Over the past several decades, mom-and-pop operators have found car washes to be ideal family businesses because of their relatively predictable profitability, their durability through economic downturns and what Brad Mewes calls “operational leverage,” meaning that after an operator’s monthly fixed costs are met, every car that passes through the tunnel is almost pure profit.
Now, the industry’s well-kept secret is out, and institutions with deep pockets want in on the action. According to the Boston Consulting Group, there were a record 2,296 active private equity groups (PEGs) at the end of 2017, and those firms had accumulated a record amount of “dry powder” – about $628 billion earmarked for purchasing businesses such as car washes. That kind of monetary firepower requires many targets, and the typical PEG manager is willing to pull the trigger on well-managed car washes with a consistently strong bottom line.
“There are private equity groups that I’m working with that are very intrigued by the car wash space,” said Mewes, principal of the Irvine, Calif.-based business-consulting firm Supplement Advisory. “These private equity managers have to put this money to work and find ways to invest this capital, so we are seeing managers becoming more aggressive, and car washes are attractive from a business-model standpoint.”
According to the Boston Consulting Group, PEGs deployed a total of $1.18 trillion in capital worldwide in 2017, up from $1.13 trillion a year earlier, with business buyouts representing the largest private-equity asset class. The strong demand for successful businesses led to a dramatic rise in the average multiple for an acquisition in 2017, according to the BCG. Last year, consolidators paid roughly 12.5 times a business’s annual EBITDA (earnings before interest, taxes, depreciation and amortization) in order to acquire it, making it a great time to sell a thriving business.
“This year will be a big year [in mergers and acquisitions] in general and will be an even bigger year for car washes because they have been behind in the roll-up trend,” said Paul K. Richey, regional managing director of FOCUS Investment Banking LLC, which handles sales, acquisitions and financing for business owners and investors. “The car wash industry has been a secret success story heretofore, and these new investors are just now discovering it, so these PEGs are wanting to buy car washes.”
Richey said PEGs that have no presence in the retail automotive services industry are most interested in acquiring car washes with about 20 locations or more, giving the PEG a “platform company,” a way to enter the industry in a meaningful way.
From there, PEGs would like to expand the business quickly by acquiring other car wash chains or building new locations so that they can give their investors a healthy return. He said PEG managers typically understand that the successful car wash operator is doing everything he can to increase volume and the average price per ticket, so the growth strategy focuses mainly on expansion rather improving operations.
Up until now, Richey said, most of the bigger car wash acquisitions have been done by larger car wash companies, but PEGs are seeking a path into the industry, to the point where they are willing to acquire smaller chains than they typically would target.
“The PEGs have so much money, and they can’t always do the big deals, so they are moving down-market and doing smaller deals,” Richey said. “They want to find an operator who might have been fat and happy and didn’t need to grow too much in the past, and hopefully they can double that company’s value in the next five years. They’ll buy stores one by one or 10 at a time, whatever they can find, or they’ll build them, because they want to grow fast. That helps the mom-and-pop operator too because a rising tide lifts all boats.”
Richey said that some PEGs have rolled up quick-lube businesses but have grown increasingly interested in car washes because they tend to be more profitable. Since the PEGs have no expertise in running a car wash and no desire to take over day-to-day operations, they would prefer the car wash operator and management team to stay on for several years or more and often are willing to let the car wash operator retain a minority interest in the business.
With consumer confidence high and interest rates still low, Richey said PEGs will continue to acquire car washes for the foreseeable future, though an economic downturn or a steep rise in interest rates could lead to a slowdown. (See the article on page 22 for more on where the economy is headed.) He said the relatively predictable nature of the car wash industry, coupled with the trend of drivers keeping their cars longer and taking better care of them, has PEGs bullish on the industry.
“The PEGs that have never been in the retail automotive service business are saying, ‘Hey, that’s a pretty good industry, it’s steady in good times and bad, they’ve got good bottom lines, and there is growth as long as economic times are good’,” Richey said.
The car wash industry is the latest in a long line of business sectors to be targeted for consolidation, according to Mewes, who pointed to the previous rollups of home hardware stores, pharmacies, banks, airlines and office-supply stores. The car wash industry is more fragmented than those retail sectors, however, since the largest car wash operator has only about 250 locations, representing a small slice of a big pie.
“Because the industry is so fragmented, the rate of consolidation might be slower to some degree, but it’s not going to derail this train, I believe,” Mewes said.
PEGs’ interest in the car wash industry can be a double-edged sword for car wash operators, according to George Odden, principal of Scottsdale, Ariz.-based Commercial Plus Capital Advisory Services LLC. Sure, successful car washes have grown in value sharply in recent years, but that really benefits only the car wash operator who is willing to sell. That’s the carrot – the opportunity for the car wash operator to reap the next decade worth of profits at once.
But here’s the stick: Car wash operators who don’t sell might face intense pressure from PEGs that purchase rival car wash chains, invest in them to increase profitability and build new locations.
These PEGs see immense potential for car washes to begin each month with most of their fixed costs already paid for through revenue from unlimited-wash and loyalty programs. PEGs also like the idea of either owning a real estate asset or purchasing it, selling it and leasing it back from the purchaser. The lease-back approach essentially allows the PEG to purchase the operating business at a very low multiple, Odden said.
“Car washes are wonderful family businesses because they generate a reasonably predictable cash flow year in and year out, and that also makes them attractive to consolidators,” Odden said. “We probably get calls from 15 to 20 private equity firms in a year looking to enter the space in a big way. The beauty of the car wash industry is that secondary and tertiary markets can be just as lucrative as the largest markets.
“When I first started talking to consolidators three or four years ago, there was a significant focus on buying existing assets. That focus still exists, but there seems to be more patience and more interest in buying into a development situation.”
PEGs essentially are offering smaller car wash operators the classic “join us or die” proposition, but with a little more emphasis on the carrot instead of the stick. “They’re saying, ‘Join us, and we’ll help make you rich – or die’,” Odden said.