Deal Opinion - 2 Bay Drive Thru Car Wash
January 15, 2021
by a searcher from East Carolina University in Winston-Salem, NC, USA
Hello-
I have an opportunity through a relationship I have been nurturing for some time. There is a 2 bay, self-serve drive thru car wash in a secondary market. The business itself is turnkey and passive. In place is a 1099 employee that works for a car wash equipment business who manages the site as a side gig. Asking price is $1.2m. All the equipment was replaced approx. 2 years ago. SDE in 2019 was $140k, and in 2020, it looks as if it will be $126k. As everyone knows, the pandemic put quite the damper on commuting traffic. Additionally, the vending and vacuums have been closed most of the year.
Location is optimal, in a rapidly developing area, but near one of the most prestigious neighborhoods in the city. Commercial property values are increasing rapidly, with limited supply of developable land. I believe it is unlikely that we would see one of the newer concept conveyer/full service washes come in anywhere near this location, as land acquisition costs would likely be prohibitive and there are also likely higher and better uses for the land.
As I evaluate, some of the positives are new equipment, ideal location, opportunities for SBA financing with favorable terms during the pandemic. Some of the negatives are uncertainty on "normal year" productivity of new equipment, valuation seems somewhat high, however, I am talking with a commercial broker on normalizing valuation by separating business from property based on property cap rates in the area.
What are some other things I am missing that I should consider??
from Westminster College of Salt Lake City in Salt Lake City, UT, USA
The most important bits of advice I can offer are the following:
1. Do not underestimate the competition. Make sure you know anything & everything about existing competition & keep a pulse on the plans that your city approves so you can do everything possible to stop new competition cause it's nearly impossible to differentiate. If a new wash gets approved near yours, you literally just shared a big % of your revenue with them. People aren't going to wash their car more just because there's a new show in town, if the new wash is closer to them than yours, you'll never see them again. I offered free towels to dry your car off with & it was the only way to get people to drive past another car wash to use mine but it was just more cost, washing & drying, replenishing them, etc. Don't expect the city to protect your business or have any common sense whatsoever. My deal would have been great if the city didn't approve 13 new car wash developments within a 5-mile radius of mine during my first 24-months of business. The dumbasses even approved a tunnel wash in the lot next to mine that came with an incoming gas station that had billions in assets, staff, marketing, free vacuums & POS at the pump, which leads me to the next point.
2. Remember that most people only care about themselves, they are lazy, dirty, not very smart & with car washes, they see your property as their dumpster. Catering to people's laziness, the gas station POS at the pump was tough to compete against. But the main point here is that if people/customers can break it, steal it, vandalize it, hurt themselves or their cars by it, they will. The big one & this relates to having a manager, I never intended on operating a car wash, I was solely supposed to supply financing & my best friend since we were little boys, who had always wanted to get into car washes was responsible for operations. , I wanted to help him, had just exited a deal & had capital that I needed to invest in another property so I 1031'd it. Plus, he was like a super achiever, he was our class president high school, 4.0 student in college, had everything going for him & after about 12-years of being best friends, I trusted him as much as I did my mom. But once I was vested financially, he let his foot off the gas pedal & I found myself having to always work with the architects, deal with the city, etc. We talked about it, he said he was sorry & we kept going. During construction it got worse & by the time we opened I insisted that I be the one to collect the cash. Needless to say, within a few months I noticed that something was off, wash counts weren't reconciling with deposits & so on. It didn't take long for me to figure out that he was skimming off the top. So, I ended up buying his share out & haven't spoken to him since.
I wouldn't trust this manager guy if my life depended on it but these things require more maintenance than you can possibly imagine. So, if you can't turn wrenches, you're going to have to have someone down there for many hours every single day, especially weekends because they are the busiest time & you can't afford to have a change machine or a bay down (half of the whole operation in this case) for half a day or more.. The machines are fickle, they jam up with quarters, electronics get wet, chemical runs out, hoses break, someone vomits or shits on/in your vending machine, etc. etc. etc.. It never ever ends & if you aren't doing the little things like this but instead paying someone to run down there for every little issue, your profit will erode quickly. It doesn't get better either, it gets worse because the equipment will break more & more over time. The only way to bring more customers is a price war when margins are already tight or hope to get some high density developments nearby, otherwise everything but costs will trend downward as costs trend upward. Then you'd better just hope that someone doesn't have the bright idea to throw one in down the road from you because you'll be upside down & the SBA doesn't play around, you could end up losing your house too.
Remember, this is one experience. I'm sure others have had better experiences or nobody would be doing them. I would never think about doing one again but if I did, I would do it the way you are so at least you know what your getting instead of speculating, just as long as the seller is fully transparent. Before signing your life away, go down & work the financials backwards, see when the machines "clicks" as I called them, were last cleared, 1-click = $..25 & do the math. Make sure the revenue adds up & make sure he is including all of the costs, get some industry standards & compare them. If his are lower than the standards then something is up.
I don't want to be a party pooper here but it is hard to find someone who will tell you what really happened, how things really went down, what it's really like, etc. & I wish someone would have been candid with me. I got lucky because the land ended up appreciating more than the business was worth & I got an offer from another developer for the land alone. Don't trust anyone, especially someone selling something, there's a reason. I would take 10-15% off the top of the revenue & add that much back into the costs, if it's still a good deal then maybe.
I hope all the breaks are in your favor & luck is on your side. As long as only your only working with your capital & not somebody else's, the only real mistake you can make is to not do any deal. I'd rather do a bad deal & get the experience, build character, etc. than not do a deal at all.
from East Carolina University in Winston-Salem, NC, USA
I share you concerns about the current manager. There is a service contract in place with the chemical distributor/equipment maintenance provider, and this manager knows them well. However, if I found him to be unreliable, I have a few contacts that I have worked with for years that would easily be able to take over management of the site.
In my view, the investment doesn’t have much upside, other than inflation, so at the end of the day, it becomes a good cash flowing real estate play. Based on my estimates of pandemic 2020 revenue, staying static, leaving all capital in the deal, the loan would payoff in approximately 10 years. At which time, the equipment will be ending its current lifecycle. At that point, I would own the property free and clear and could decide to replace again the equipment and start over, albeit with a lower equipment loan to amortize. I believe there is a possibility for higher revenues once the pandemic passes, however, much of this will be dependent upon economic conditions.
Again, I really appreciate the insight of a former owner/operator!