According to JP Morgan Chase Institute, there are approximately 28.4 million small businesses in the United States. Only 20 percent are employer businesses. Eighty-eight percent of these firms have fewer than 20 employees, and nearly 40 percent of all small businesses have under $100,000 in revenue.
In other words, most small businesses are small.
COST OF ENTRY
Evidence of this is the lists of Best Small Business Ideas that permeate the World Wide Web. These ideas are usually couched as a great entry point for beginners, boot strapping, or a side business for anyone with a busy schedule. Ideas run the gamut from drop/shipping, on-demand printed t-shirts, subscription boxes, vending machines, to selling services such as lawn care, a coffee shop, or a beauty parlor.
Pundits often describe selling services as a lucrative way to gain self-employment as long as you have the time and skills that are required. For example, mobile car wash or detail service is the least expensive means to enter the car wash industry. According to Mobile Tech RX, the initial investment is around $5,000 to $25,000 with the median investment being $10,000. According to Simply Hired, the top 10 percent of mobile detailers make more than $147,000 a year whereas the mid-range is around $67,000.
However, as with other service-based small businesses, time is often the biggest investment. There are only so many hours in a day and only so much work that one person can produce. Consequently, to grow the business, the mobile operator would need to scale up or expand to a location-based operation. The former would require adding more mobile units and hiring employees whereas the latter would require an investment of $125,000 or more to create a store front. In other words, a bigger small business requires more time, money, and risk.
Besides the low cost of entry, another factor that attracts mobile operators is demand. According to the U.S. Department of Transportation, there are approximately 1.8 vehicles per U.S. household. According to our model of the industry, 1.8 vehicles per household translate to an estimated demand for 6.6 million car wash services per day.
Based on 62,668 car wash locations nationwide (source: ICA), this works out to an average of about 105 washes per day per location. However, a one-person mobile operation can’t wash 100 cars a day, maybe six to eight. Even a location-based hand wash would be hard pressed to process 100 cars a day.
In short, volume requires a commercial operation. Commercial refers to a professional field that is dedicated to optimize a company’s ability to sell services, manage processes, and reduce operational costs.
Here, the objective is to recommend the best-fit business model and equipment that will most effectively meet projected volume and provide customers with an experience that builds loyalty and repeat business.
If time is a major consideration, a professional would recommend a more passive business such as self-service or an in-bay automatic. Reason being these types of washes do not require on-site attendants to operate.
According to Auto Laundry News operator surveys, the current benchmark for a combination self-service is annual sales revenue of $260,000 or net operating income of $156,000 after expenses. Assuming rent/debt service of 18 percent of sales, we would anticipate earnings before taxes and depreciation (EBTD) of more than $100,000. However, instead the $5,000 to $30,000 equity to start-up a mobile or location-based hand wash, a self-service, or in-bay automatic will require equity in the $250,000 range.
If time isn’t a consideration, a professional would recommend a less passive investment such as a conveyor car wash operation. Where the aforementioned washes are capable of washing up to 20 or 30 cars an hour, a conveyor of sufficient length can wash 100 or more cars an hour. However, this requires a more substantial wash which raises the required investment equity to between $650,000 and $1 million.
Moreover, a conveyor needs full-time and part-time attendants, management, as well as a considerable amount of time to administer human resources and marketing functions.
As for income, unless it’s a small town or a saturated market, it is uncommon to come across a full-size conveyor with annual sales of less than $1 million. If an express exterior car wash, experience shows we can sanity test by applying a ratio of 1:4 against income or $250,000 (EBTD). Consequently, a cluster of such stores would place a car wash at the top of the pile of small businesses in terms of owner income.
In the final analysis, start-ups should consider time as well as money and risk in their deliberations. Generally speaking, low-cost business models have less risk but require a substantial amount of time. Business models that substitute capital for labor cost more and have greater risk but require less time. Business models that have the most income potential cost the most, have the greatest risk, and require the most time.
There are many issues to address when planning to get into the business of washing cars. Solving the location problem is considered the single most important one, but sustaining the business long-term is surely the second most.
For example, threshold population is defined as the minimum number of people necessary before a particular good or service can be provided in an area. To illustrate, if a trade area contained 25,000 people, a threshold population of 5,000 would imply the area could support five car wash sites.
In this case, a fair share would be 20 percent (1/5). If someone is planning to build a new wash in this area, the fair share calculation drops to 17 percent (1/6). However, is 17 percent a realistic expectation for a new site if the competing washes are successful?
For example, success may mean a well-established business with a long history and strong customer base. Such businesses may own their premises, be highly regarded in the community, and located in the most attractive of environments. In other words, a formidable business that presents a major barrier to entry for a new competitor.
Moreover, unlike the quick-serve restaurant industry where companies attempt to create competitive advantage by being different, most new washes have sameness. Sameness refers to store characteristics such as size, layout, and implemented services (i.e., exterior-only, free vacuums, unlimited). Consequently, different may come down to price, color scheme, and owner-operated as opposed to a management company.
Subsequent to location, start-ups will need to consider that commercial construction costs are higher than ever. Several years ago, the average cost to develop a car wash facility with standard components was in the range of $250 per square foot. This included the cost of materials, architectural fees, and general contractor (fee, overhead, and profit).
Today, the cost exceeds $300 per square foot due to increases in the cost of raw materials, trade labor, and fuel. Moreover, these costs are expected to continue to rise. Consequently, start-ups should expect to be presented with more stringent escalation clauses in the contracts.
The costs to clean a car are also higher than ever. Over the last several years, we’ve seen unit variable cost for the conveyor product class creep up from $2 to $2.50. Moreover, hourly wages have risen, and labor has become increasing difficult to recruit and retain.
There are also intangibles that start-ups need to consider such as the time needed to administer social media programs and participate in community activities and events.
In the past, operators would attempt to mitigate operating risk of generating sufficient gross sales by locating on a high-volume road, offering a low price, and trying to maximize average per car revenue. Today, there is more emphasis on monthly unlimited wash clubs, finding the sweat spot for customer conversion rate, and managing subscription churn.
Finally, there is the business of washing cars. This means being open seven days a week, 12 to 14 hours a day, rain or shine. Throughout, the operator needs to be prepared to sell, operate a plant, and provide a great service experience.
In the past, selling was largely a function of interpersonalrelations requiring people with the ability to recognize motivations, needs, and perceptions. Today, operators have the option to install point-of-sale systems with smart technology that allows for selection, payment processing, vehicle recognition, and automatic entrance gates.
Plant operation is the backbone of the car wash facility. Here, management’s responsibility is to ensure an efficient operation and to keep customers and employees safe. Operations also refer to maintenance activities intended to keep facilities in good working order.
Bob Roman is a car wash consultant. You can reach Bob via e-mail at email@example.com or by visiting www.carwashplan.com.