Arguably, the car wash industry is ripening for private equity. For example, growth is projected for industry wash revenues and size of the fleet. Moreover, the market remains fragmented, which is a good play for consolidation.
To illustrate, the top 50 car wash chains in the United States account for only 1 percent of the estimated total number of car wash establishments.
The largest chain on the list is Mister Car Wash with 212 locations (20 states), and the last chain on the list has eight locations. Mister has been the most active firm with more than 50 acquisitions over the last 18 years.
Mister offers full-service and express wash services, operates 34 lube centers, and selectively sells gasoline, sundries, and other automotive services. Mister is owned by Leonard Green and Partners, L.P. (LGP).
LGP is a leading private equity investment firm based in Los Angeles. The firm partners with experienced management teams, and often with founders, to invest in market-leading companies. Since inception, LGP has invested in over 80 companies in the form of traditional buyouts, going-private transactions, recapitalizations, growth equity, and selective public equity and debt positions.
Last year, the experts said that agribusiness, food and beverage, grocery, and related sectors took up the bulk of big-deal flow for private equity ($1 billion or larger). According to Pre Hub Network, LGP reportedly paid $400 million to $500 million for Mister Car Wash in 2014 (then with 134 car washes and 32 express lubes in 14 states).
As for deals valued at $50 million or so, the experts said private equity remained acquisitive through portfolio companies that were able to make synergistic add-on acquisitions. So the question is: How many more firms like LPG are there that might consider adding car washes to their portfolios?
To illustrate, let’s consider a private equity firm looking to stress test an investment in the car wash space. This is a U.S.-based venture capital firm located in the west that focuses on technologies. The firm manages multiple investment funds including funds specific to foreign markets.
The firm also has an opportunistic fund. Generally speaking, an opportunistic strategy can target development opportunities in developing markets as well as underperforming, mismanaged, or temporarily depressed properties. Typically, property is acquired with a high degree of leverage, held for a short period of time, and then sold for an expected profit of at least 20 percent.
Experience shows deals are modeled on an exit after three to five years. If market conditions change or business doesn’t perform as expected, the hold period can be 10 or more years. Typical size of an opportunistic investment is $20 million or more.
So, the first part of a stress test would be to determine how many stores to buy, in what period of time, and in what region. To illustrate, we use the top 50 car wash chains as a surrogate for available properties.
Based on the assumption LPG acquired Mister for an average of $2.7 million per facility ($450 million/166 facilities), $20 million would buy seven or eight properties. Here, we could be talking about an established chain of eight stores or so, or it could be an upstart with only two locations and plans for six to eight more sites.
As shown in Table 1 above, most of the companies and most stores in the list of top 50 car wash chains are assisted-services or multiple-profit-center operations. Multiple means full, flex or express wash combined with complementary services including but not limited to lube, convenience store, gasoline, detail, etc.
As shown in Table 2 above, most of the stores in the list of top 50 car wash chains are located in the south and west regions.
Table 3, above, suggests some of the reasons for this. The grades are based on a compilation of indexes that rate cities and regions for best shopping, retail, retirement, and growth.
The last decision, what store characteristics to choose, is crucial for our equity firm because store and services design is most linked to service quality and customer satisfaction.
For example, unlike Mister Car Wash, our private equity firm does not have an experienced team of professionals to manage day-to-day car wash operations.
Consequently, many of the companies and properties in the list of top 50 would not make good candidates for our private equity firm regardless of performance. Nevertheless, there are lots of juicy small regional chains to whet the appetite for opportunistic funds.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at email@example.com.