You can't afford to ignore
When it comes to running a business, money management and financial planning is more than just dollars and cents. It takes keen organization, knowledge, expert advice and an arsenal of other tools. To help car care owners better equip themselves with their financial disposition, we turned to three experts: Roger A. Pencek, president and founder of Carwash Brokers Inc., who has been brokering and consulting carwashes since 1985; Reuven Birnkrant, president of PetroCal Associates, a commercial mortgage brokerage firm; and Jim Phelps, president and owner of Capital Equipment Leasing.
Financing for a carwash in 2014
A lot has changed in a year.
By Roger A. Pencek
Back in 2013, I authored an article for PC&D entitled, “Financing for a carwash.” Here are the “revised and unleaded” facts for what owners and buyers have to digest in the financial world for 2014, specifically in buying or selling a carwash.
Buyers applying for a loan to close their ESCROW, and existing carwash owners applying for a loan for refinancing, have the same challenge: How do we get the money? This loan dilemma is the same challenge for existing wash owners who choose to convert antiquated full-service washes, to today’s popular express or flex operations. In 2014, the biggest obstacle for sellers is the fact that the last three years of P&L’s are generally in a “declining to steady income” trend. Lenders are putting more credence in the past three year’s performance than ever before. Small Business Administration (SBA) government lending is the most popular borrowing vehicle (20-30 percent down) for buyers and has tightened their already tough lending requirements for 2014. Alternatively, conventional lenders like, Wells Fargo and Bank of America, require (35-40 percent down) and specifically shy away from funding gas stations and carwashes due to their “single purpose” real estate profile.
So, the good news is seller carry back is the “new bank” which can be a win-win situation assuming the buyers and sellers have luck on their side.
Institutional (bank) financing
Banks and borrowers unanimously have a love-hate relationship. Banks love to talk lending money, but hate to give it up, and they’re relentless when it comes to debt collecting. To make the process easier, borrowers need to be prepared with what lenders require. The specific information that a banker wants is commonly accumulated in what is called “a package.” When a carwash is typically listed for sale, the seller transfers bit-by-bit information relating to the business to a broker for a potential buyer. The big problem is planning, pricing and organizing books and records in preparation of marketing their business for sale. To maintain the attention of buyers for lenders, pertinent information must be assembled at the beginning to avoid buyers and lenders losing interest.
Paramount to the sales/financing process is getting all of the complete information upfront for multiple lenders to review. The buyer’s accountants and lenders can then immediately start mustering the seller’s books and records; simultaneously appraisers can then begin their review. The obvious delay factor of time, which is the common deal breaker, is avoided when a proper package is prepared and a deal can commence. Each package will include the items on the partial list below. Any lender will require these items to do an “acid test” on the borrower as well as the strength of the carwash as collateral. Remember, the borrower and carwash business are both under the bank’s microscope, and have to be financially strong and clean.
List of items needed:
From the seller:
(Purchase and sale agreement, with asset allocation breakdown)
- Year-to-date business financials (income statement and balance sheet)
- Seller’s last three years of IRS tax returns
- Seller’s last three years P&Ls with balance sheets
- Last 12 month rolling P&Ls
- Daily record book (DRB) or comparable monthly report for last rolling 12 months
- All leases (including, but not limited to, landlord lease, if applicable)
- Complete list of all equipment
- Complete list of personal property
- Complete list of all employees with payroll records (DRB)
- Copy of current appraisal (if available)
- Current surveys (if available)
- Current Phase I (if available)
- Current plot map (if available)
From the buyer:
(Purchase and sale agreement, with asset allocation and breakdown)
- First-year sales and expense projection after purchase
- Business profile (to support projections)
- Personal financial statement
- Source and documentation of buyer’s cash injection (bank statements, gift letters, brokerage house statements, etc.)
