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Help first Car wash Purchase w/o RE

Brian147m

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Good Afternoon,

First post, love the info on this forum. I'm looking to purchase a local car wash in my hometown. It's an existing 4 bay SS with 2 IBA's, that's been open for about16 years or so. VERY WELL maintained, and I was told by the distributor it's one of the most well maintained, nicest washes around. The Touchless is an Oasis Typhoon that was put in all new in 2020, the soft touch is an older Ryko that is original. Owner is retiring and is looking to sell. This would be my fist car wash but I have a strong business background and have financing in place. Strong cash flow and excellent financial history on the business.
Purchase price is $600,000 which is about 3.5X earnings.
2 issues I'm struggling with: #1) A new Express tunnel wash just open up literally across the street q4 of last year. Q4 numbers were down 25% year over year on this wash (I was told the new wash was giving away free washes initially), and it's still down 9% in Q1 of 2022, but I'm not just sure of the long term effects of this new wash.
#2) The lease. This is located just off of main street in a booming and growing part of town that's right in the path of progress. Lot's of new building within a few miles of this great location. Existing rent has been about 25-28% of gross sales, but the new lease I would have to sign (15 years) would be 32% of gross and will likely go up from there, as it's tied to the Consumer price index and we all know what inflation is doing right now. This concerns me greatly as we may be moving towards a recession and rates will most likely keep climbing for a year +.

I'm looking at overall thoughts on this deal from those with lot's of experience. Is 3.5x to high without real estate? Experience with competition being so close? What else should I be looking at? I can provide more info as well.

Thanks in advance!
 

traveler17

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I would NEVER purchase a business for 3x’s gross without the real estate. I just spent 3.5x’s the gross on my 2nd wash w 2 acres. Most washes like ours are going to take a bump w a tunnel. I understand everyone can’t but I’ve never been a fan of any sort of leased business. It’s like renting an apartment, spend all the money and zero to show for it in the end because you’re going to spend a chunk of money on upkeep and replacing/repairing equipment. I don’t know how others feel but if it were me I’d ask the owner if he’s on meds. 😬 that’s a joke. Hard pass here!! Keep us posted
 

Brian147m

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I would NEVER purchase a business for 3x’s gross without the real estate. I just spent 3.5x’s the gross on my 2nd wash w 2 acres. Most washes like ours are going to take a bump w a tunnel. I understand everyone can’t but I’ve never been a fan of any sort of leased business. It’s like renting an apartment, spend all the money and zero to show for it in the end because you’re going to spend a chunk of money on upkeep and replacing/repairing equipment. I don’t know how others feel but if it were me I’d ask the owner if he’s on meds. 😬 that’s a joke. Hard pass here!! Keep us posted

Thanks for the response. The purchase price is 3x net, not gross. It's basically 1.2x gross. Current owner netting almost $170k after expenses, so that's the 3.5x valuation. I believe there's quite a few interested parties so I don't think he's completely out of line.

I agree about leasing, but the real estate alone is probably worth $3mm+ so this is a way to get into the industry in a good location at a reasonable price. I would love to buy the land someday, but the landlord is a big out of state investor not interested in selling at the moment.
 

traveler17

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Thanks for the response. The purchase price is 3x net, not gross. It's basically 1.2x gross. Current owner netting almost $170k after expenses, so that's the 3.5x valuation. I believe there's quite a few interested parties so I don't think he's completely out of line.

I agree about leasing, but the real estate alone is probably worth $3mm+ so this is a way to get into the industry in a good location at a reasonable price. I would love to buy the land someday, but the landlord is a big out of state investor not interested in selling at the moment.
My bad , I should’ve asked that. I could’ve bought a lease / business wash for 400. It was grossing 200 so that’s about right as far as multiplier. So now you gotta ask yourself do you want a note w a 30 percent gross sales on top of that ( if I read that correctly) It’s just one of those things you have to decide if you feel the numbers are right.
 

Brian147m

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A 3mm piece of property is not going to be a ss car wash very long.
Sorry, let me clarify. The landlord owns a large parcel that includes the car wash, an auto parts store, and a lube stop all as part of a complex. So while he could possibly split it out and sell just the real estate for the wash, he's not likely to do so.
 

eckert16

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View attachment 6121
Talk to your accountant, have him run your numbers...
a Lease? with a tie to CPI, which is expected to go higher, during a time of inflation? Let's say you signed it at the end of last month (Apr 2022) and that the rate didn't go any higher...
1653657529627.png
Do a simple chart... for the past year, (Apr 2021-Apr 2022) the index was 16.3%. If the lease payment changes every payment cycle, a $1000 cycle payment would be $2126 by the fifth cycle (if my math is correct and IF it was a cycle change). Pretty sure you would not raise your price per wash the same amount ($10 to $21 during the same time frame to keep up).
I understand the State of Maryland recently passed a law tying their Gasoline Tax to the CPI or Inflation rate...(it's quite a sorry state of affairs as I know of no paycheck that rises equal to the CPI nor Inflation).
 

sjb

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I believe strongly that you need to own the underlying asset, the dirt below the car wash biz, or you are just making $$ for someone else. Rent is a 4 letter word, unless you are the landlord. Only thing worse is a franchise deal on leased land. That is where you have all the headaches, but very little equity, or viable exit strategy.

Caveat, a legal document that provides an option to buy the dirt down the road as the community evolves and changes.

Best of luck!
sjb
 

Waxman

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The car wash business is much too demanding to operate with no real estate component in place. I would not be motivated without knowing that I am paying off the real estate each month.
 

Toms PTcarwash

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On the flip side, principal payments on a mortgage are not tax deductible, only the interest. The lease payments are 100% deductible.
If a bank is willing to loan you money to purchase this business without any "tangible assets" such as land, it must have really solid financials.
 

Greg_T

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Whilst I can see that operating a carwash on a leased property would be viable (and perhaps really profitable) in the right circumstances, it's not something I would do personally. I like to think that all the effort in cleaning, maintenance, upgrades etc. that we put in returns as a benefit in the long term value of the facility. If we leased a carwash site, I think our motivation to maintain and improve the facility would be much, much lower.

As a little aside, land values in Australia are typically much than in the USA (why - I don't know!). We had to pay about 6 times gross for our wash, and this was pretty cheap compared to other sites that we looked at.
 
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