Charles Darwin was once asked why some species continue to exist while others do not? He responded: “It is not the strongest or the smartest that survive…. it is the ones that are the most adaptable.” We are experiencing a period of unprecedented change in the car wash industry requiring operators to constantly make adjustments.

Over the years, I’ve led multiple businesses in different sectors and spent eight years competing in the private equity market. These experiences have provided me with the unique perspective, competence, and just plain street smarts to succeed and excel in a market that is radically changing, such as our car wash industry. I have been asked by many to share my perspective and I am delighted to do so.

A company owned by a private equity group (PEG) operates radically differently than a private or a public company. Their business model breaks all the rules private and public companies play by.

Private and public companies make investments in their business for the long term (five to 10 years). Their goal is long-term growth. They spend more money in preventative maintenance, training, talent, product development, and new capital equipment. It is all about the long-term growth. They can afford to be more patient then a PEG has to be.

Private equity companies’ investment strategy is radically different since they invest for short-term growth of rapid EBITDA enhancement. (EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization, which is more reflective of the true performance of a company.) PEGs typically only own a company for three to seven years. They must be quick since their investors expect and demand a 20 percent return per year. Yes, a 20 percent return per year! You invest $100 and in three years the PEG will pay you your original $100 plus $73.

PEGs all operate with a very simple three-stage process, which is:

1. Buy Right (i.e., Buy Low)
Purchase companies which have value and who can rapidly expand EBITDA. Buy at low multiple.

2. Add Value
A PEG’s definition of value is 80 percent to 90 percent determined by EBITDA. They have to move fast within a few short years. (EBITDA is the base line that drives 90 percent-plus of the calculation in determining the value of a company.)

Do not make the same mistake others have made:
• It is not only the top line (sales) that counts. It is really about the bottom-line (EBITDA). This is the only financial measurement the PEGs will pay for — show me the money.
• It is your last three-year financials that count. They want to see growth in EBITDA year over year.
• PEGs love “recurring revenues” such as monthly subscriptions since it lessens risk.

The car wash industry is very hot, solely because it is ripe for consolidation, which is by far the quickest method for increased sales and, more importantly, profitability (EBITDA). Always remember: The main driver for growth is acquiring a large platform company with many locations and then adding smaller “bolt-on” car wash companies to the platform to improve EBDITA.
E-pluribus unum — from many, one.
It is a synergy game on steroids. Consolidators relentlessly, and quickly, take out cost while getting bigger. One obvious example: if you were to purchase 15 car wash companies you can eliminate 14 management teams.

3. Exit
Sell the company at a higher multiple with a much higher EBITDA, less debt. Nothing more and nothing less.

EVALUATION FORMULA

All PEGs, and banks for that matter, evaluate businesses by a very simple formula:
EBITDA x multiple – debt = company’s value/purchases price.
Here’s an example of the purchase and subsequent sale of a company:
$1M of EBITDA x 5 (multiple) = $5M – $500,000 debt = $4.5M value/purchase price.
All PEGs have a goal to at the very least triple EBITDA in three to five years. (Buy Right, Add Value, Exit). The subsequent sale looks like this: $5M of EBITDA x 6 (multiple) = $30M – $2M debt = $28M value/sales price.
Therefore: Sales price of $28M – original purchase price of $4.5M = $23.5M profit or a 522 percent return.

OPTIONS FOR THE FUTURE

Now you know private equity’s rules of the game: that at least 85 percent of the value of a company is determined by EBITDA, and that the car wash industry is changing at supersonic speed. Your business is now faced with three key options moving forward:
1. Remain independent as an autonomous company
2. Remain independent, but join/form an alliance with other companies
3. Sell the company at the maximum value of EBITDA

You can survive and even thrive with any one of the three, but you must change since only the adaptable survive. We all know the car wash industry is rapidly changing from a family business of one to 20 car washes to a very sophisticated business organization of 300 to 1,000 car washes under a single identity. The key reason is that you can become

far more profitable when you consolidate spending, slash the cost of highly expensive redundant management teams, reduce advertising cost per location, and implement a myriad other EBITDA improvements.