- Last three years of buyer’s individual tax returns
- Management resume on buyer’s and existing management
- FORM 4506 — Request for transcript of tax form signed and dated only. Lender will complete information
- Authorization to do a credit check
Note: Once the information is gathered call the lender to pick up information. Prequalification or a decline notice typically will be provided within 48 hours by the lender. A prequalification letter will be delivered to the buyer directly by the lender and an initial interview will be set. The selling broker and borrower should attend.
A well-prepared list will allow the lender to expedite their decision. Most likely the borrower will “shop” two to three lenders, speed up the process, and give the borrower a negotiating position. Keep in mind, a full-service carwash is a “single use business” and therefore, more risky for lenders. Targeting banks that specialize in that market is to your benefit. Visit www.carwashbrokers.comfor a reference list of qualified lenders. The information above is more of a fast track model to obtain a decision from a lender; sale, or a conversion to an express and or a remodel.
The initial goal is to be approved by the lender within the first 10 days of the loan application with a Letter of Interest (LOI), describing the terms of the loan and approval notes. During the next 45 days, after accumulating the lender contingency data, a Letter of Commitment (LOC) is ultimately issued. A loan is then approved and the buyer is ready to sign for 20-30 years, closing 10-20 working days thereafter.The whole due diligence-loan approval takes about 75-90 days.The following equation is a basic “acid test” formula that will save everyone a lot of time and generally qualify a borrower for an institutional loan:
- 2014 (25-40 percent) down payment (balance of the purchase price to be banked);
- Excellent borrower credit (see page XX);
- Experience in the carwash business;
- Carwash business includes the land; and
- Three years and year-to-date carwash P&Ls plus tax returns, minimum of
30-35 percent Earnings Before Interest, Taxes, Depreciation and Amortization (EBIDTA).
These five items can assure most borrowers that a loan will be approved
Seller carry back
This form of carry back financing is when the carwash owner (the seller) is the “bank.” As an example, the buyer will typically put 20–35 percent cash down and the seller will take a promissory note for the:
- $1 million Sales Price
- $250,000 down (25 percent)
- $750,000 Promissory Note from Seller to Buyer including 8 percent interest amortized over 10 years payable in equal amortized payments of $__________ (no prepayment penalty) commencing 30 days from Close of Escrow.
Buyer will give a personal guarantee note with a Due on Sale clause. This type of financing is typically designed when the carwash is on leased land or if there is soil contamination. The caveat here is that the sellers must have a long and desirable lease on the property.
Institutional (banks and insurance companies) and SBA financing is a process that may typically take four months or more to complete. SBA is generally more expensive to obtain a loan (fees $15,000-$45,000), but requires 25-30 percent down versus conventional lenders who require 35-40 percent down. All lenders will have to order current appraisals, environmental reports, surveys and title policies which all consume valuable time. There are very strict guidelines for both conventional and government SBA loans. Currently, bank commercial lending rates are very desirable; therefore, the conventional and SBA bank financing can be unpopular. The challenge, of course, is in proving your business to the lender.
Borrowers have to qualify, the business has to show 30 percent or more EBIDTA, and impeccable records, to confidently qualify.
