How to value a carwash
It’s one of the first questions any new investor will ask when considering a new carwash build or existing location: How much is this carwash worth? For the past few years, I have presented a seminar on this topic at the Western Carwash Association’s annual show and convention in Las Vegas. I find the audience is typically split evenly between full service, express exterior and self-service carwash operators; all eagerly wanting to know what the current market values are due to the economy.
First, the bad news: Values are down by about 35 to 45 percent across the U.S. But don’t leave yet, I’m just getting started. I’m sure I’ll get a lot of mail over this “reality check,” but banks and appraisers both agree with me.
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The individual wanting a proper value of a carwash — with paperwork supporting that current value — has several options. The two most common are:
- Member of the Appraisal Institute (MAI) appraisal; or
- Opinion of Value (OOV).
To appraisers’ credit, they are bank/lender certified contractors who use a more intense appraisal report. This service generally costs $2,000-$3,500 per location and the appraisers will do a superb job — if they have direct experience and history of appraising carwashes.
Conversely to the MAI appraiser, there is the OOV. In this case, carwash consultants or persons like myself craft an appraisal for a fee of approximately $800-$1,500 per site. This service incorporates similar techniques to the MAI as an “acid test” of value for a buyer who would like a unbiased ‘opinion of value’ as to the value of a wash prior to making an offer. These appraisals can also be used by sellers or lenders in the sales process.
Full-service carwash values
Since 2008, there has been a severe 30 percent decline in the full-service carwash market value.* The person willing to spend $18 on a carwash customer is not washing as much. Some of these customers are even being slowly converted to the speed and economics of the evolving express wash.
There is one common way to determine a value: The income approach. In this way, a full-service wash would be valued on a multiple of its EBIDTA (earnings before interest, depreciation, taxes and amortization). Today, five to six times the amount of the EBIDTA is the reasonable multiplier contrary to the 1995-2008 cash cow days of eight to 12.
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To establish the EBIDTA, take the total profit center’s (including the wash, detail center, possible quick lube or convenience store, etc.) yearly gross sales and multiply it by .33. In the event there is fuel at the site, take .08 cents per gallon and multiply it by the gross gallons pumped. Add this figure to the gross before you complete your equation.
There are a few variables to keep in mind, such as:
- Condition of equipment;
- Site or absentee owner; and/or
- Possibility of road construction.
These are just to name a few. Like all wash valuations, the wash has to have a history of books and records from at least three years or the reproduction approach has to be used.
The value system relies on the cost to rebuild the wash. The respected equation is reasonable for a new build:
Land + Building + Equipment + Convenience store + Quick lube + Landscaping + Signage + Water and sewer hook ups + Soft costs + Start-up = Cost of new construction.
The comparable approach is based on other washes that have sold on similar gross sales and time period. But there’s not enough of these sales happening to be a reliable indicator.
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In general, the full-service wash model has the most potential for income because of the average base wash of $10.99 and its additional profit centers, however that also comes with a penalty of 40 percent* of gross income as typical payroll. Therefore, a break even before seeing a profit is to monitor the payroll and deliver exceptional service all in balance to achieve a minimum of 4,500 cars per month (goal: 9,000 cars per month) with an average carwash ticket of $18 without other services, such as detail or quick lube.
Although service is the key ingredient for success of the full-service, on-site ownership and the ticket writer can also determine the rate of success or failure.
Express exterior carwash values
The express exterior carwash started evolving around 2006 as an alternative to the long wash time and high price format of the full-service carwash. It resembles the full-serve model, except it can wash six to eight cars at a time and offers free vacuums at a price point that starts between $3 and $5 and the national average gross is $6.30 per car.
The key point here is the payroll of 11-15 percent for express versus 40 percent for a full-service wash, which makes this wash investment a superior value for the absentee owner.
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The income approach value is simple: Take the gross sales of the last twelve months (not the EBIDTA) and multiply it by four. Of course, the wash has to have a history of at least three years — which brings the wash into its prime. The goal is to begin the wash at 8,000 cars per month for the first year and at the end of the third year build a volume of 10,000 cars per month at $7 per car.
The reproduction approach as to the new build is just as with the full-service wash, only you are not likely to have any additional profit centers, like a quick lube or detail center.
All around, the express exterior wash model was crafted for speed, convenience, economy, and security for the carwash customer since they stay in the car during the five minute wash experience.
The market value of the express wash can rationally achieve a $4 million price tag and EBITDA of $400,000 (40%). If a buyer places $1 million down and finances $3 million at $20,000 per month, with a debt service of $240,000 minus the $400,000 EBIDTA, the investor should easily enjoy a minimum $160,000 profit — which is 16 percent before any deprecation, ammonization or any other deductions. Who couldn’t be excited about this, especially as an absentee owner?
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Self-service carwash values
Let’s get right to it. Valuing a self-serve (or coin operated) carwash is easy. The income approach is determined on a multiple of three to five the full amount of gross sales.
For a wash that seems to have inaccurate books (of which there are sadly more than a few in the self-serve segment), there are ways of determining the true gross sales dependent on the water usage, utility bills and chemicals. Consider hiring a carwash consultant to help you if this type of valuation service is needed.
The reproduction cost today is almost prohibitive. We would use the same formula as with the full-service of express, but the average revenues are much lower. The obstacle today is that the average customer in the self serve bay spends about $4.35 per wash and the automatic (which washes only one car at a time) generally generates only $5 per customer. These washes have to compete with the aforementioned express wash at a base wash of $5 with free vacuuming.
Notwithstanding the competition, there is an essential element of the self-serve wash customer especially in rural areas that cater to farm machinery, all-terrain vehicles (ATVs), duallie trucks, and other oversized vehicles.
The above valuations are at best an art, and not a science, since each wash has its own personality. Remember, a value is only an estimate. The new investor should be prepared to rely heavily on carwash consultants, brokers, and other unbiased experts to clearly evaluate the wash’s hygiene (books and records and trends). The value of these aforementioned multipliers are only estimates and to be used as a guide.
Be cautious in your due diligence and consider that an equipment manufacturer with a pro forma has an agenda.
I will close with a comment on denial versus reality on values. From 1990 to 2003, the carwash industry was experiencing a profit boom. An owner, buyer or builder could buy and flip a wash and make an easy 20-30 percent in a year. The rate of land increasing every year was a minimum of six to eight percent per year, added to the 20 percent profit margins increasing each year. It was a roaring commodity.
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Today, land is flat to declining, economy the same and financing difficult. So the denial part is from the current owners that either bought over the last five years high, or owners in the wash business hearing of inflated and high past sales that cannot comprehend the current price adjustment reality check.
Unfortunately, retirement, divorce, partnership dissolutions, health and burnout, just to mention a few, does not have any warning when a sale is involuntarily forced, reality then prevails. There is no negotiation to the Golden Rule: Get an expert to evaluate each model. It can easily prevent the devastation of over or underpayment.
*Author’s own estimate.
|Roger A. Pencek is the president and founder of Car Wash Brokers Inc., and has been selling and brokering carwashes since 1985.|