Today, for investors, there are few retail businesses that are more attractive than the professional carwash market and, specifically, the conveyor segment. Buyers and sellers are entering and leaving the market — many reinvesting back in the industry post-sale — on a regular basis. Mergers and acquisitions (M&A) are trends insiders expect to continue this year, but what other changes and challenges can operators expect in 2022?
We reached out to several market leaders to offer their predictions on the coming months.
In the spotlight
According to the U.S. Census Bureau’s 2019 County Business Patterns program, there were 16,976 carwashes with paid employees in the U.S., which is a 6.8% increase from 2015. While California ranked first in the number of carwash locations and carwash employees in 2019, Florida added the most carwashes over this five-year period, increasing the state’s number of carwash sites by over 21%.1
Suffice to say, however, professional carwashing is growing fast these days in most U.S. states as large investors are funding acquisitions, remodels and new builds. Busy intersections and roadways across America are now showcasing our industry’s best new equipment, chemicals, technology, signage and service. And, despite recent economic challenges and even a global pandemic, growth as well as M&A activity in the carwash space has remained steady.
Tuck Bettin, CEO/General Manager for Cobblestone Auto Spa, says carwashing is currently in the spotlight and he expects the market to stay there through 2022 and well beyond. “There is considerable focus, intensity and acceleration on our industry, and I don’t believe that it will easily diminish. Sellers are also acknowledging the industry’s acceleration as their own personal opportunity to monetize their investment,” he explains.
Despite elevated M&A activity, the carwash market remains highly fragmented. This market condition is a key draw for many investors that are both well-funded and practiced in scaling and consolidating other retail businesses. The market’s makeup, availability of capital as well as other factors, such as the emergence of subscription-based buying, is keeping the industry in investors’ spotlight.
Colin May is the managing director at Car Wash Advisory, a broker and M&A advisor. May offers some predictions on what to expect in 2022 on the M&A carwash front.
“While we predict that the total number of M&A transactions will be flat or even slightly lower in 2022, we think that the average size per transaction, in dollar terms, will increase compared to 2021 for a few reasons,” asserts May.
One reason May notes is the type of carwash business investor has changed from opening a single site or two sites to developers now building and opening double-digit sites in a short period of time.
Also, he adds, a lot of the “low hanging fruit” has been picked, especially in the popular geographies, leaving larger and more substantial portfolios left, on average, as naturally accretive acquisition targets.
“Additionally, some of the mid-sized consolidators that have been building 20- or 30-site carwash portfolios will start to be acquired by the bigger buyers now that they are reaching a larger scale and their private equity backers are ready to sell and crystalize their return. We just saw this with the acquisition of Clean Streak Ventures by Mister Car Wash [in late 2021], and I predict we’ll see many more similar deals in 2022,” continues May.2
Agreeing with May, Bettin also believes that we will see a variety of acquisitions that involve larger chains acquiring 20-plus location chains or even mid-sized acquirers combining in the future. Clearly, the industry is scaling to big business with large, financial companies.
“With the amount of capital focused on carwashing these days, there are large funds available through investors who are extremely motivated to get into the industry,” says Bettin.
Cobblestone Auto Spa, which offers full-serve and detailing at several of its sites, saw a strong bounce back in volume for these services in 2021 compared to 2020’s public health effects and Bettin expects that trend to continue upward this year as well.
Those we interviewed for this article believe valuation multiples for interested sellers will remain high in 2022, which will maintain supply side targets for buyers. They also predict the large acquirers will continue doing so this year despite shifting to more new builds. As mentioned, investors are expected to remain hungry for opportunity in the carwash space this year.
“We are constantly speaking with new buyside entrants into the carwash industry every single week that want to be included in our sale processes. This not only includes individuals wanting to buy a single wash or small chain, but also new, large private equity investors seeking to acquire an existing sizeable portfolio. Buyer appetite for carwash acquisitions is still very, very strong,” May notes.
May also offers another 2022 prediction. Following the news of Mister Car Wash, which is the industry’s largest conveyor operator, filing for an initial public offering (IPO) in June 2021, “I think we see another top carwash company announce in 2022 that they are going public through an IPO,” he forecasts.
Built to last
According to a recent Professional Carwashing & Detailing article, 40% of estimated growth in 2021 for the top 10 conveyor chains was via new construction.3 Large chains seem to be shifting toward incorporating more new builds as a key part of the growth strategy, but that doesn’t seem to be a trend that will minimize an operator’s ability to sell in 2022.
