An accountant by training, Mike North certainly has plenty of knowledge of the numbers side of car washes. But North, CEO of Oklahoma City-based Okie Express Auto Wash, is perplexed by how to properly value a car wash.
It’s not that he doesn’t have experience. He’s sold a child care firm and also a car wash. The former was straightforward: Sell the real estate and sell the operations in two transactions. The car wash sale was more of a lark; a buyer who wanted into that market sought out the 9-month-old wash, and North and his partners practically named their price.
While North found selling his child care business to fit in with that industry’s norm — two transactions — valuing a car wash has too many variables. It has become more complex, too, as private equity firms have purchased small and large chains in the U.S. and the U.K. The world’s largest car wash — IMO — has changed hands multiple times, while in the U.S., Mister Car Wash went to a private equity firm.
“That’s changed the dynamics, once a big hitter with real money comes into the industry,” North said. “I believe it’s going to cause a feeding frenzy, and people who have large amounts of equity in their car washes are going to get out.”
With so much confusion about how to value a car wash, where does one start? North, along with Gary Dennis, ICA president and owner of eight car washes in Georgia and Alabama, and business broker Mark Doran, offered these tips:
1. Understand that what applies in other businesses may not apply to yours. “Numbers that are generally true to one industry don’t apply to another industry. That may be due to the fact that the margin structure of the investment of one industry is different,” said Dennis, who comes to the car wash industry with a banking background. “You can’t apply the exact same principles to a software company as something with hard assets. Car washes have a different operating margin than the grocery. There can be some nuances specific to industries that are different, but fundamentally, you’re always getting back to the way most valuations are derived.”
2. Car washes have a number of variables that must be considered in any purchase. There is full-serve versus self-serve. The number of locations. The value of the real estate. “I can foresee a scenario where there would be valuation differences between full-serve and other types, based on perceived complexities and whether or not your buyer is a strategic operating buyer versus a financial buyer,” Dennis said. “A financial buyer who thinks they can buy an easier-to-manage wash might be willing to pay the difference.”
3. If it’s not on paper, it’s not real — and if it is on paper, it may not be accurate. “You have to be careful that you define earnings correctly,” Doran said. “In a small business world, a seller recasts discretionary earnings. You’d add back the fact that he’s paying his daughter a salary while she’s away at college. Make sure that you go in and recast financials removing any discretionary, non-essential, non-business expenses.” As the size of the transaction grows, the method for valuing will move from a multiple of discretionary earnings (recast SDE) into earnings before interest, taxes, depreciation and amortization (EBIDTA). “With true EBIDTA, you would not go in and recast,” Doran said.
And there’s no selling on promises, either. If the revenue isn’t accurately reflected on tax statements, don’t expect buyers — or their bankers — to believe it.
4. Just because you spent it, doesn’t mean it’s worth it. Some owners want to start the pricing at what they’ve put into the wash. And that may work for a while. “What you paid for a wash or what you built it at is relevant for a year,” Dennis said. “After that, you have operating results. Either the wash is worth a lot more than what it cost you to build it and you’re getting enough return, or it is worth substantially less because the results aren’t there. Maybe the highest and best use isn’t to be a car wash. Rarely is a car wash truly worth what it cost you to build it.”
5. Size matters. Doran classifies business into multiple categories based on annual revenues. “There are businesses that I consider basically buying a job, where the owner is earning $70,000, $80,000 or $90,000 per year,” Doran said. Those typically will sell at 1.5 to 2.0 times earnings. “Once you double that, a business is making $200,000, the multiple immediately jumps into the 2.0 to 3.0 times earnings.” As the business income approaches the $1 million mark, the number jumps again to the 3.0 to 5.0 range. By the time a business net has revenues of $2 million, the multiple is at five to eight times.
Dennis sees the same possibilities with the size of the operation. “If it’s a single-site location and you’re selling to another owner/operator, that can have a different implication than if you’re trying to sell to a financial buyer who might treat a single location as a one-off transaction. The smaller you are, the fewer potential buyers you have, especially outside financial buyers who are looking for size of transaction. That limits the pool a little bit compared to larger companies. In our industry, only a handful of operators would be large enough to attract the interest of some deep-pocketed financial buyers.”
For his part, North continues to seek information and has received diverse advice. He has been told car washes typically sell for a multiple of six to eight. But he’s heard rumors of someone who received 10 times multiple. “I’ve been trying to decide whether the age of the facility and the location truly affects the multiple,” he said.
And then there’s the issue of pricing, which always is tricky. “People value pride of ownership into the price,” North said. “You can sell blue sky, but you can’t
sell pride.”
I can foresee a scenario where there would be valuation differences between full-serve and other types, based on perceived complexities and whether or not your buyer is a strategic operating buyer versus a financial buyer.
If the car wash is for sale, it’s possible a broker could be an invaluable part of the team. Mark Doran, a Denver-based business broker at Choice Business Opportunities, offers these benefits:
• Weeding out unqualified buyers. Doran calls those “jammie shoppers”: people who look at businesses for sale at nights and on weekends (when they might be in their pajamas). “Liquor stores and car washes are two that will generate more activity than I really like to deal with,” Doran said. “With a normal population, if I take 100 calls, I can find 10 to 15 percent that should even consider being in business and half of those have the financial wherewithal to pull it off. With a car wash, I might find one or two of a hundred contacting me who would qualify.”
• Keeping rumors at bay. A full-service car wash owner who advertises his business for sale will give his competitors valuable information and his employees reason to worry — and perhaps look for work elsewhere, Doran said.
• Structuring the transaction. With a strong valuation — something Doran believes any reputable broker can provide — a seller can avoid the back-and-forth haggling and structure the deal in a way that reduces tax burdens as much as legally possible.
• Hearing the truth. A legitimate broker will help a seller understand the reality, Doran said. “Frequently, the hardest part is to help the seller understand it’s not worth a bajillion dollars and why.”