Newbie Needs Help On Evaluating An Opportunity

[Jengah]

Hi All -

I'm new to the business, but wanted to get into it for years. An opportunity has come up by me and here's what it looks like. Can I get some feedback, please.

The wash details:
- (6) bay SS
- (2) IBs (one RYKO, one D&S 5000)
- built in 2006
- Town population of 35,000, w/ two other washes in town.
- Gross Sales $340,000
- Expenses of $90,000

The opportunity:
- owner is going to keep the land
- wants to sell the "business" for $500,000
- wants to lease the land and equipment (not triple net) for $18,000/month

To me, what he is asking is out of whack, not so much for the asking price, but for the $18K/month lease. At that rate, it would take a buyer 7 years just to break even without even considering a single other expense or tax. Seems to me a lease should be based off of the total square footage of the land, plus the value of the improvements, building and equipment.

Can anyone shed some light on:
a.) the deal at face value
b.) what a reasonable and fair deal should look like with the above P&L
c.) any advice on making this sort of deal and any deal tips.

Thanks

 

[robert roman]

My advice is to get someone with experience in carwash buy/sell transactions to help you.

For example, I begin by applying maximum allowable payment (MAP) as sanity test.

MAP = NOI / 12 months / 1.5

$340,000 less $90,000 expenses is $250,000 less $216,000 rent is $34,000 less $6,000 property tax (assumed) is $28,000 less $3,000 insurance (assumed) is $25,000 NOI.

MAP = $25,000 / 12 / 1.5

MAP = $1,390

“….wants to sell the "business" for $500,000”

MAP says the price for “business only” would have to be less than $74,000 for the deal to make financial sense.

The sanity test indicates the seller needs a reality check.

Business owners usually will “pad” the asking price for the business by 10 to 15 percent well aware that they won’t get the full price.

However, an offer of anything less than 85 percent may insult the seller and make them disinclined to work with buyers.

Sometimes a seller may remain firm on the asking price, but be willing to negotiate elsewhere such as making improvements, equipment repairs or pay for closing costs.

In the case of leasing a carwash business, the seller may be willing to extend terms or modify conditions of the lease. Always keep in mind that everything is negotiable.

The length of time a small business has been on the market can greatly affect the negotiating position.

As you can see there is a lot to consider in price assessment and negotiation.

Moreover, you must also consider the risk associated with continued operations. Will the site continue to produce sufficient sales in the future?

Fewer sales, less cash, lower the price.

 

[Greg Pack]

Robert did the math. I'll make this easy:

Run, Forest, Run!

You're basically buying a low paying (50K or less/yr) job for 500K


This guy's offer is so far out of reality I wouldn't even bother negotiating.

 

[PaulLovesJamie]

I didnt even think this was a real post. But if it is and you are seriously considering it then please call me, I'll sell you my wash on the same terms

 

[Jengah]

So I realize that the numbers the seller is asking for are ridiculous and not sustainable. What I'm looking for is advice on two things: the health of the opportunity and advice on structuring a deal. Do you guys think these are healthy and obtainable profits? And given these P&L figures, what would be a fair offer to the guy?

I'm thinking the land is probably worth about $0.15/sf to lease based on comps, but I have no idea how to value the building, improvements and machines.

As far as what to pay for the "business" (or essentially the goodwill) that one I'm kind of stumped on.

Any and all feedback is welcome.

 

[hsb]

Only opportunity is for the seller. Run from that offer.

 

[robert roman]

“What I'm looking for is advice on two things: the health of the opportunity and advice on structuring a deal.”

“Do you guys think these are healthy and obtainable profits?”

Average income and profit for self-serve is $175,000 and $96,250, respectively.

So, gross $340,000 would be considered above average income as in the upper quartile of the population.

Above average profit could be result of trade area dominance (superior location and/or chain), lack of competition or another key factor.

As for obtainable, it will be difficult for you to obtain these levels because of your lack of ownership and management experience. This risk is mitigated by offering a lower income multiple.

“And given these P&L figures, what would be a fair offer to the guy?”

According to experts like Pencek and others who prepare opinion of value, the current equation for self-serve “business-only” is 2 to 3 times gross.

So, $500,000 price for business-only is not absurd.

What is absurd is rent. For example, gross $340,000 benchmarks at $6,000 a month.

“As far as what to pay for the "business" (or essentially the goodwill) that one I'm kind of stumped on.”

You are stumped because you simply have no understanding of the fundamentals.

Valuation of business involves intangible and tangible assets customary to normal operation of the business.

Since you are not buying real estate or building, tangible assets of the cash business are furniture, fixtures and equipment (F/F/E).

Preliminary valuation for 100 percent of a company or business-only is calculated as a multiple of available cash flow (reconstructed or adjusted).

So, goodwill would be calculated as preliminary value less liquidation value of F/F/E.