“While some of the more established platforms are growing their internal growth capabilities for ground-up construction, there are more acquirers than ever before,” confirms Eric Wulf, CEO of International Carwash Association. “I believe our industry has more runway for acquisition. The larger question may be whether the economic factors that support the acquisition model continue as they have.”
Wulf adds that he expects new construction will grow in importance to retail platforms in 2022. “There are only so many transactions available at a given time that will make sense for both the buyer and the seller. Price is one component, but so is the quality and opportunities of a site,” he says.
When asked about Cobblestone Auto Spa’s growth strategy makeup of 2021 versus planned 2022, Bettin estimates that about 60% of the chain’s 2021 growth was attributed to acquisitions. “For 2022, we’re expecting to flip that around and be 70% new ground-up construction,” reveals Bettin, adding that timing factors, such as achieving permits on existing lots, will contribute to this anticipated switch from acquisitions to new builds this year.
Reflecting back on previous acquisitions and openings announced from Cobblestone, which maintains a presence in Arizona and Colorado, specifically in the Denver area, Bettin explains how the chain has developed through a mix of single and smaller group site acquisitions as well as new builds. Unlike some investors that are looking to get capital in the market quick regardless of location, Cobblestone — much like many of the larger chains in the conveyor segment — is taking a more regional approach to growth.
“We have been strategically acquiring in the Denver metro market; we’re now at almost 20 locations and still growing fast with four under construction. We’ve been deliberate in trying to achieve densification of services to create value for Denver area customers. Being able to visit multiple Cobblestone locations in the region is important to today’s customer base,” informs Bettin.
The evolution of the market and the maturation of the M&A activity from recent years is also causing some investors to shift growth strategies. As more acquisition news is announced, it pulls sellers out of the market and, as valuations have increased in recent years, investors are seeing new builds as a cheaper alternative without the need for lengthy negotiation.
“New build carwashes will certainly continue to be a significant part of the growth strategy for the largest chains. In their existing markets, greenfield development is a great way to densify and grow market share in a more cost-effective way than acquisitions given the current industry multiples,” concurs May. “Additionally, as these chains continue to get bigger and bigger, the acquisitions they make need to be larger also in order to ‘move the needle’ in relation to their current size. But, those larger deals typically come with higher price multiples which, on its own, is not a sustainable growth strategy in the long-term. The ability to build new carwashes at a much lower price tag is a great complementary approach.”
Interest in new builds could shift the M&A pendulum back to the buyer’s side in 2022. However, even carwashing is not immune to external, macro-level trends occurring in this country, specifically labor and supply shortage issues. How will this affect new carwash building this year, if at all? At this point, operators and builders our publication speaks with are moving forward as planned with little to no delays expected to impact year-end goals.
Regardless of how buyers grow and expand this year, contributing factors are expected to continue supporting and carrying these businesses forward. These factors include, but are not limited to, subscription-based membership, availability of funds and the creation of a scalable business model.
“A large number of acquisitions and/or greenfield development are financed with a high proportion of debt capital, and the ease of access to this capital is expected to persist in 2022 at very attractive terms as well as low interest rates, allowing operators to keep their foot on the gas with their aggressive growth plans,” educates May.
May and others warn operators to scale at a manageable pace. After all, despite some perceived public opinion, operating a carwash is not turn-key and it requires operation from skilled operators, managers and team members. Large investors and consolidators are flexing their financial muscle here as well and they’re hiring many of these key people from inside and outside the industry.
Some of these c-suite level executives have experience and backgrounds consolidating and scaling other retail businesses. As a result, 2022 could see the carwash space start to enter the next level of M&A activity, which experts noted was just in the “early innings” in recent years.
Operators also must realize that the dynamics of running a successful carwash or chain has changed from the old ways of doing business and need to adjust accordingly.
“It used to be that weather was what determined a good year or not in carwashing, much like farming. The subscription model has changed that, and for the better. Now, network reach is paramount — the size of your trade area and subscriber network. The larger you can build those, the more resilient and successful your business becomes — rain or shine,” concludes Wulf.
What is certainly in the forecast for the remainder of 2022 is more M&A activity as well as positive forward momentum and growth in the carwash market.
Be sure to check out some market predictions from Amplify Car Wash Advisor’s Jeff Pavone in the below video interview.