valuation - AZ location versus northeast location?

[2MCHPWR]

Hi - great forum you have here.
My friend runs 10 car washes in AZ and told me when he looks to buying a location with real estate, he tries to be about 6 times net income, but lately it should be about 5 times because of the economy lately.

My question is would that apply to a car wash in the northeast that has seasonal changes? Is that rate be applicable here as well? if not, what do you guys try to use for valuations?

thanks.

 

[robert roman]

If your friend operates 10 carwashes in Az., he/she should know that the value of goodwill is a function of a number of factors that will vary considerably from location to location. If it is chain operation, brand will need to be factored into the opinion of value. If he/she is an absentee owner, the earnings will need to be reconstructed so the opinion of value reflects the risk associated with the continued operation of the business. For example, unless you are a clone, your risk will probably be very different than the owner and/or operator.

Region also factors into an opinion of value as should area profile, the nature of competition and the latent distribution of demand.

Generalized cap rates are rather useless for determining the worth of a carwash and using rule-of-thumb multiples may lead you astray if you don't have in-sight to the business and fail to make objective assessments. For example, if you have no experience operating a carwash, your risk would probably warrant increasing a cap rate by several points or reducing multiples by some percentage. Moreover, the magnitude of this adjustment will vary by category of carwash and the nature of your competitors.

Anyone that tells you otherwise, you should take with a grain of salt.

 

[Patrick H. Crowe]

Dear Sir:

I wrote The Car Wash Appraisal Handbook. It is based on the ownership and operation of a chain of washes for more than four decades. For 25 years my partner was an MAI appraiser and we looked at 100's of washes, we bought only 9.

The book has sold thousands of copies. It was completely revised in 2009.

2 points: Car wash evaluation is tricky business. Due to space limitations on this forum I'll limit myself to one (of so many) reasons:

Most car washes consist of land, building, equipment and good will. Meanwhile nearly all "bidnez" in the USA is done in leased space.

Thus my essential point is that apprasising car washes is a tricky problem and most commercial apprisers have almost no hope of getting it right because it is a tiny and unique fraction of the commercial market.

For many years I hired commercial appraisers and was shocked to see their work titled: "A Real Estate Appraisal of . . ."

My secondary point: To use any sort of net income multipler is to invite peril. There are so, so many reasons but once again due to space limitations I'll mention just one of the many:

THE DEFINITION of net income varies widely. What's included? It varies so much that the figure either must be extremely carefully analyzed or, preferably not used at all. Just one example: what is included as a management fee? Moreover, as we all know, this is a cash "Bidnez". So how does that factor in?

I'll get to the bottom line. My few critics claim I should not tell readers of these postings that I am a published author, and not "hawk" my book as they would say.

Most of the very few other books on car washing sell for many times my price and so far as I am able to determine were not written by owner/opoerators. Mine sells with a 100% money back guarantee and I'm proud to say that less then one in 1000 has ever been returned. Try me, $29.97.

Patrick H. Crowe www.carwashappraisal.com

 

[Earl Weiss]

My 2 cents. Def of Net income varies, and so does what you may find on tax returns. A couple of examples. Saw a return for one. #s were showing triple the average. Place should have been busy as heck. It wasn't. Asked around. Conclusion was he was funneling other income thru wash. I could see someone buying it and being mystified that the sales were so much lower than expected.

Saw another for a c-store gas, and tunnel . Labor cost did not seem realistic for an oeration open 24/7. Only guess was underreporting some cash income to pay help off he books.

Saw others were for whatever reason managers' Salaries were deducted after net income factor. IMNSHO this was misleading as far as labor goes. Others being owner operated did not have a labor factor for owner salary. So any absentee owner would need to pay at least one extra person.

So, you need to know how it is defined and be certain what goes into arriving at that # is realistic. The Seller may have retired debt long ago. A buyer needs to figure in the cost of financing.

You can look at 5x net income as a 20% return, but it is not passive. You have to work for it.

Oh, and in the interestof full disclosure I have not written any books on anything. (Just a few articles).