Changing Tax Times

What could new laws mean for professional carwash owners?
By Chris Jenks on November 11, 2021

The Biden administration and House Democrats have released proposed changes in tax law that would, in general, raise taxes to support spending on key Democratic agenda items, such as infrastructure and social services. While there is still much to be learned in terms of the timing and magnitude of such tax increases, carwash owners have been grappling with the question: What does this mean for me?

Please be advised: The situation on Capitol Hill is fluid, and at the time of writing at the end of September, there are still a lot of unknowns as they relate to how any changes in current tax law may actually shake out. The following is not meant to be tax advice but instead an assessment of how evolving tax law could impact the carwash industry based on what we know today.

Changing incentives for carwash owners
For corporations and businesses, the exact impact will ultimately depend on your organization’s size and structure. Current proposals call for a 26.5% top rate for C-corps with income in excess of $5 million. When taking into account local and state tax rates, corporations in certain regions of the U.S. could be among the highest-taxed businesses in the developed world.

Currently, pass-through income derived from investments in LLCs are taxed at the owner’s individual rate, with a 20% deduction under section 199A for domestic profits. Under the proposed changes, top-line tax rates for individuals will jump to roughly 39%, with an additional 3% surtax that goes into effect at $5 million of income. Additionally, deductions for pass-through income under section 199A are proposed to phase out for those with income levels greater than $400,000.

Under this scenario, carwash owners could be incentivized to increase capital expenditures on depreciable assets, such as equipment. The Trump-era Tax Cuts and Jobs Act of 2017 extended provisions for bonus depreciation, which allows businesses to immediately expense 100% of assets put into service after September 2017, with a 20%-per-year phase-out beginning January 2023. At the moment, there is no specific proposal under the new administration that would impact current bonus depreciation rules. As such, greater investments in equipment and machinery could allow carwash owners to lower their taxable income. With higher tax rates, every incremental dollar spent on depreciable capital improvements is worth much more to carwash owners.

For example, at a 20% tax rate, $1 million in capital expenditures is worth $200,000 to the bottom line, due to the taxable benefit of immediately expensing depreciation. Conversely, at a 30% tax rate, that same $1 million spend adds $300,000 to the bottom line. In addition to providing an economic benefit, increasing capital expenditures can drive greater efficiencies in carwash operations and could potentially allow operators to reduce expenses in other areas, such as labor during a period of rising labor costs. Greater levels of capital expenditures could also help sustain the extraordinary growth rates of the carwash industry that we have witnessed in recent years — for both carwash operations and vendors alike.

While taxes on business income will likely increase for many in the carwash industry, there could be a silver lining, since owners have greater incentive to reinvest cash flows back into their businesses by way of capital expenditures, which could have a positive impact on their bottom lines for many years to come.

The end of mergers and acquisitions?
The anticipation of changing tax laws has been a key driver of mergers and acquisitions (M&A) activity over the last six months. Higher capital gains taxes have been one of the biggest headlines from President Biden’s tax plan. While the magnitude of the increase has moderated quite a bit from the initial proposal of 43%, it looks as if new tax rates on long-term capital gains will settle in near 25% from the current rate of 20%.

In expectation of paying more on long-term capital gains, there’s been a flurry of carwash sellers looking to exit ahead of any changes to the treatment of capital gains. While this continues to be the catalyst for greater transactional activity in the carwash industry as of late, how will higher capital gains taxes impact the carwash M&A market in the years ahead?

Our assessment is that the impact will be minimal. We estimate that there have been more than two times the number of new builds than there have been carwash transactions over the last year, which should continue to provide a robust pipeline of potential M&A targets. There could certainly be fewer sellers in response to higher capital gains taxes, but the continued growth of greenfield developments should still provide ample supply for M&A activity. Furthermore, there is an abundance of capital in the system that should continue to fuel M&A activity in the carwash industry.

It’s no secret that the emergence of financial buyers, such as private equity firms and family offices, have accelerated M&A activity in this space over recent years. As investors continue to allocate more to private markets, there has been a growing amount of capital sitting on the sidelines. The carwash industry has presented itself as a high-quality opportunity for financial buyers, which is showing no signs of slowing.

Holding all else equal, it’s hard to envision a scenario that would throw off the abundant supply of capital that is currently in the system. The Tax Foundation estimates that the Biden tax plan will have a negative effect on gross domestic product (GDP) to the tune of -1.6% reduction in growth, but this is far from being considered a significant enough disruption to the economy that would impact the amount of capital or quality acquisition targets available to fuel M&A transactions in this space, especially given the fairly robust recovery of the economy following last year’s aggressive stimulus measures in response to COVID.