Let’s address the actions required to thrive for each of the three options:

1. Remain Independent

This is the most expensive and slowest option since it is all your own money and effort. It is the Lone Ranger approach.

One needs to take the emotion and pride hindering your objectivity from past poor/bad decisions and eliminate them. We’ve all made mistakes. Don’t make a bigger one by not correcting or eliminating the issue.

An example: You own five locations of which four are profitable and one is marginal, breaking even or even losing money. That single unit is negatively affecting your entire EBITDA. PEGs will, under the right conditions, love to purchase companies in this situation. They will close this facility in a heartbeat since, even though sales will go down, it will enhance the EBITDA because in this case addition by subtraction really works. They will make more money per wash by closing the subpar facility. The argument that “I can’t afford to close it” has just been shot down by the above example. You cannot afford not to. Why should a PEG make a simple move like the above and reap the advantage of a quick value action? They use this tactic all the time. It’s easier for a PEG to do this because they are not emotionally tied to the decision. They have strict rules of profitability and adhere to them. Why not you?

Get more adaptive and embrace new approaches. Many of you continue to provide only full service. It’s a good business model and it has paid well from 1945 to 2020, which is 75 years! The market has changed to include express car washes with an entirely different value proposition for the customer (speed and inexpensive). A lot of you have dipped your toes in this new market with some success. There’s a reason why more express car washes than full service are being developed today. You can accept or reject the argument, but “only the adaptable survive.”

Many car wash owners claim, “We are different, we have a unique system.” If your system is truly unique, that’s great value since unique systems drive higher EBITDA. Think about it, though, what makes you unique? Is it really uniqueversus the business across town or in the next city or state, or is it just the way you want to run it, which happens to be different? If it is truly novel and unique you might get a slightly higher multiple but, if it’s just different, you will not. What good is it if it doesn’t create more money, which is reflected in more profit? Always remember PEGs purchase multiple companies and change them to one system: one supplier for all chemicals, one marketing approach, one management team and system, one financial system, one measurement system — one, one, one, one. Variability is expensive, so they must take out the cost of multiple systems quickly because they only have three to five years to rapidly reduce cost, thus improving EBITDA when selling.

2. Remain Independent, but Form Alliances

Zebras run together in large packs because there is safety in numbers, and it greatly reduces the chance of a lion eating them — just out run the slowest Zebra.

You will be able to keep your independence and compete with lower costs, but you must be willing to share your information and give up some of your autonomy or sovereignty. It is all about how you make 1 + 1 = 3. When two companies share best practices, they both benefit. It is a very quick and low-cost investment since the only out of pocket cost is travel.

Enhancement Groups

The first Zebra pack is the enhancement groups. There are many great articles on their benefits of which I am sure you have read. Reading and doing are two very different skill sets.

Most of you have profitable independent car washes, but are you the very best in procurement, operations, marketing, cost control, or financial planning, to name just a few issues? Of course, you’re not. If your operations are in Texas, are car washes in California, Illinois, Ohio, New York your adversary/challenge? Of course not. Your real adversary, and largest challenge, is cost. Cost is the adversary for us all.

Strong enhancement groups reduce cost because they are not myopic, i.e., lacking imagination, foresight, intellectual insight, or just thinking out of the box. In every marketplace there is a special group of 10 organizations that rise above the masses. We all know who they are. They are highly successful and thus become “the industry influencers” that others will emulate. Sadly, it is too late for those who copy their success since they are now behind the leaders. By the time you implement, the influencers are jumping ahead with the next new thing. The goal is to lead with them. Your goal is to join the organization where the influencers play. Join them, but more importantly, contribute to their success. If one can have “guilt through association” then you can surly have “respect and success through association.” They are the A Team. Second place is really just the first loser.

When you meet quarterly, it is all business, spend an extra day for golf if needed. During that day you will share each other’s financials (yes financials) review successes and failures, and share best practices. These meetings are all business, it is about enhancing everyone’s EBITDA.

If you can’t get in with the perceived “best and brightest” group, then form your own enhancement group, but be prudent, judicious, and very selective of the membership. Qualifications are just one simple question to ask yourself: “Do I genuinely trust, respect, and admire their car wash business and, if I had the capital, would I buy them?”