Carry back financing, commonly referred to as a “land contract” since the 2008 financial meltdown, is becoming more popular and by far the easiest financing to obtain. Depending on the comfort level of the buyer and seller, due diligence from the time of opening ESCROW to closing, can take 15-30 days. Often, in a typical sale, the seller’s tax implications, take all the money from a sale at closing, which is ultimately not tax favorable (capital gains tax). The synergy of this type of lending is generally beneficial to both parties. Both buyer and seller can speed up the sales process with a carry back promissory note, a lower down payment for the buyer (20-25 percent), and a balloon pay off can be structured structured, and the seller can do some tax planning. Buyers do not have to muster the strenuous red tape loan requirements and sellers know their collateral is valuable. Disclaimer: Each U.S. state is different as some are mortgage or deeds of trust states; Check with your CPA or attorney as the crafting and repercussions of this type of carry back financing; generally the seller retains ownership to all the assets (as collateral via a recorded lien, known as a chattel security agreement and UUC filing) until the note is paid in full). The traditional lending criteria and restrictions are forcing most sellers who have no debt on real property to consider being the “bank” since they can take the down payment and use the carry back note, which is a recorded first lien on the property; and then use the payments as an annuity backed by collateral. They can then go in and resell in the event of a default or hypothecate if they need to borrow against the equity of the property. The borrower (payer) and carry back lender (payee) should be aware that legal representation is highly recommended due to an array of issues:
- Prepayment penalties
- Due on sales clause
- Personal guarantees
- Balloon payments
- Interest increases
- Note assignment clause
- Acceleration clause
Carwash Brokers, Inc. is not MAI Certified or in any way claims to be certified appraisers, and does not purport to be experts in appraisals. CWB’s “acid tets,” opinions of value or market value analysis are estimates and purely based on real estate expertise in listing and selling carwashes. For purposes of bank financing, CWB Inc. recommends a Certified MAI that specializes in carwash appraisals. Roger A. Pencek (Author) is the President and founder of Carwash Brokers Inc., and has been brokering and consulting carwashes since 1985. Roger is licensed as a broker in nine states with 14 offices within the USA.
Best business practices for money management
By Reuven Birnkrant
Carwash operators have differing opinions on best business practices. For every operator that prefers pay stations, there is an operator who prefers ticket writers. Put five carwash operators in a room and you’ll have five opinions on which equipment manufacturer makes the best tunnels. However, there are two practices in particular that should be universally accepted as superior for multiple-site operators. Those practices are keeping separate books and records for each location, and holding title to separate locations under separate legal entities. Whereas the simplicity afforded by only having one legal entity or one bank account for multiple locations seems ideal to some, that simplicity can quickly turn into unnecessary complexity when it comes to financing, optimizing operating efficiency, selling a location and limiting legal liability exposure.
Site-specific performance measurements
When it comes to financing, the importance of measuring site-specific operating performance cannot be understated.
If a multiple-site operator needs a loan, whether it’s a refinance of a real estate mortgage or a lease for some new equipment, the vast majority of lenders will underwrite the cash flow on both the individual site requiring financing and the combined cash flow of all of the operator’s locations. Even if the combined cash flow of all of the operator’s locations is sufficient to cover the requested loan, lenders will underwrite the cash flow of the location they’re being asked to finance because there can be a big discrepancy in the operating performance of an operator’s strongest and weakest locations.
Though lenders might be willing to provide financing in a turnaround situation, they won’t be willing to do so if they cannot determine how much of an uphill battle the site they’re financing is facing.
Tracking income and expenses
In addition to simplifying the financing process, tracking income and expenses by location can help operators increase their profits by optimizing operating efficiency.
Whereas every location has its own utility meter thereby making it easy to track utility expense by location, the same does not hold true for all expense categories. For example, though an operator might receive discounts on chemical pricing based on the combined volume of multiple locations, it is important to keep track of chemical usage by location.
One way to identify a delivery issue with one of the tunnel arches would be if the operator notices a spike in chemical usage at one location without a corresponding spike in wash volume at that location. However, if the operator does not track chemical orders by location, what would constitute a clearly abnormal and easily identifiable spike in chemical usage at one location might be disguised as a minor, normal fluctuation in chemical usage across multiple locations. Every gallon of unnecessary chemicals wasted is profit unrealized. This example demonstrates merely one way that tracking operating income and expenses by location benefits multiple-site operators in a measurable way.
An avoidable complication
Commingled operating financials also creates an avoidable complication for a multiple-site operator who wants to sell one location. The ease of selling a location is much greater if the seller can provide a potential buyer with clean books and records for the site being sold. The more accurate the information given to a buyer during due diligence, the easier it will be for the buyer to assess the strength of the site they’re considering buying.