What would be fair NNN is staring you in the face.

 

[JGinther]

Robert seems willing to get into the math of the absurdity of the deal, but I think its way easier than that. A car wash business is a special use building, and is based on location. So, there is no way to sell the 'business' - you can't separate it from the building and land. Next, everything you would be buying is depreciable, and what he would be keeping is the only appreciable part (from an accounting basis). Third, where is the upside? Even if you did purchase the whole property at a fair market value, why buy it unless you feel strongly you can improve its value? Sounds like the wash is doing just fine - until someone else cuts into it. Maybe you should be the one that cuts into it instead...?

 

[robert roman]

“….willing to get into the math of the absurdity….but I think its way easier than that.”

There is no easier path than the math.

“….there is no way to sell the 'business' - you can't separate it from the building and land.”

This is done every day. For example, this seller is only offering the business-only.

Let business equal real estate, building and F/F/E and value of inventory at time of transfer.

So, land and building is incidental to value of business-only.

“Third, where is the upside?”

Buying low is viable strategy in a down market and for under-performing properties but above average/superior profit warrants a premium.

Buyers of such cash businesses are concerned about income and vocation not building equity.

 

[Jengah]

Hi Robert -

Can you elaborate on the "benchmark at $6,000 a month?" Is there a known percentage lease multiple for this industry?

BTW - The lease is NOT NNN. Given that a very similar property across the street is renting for $0.15/SF and this carwash is on approximately 30,000 SF, I'd think that the land portion of the rent/lease would be at least $3,500/mo.

 

[Jengah]

Hi JGinther -

I realize the deal as it is offered, that's why I'm asking how to construct a fair deal to offer the seller. Since I'm not experienced in the indutry I need solid reasoning based on industry standards to help support my offer when presenting it. Do you have any input on what you'd offer if you saw the P&L numbers listed for this deal?

As fas as selling a business, this happens all the time aroudn the world. I personally sold two flower shops where I leased the property, didn't own the fixtures, and essentially sold the opportunity for a person to walk into a turn-key business with an established customer base. All the buyer needs to do is provide the inventory (be it flowers or in this case soap and water and electricity) and manage the business.

 

[Greg Pack]

A few things:

I bet your expense won't be so low. Most are 35-40% of gross revenue

Someone could build in your market and take 35% of your business or more. It happens fairy frequently. In your situation you're pretty much left with nothing.

Most IBA/SS (probably 95%plus) are sold outright with operators expecting a 15% or so return on the investment. You're going to have a difficult time selling your interests.

If you really want it the safest thing is to offer to buy it outright.

 

[JGinther]

“….willing to get into the math of the absurdity….but I think its way easier than that.”

There is no easier path than the math.

Sure there is. I didn't have to do any math. Sometimes you can see a pig is a pig without getting out the book.

“….there is no way to sell the 'business' - you can't separate it from the building and land.”
This is done every day. For example, this seller is only offering the business-only.

No you can't. Explain how you can do this with a self-serve and automatic car wash. Its obvious that most businesses aren't as tied to their buildings and location, but a car wash is. I would like to see someone purchase the 'business only' of a car wash and move it to a building where a bike shop used to be. I would be wrong then.

Let business equal real estate, building and F/F/E and value of inventory at time of transfer.
So, land and building is incidental to value of business-only.

Yes but you can't have a car wash business without either - Matter of fact all three portions of a car wash (land, building, and business with equipment) are all mutually required. You can't have a car wash without all three - so why buy just one? I get that you 'can'. I just have no clue why one ever 'would'.

 

[JGinther]

I realize the deal as it is offered, that's why I'm asking how to construct a fair deal to offer the seller. Since I'm not experienced in the indutry I need solid reasoning based on industry standards to help support my offer when presenting it. Do you have any input on what you'd offer if you saw the P&L numbers listed for this deal?

I do, but it might vary with lots of other market research. There is too much to look at that doesn't even fit in the P & L. Not only that, I don't know anything about your market area. Other car wash people in your area would be a better source of information, but they may be weary of giving you too much info unless they are at least an hour away... If it were here, I would shoot for a cap rate of 15% and only buy the whole property, but I would research the market and new possible competition for 15 years first...

As far as selling a business, this happens all the time around the world. I personally sold two flower shops where I leased the property, didn't own the fixtures, and essentially sold the opportunity for a person to walk into a turn-key business with an established customer base. All the buyer needs to do is provide the inventory (be it flowers or in this case soap and water and electricity) and manage the business.

A car wash is a whole different animal. See my response to Robert Roman's reply for further explanation. I realize it happens all the time, but it never happens in the car wash world (without someone loosing hardcore) - unless someone is renting/leasing from themselves for tax/liability reasons; or they are in an area with such high real estate values that new car washes can't pencil out.

