Buying a Car Wash Business

Question:
I am considering buying a full-service car wash. What do you think of the industry? How would I go about determining the value for this type operation? Typically these cash type businesses say they earn more revenue than they have documented. What is the best way to do due diligence on this type of business?

Answer:
I like the car wash business. I believe that successful ones provide an excellent platform to generate good profits, the can be operated quasi-absentee with a good manager, and there's always a strong resale market.

Insofar as determining a value, it is one of those businesses where sometimes annual revenues are utilized with a multiple of around two times annual sales. The big question of course is what are the true sales? If you are able to reconstruct the revenues, a good barometer of profit is 30 to 35% of gross revenues. As well, most full-service facilities are sold with the real estate. In these cases, the general rules are around 2 – 2.5 times the Owner Benefit figure plus the cost of the real estate and equipment less an allowance for capital expenditures. Without real estate, the multiple ranges from around 3 - 4 times the Owner Benefit less an allowance for capital expenditures.

You are correct that many times the sellers claim to generate more sales/profits than is documented. While this may be true, my personal rule in any "cash" business is: if they can't prove it, you can't pay for it. And so, the onus is on the seller to validate what has been represented. You can also use the utility bills as a general barometer of X gallons per wash. However, there are additional services like waxing, full detailing, etc. that may be impossible to prove out.

An observation period during due diligence is quite common where you literally monitor the business over a few days and count the cars hoping to annualize the figure. The problem of course is that a few days really do not give you a true picture. What if it rains for a week? The conclusion here is that you need proof of the figures in order to make any type of realistic assessment and valuation of the business.

During the due diligence, in addition to the financials, you should check out:

• The lease if the property is not owned. This business survives based on its location. A long-term lease must be assignable or a new one granted by the landlord.
• Are all employees legal?
• Any workman's comp or other insurance issues?
• Condition of equipment, maintenance records, amount of useful life remaining.
• What additional services can be added if any?
• Are there any potential competitors looming? Verify any permits being pulled at city hall.
• When was the last major road construction done? You can figure on work being done at least every ten years or so. Major traffic disruptions could dramatically impact the business.

Naturally, there is far more to be done in due diligence but these are a few things to consider. I was recently assisting a client with a review of a car wash and found a very good resource in The International Car Wash Association at: www.carwash.org