Additionally, if the seller is not going to finance the purchase for the buyer, and the buyer requires a loan that necessitates an appraisal, the appraiser is going to request historical site level financials in order to complete their valuation. The absence of reliable site specific financial statements can cause a buyer to have both the financing and appraisal challenges mentioned above, thereby limiting the pool of potential buyers to exclusively those with all cash offers. In summary, the likelihood of a smooth and simple sales transaction decreases significantly if a seller can’t produce reliable, site-specific financial statements.
Keeping things separate
Whereas doing something as simple as having separate bank accounts for each location can go a long way towards improving one’s ability to track site specific performance, in most cases, it is worth going one step further by vesting each individual location in its own separate corporate entity. Legal complexities can arise if multiple locations are vested in the same corporate entity. If an event occurs at one location causing the entity to be named in a lawsuit, and the entity has multiple locations vested within it, a ruling for the plaintiff puts all of the locations vested within that entity in jeopardy as opposed to exclusively affecting the location where the event occurred. Prudent business practice dictates that any practical method of protecting one’s assets should be exercised especially when operating businesses that see thousands of customers every month.
There isn’t one financial or legal structure that works for all multiple-site operators. Talk to your accountant and your attorney about the bookkeeping, banking and legal structures and controls that best suit your operation. You will likely find that with a few minor changes, you can improve your operation in a way that leaves you better prepared for a loan, a sale or even a lawsuit while most importantly improving day-to-day profitability.
Reuven Birnkrant is President of PetroCal Associates, a commercial mortgage brokerage firm that has specialized in financing for car wash, gas station, and convenience store owners and operators for over 15 years. Mr. Birnkrant is also a California licensed real estate broker and can be reached at firstname.lastname@example.org.
Loans and credit score advice
A Q&A with Jim Phelps of Capital Equipment Leasing Inc.
Q: What’s new in the financial world since last year?
A: Credit is easier to get. However, you may notice that interest rates are starting to creep up. Historically, interest is still at the lowest rates in years. I remember a bumper sticker on a real estate agent’s car in 1972, “Happiness is 6% interest.”
Q: What do today’s car care business owners need to know if they are looking for a loan? (The question you asked doesn’t really fit the structure of how he answered the bullets)
A: I’ve said this before and I think it bears repeating:
- Poor personal credit.Most businesses are closely held or have a limited number of shareholders. In those instances, a personal guarantor is always requested. You must take care of your personal credit as well as your business credit.
- Not enough cash flow. This is usually demonstrated by the average daily bank balance. Many businesses try and show little or no profit for tax planning reasons. That may be good for reducing tax liability, but when you deal with a lender, they want to see net worth and enough extra money above operating costs to service the loan or equipment lease. Sometimes your CPA can be “too good.”
- No experience or not enough time in business. It doesn’t make sense for a garage mechanic to start a restaurant. ... Length of time in business also demonstrates staying power, so the longer you are in business the better chance of getting a loan.
- Business shows a negative net worth.
- Business shows operating losses. One year may not kill you. It will hurt you. Several years of operating loses will kill you.
Q: What do today’s car care business owners need to know if they are looking for credit score information?
A: The credit score you get from the free credit score services are not accurate nor necessarily a true reflection of the credit score that lenders use. Various lenders have their own scoring system and credit models created for them by the credit reporting agencies. Those agencies make it clear that we are not to share that information with the applicants. The best you can do is to follow the steps outlined above. Also, try to keep your revolving credit card debt limited. Lenders are concerned if you show a lot of credit card debt. Typically you should have no more than $30,000 to $40,000 of credit card debt and have used 50 percent or less of that credit limit.
Q: What do today’s car care business owners need to know about the importance of good record/book keeping?
A: Good record keeping is very important. You can secure an equipment lease based upon your time in business, but generally that is limited to companies that are two or more years’ time in business. The longer you are in business the more you can secure, usually up to $100,000. However, we will want to see the last three months’ business bank statements to show that you have the cash flow to make the payment. You have to run all of your receipts through your bank account. If you want a major loan from a lender or a lease over $100,000, you will have to present financial statements and tax returns. The better those look, with backup information, the better your chances of approval and the better the loan/lease terms.