Carwash M&A Heats Up
Why is the carwash market so hot, and will it last?
By Jeff Pavone
The carwash industry has been one of the hottest markets for mergers and acquisitions (M&A) activity in recent years, which has been largely driven by the emergence of strategic and financial buyers and the quest for consolidation. Today, we have approximately 20 strategic and financial buyers that are active in this market and at least that many trying to get into the carwash space. In recent months alone, there have been several notable transactions, such as Atlantic Street Capital buying into Zips Car Wash and Driven Brands acquiring International Car Wash Group. The question many people are asking now is: How long can this last?
While there are several threats that can potentially slow down the trajectory of activity in the carwash M&A market, we believe that the growth we have seen over the past five years will pale in comparison to what we will see over the next three to five years. The remainder of this article will examine why.
The industry continues to evolve
For decades, the industry has been dominated by “mom and pop” operators, but that’s changing fast. The emergence of financial buyers, including private equity firms and family offices, has institutionalized the way in which carwashes operate. With so much pent-up demand in private markets, there is a tremendous amount of capital sitting on the sidelines.
The lack of quality opportunities, which has intensified in the post-COVID environment, has had a slowing effect on deal flow. As a result, financial buyers have found themselves with a lot of dry powder and the need to put money to work.
The carwash industry has evolved in recent years, with recurring revenue models via memberships offering greater stability in cash flows, making for an even more attractive investment opportunity. A growing pool of financial buyers and attractive industry characteristics will continue to be a significant driver of growth.
Start your engines
The race is on to build new and establish regional brands.
Valuation multiples are currently trading at double digits (on EBITDA), and as a result, chains are now aggressively developing new sites. The logic here is simple: If you have to pay a multiple of 10-times to buy an established site but can build a new site at a multiple of five-times, the economics are far more favorable to build versus buy.
In addition, the trend to grow and establish a regional brand continues to shape the carwash industry. Multi-site operators are quickly recognizing the importance of a strong regional brand, not just for the purposes of achieving scale in operations but for the positive impact it has on customers when delivering the same experience at any location. With so many untapped markets in an industry that is still very much fragmented, there are ample opportunities to develop major market brands and quickly become a top player in the region.
While these dynamics will continue to fuel the growth of the industry as a whole, they can also make smaller operators more motivated to sell. Small operators may have a great site today, but if a new entrant penetrates the local market and develops new, the value of the established site may quickly erode. The threat of growing regional players penetrating markets via new developments can feed the already robust pipeline of acquisition targets.
What can stop this?
The obvious near-term risk is COVID. A new problem we are seeing during the COVID-19 pandemic is credit. Financial institutions are slowing lending to fund loan loss provisions in the anticipation of defaults. Because of this, credit is getting much tighter for individual operators, which may slow down growth plans and ultimately allow the larger, more well-funded national players to expand. The political landscape can also prohibit the full realization of the industry’s growth potential. Changes in tax law and evolving sentiment can put a significant handcuff on transactional activity in the carwash industry.
The good news …
The good news is that this is still a great time to sell, despite increased competition and the emergence of exogenous risks. We are seeing some extraordinary deals being done in this space, but it is critical to go into these discussions prepared. If you do want to sell, get multiple bids, because not all offers are the same.
For example, if you have recently built a wash or are in the process of building new locations, how will the buyer treat that value? This is where it pays to seek the help of a professional advisor.
In a recent case study, we found a chain that was in the process of signing a letter of intent to sell for $40 million. However, the deal fell through at the last minute. The seller went back to market using an advisor-led, competitive process and was able to increase the price of the sale by $4 million. This example proves that it pays to know your value.
Jeff Pavone is the founding partner of Amplify Car Wash Advisors and Commercial Plus, a market leader at the forefront of M &A advisory, real estate brokerage and financing for the carwash industry, successfully completing more than $5 billion in carwash-related transactions over the last decade. Recently, Jeff partnered with car wash veteran Bill Martin to launch Amplify Car Wash Advisors, addressing the evolving needs of car wash owners.