BY BILL MARTIN AND JEFF PAVONE
Bill Martin and Jeff Pavone, both Partners at Commercial Plus Group, share insights about trends in the industry, updates on the effects of COVID-19, thoughts on the mergers and acquisitions (M&A) environment, how to maximize the value of your car wash and understanding your options if a sale or financing plan is pursued.
For years leading up to 2020, the car wash sector has seen strong growth as evolving consumer behavior and a robust economy has driven an increase in sales. At an estimated $12.3 billion in revenue in 2019, the growth trajectory of the car wash is expected to continue, with a target of over $13 billion by 20221. Accelerated growth came with the introduction and consumer acceptance of the express wash model, which allows for more affordable and convenient washes for the consumers, higher margins for operators, and for some chains, recurring revenue in the form of monthly wash subscription programs.
As a result, institutional interest has intensified, with private investors vying to consolidate and build on existing chains. The introduction of private equity buyers has dramatically reshaped the express car wash landscape. Market control is shifting from smaller single- or multi-site operators to larger regional/national players that can provide a more robust wash membership network and utilize their scale for better pricing, and upon exit, a higher valuation multiple.
That said, there are still abundant opportunities for independent operators to grow and scale their operations by understanding their respective markets better, which may mean being more selective when engaging in greenfield opportunities or new site acquisitions.
Despite the emergence of private capital, the industry remains highly fragmented, with most sites still being owner operated. This presents opportunities for significant mergers and acquisitions activity in the coming years, which in turn presents opportunities for current operators to maximize the value of their washes in a liquidity event. In order to do so, operators must demonstrate the existence of a sustainable business in addition to having a robust and actionable growth plan (via new construction or acquisition). The prospect of additional pro forma cash flow can drive single digit valuation multiples to the double digits. This also includes management’s ongoing role in operations, real estate ownership (in the event buyers seek a sale-leaseback for liquidity), and comparative margins.
Early 2020 saw a rocky start for the car wash industry as a result of the COVID-19 pandemic. In response to the outbreak, isolation efforts aimed to limit the spread of the virus have put a temporary pause on the global economy. Experts believe the path forward will follow what is known as a “v-shaped recovery,” meaning the economy will experience a swift and sudden decline, followed by a rapid snapback once economic activity is able to resume. The exact timing is still uncertain, but most expect economic contraction in Q2 2020 followed by recovery/growth in Q3 and beyond.
While there is likely to be a lasting effect on many industries, the car wash industry should be relatively immune to the economic impact of COVID-19 as the risk of exposure to the virus is lower. Consumer behavior is likely to change and will disproportionately impact companies in industries such as travel and leisure, and hospitality services. Car washes, on the other hand, offer a safer environment for consumers, operators and employees to conduct business. In particular, the transition to exterior only/express operating models limits customer and employee contact, protecting the general health of patrons and staff.
Given the uncertainty surrounding the longevity of the pandemic and the impact following (whether the lingering effects are long or short term), many buyers and lenders have taken a hold on capital deployment activity. It is important to distinguish that interest in the car wash sector from buyers remains high, but in this current environment, buyers are struggling to pay higher multiples without a solid grasp on how this will affect their return. Instead, many are reserving cash to stabilize their existing investments. The same situation applies for lenders. Although rates are near zero, many lenders don’t have the bandwidth to pursue new business loans. Like private investors, lenders are focusing on supporting the existing portfolio and are highly selective when issuing new debt. We view this as a short term impediment to M&A activity, as the long-term attractiveness of the industry and capital markets remain intact.
Looking forward, the economic landscape post-pandemic provides a compelling opportunity for the car wash industry. The unprecedented amount of stimulus to stem the impact of COVID-19 could have a significant impact on future growth, resulting in a strong consumer-led economy. Pent up demand for acquisitions and a growing dry powder pool may lend to a strong recovery in car wash M&A. In terms of preparation, now is the time for operators to take a step back and assess their respective financial positions and solidify growth plans or perhaps decide to take chips off the table.
1IBISWorld 2019