump w a tunnel. I understand everyone can’t but I’ve never been a fan of any sort of leased business. It’s like renting an apartment, spend all the money and zero to show for it in the end because you’re going to spend a chunk of money on upkeep and replacing/repairing equipment. I don’t know how others feel but if it were me I’d ask the owner if he’s on meds. that’s a joke. Hard pass here!! Keep us posted

Thanks for the response. The purchase price is 3x net, not gross. It's basically 1.2x gross. Current owner netting almost $170k after expenses, so that's the 3.5x valuation. I believe there's quite a few interested parties so I don't think he's completely out of line.

I agree about leasing, but the real estate alone is probably worth $3mm+ so this is a way to get into the industry in a good location at a reasonable price. I would love to buy the land someday, but the landlord is a big out of state investor not interested in selling at the moment.

 

[traveler17]

Thanks for the response. The purchase price is 3x net, not gross. It's basically 1.2x gross. Current owner netting almost $170k after expenses, so that's the 3.5x valuation. I believe there's quite a few interested parties so I don't think he's completely out of line.

I agree about leasing, but the real estate alone is probably worth $3mm+ so this is a way to get into the industry in a good location at a reasonable price. I would love to buy the land someday, but the landlord is a big out of state investor not interested in selling at the moment.

My bad , I should’ve asked that. I could’ve bought a lease / business wash for 400. It was grossing 200 so that’s about right as far as multiplier. So now you gotta ask yourself do you want a note w a 30 percent gross sales on top of that ( if I read that correctly) It’s just one of those things you have to decide if you feel the numbers are right.

 

[Kar B Kleen]

A 3mm piece of property is not going to be a ss car wash very long.

 

[Brian147m]

A 3mm piece of property is not going to be a ss car wash very long.

Sorry, let me clarify. The landlord owns a large parcel that includes the car wash, an auto parts store, and a lube stop all as part of a complex. So while he could possibly split it out and sell just the real estate for the wash, he's not likely to do so.

 

[eckert16]

View attachment 6121
Talk to your accountant, have him run your numbers...
a Lease? with a tie to CPI, which is expected to go higher, during a time of inflation? Let's say you signed it at the end of last month (Apr 2022) and that the rate didn't go any higher...

Do a simple chart... for the past year, (Apr 2021-Apr 2022) the index was 16.3%. If the lease payment changes every payment cycle, a $1000 cycle payment would be $2126 by the fifth cycle (if my math is correct and IF it was a cycle change). Pretty sure you would not raise your price per wash the same amount ($10 to $21 during the same time frame to keep up).
I understand the State of Maryland recently passed a law tying their Gasoline Tax to the CPI or Inflation rate...(it's quite a sorry state of affairs as I know of no paycheck that rises equal to the CPI nor Inflation).

 

[sjb]

I believe strongly that you need to own the underlying asset, the dirt below the car wash biz, or you are just making $$ for someone else. Rent is a 4 letter word, unless you are the landlord. Only thing worse is a franchise deal on leased land. That is where you have all the headaches, but very little equity, or viable exit strategy.

Caveat, a legal document that provides an option to buy the dirt down the road as the community evolves and changes.

Best of luck!
sjb

 

[Waxman]

The car wash business is much too demanding to operate with no real estate component in place. I would not be motivated without knowing that I am paying off the real estate each month.

 

[Toms PTcarwash]

On the flip side, principal payments on a mortgage are not tax deductible, only the interest. The lease payments are 100% deductible.
If a bank is willing to loan you money to purchase this business without any "tangible assets" such as land, it must have really solid financials.

 

[Greg_T]

Whilst I can see that operating a carwash on a leased property would be viable (and perhaps really profitable) in the right circumstances, it's not something I would do personally. I like to think that all the effort in cleaning, maintenance, upgrades etc. that we put in returns as a benefit in the long term value of the facility. If we leased a carwash site, I think our motivation to maintain and improve the facility would be much, much lower.

As a little aside, land values in Australia are typically much than in the USA (why - I don't know!). We had to pay about 6 times gross for our wash, and this was pretty cheap compared to other sites that we looked at.

 

[bkim13]

looking an express wash that does 70-80k cars a year around $8-9 effective price given monthly members (over 1k and growing) that does 750kish revs and 300-350k cash flow with the owner asking for around 5x cash flow the biz..equipment is in good shape but the owner is unwilling to sell the real estate (300-350k includes 90k rent)...it is the lowest price of the car washes around it and has great consumer reviews...12 free vacs and a few self serve bays....don't want to share more details than this but curious if this valuation seems reasonable to pple in this chat

 

[Roz]

5x property would be if real estate is included.
2x-3x is more appropriate if just buying the business and paying rent. Make certain you have a long term lease as you will find it hard to resell if you lease term is short.

 

[bkim13]

prob means i need to maybe move/look at other geographies coz all the express with property in the new york area going for 10x and 90% of deals in the 4-5x range don't have real estate (most sellers here won't sell their real estate unless buyer offering 10x total)...maybe it's time to move to the midwest! plenty of liquidity and action in ny state and most deals w/o real estate the sellers asking 4-6x (and getting those prices) while those w real estate and cash flow over 1mm+ asking for 10-13x

 

[Roz]

Express washes are hot now. Many are selling for 10x gross as there is a lot of private equity money chasing them. Perhaps you look for a SS/IBA model.

 

[bkim13]

Yup very hot. As someone who wants to own several over time, my preference is to buy an express to learn the model inside and out so Im fine paying a premium to learn the model I want to replicate over time but fully appreciate it cld be toppy from a valuation perspective but I really believe in the express model long term. Almost 300mm cars in America and only 60k car washes with 10k express…have to believe express a long term share winner with the whole industry having an oppty to grow long term

 

[traveler17]

looking an express wash that does 70-80k cars a year around $8-9 effective price given monthly members (over 1k and growing) that does 750kish revs and 300-350k cash flow with the owner asking for around 5x cash flow the biz..equipment is in good shape but the owner is unwilling to sell the real estate (300-350k includes 90k rent)...it is the lowest price of the car washes around it and has great consumer reviews...12 free vacs and a few self serve bays....don't want to share more details than this but curious if this valuation seems reasonable to pple in this chat

Huge note, huge rent and nothing to show for it in the end. Hard pass. If you’re able, be patient and find one w the dirt. Good luck !!

 

[bkim13]

Thx for the feedback. It won’t be a huge note coz I’m paying mostly cash. And in ny most of the leases start over 100k so this actually is a below market rent.

 

[bkim13]

if anyone knows of express washes with real estate being offered at 5x, let me know lol! being in ny where the average residential rent is over 5k i think is skewing some of the perceptions of prices/multiples up in the northeast

 

[Roz]

From a purely financial perspective (cash flow) why should Express Washes sell for 10x and a high performing SS/IBA sell for 5x when both might have the same (or close) operating income without the numerous employee headaches?