Purchasing first car wash

[Sydmax]

Friend and I are looking to purchase our first car wash, preferably full service or express. We are not interested in self serve at this time. For a little background, neither of us has car wash experience. My buddy is in corporate finance and has owned a couple of small frozen yogurt places that he sold a few years ago. I have never owned a business before but I work in banking and have actually financed a few car washes in the past.

We've been looking recently and came across a few washes in the area that are up for sale. Our research had shown that the prevailing attitude is that not only do you want to own the business but you also want to own the bricks and ground. We've seen some say that's not necessary and you can find good business only deals. But our focus has largely been on full purchases of business and property.

However, we did come across a business only full service car wash. EBITDA on the surface (we have not seen the full financials) seems to be around the 30% of gross range. Purchase price is significantly less than a land included deals we've looked at. It peaked our interest for a few reasons. One, could there be a benefit to buying a smaller operation first, getting our feet wet and understanding how the business really works and then moving onto a larger operation (our long term goal would be to own 2-3 car washes in the next 5-7 years). Two per the limited info we have the owner has mismanaged the business. No advertising, no promotions, etc. Three, the purchase price is lower than other places we have looked at and gives us a chance to enter the industry with a little less risk than if we took on a larger place with more debt, cash tied up, etc.

We would do extensive due diligence because this broker appears to be a business broker not a specific car wash broker. Per the listing, the equipment is in decent shape. New cloth on the equipment, new conveyor in the last 7 years, 100' tunnel. Equipment is apparently Sonnys. So on the surface it looks to be in decent shape.

Our question to some of you more seasoned operators, do you see any benefit in a business only deal that isn't a significant outlay of cash and debt (relative to larger, land included deals) in order to get some experience and a feel for the industry? Or would we be wasting time digging into this type of transaction and focusing on a larger, land included site?

Sorry for the length of the post!

 

[robert roman]

“….benefit in a business only deal....in order to get some experience…..Or would we be wasting time digging into this type of transaction and focusing on a larger, land included site….”

Answer depends on goals and objectives.

If the desire is to wash cars for a living, it would probably make more sense to get a job at a full-service and/or express facility to see what all the excitement is about.

Full-service is a contact sport - 20 percent equipment, 80 percent customer service.

Most operators have to work at marketing to create an image that draws in customers.

Fake smiles won’t work.

Full-service typically comes in three flavors – cash cow, benchmark performance or expensive job.

Express is like vending industry – 90 percent equipment, 10 percent customer service.

Image is achieved mostly with visual appeal like big, bright and modern and then discounting the hell out of it (i.e. low price, unlimited, free amenities).

Customer service is delivered with self-pay terminals, smile attendants, internet.

Eight out of ten new conveyors today is express and many are absentee ownership.

If the desire is land play, it would probably make more sense to focus on deals, costs and market conditions to minimize risk of getting stuck with property.

Hope this helps.

 

[Waxman]

i don't think 'learning the business' is a good reason to buy a wash that doesn't include the land and imporvements. if you want low risk, work even part time at a wash like what you would like to operate. that is just what i did.

i enjoy my wash and after 10+ years in business i have become somewhat knowledgeable and seasoned. car washing gets in your blood and is a way of life for many of us. it is a hands on business and requires a big time commitment. perhaps a long-time operator could step back and run the business in a hands-off way. however, for a new investor with no experience, i can see a thousand ways the project would fail.

the car wash business is complicated in its equipment. customers can be demanding and fussy. labor utilities and chemicals are expensive.

 

[TEEBOX]

A response from a former banker: Do not purchase with out the bricks and mortar. Also, if you plan on making a living at this profession, you must go all in. Assuming by your post ID you live in Jersey, Don't just look at the long lines during a busy winter day, the 3-4 previous days were probably dead because of bad weather conditions. You have no clue what it takes to operate a conveyor, it's constant maintenance when your open and when your closed. Also, with minimum wage going up within the next 4-5 years that is going to take away from your profits.

I agree with Bob, it's all about the curb appeal. I charge a little more for my express wash but my location is brightly lite at night and clean. I don't allow solicitors or beggars on the property, my female clientele appreciate it a lot.

If you are planning to get in because like i did, I loved the car care industry jump in, if it's for flipping then stay away.

You will be disappointed!

 

[Pjtmiii]

I’m still a little confused about why so many people feel so strongly about owning the land also. I do not own a car wash yet so don’t have that experience but in heavy into real estate with well over 20 properties and truly can’t understand the idea.

