Mergers and acquisitions (M&As) have long played an important role in the life cycle of many car wash and car care businesses.An M&A transaction can help a car wash operation expand, move into new areas, and become more efficient with one relatively simple transaction. For car wash operators an M&A is a proven strategy for cutting overhead costs, increasing efficiency, or battling a larger competitor.

According to many reports, car washes are attracting a great deal of attention from investors. Whether the recent spate of M&As is attributable to the Tax Cuts and Jobs Act (TCJA), the cash it freed up, or the new lower corporate tax rate, M&As are on the upswing — with a great deal of the action involving smaller deals. The use of warranty and indemnity (W&I) insurance to remove all or a great deal of the risk in M&A deals is yet another factor allowing both parties in this increased M&A activity to prosper.


While often synonymous, the terms “merger” and “acquisition” are two separate transactions. A merger occurs when two separate entities combine forces to create a new,joint organization in which both — theoretically — are equal partners.

An acquisition refers to the purchase of one entity by another. A new car wash business does not emerge from an acquisition, rather, the acquired business, or “target,” is often consumed and ceases to exist with its assets becoming part of the acquiring business.

The general term “M&As” can include a number of other transactions, including:

• Consolidation: A consolidation creates a new entity where owners or shareholders in both entities approve the consolidation, after which they receive equity shares in the new operation.

• Tender Offer: Usually involving larger, often-publicly-traded businesses, in a tender offer, one business offers to purchase the outstanding stock of the other business for a specific price. The acquiring business often bypasses the management and board of directors, directing their offer directly to the other business’s shareholders.

• Asset Acquisition: In a purchase of assets, one business acquires only the assets of another business. Asset purchases are common during bankruptcy proceedings, where other businesses bid for assets of the troubled business, which is liquidated after the final transfer of assets to the acquiring business.


Adequate funding is necessary since there is little doubt that M&As are expensive. Fortunately, financing an M&A transaction with stock, even small business, privately held stock, is a relatively safe option for both parties since both share the risk.

In a typical share-exchange transaction, the buyer will exchange shares in its business for shares in the selling business. Paying with stock is particularly advantageous for buyers, especially if their shares are overvalued.

In a merger, shareholders on both sides can reap long-term benefits of a stock swap as they will generally receive an equal amount of stock in the newly formed operation that results from the transaction, rather than simply receiving cash for their shares.

Paying with cash is the most obvious alternative. After all, cash transactions are instant and relatively mess-free and usually don’t require the same kind of complicated management as stock would. Unfortunately, smaller car wash, car care or detailing operations, without large cash reserves, must usually seek alternative financing options to fund their transaction. One popular alternative to paying for a M&A with stock or cash involves agreeing to take on the debt owed by a seller.


For many car wash operators, debt is the reason for the sale. Unfortunately, debt can reduce a seller’s value, often to the point of worthlessness. From a buyer’s point of view, this strategy offers a cheap means of acquiring assets.

Being in control of a large quantity of an operation’s debt means increased control over management in the event of a liquidation since owners of debt have priority over shareholders. This can be another incentive for would-be creditors who may wish to restructure the new business or simply take control of its assets.


Conventional bank loans for car washes can be difficult to obtain with lenders considering them “single-purpose properties” (not easily converted to other uses). Even if approved, down payments of up to 40 percent and balloon payments at the end of the loan’s term may be required.

Non-traditional lenders have stepped into the void with many offering targeted financing opportunities for car wash operators. However, inflexible conditions, high interest rates, and shorter terms limit this avenue of financing. Enter the U.S. Small Business Administration.

Surprisingly, many M&As and owner buyouts of car wash operations qualify for SBA loan guarantees. The SBA’s 7(a) program is the most popular loan program, providing up to $5 million for refinancing, working capital, or to buy a business. Even larger transactions are possible with so-called “mezzanine” financing or when real estate is included.

The SBA’s 504 loan program can be used to buy land, buildings, or equipment with a service life of 10 years or longer. It can also be used to construct a building or to renovate and upgrade buildings and equipment, making it an ideal M&A funding option.

SBA M&A financing is generally through the SBA Preferred Lender program, often with additional working capital loans and lines of credit for financing packages in excess of $5 million. Since the SBA has eliminated its personal resource limitations, borrowers and investor groups with high net worth and liquidity are now usually eligible.


Much of the risk in an M&A transaction can be eliminated with a frequently overlooked type of insurance. Warranty and Indemnity (W&I) insurance has evolved from its introduction in the 1970s, into a popular and sophisticated tool for protecting buyers and sellers from the financial risk in M&A transactions.

W&I insurance essentially removes the risk, in whole or in part, with the promise that underwriters will be standing behind the warranty claim. By offering more protection against downside risk, W&I insurance also negates the necessity of escrow or indemnities, providing a degree of certainty and finality to both parties.

With a seller’s W&I policy, the seller gives warranties and indemnities as is customary, but then insures its own risk of a claim. Sellers remain liable to the buyer, but they are indemnified by the insurance underwriter.

Thus, when a claim occurs, the buyer would usually claim against the seller for breach of warranty but the seller would look to the insurance company to write a check for all or at least part of the damages being sought. A buyer’s W&I policy covers damages following breaches and/or fraud as well as defense costs. With a buyer policy, if the seller commits fraud, the policy would still payout.


Despite the new, lower 21% corporate tax rate, many car wash operators will likely continue pursuing tax-free M&A transactions. Tax-free M&A transactions are considered “reorganizations” and similar to taxable deals except that in a reorganization, the buyer uses its stock for a significant portion of the sale price rather than cash or debt.

Reorganizations, while not usually taxable at the entity level, are not completely tax-free to the seller. A reorganization is immediately taxable to the target’s shareholders for any “boot” received. Boot is any consideration received by shareholders in the target entity other than the buyer’s stock.

Other provisions of the TCJA, such as the full expensing of asset costs, may cause many to weigh their effects on any transaction. In reality, the ability to do a taxable asset transaction and take advantage of front-loaded deductions may encourage many in the car wash or car care industry to complete a taxable deal instead of a tax-free transaction.

Consider a situation where a seller really wants cash while the buyer is pushing for a tax-free acquisition. The tax law’s Section 338 permits a car wash or car care business to make a “qualified stock purchase” of another business and choose to treat the acquisition as an asset rather than a share acquisition for federal tax purposes. The stepped-up basis or book value of the qualifying assets can be immediately expensed and written off, dramatically changing the bidding dynamic on the transaction.


A natural consequence of private investors and equity firms entering the market is predicted to produce economies of scale, making the big players more profitable. However, on the downside, M&A deals are often difficult to accomplish.

The interests and objectives of sellers and buyers are all-too-often discordant. Sellers want the highest price with little or no residual risk or liability. Buyers want the lowest price possible with maximum recovery options.

Recent trends involve more cash-ready buyers but with more aversion to risk. What’s more, buyers are generally unwilling to enter into transactions if the warranty package being offered is too limited or there are concerns over enforceability of those warranties.

Obviously, these challenges are not insurmountable and deals continue to emerge with and without tax breaks, alternative financing, or risk insurance. But, every car wash operator and owner would be well advised to perform their “due dilligance” and seek professional advice.

Mark E. Battersby is an Ardmore, PA-based freelance writer, specializing in finance and tax issues.