 

[robert roman]

“….all three portions of a car wash (land, building, and business with equipment) are all mutually required. You can't have a car wash without all three - so why buy just one? I get that you 'can'. I just have no clue why one ever would.”

Investor buys land $650,000, site improvements are $250,000, building construction is $650,000 and F/F/E is $650,000 or total project cost $2.2 million.

Gross sales year three is $700,000. NOI is $385,000.

Owner no longer wants to operate carwash but wants to keep possession of personal property.

The reason is the business now has market value of $3.5 million for 100 percent of the company.

So, owner sells “business-only” and becomes landlord.

The seller wants a price of $600,000 for “business-only.”

This price is function of adjusted cash flow, capitalization rate and liquidated value of F/F/E.

So, incidental to value is land and building as well as other assets and liabilities.

The seller accepts 50 percent down for cash business ($300,000) and finances balance at $3,100 a month.

The ground lease requires buyer to pay $20,000 property tax, $6,500 liability insurance and rent/amortization $133,800.

So, new owner (buyer) has EBTD $187,500 or 63 percent return on invested cash. This is pretty good reason.

Seller gets $300,000 cash plus $3,100 a month for 10-years and still owns everything plus no overhead as equity grows.

Everybody’s happy. End of story.

 

[JGinther]

In that case the seller is a moron. He is risking $2.85M for 600K - or really 300K. If the new buyer doesn't run it well, or new competition splits up the market share, the value plummets. It wouldn't be a big deal if it weren't for the special use nature of the Car Wash Building... The 600K purchase price is meaningless when the customer base is gone. Suddenly the land is the only thing left that is 'equitable'. The building is worth almost nothing (what can you do with a closed down car wash besides reopen it?), the FFE is worth maybe 20K (see car wash consignment and ask about recent sales). However, the investor wouldn't be a moron for building in a heavy managers wage... And the buyer wouldn't be a moron if he instead built a wash in the trade area if it is underserved...

 

[robert roman]

“If the new buyer doesn't run it well, or new competition splits up the market share, the value plummets.”

Unless the buyer is deceived with false income figures, a wash generating above average profits is a signal of its dominance, unmet demand or other conditions that need identified.

Nevertheless, it takes a rational person to plunk down over a quarter million dollars to acquire an income stream. Whereas experience shows irrational people are capable of running a profitable wash into the ground.

“….when the customer base is gone. Suddenly the land is the only thing left that is 'equitable'. The building is worth almost nothing…..the FFE is worth maybe 20K….”

Most properties in this condition usually have poor location characteristics and/or lose their competitive advantage. This means insufficient sales then become over leveraged then become upside down.

Most small businesses are business-only and own few assets. For example, there has to be at least 25 family-owned and operated pizzerias within several miles of my home.

All of them are leased restaurant buildings or storefronts. Can these businesses be moved? Certainly they can.

However, I doubt you would find one owner willing to do so.

So, how is this different than carwash cash business?

Tony’s Pizza in business three years, grosses $450K and nets $139K. F/F/E is $60,000. Assets and liabilities/equity is $41,000. 17-years left on lease.

How much is business-only (and statement of risk) worth to someone who wants to own and operate a successful pizza business without having to start from scratch?

Why do entrepreneurs buy Subway franchise and pay fee plus monthly royalties? The reason is the brand success represents a statement of risk before opening the door on a new store.

 

[Waxman]

$18,000/mo lease? 500k purchase price?

no deal

 

[JGinther]

So, how is this different than carwash cash business?

Once more... Its different because of the special use building. The pizza places can go in any storefront... Try to move a car wash into a storefront. THE BUSINESS IS A FUNCTION OF THE BUILDING! The building is purpose built for washing cars... Otherwise it is useless. There is no 'real estate' in the car wash business - its all business plus land. The FFE should include the building in reality. All of which are totally worthless if the business isn't making ends meet - which is why car washing is one of the the riskiest 'real estate' proposition out there... Only those who are good at operating the business will succeed. However, an investor could easily build a stripmall, take out one section for their own pizzeria... If the pizzeria fails, oh well, lease out the space! Mega difference in my opinion!

 

[Jengah]

With all due respect, rather then judge the deal I have in front of me which I obviously know is ridiculous, can anyone weigh in on what WOULD be a good, fair offer?

I'll review the facts:
- (6) bay SS
- (2) IBs (one RYKO, one D&S 5000)
- built in 2006
- Town population of 35,000, w/ two other washes in town.
- Gross Sales $340,000
- Expenses of $90,000

The opportunity does not include the land, building or equipment. Would offering $250K for the business and 15%-20% of Gross Monthly Sales be a good offer? Ask for a 10 yr. lease w. two 10yr. options. With $50K down and paying $50K/year for the next 4 years it leaves EBITA of about $130K/yr. (at 20% lease rate).