How Long Will the Market Stay This Hot?
Why now may be the right time to sell your car wash
The car wash industry has seen a significant increase in valuations, and operators are asking themselves is now the right time to sell? Is it better to take some chips off the table at what could be peak valuations, or continue to roll the dice? If we’ve learned anything from previous business cycles, things can’t stay this good forever. Here’s what you need to know now if you are considering selling car wash business.
Private equity-backed chains are getting more aggressive.
Demand by private equity is strong with record money entering the space as the last 12 months have provided solid returns during this recession and COVID economy compared to other retail investments. Private equity sees the professional car wash industry still at an infant state regarding consolidation. But as more private equity-backed brands achieve scale in a market, at some point it becomes cheaper to build than to buy an existing location.
Regional chains continue to develop at a tremendous pace.
Regional chains are racing towards the 100-unit mark. It wasn’t that long ago that car washes were building two or three car washes a year. Now, there are several groups that are looking to build 25, 50, or even 100 car washes a year, with a primary goal of expanding their own footprint, even if that means developing a site across the street from an existing location. The old days where there was an assumed agreement amongst car wash owners that you would stay out of each other’s immediate space are gone.
The biggest risk to your business valuation is development.
As markets become more saturated, the value of smaller chains starts going down. When brands become established, continue to build up and develop out, it makes the small operator less valuable. The current market is looking to build dominant brands in regions, so there is an opportunity if you have something of value. Right now, there is so much interest and the valuations are so good, but as the field becomes more crowded and development is at an all-time high, that will change in the near future.
Rising inflation could make it more costly to build, therefore lower return on the exit.
A company’s cost of capital is a key factor in determining valuations. Rising interest rates results in greater borrowing costs, thus increasing a company’s cost of capital. The cost of capital has an inverse relationship with valuations. In other words, if a company’s costs of capital increases, valuation multiples typically decrease.
Credit availability may tighten if loans begin to default.
Despite a recovering economy, the lingering effects of COVID can cause loan defaults for companies and consumers with exposure to certain industries that have been disproportionately impacted by the pandemic. Banks putting capital aside for loan loss provisions could limit the amount of funds available for new loans.
A change in tax law could adversely impact the incentives of both buyers and sellers.
It is widely expected that some combination of changes to the treatment of capital gains, corporate tax rates, and bonus depreciation could occur in the future. If taxes on capital gains increases, sellers could be less motivated to trigger a taxable event by way of a sale. Similarly, changes in the handling of depreciation could impact the relative attractiveness of the car wash industry to buyers given the capital-intensive nature of the business.
Conclusion
The car wash industry has changed dramatically in the last 10 years. It is evolving from a mom-and-pop, local business and pushing towards mega-branded chains with 20-30 sites in a market, and some chains with aspirations to grow on a nationally recognized level. So, if you are considering selling your car wash, now is the time to really explore your options while you have the interest of buyers racing to scale.
Jeff Pavone, Partner, at Amplify Car Wash Advisors, a national full-service car wash advisory firm with expertise in mergers and acquisitions and capital advisory. Amplify helps get you the most for your car wash by discovering the true value of your business through a proven competitive bidding process that positions you with options beyond accepting the first offer that comes your way. Learn more at AmplifyWash.com or contact Jeff at [email protected].
