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A vested interest in carwashing

October 11, 2010
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During the course of this fiscal year, interest rates have been slowly rising from federal economic pressures, which may slowly close the window of opportunity for carwash owners working to expand or open new operations.

According to a recent Bloomberg report, Federal Reserve Chairman Alan Greenspan gave no indication that he has any intention of lowering rates in the near future, partially brought on by a looming inflation and today's housing rates.

While it may be true that the past year's extraordinarily low rates increased, and the chance that people would be more likely to invest in new businesses' has decreased — to date, the carwash industry shows no loss of investors due to the climbing rates.

This leads to several inevitable questions:

  • If interest rates continue to rise, will new development level off?
  • Has the industry seen its peak in independent wash investors?
  • Will segments of the carwash industry struggle?
  • What can we expect for the future of the industry's investments?
Yesterday

June 1, 2004

According to a Bloomberg report released on July 19, Federal economic regulators began raising interest rates in June of 2004 when the federal funding rate was at a 45-year low of one percent after the central bank slashed interest rates to combat recession.

What these low rates did was help small business owners secure loans with low interest rates, thereby increasing entrepreneurial interest.

The carwash industry was just one of the few industries that benefited from the low interest rates. Advantages were gained by new investors and old alike.

New investors

New investors in the carwash industry were able to secure larger loans at a lower interest. With a larger amount of money at play, new investors were enticed to build bigger or even multiple sites.

Current owners were able to take out loans for new equipment, site upgrades and property improvements.

According to Alan Bussey, founder of CarWashLoans.com, a company that specializes in securing loans and funding for individuals in the carwash industry nationwide, the low interest rates of the recent past and a combination of other factors that improved the economy helped to increase the number of new investors in the industry.

The improved economy and financial circumstances made lenders more willing to make loans to carwash owners, Bussey explained.

More importantly, Bussey noted that the cash flow of carwashes just a few years ago was higher in relation to the interest rates and that produced an excess cash flow, which spurred further transactions and investments.

Express expansion

Another result from the previous low interest rates was a lower cost of entry into the carwash industry and other investment avenues.

According to Jack Anthony, owner of 7 Flags Car Wash, Vallejo, CA, and current International Carwash Association (ICA) president, the low interest rates and relatively flat stock market assisted in a lower than normal cost of entry, and the subsequent interest and expansion of the express exterior segment.

Anthony explained that the accessible funding and lack of labor component has helped the express exterior segment explode.

Mark Thorsby, executive director of the ICA, agreed that the advent of the express exterior trend began about two years ago and has been popularized, in part, because it doesn't require a large financial investment.

According to Bussey, the introduction of the express exterior, which may have been partially facilitated by the lower start up costs associated with low interest rates, has brought the industry to its current standpoint where the cash flow has been impacted by a larger number of carwashes, particularly express exteriors, and significantly greater competition.

Today

September 1, 2005

Although interest rates are currently on the rise, the good news, according to Thorsby, is that all financial indicators suggest that the next 18-24 months are looking pretty stable.

Essentially, this means that for the time being carwash owners and potential investors have some breathing room and can relax a little bit.

Anthony isn't very worried about the current financial stability of the industry. He agreed that as long as the interest rates stay reasonable, around 7 to 8 percent, there won't be a major impact on the industry.

Manufacturer opportunity

Carwash owners and investors aren't the only people who have benefited from the surge in available financial resources. According to Anthony, manufacturers are in a good position because wash owners have also focused on re-equipping and updating systems.

Thorsby agreed with Anthony's sentiments, explaining that manufacturers have been, and will continue to, promote upgrade options. The combination of new sites and equipment replacement at existing facilities has made for a profitable year despite the slight rise in interest rates.

According to Anthony, regardless of the slight surge in new investors the low interest rates may have provoked, there are still a lot of underserved markets in the US.

This observation implies that the profitable period for equipment manufacturers is far from over, if as Anthony explained, prospective owners do their homework and put their sites where they are needed.

Fierce competition

At the moment the surge in exterior-only carwashes is having an affect on other washes. The new express-exterior competition means that business is being drawn from full-service, self-serve and in-bay wash operations.

Although Bussey admits that he believes the "jury is still out" on the long term success of the express exterior, during the intermediate time period, if the news appears to be good regarding the express segment the industry will see more and more express exterior and henceforth more competition.

Thorsby said that the express trend is at an all-time high and he can't predict at the moment if it will begin to decline. He noted that the express carwash is not for everyone and tends to work best in areas where labor is a more serious problem.

Caution to the wind?

Despite the apparent stability of the market, some industry veterans warn against throwing caution to the wind.

Gary Pendleton and Paul Dadgar, senior advisors at ProWash Consulting, LLC, Beverly Hills, CA, have observed the gradual increase in interest rates in the recent months and recommend that potential carwash buyers remain cautious at this time.

Investment specialists, like Todd Rosin, spokesperson for Bank of America's small business division, agree that while investment in the industry remains strong and has a great appeal, the interest rate increases could affect small business loans in the future.

"While low interest rates have definitely made it easier to start a carwash and manage one these past few years, we've definitely seen an increase in some rates, which could affect SBA 7(a) Express, and 504 loans over time," Rosin said.