Buying Groups

The second Zebra Pack is the buying groups. To be successful they require mature, methodical, ethical, and just flat out smart members who are quick and understand the big picture — members who understand that you must sometimes give in on a small issue to achieve a substantial gain in the end. The art of knowing when to “give to get” is what is important.

As you now know, PEGs quickly implement a holistic strategy based on five simple words: Buy Right, Add Value, Exit. It is all about gaining leverage to reduce cost on multiple fronts. The only way for an independent car wash to improve their purchasing leverage, is through acquisition or, more quickly and less expensively, by joining, or creating a purchasing syndicate. A syndicate is an organization combined to promote and benefit a common interest. Members get a better deal than if they were on their own.

To get leverage with suppliers, the members of the buying group must consolidate all of their purchases with a few suppliers. Mark Twain said it best, “There is nothing wrong with having all your eggs in one basket…. Just watch the basket!” This makes sense and sounds easy, right? In the early stages of a buying group, it is far from easy. In a new and immature organization, all new members are all in as long as it’s his/her current supplier that is being picked from the list of preferred suppliers. If a member, instead of using the preferred supplier, uses a different supplier (the preferred supplier’s competitor), and still shares in the annual discount at the end of the year the group receives from the preferred, that member is nothing but a taker and not a contributor. Takers do not add any value to the organization. They will eventually cause major confrontation and will result in the givers/contributors leaving since they could be receiving a better discount working directly with the supplier and not having to share.

When choosing preferred suppliers, there must be an incentive for suppliers to join the group. If there are three different suppliers for the same type of item and the supplier, after a few years does not receive any new additional orders, they have no incentive to stay. Would you? These three competitors are currently competing in the marketplace. Nothing has changed for them, so they have no incentives to supply the buying group.

I personally have worked with mature and seasoned buying groups in the automotive industry as president of Bendix Brakes and as president of an aerospace company supplying instrumentation and hardware. I have found buying groups to be a very financially rewarding experience, both for the buyer and the seller. Why was it rewarding for the supplier? We know that when buyers combine the volumes, they all get better prices. At Proto-Vest, our marketing costs are approximately 7 percent to 12 percent of our annual operating budget. This is a significant cost for any multimillion-dollar company. The beauty for me, the supplier, is if the buying group purchases volume for a better price, it reduces my marketing costs and I can, and am willing, to pass on a lot of those savings directly to the buying group which increases their annual rebate distribution. I have less cost in marketing expenses, which means I can give a higher discount yet still maintain an acceptable margin. Again, it’s all about reducing cost for both the purchaser and the supplier, so that we can make 1 + 1 = 3. Both must win. Both must be straight up on their commitment and “just do it.”

If successful, the buying group membership now has the purchasing power equal to the 500 to 1,000 car-wash-unit organizations while the suppliers are more than willing to allow more discounts since it reduces their expenses. If that’s not a true win-win for both sides, I don’t know what is. Show me the volume, I will show you the money.

3. Sell the Company at the Maximum Value EBITDA

There is absolutely nothing wrong with cashing out and selling your company. I, too, look forward to the time in my life when my biggest decision for the day will be choosing either dark or light rum in my Pi?a Colada! Prior to selling, I would strongly suggest you explore being involved with enhancement and/or buying groups for two years. $500,000 of enhanced EBITDA can be worth millions.

So now you know why PEGs are enamored and enchanted with the car wash industry. You know the rules of how they play, the timing within which they have to execute, and how they value a business in any market sector, which is all about EBITDA.

You also know the three options you have to address the rapid change in our industry and the actions I am suggesting you explore. You need to explore and implement quickly, since time is not your ally.

“It’s not the strongest or the smartest that survive…. it is the ones that are the most adaptable.”

Jeff Reichard is president of Glendale, AZ-based Proto-Vest Inc. In the private equity arena, he served as the managing partner of Global Point Capital Partners. During his 5-year tenure he sold and assisted in purchasing 28 companies with annual revenues between $8 million and $2.4 billion in multiple business sectors. Prior to joining Proto-Vest, Jeff served in a number of senior executive positions at Allied Signal/Honeywell International. He is a graduate of Youngstown State University and the Harvard Business School.