The current state of the car wash business has evolved from the original mom-and-pop, personally-on-site operators into a high-tech, absentee, private-equity, impersonal gorilla. Wow! Somebody finally said it out loud!
The first car wash business reportedly was opened in Detroit in 1914, named the “Auto Laundry.” Originally, cars were pushed through a tunnel with rollers on a track; workers soaped, rinsed, and dried the vehicles. Workers had a specific task, which gave the wash a personal experience. Today, the automated express car wash concept has replaced that “personal pride and touch” that the original car wash business was built on, into an impersonal “vending machine car wash” concept, based on speed, low wash-price points, and limited payroll. Below is the author’s perception of the current “car wash food chain:”
PRIVATE EQUITY (PE)
The top of the food chain. The strategy of these multitudes of acronym-named investment firms is to “roll up” consolidators’ assembled fragmented car wash businesses and turn them into profitable machines. The goal is to turn bundles of washes into one brand when combined, cutting labor, injecting technology (monthly memberships), speed, and volume, resulting in fast profit for their investors. They are essentially crafting a profitable machine in which the sum of the original combined pieces is more profitable than the original working-solo businesses. Their objective is to bundle these car wash businesses and sell them for higher multiples to bigger PE groups.
PE investors typically inject $25 million to $250 million and financially plan to keep their positions for about 10 years. The ROI expectations are 11 precent, compared to a stock exchange return of 6.9 percent. These wealthy individuals, retirement funds, church and university endowments are interested just in the monetary return: no pride of ownership. That’s why big investors are drawn to these PEs, who purchase reasonably stable bundles of regional fragmented businesses, such as car washes, dry cleaners, and even professional medical-doctor practices.
PE firms are aggressively buying car wash consolidators’ inventory of regional car wash chains. Mister Car Wash, Tucson, AZ, is a prime example of a successful organization currently owned by Inspire Brands (2020–present) operating more than 400 locations nationwide. Driven Brands is another successful operation with more than 900 car wash locations in 14 countries, 200 of which in the United States.
However, recently a multitude of wanna-be PEs have entered the market, paying 7 percent to 9 percent EBIDTA for washes, an increase of 0.8 percent in 2022. A word of caution: with so much new PE competition in the car wash market, one has to keep in mind past PE failures, such as Wash Depot, Toys R Us, Sears, Radio Shack, and PayLess Shoe Source. A wanna-be PE failure in the car wash market can easily taint Big PEs’ appetite, spook future investors, and give the car wash industry indigestion down the food chain.
This is the middle of the food chain. Institutional investment funds in concert with larger existing successful car wash operators often combine efforts to build a consolidation. Several multi-unit car wash chains in a geographical venue competing against each other are prime targets to assemble. Thus, combining three or four local car wash chains in the same city makes a ”meal” for a consolidator purchase. The goal of the car wash consolidator is to make their combined purchases attractive to an ultimate PE. In real estate we call this technique a long flip. Consolidators have to be very shrewd in the buying of these car wash solo and cluster sites.
It is a challenge to keep these washes profitable until sold to PE. The consolidator has to manage these newly acquired clusters, keep out competition, annihilate solo car wash holdouts, build up the losers, and simultaneously romance a PE to buy the lot. Consolidators like to buy washes with land for a multiplier of 3.8 to 5 times gross sales or 7.5 to 9 times EBIDTA. For prime cluster locations, consolidators have paid in excess of 12 times EBIDTA, depending of the number of the washes in the acquisition and full control of the geographical location.
Consolidators’ purchases 10 years ago were assembling tired, unsophisticated, seasoned family-owned full service multiple site washes in high-traffic city venues, to ultimately be converted to the express model. The pitch then was to offer the family-wash owner a quick exit with cash, often a carry back to lever the deal, or face the advent of the aggressive express model ultimately invading their back yard. Today, consolidators have to search deep to make reasonable offers to existing car wash clusters, before a competitor enters the fray. Traditionally, a bidding war commences for the same cluster venue, or the consolidator simply overpays to keep others out. The costly alternative is to build ground-up express sites at a cost of $4.5 million to $8 million each.
MOM AND POP
The bottom of the food chain. In the ‘80s, when I started my Car Wash Brokers Inc. business, there was a hand-full of what I call ”Yellow Stone” proud family car wash operators. All the washes were a reflection of the owners who came to work each day and greeted the customers. Family members were expected to work at the washes — even the kids after high school. Personal interaction with each customer was a given. Quality was never substituted for short cuts or speed. Employees often had an ownership interest in the wash. Today, mom and pop are still buying existing washes and building:
Express ($4 million to $8 million+)
New builds now control 70 percent to 80 percent of the total car wash market. Lenders like this model for loans due to their historic success rate of low payroll, speed, and consistent EBIDTA. Buyers generally need a great business plan, spotless financial record, collateral, and 30 percent down.
Self-Service ($1.6 million to $3 million)
New-build, coin-operated washes are doing remarkably well, especially since COVID 19. This entry level, self-service wash business, is still affordable and an attractive absentee or family business. SBA can often do loans with 15 percent down for an experienced buyer with a good financial statement.
Full Service ($4 million to $7 million)
In affluent cities these few full-service washes by far exceed the express profit EBIDTA margins. They are rare, but with a $25 to $40 a car ticket average, monthly car count of 6,000 to 9,000, and a trimmed payroll, are a natural choice for exotic car owners and wealthy customers who have the 20 minutes to spare for a wash. These are washes not many owners ever sell.
New, inexperienced buyers acquiring a wash, is usually arranged through an SBA lender that specializes in car wash loans. The requirements to buy an existing wash is based on the wash owner’s last three years operating P&Ls, IRS returns, appraisal, phase 1, and buyers experience and personal financials. The down payment is often 20 percent for existing washes and 25 percent to 40 percent for new builds. Current Fed interest rate hikes are limiting opportunities for new buyers to qualify, which is a real problem for families wanting to enter the wash business. Building any new wash is a hurdle for the neophyte, conversely a breeze for existing multiple-wash owners who typically cross collateralize their existing washes.
There is a massive influx of IRS 1031 Exchange cash-money buyers in the car wash market — investors who have sold eligible investment properties and need a place to park their capital profits, to avoid paying immediate IRS capital gains taxes; car washes are the perfect fit. These new wash buyers, flush with cash, savvy to the express car wash canon — no inventory, no receivables, cash business, recession proof, and includes land and few employees — are a perfect fit.
The car wash industry has made dramatic changes since I entered the car wash broker business in 1983. The coveted early full-service family-owned wash companies — for example: Jerry Weiss (Weiss Guys), Leon Marx and John Jurkens (Octopus), Coy Lindblom (The Carwasher), Harvey Allen (University Car wash), Mike Cahill (Cobblestone) — pioneer wash owners, personally took daily pride of their washes and were my true mentors.
Today, with the advent of the express monthly memberships and automated wash technology, the quest for pure profit places private equity funds at the head of the wash food chain, transforming a once coveted personal family car wash into a car wash vending machine culture. I remember going to the wash as a kid with my dad, ‘wash n’ the car with a sixpack. Now we have an impersonal experience, replacing our once appreciated family-fun car wash world with speed, volume, reduced payroll, technology, and just numbers.
Roger A. Pencek is president, broker, and principal of Scottdale, AZ-based Car Wash Brokers Inc. He has been selling and marketing car washes since 1985. He molded his early merger and acquisitions career in a management capacity at General Motors Corporation and International Harvester upon graduation from Western Illinois University in 1974 with a BS degree. He obtained his MBA in 1985 from the University of Phoenix. You can visit the firm on the web at www.carwashbrokers.com.