Professional Carwashing & Detailing

Study your wash before you invest

October 11, 2010

There are a number of activities that must occur before an investor can submit a loan application for a carwash project.

Some of these are:

  • Researching the industry;
  • Searching for suitable property;
  • Determining the eligibility of the site as a carwash location; and
  • Developing a study to determine the feasibility of the project.

The ultimate goal of a carwash study is to demonstrate that the project has sustainable earnings growth, a dominant market position, a strong balance sheet and abundant cash flow.

Pro forma financial statements
Pro forma are income and balance sheet statements that are projected for future years. The cash budget and pro forma income statements act as inputs to the pro forma balance sheet and the sales forecast is the key input to all statements.

The sales forecast is a key input to the investor’s financial planning process. Sales forecasts can be developed with a number of methods.

Some equipment distributors have been at this for so long that they have developed a keen sense for determining eligible sites, the market potential of a trade area and the yield of a site based on their intuition.

While this may be acceptable to the investor, lenders want to see quantitative results in addition to the qualitative aspects of analysis.

As such, invest-ors must rely on equipment distributors, independent consultants or themselves to produce a carwash study and a business plan.

Why bother?
The purpose of a carwash study is to determine eligibility of location and the financial and operational feasibility of the project subject to reasonable assumptions and limiting conditions.

The notion of reasonable and limiting conditions is critically important to investors because the carwash study often serves as the baseline from which the business plan is produced.

From an investor’s perspective, the worst possible scenario would be to have a site that is overrated, development costs that are under-estimated and sales forecasts that are overly optimistic.

This could lead to pro forma statements that are unrealistic. If so, the result could be a carwash that may make money but performs well below the investor’s expectations.

Does it follow a logical sequence?
If a carwash study is presented in a manner that does not follow a logical sequence, the investor should have serious concerns with the validity of findings.

Typically, the sequence of activities includes site and location analysis followed by a complete demographic analysis, market survey and estimates of market potential and site yield. Only then is there enough information to produce a meaningful sales estimate.

The next logical step would be to develop a preliminary site layout followed by an estimate of the expected development costs. Following this, the analyst can develop the sales forecasts and then the pro forma statements.

Again, if the carwash study doesn’t appear to follow a logical sequence, the investor should be concerned with the possibility that the study may have been cooked or developed in a piecemeal fashion where cause and effect has not been established and carried throughout the analysis.

The score

There can also be problems with the methods that are used to develop carwash studies. One example is the location analysis worksheet that many equipment distributors use to rate sites.

The location worksheet is based on a set of physical and socio-economic factors that are thought to be well suited for determining the eligibility of a location as a carwash site.

The outcome of the worksheet is a score that is used to rate the site. Some of the inherent problems with this approach are that the worksheet is based on a qualitative ranking that considers average or normal values and the evaluation of the results can be highly subjective.

Don’t get captured

The use of capture rate to develop demand estimates can also introduce a high degree of inconsistency and variability in the sales forecast.

With the capture rate method, carwash volume is estimated by multiplying average annual daily traffic count (raw counts adjusted for seasonality) by a factor that represents the percentage of traffic that the site is expected to randomly capture (ratio of cars washed to traffic count).

The problem with capture rate is that the approach is naïve. For example, the 2003 capture rate (expressed as average annual volume divided by average daily traffic count) for the northwest and southern regions is 3.25 and 2.18, respectively.

If these rates represent what an investor should expect in terms of volume, the analyst should be able to use the basis for the methodology to explain why folks in the northwest are much more inclined to randomly pull off the highway for a carwash than southerners are.

However, the analyst does not have the explanatory power to do this because the capture rate approach is not based on a cause and effect relationship.

Cause and effect relationships should also be evident in the demographic analysis and market survey. However, many carwash studies merely present the demographics and existing level of competition without any real analysis to support the market segmentation for the proposed business model.

Account for development and operating costs

Carwash studies can also go awry if development and operating costs are not adequately accounted for. First of all, investors need to acknowledge that most of the no-cost or low-cost carwash studies are usually preliminary in nature.

Many times the analyst who prepares these studies may develop unreasonable cost estimates or omit certain items that can have a meaningful effect on the overall numbers and make the project look better than what it really is.

For example, investors should examine the study to ensure that the analyst has adequately addressed all of the elements involved in the site development process. This should include:

  • Site preparation
  • Paving and curbing
  • Landscaping
  • Detention
  • Building construction
  • Perimeter lights
  • Ground sign
  • Non-structural trades
  • Furniture and fixtures
  • Impact fees
  • Inventory
  • Professional fees
  • Contingency fee
  • Carwash equipment (equipment, erection, installation, freight and sales tax)
  • Interim interest
  • Closing costs
  • Operating capital, etc.

Cover all bases

Investors should also examine the assumptions that the sales projections are based on. For example, the projection should include three components:

1. The expected change in volume that occurs as a business moves forward from launch to maturity.

2. The percentage of market share that the business is expected to capture from the competition.

3. The change in volume that can be attributed to the trade area’s economic growth.

Investors should also check to see if an inflationary factor has been included to grow operating expenses at a reasonable rate throughout the projection horizon.

Curb your enthusiasm
What can investors do to minimize the possibility of getting an inaccurate and misleading carwash study? Perhaps the most important thing that investors can do is to temporarily muzzle their enthusiasm for the project and examine the carwash study in a very critical manner.

This should include thoroughly reviewing the study, asking the preparer pointed questions about the assumptions and facts that have been included in the analysis and how they relate to the conclusions and findings stated in the report, requesting second and third opinions from other equipment distributors and/or enlisting the services of a qualified consultant for an independent and unbiased evaluation.

Investors should pursue this strategy well in advance of the decision to move forward or commit a significant amount of money towards the project.

Robert Roman is a former carwash and detail shop operator and is president of RJR Enterprises (www.carwashplan.com), a Clearwater, FL-based company that provides professional advisory services to the carwash industry. Roman is also a member of PC&D’s Advisory Board.