We all know there is a tremendous amount of interest in the car wash industry on the part of professional investors. The private equity industry has alit upon express car washes in particular because of their low employment cost, consistent cash flows, highly fragmented competitive base, focus on unlimited plans, and a number of other factors. If you own a chain of 20 or even a one-off site, chances are you have been approached by someone or some group looking to buy you out. This article will ignore the myriad decisions you have to make in choosing to sell or in finding the right buyer and will focus only on how the market looks at valuing a car wash.
There are countless stories out there about owners getting stratospheric multiples for their businesses, and they may be true, but those stories miss the point. A better yardstick is what your car wash is worth in dollars.
As a simple example, two car washes are sold on the same day. They both cost $5 million to build. One, Wash A, achieves EBITDA of $400,000, the other, Wash B, achieves $1,000,000. Wash A sells for 12X while Wash B sells for 10X. Which owner would you rather be? Of course you would take the $10,000,000 over $4,800,000, even though Owner A gets to brag about their great multiple. You pocket a cool five million while your friend has to write a check to the bank to pay off the rest of their debt. Don’t fall into the trap of focusing too much on multiple — it doesn’t tell the whole story.
It is absolutely true that the car wash industry is generally valued as a multiple of EBITDA. The math is simple:
EBITDA x Multiple = Value
But the story is not so clear. What EBITDA? Trailing 12 months as of the date you enter discussions? Trailing 12 months as of the date you close? Current calendar year? Next calendar year? Do you include addbacks of extraordinary expenses? By choosing which EBITDA to use, there can be a dramatic shift in multiple to arrive at the same value. Imagine we use Wash B from the above example, and it is growing quite rapidly as the unlimited plan they have recently put in place is gathering momentum. They have $600,000 of EBITDA today, but by the end of next year they will be at the $1,000,000 mark we talked about. They have convinced the buyer the growth is real, and the buyer makes that 10X bid based on next year’s results. If you look at the implied multiple based on current EBITDA it is $10,000,000/$600,000 or 16.7X. Now they get the money and the bragging rights.
I hope I have convinced you that a headline multiple is not always what it seems. Rather it is the performance of the site and the prospects of the site that will ultimately drive value. Multiple is just a tool to help establish how the value relates to similar opportunities. I’m not suggesting we retreat from EBITDA multiples as a valuation yardstick. They are helpful in determining where one wash is valued versus another or versus other investment opportunities outside the car wash space. But if owners focused more on the overall value of the site, they would likely be less concerned with getting the “right” multiple.
VALUE DRIVERS
So what drives value? There are only two levers in our equation, multiple and EBITDA. Both can be affected by operating decisions. Various factors influence your EBITDA, but it would be tremendously arrogant of me to attempt to describe the methods of increasing the profitability of a business you live and breathe on a daily basis. Instead, I will focus next on what elements impact multiple, or in other words, what characteristics of a business will cause professional investors to consider paying more.
Growth Prospects
A business with superior growth prospects will be worth more than one without and will garner a higher multiple. Growth could be related to geography, upgraded equipment, enhanced focus on unlimited plans, or an advertising campaign. In the case of multi-site chains, growth will most often come from introducing new sites to the chain. Ironically, a poorly run car wash can sometimes sell for a high multiple because it has been mismanaged, and the buyer believes he can grow into the price simply by operating the business more effectively. Imagine Wash A that currently produces $400,000 of EBITDA. It sells for 12X, but the new owner is convinced it has been poorly managed and they can move the EBITDA to $800,000 in a year. The seller still feels like they got their 12X, but the buyer feels they paid $4,800,000/$800,000 = 6X — all because of the growth inherent in the opportunity.
Size of the Chain
A larger chain will always be worth more than a smaller chain excluding other variables from the equation. A larger chain has economies of scale that allow for superior results. They also give a private equity player a larger platform from which to grow, allowing for a more efficient deployment of capital. Most often, private equity will look to sell a company it has acquired in three to seven years. Their gain is based upon operational improvements (think higher EBITDA) and multiple expansion that comes about through growth.
Owned Versus Leased Real Estate
Owning the real estate will always be more valuable to a buyer than leasing. This is inherently obvious, but a numerical example is helpful. Let’s use Wash B and its $1,000,000 EBITDA, or in this case you can call it EBITDAR as it is owned and no rent is charged, so effectively the value is before rent. Instead of selling the business, the owner may decide to sell the property and building and lease it back from the buyer. He or she might agree to pay $300,000 in rent, leaving $700,000 in EBITDA. Commercial real estate such as a car wash is valued by cap rate, which is the rate of return a landlord receives on their investment. A decent cap rate right now is around 7.0, so if an investor is willing to accept a 7 percent return that means they would be willing to pay $300,000/.07 = $4.3 million for the property. So the owner has $4.3 million in their pocket and EBITDA of $700,000.
The multiple on the remaining $700,000 will be lower than the multiple they would have received on the $1,000,000 EBITDA as that method of funding is no longer available to the new buyer.
Development and M&A Pipeline
This concept is directly related to growth prospects. If you have a four-site chain that is thriving but also has no potential to become an eight-site chain, it will garner a lower multiple than a similar chain that has sites under construction or identified. As we have already determined that growth in large part drives the multiple, access to rapid and economically sensible growth in the near term will yield a higher multiple.
Operational Excellence
All things being equal, a well-run car wash with pristine books and records will trade for a higher multiple than a disorganized peer. Buying a business is by definition risky. All the due diligence in the world will not uncover all the potential issues facing a business. At some point the buyer has to assume an acceptable risk and move forward with a transaction. The more comfort a buyer feels that they are making the right decision and that they are not walking into a pit of unknown liabilities, the higher the multiple they will pay. And the crisper the business is in terms of recordkeeping, site appearance, employee appearance, etc., the more comfortable the buyer will be.
Type of Wash
For better or worse, the market is rewarding express washes and penalizing flex or full-service washes. A chain with all express washes will trade at a meaningful premium to full or flex. That’s not to say there is anything wrong with a full-service wash; it is just not the favorite of today’s professional investor looking to enter the market.
Geography and Competition
A car wash in a town with significant barriers to entry in the form of strict zoning regulations or little availability of land will be more valuable than a wash that is subject to increased competition over time. Additionally, certain geographies are favored by buyers. This may be because of favorable demographics, availability of land, the anticipated appreciation of real estate in a given area, fewer competitors, or any of many other reasons.
Management
Great managers will generally mean premium prices. Not only are they more likely to have a more valuable wash by virtue of their skills, but a new entrant into the space needs guidance, and a team with which they can grow. Truly great managers who can operate, develop, and build are a rare commodity and make the associated washes more valuable.
MANY VARIABLES
This is not in any way an exhaustive list. Rather it is meant to try and convey the larger issues that are important to buyers. You may be cursing me right now as I didn’t really provide an answer to what your wash is worth, but there are many variables that make it not easily calculable. The bottom line is that your wash is worth what the high bidder in a fair and competitive auction is willing to pay. It’s a cop out, I know. But it’s the truth. The market is hot. Buyers are plentiful and fat with cash, and financing is cheap for now. Multiples for a chain of washes are often 10X or more. But don’t go by what your buddy got. Maximize your own value by running the best business you can and, when the time is right for you, exit in a professional and competitive process.
George Odden is a partner with Ardent Advisory Group, a leading investment bank specializing in the sale of multi-site car wash chains. You can contact George at George@ArdentAdvisoryGroup.com or call 310-848-4240.