No matter what the interest rate environment is business owners need to have a very strong, strategic business plan for how they're going to develop and grow their company.

"You can't let moments of great opportunity go by, but you also can't allow those opportunities to blind you," said Rosin. "It's very important that business owners work with their bankers or loaners to plan their carwash's growth well in advance. If you know what you'll need, make sure to plan for it today so you're prepared for credit tomorrow."

Tomorrow

January 1, 2006

The financial road ahead hasn't been mapped out for anyone, but for carwash owners it's safe to say that consumer education has brought the industry to a wonderfully enlightened place.

"The motorist is aware of the benefits of professional carwashing now more than ever before," Chuck Howard, founder of Autobell Car Washes and Howco, Inc., Charlotte, NC said in a written statement to Professional Carwashing & Detailing magazine.

Rising rate reality

Howard conceded that yes, rates are going up and probably will continue to do so for some time. He stated that the low interest rates of the past few years will not return for a long time, if ever.

If rates continue to rise, according to Thorsby, traditional economics would say that it will tighten up credit and slow lending down — meaning fewer investors, fewer new sites, and fewer business expansions.

Thorsby believes that the carwash industry is strong enough to sustain growth and expansion for a fair amount of time even if interest rates continue to rise. However, he noted that there could be a point where investment in the carwash industry would not be sustained if interest rates reach a particularly high level.

Anthony believes that if interest rates spike it will affect businesses and industries everywhere.

According to him, the stock market is another factor that may keep new investors looking toward the carwash industry.

Anthony said that if the stock market shows a steady climb, people will be happy to invest in it.

However, if it's a flat or declining stock market people will take their money out and look for other places to invest it, and the carwash industry is just one of those places.

Bussey explained that right now, the slight increase hasn't affected the rate of return on a carwash investment yet.

If interest rates get up to where people are paying over 10 percent, it could possibly reduce the number of investors because they might be able to get a better rate of return elsewhere.

Lending

Eleven years in the carwash lending business has given Bussey a unique understanding of the industry. He admits that banks and other lending institutions aren't jumping at the chance to set up loans for future wash owners.

According to Thorsby, the desire to invest in carwashing will always be there, but people will need to start raising funds from private sources.

Anthony said that he thinks the entry level area of the wash industry will become harder and harder to break into as the interest rates go up.

This means future wash owners are going to have to be resourceful, organized and willing to work for the money they need.

Harvey Miller, president of Car Wash/Oil Lube Consultants, La Quinta, CA, said that to offset the rate increase, commercial banks are working with Small Business Associations (SBA) to package loans that are fully amortized over 20-25 years.

Current owners will continue to refinance their current locations if they have a poor loan or if their business and property has appreciated and they want to get equity out of their property and business.

Who will grow, who will go?

What does this all mean for each individual segment of the carwash industry?

The self-serve arena may see a slow down, according to Thorsby. He also said that in-bay automatics will continue to be primarily located at gas stations and c-stores and will be financed mostly through oil companies.

The small investor will be the one who won't be able to negotiate as attractive rates, Thorsby said. He'll have to borrow more money to get started. Typically, this is a self-serve owner.

According to Thorsby, the conveyorized segment, such as the express exterior, full-service and exterior only will sustain its growth longer.

Anthony said that he does think full-service carwashing will continue to grow, but that the express exterior has become another strong player in the market. The express sector has seen the most recent growth and he doesn't foresee it slowing in the near future.

In the past, two out of three conveyor carwashes were full-service, Thorsby said. Now, two out of three are exterior washes. He predicted that pretty soon the industry may see three out of every four offering an exterior-only or express exterior option rather than full-service.

Consolidation

One thing that may begin to shift in the carwash industry as the economy transforms is who owns what washes and how many.

With carwash franchises like Rápido Rabbit® beginning to make headway, the industry may begin to hear the buzz about franchising and consolidation on various levels.

Industry experts have predicted that the industry will continue to see consolidation on the retail level, and that there will not be a decline in the number of locations, but rather a decline in the overall number of owners. The industry may see a growth in locations, but in the end, there will be fewer owners of those locations.

At the beginning of this year, the industry saw a major consolidation when Jim Coleman Co. purchased the Hanna Brand and united two of the strongest manufacturing forces. Thorsby believes the industry will continue to see consolidation of this sort on the manufacturing level.

If you build it … will they come?

Most new investors in any arena choose to invest in a particular business for several reasons. Obviously, financial gain is one of the most influential factors.

Although carwashing can undoubtedly be a profitable business, Bussey said his experience has been that people don't get into the carwashing industry only because they can get a high rate of return.

People invest in it, at least partly, if not mostly because they have a genuine interest in the business, regardless of the rate of return. Bussey said that rising interest rates may cut out some investors, but not a significant number.

Furthermore, with the length of time Americans are keeping cars, the fascination with the automobile and its appearance, and the increasing awareness of the environmental benefits of pro-washing, anyone who can cope with the rising interest rates, secure the needed financial backing, and secure a good location will likely find that carwashing is as lucrative a business as ever, even if the demographics have shifted a bit.