Would it not be a good business if you can limit your risk for your lease terms with a very long-term lease and renewals? If the numbers work the numbers work. I don’t understand the problem with having to have the property. It sounds like you were all talking about owning the property from a risk standpoint so using your lease to manage risk would 100% cover that. Depending on your lease terms you could also theoretically pull out more money in operations if you have a great lease terms then if you had to purchase highly appreciated property in 2019.
We are looking to purchase a car wash in the next five years so understanding this will certainly be helpful. Thanks in advance for your advice.

 

[MEP001]

If you can work out the perfect iron-clad lease, then yes, you could buy the business and not the land. It's just highly unlikely someone will sell you the business for the right price and under the perfect conditions. It's also going to be extremely difficult to get a loan on a business/building on leased property because you won't have the equity of the land to support the loan. IMO best case would be owner finance on the building with a very long-term lease and either a right of first refusal to buy the land if it goes up for sale or a clause in your lease to make it transfer on sale.

 

[Pjtmiii]

If you can work out the perfect iron-clad lease, then yes, you could buy the business and not the land. It's just highly unlikely someone will sell you the business for the right price and under the perfect conditions. It's also going to be extremely difficult to get a loan on a business/building on leased property because you won't have the equity of the land to support the loan. IMO best case would be owner finance on the building with a very long-term lease and either a right of first refusal to buy the land if it goes up for sale or a clause in your lease to make it transfer on sale.

Thank you, I appreciate the Intel. We almost bought a car wash in South Jersey a few years back and luckily we have a pretty good working relationship with a few of the banks we use for real estate. I didn’t even consider the equity in the land as security for the loan if you purchased the land. That may help get over some speed bumps if the numbers aren’t great. Thank you.

 

[CarWashAdvisory]

Hey everyone, I know this thread is a little stale - but I'm hearing a lot of questions on this lately - so I wanted to bring up a few points and put them out there.

@MEP001 - I agree with everything you said. I just wanted to add a few more thoughts.

The Short:

Owning the real estate in addition to the business is desirable as a purchaser for three main reasons:

(1) The Most Surface Level Reason - Simplicity, Confidence, and Comfort

• Not having the headaches of dealing with a landlord
• Not having the potential risk of a less than airtight lease erupting into a scenario that could end or disrupt your business

(2) The Intermediate Reason - Optionality

• At some point (theoretically that is) - the decoupling of the real estate from the business will occur. As dug into below (in 'The Long'), they are different return profiles and tend to lend themselves to different buyers. Due to such, there is value to be unlocked for whoever the joint owner is at the time when this optionality is exercised (and the decoupling occurs). Most people want to be in that beneficiary position.

(3) The Deepest Reason - Downside Protection and Liquidity

• By owning the land and not having to pay rent, the business owner can be more confident and able to both (A) weather tough times (by having more free cash flow due to not having to pay rent and healthier profit margins due to such) (B) recoup some of their invested capital in the case of the ultimate bad time and business closure.
• Liquidity is often overlooked, but by having the real estate and business together, the buyer universe (due to the aforementioned reasons) is larger. Thus making it easier to sell - especially in tough times.

Now don't get me wrong, as others have pointed out, the ability to gain financing, price disparities, etc... there are other reasons and factors at play here. I just want to state that there is a flip side to this coin (not arguing for either or - as there is no single answer). Although the advantages of owning the business without the land are rarely spoken about, there are pros and cons to both - this is not a "right" or "wrong" question. This is a trade-off. Along with owning the real estate comes real estate pricing risk, the requirement to tie up more capital, and generally speaking lowering your expected return per dollar invested (all else equal). It's a trade-off. Sometimes the decision is made for you, as you may be unable to secure capital or financing without the real estate being part of the collateral pool. But in many cases, it's a choice, and in those cases, it's a trade-off.

What's even happening now more than ever before - is people buying car washes with the real estate, and then selling off just the real estate immediately after (while retaining ownership of the wash, business, and operations), to lower cost basis, free cash flow, amplify returns, capitalize on the real estate demand right now.

I’ve actually got an article coming out on this shortly. I tried to just post the whole thing here in my response – but it hit the word limit. But if you would like to know more about how this works etc… I’ll post a link to that article when it comes out (if I’m allowed to – I’m not sure what the forum rules on that are). It will provide color on all of this with tangible numbers demonstrating all the points in a real-life true scenario.

 

[MEP001]

I'm sure no one will mind what you post as long as you don't try to pull forum members' questions away and into your business like you tried once before.

 

[water guy]

Money and the Computer can take the place of experience.