It’s important to remember that with the potential for fewer sellers, high- quality carwash chains with a clear path for growth could command higher multiples, which could more than offset any negative effects from paying higher capital gains taxes.

Here’s the bottom line
Though tax changes are on the horizon, the carwash industry has proven to be an attractive market for investors and is poised for continued and even accelerated growth for the foreseeable future. For carwash owners, this means you have options based on your individual goals. If you are looking to stay in the game, consider not only making significant capital improvements to take advantage of these tax changes but also charting a path for growth now to maximize your valuation down the road when you are ready to sell. And, for owners contemplating an exit, M&A activity remains hot, especially with the rise of regional and national chains looking to rapidly expand their footprints.


Chris Jenks is an advisor to Amplify Car Wash Advisors, a national carwash advisory firm. With a mission of creating wealth for clients, Amplify helps carwash owners sell, partner or grow using practical industry experience as operators coupled with expertise in mergers and acquisitions and capital advisory. Learn more atAmplifyWash.com, or reach Chris at [email protected].

Jet Brite Car Wash

With decades of hands-on experience as operators, when it came time to sell our car wash business who we sold to was important to Sam and me. Chris [Jenks] and the team at Amplify listened to us throughout the entire process. They found the right buyer in ZIPS who would be a good steward of the brand and helped find the best path forward for us where we can continue pursuing our passion for manufacturing high-quality car wash equipment.  

Jet Brite Car Wash  
Dave Delesandro  | Founder

Quick N’ Clean

My relationship with Commercial Plus over the past 20 years has been a very professional and trustworthy relationship. The feel of trust is very important in this business, and Jeff Pavone and his staff have exhibited a level of trust that makes me continue to feel that they have my best interest front of mind. I deal with many brokers across the nation, and my best experiences and results have been achieved with Commercial Plus representation.

Quick N’ Clean
Richard Karle | Owner

Zips

It’s been a great experience working with Amplify Car Wash Advisors to bring these sites into the ZIPS portfolio. We look forward to serving Dallas area customers with an enhanced car wash experience unique to ZIPS, with the added benefit of our extensive network of stores. This year we have continued our aggressive growth track with the goal to truly shine in our efforts to be the best express car wash provider in the industry and it’s acquisitions like this that help us reach our goals.

Zips
Gene Dinkens | CEO

ModWash

It was truly a pleasure to work with the Amplify team on our most recent acquisition of three additional operating locations in our home state of Tennessee. Their team provided great support and ensured a timely and seamless closing process, and we are excited for the additional growth opportunities this relationship will produce in our near future. We know this is the first of many transactions we will successfully complete with the Amplify team as we grow from our current operating store count of 23 to well over 200 locations across 14 states in the next two years.

ModWash
Brian Thornton | COO

Busy Bee Car Wash

For years I’ve talked to a lot of brokers with the same goal; sell your car wash chain as quickly as possible. But I chose to work with Amplify because they were interested and invested in the emotional side of selling my business and truly value long-term relationships. They weren’t forcing me to take a deal just to take a deal. They listened to my concerns and goals then educated me on all my options. And that’s how I decided on the right partner for my chain specifically. I went to bed at night after I signed the papers knowing I got the best deal possible versus just having any deal put in front of me that is only about money.

Busy Bee Car Wash
Jim Mulholland | Owner

Q Car Wash

We really appreciate Jeff and his entire team at Amplify. Their expertise and deep industry knowledge helped us navigate our options and best showcase our strengths to maximize our value. Caliber is a good fit for Q Car Wash as they look to expand in North Texas.

Q Car Wash
Viran Nana | COO

Cobblestone Auto Spa

I have known both Jeff and Bill for over thirty years combined, and respect them both as experts in our professional car washing industry. Their unique and individual strengths bring very strong talent and advice to operators, sellers, and buyers with sharp knowledge, client’s best interest in mind, and an actual personal touch. They hold the expertise and performance track record to hold a very high level of respect within this rapidly-changing car wash industry.

Cobblestone Auto Spa
Tuck Bettin | CEO

Oasis Car Wash

Turning over a business you started from one shovel of dirt 25 years ago and grew to several locations is a difficult and even uncomfortable process. So, when it came time for Larry and me to sell, we chose Amplify Car Wash Advisors to guide us through the process because of their strong reputation and thought leadership in the industry. Their team was professional and did a great job walking us through each step.

Oasis Car Wash
Dallas Hawkins | Partner

Busy Bee Car Wash

Selling our business after 52 years is big deal and certainly not a decision I took lightly, turning over our family legacy was an emotional process and I appreciated that the team at Amplify respected that. They helped me understand my options and found the best deal for me.

Busy Bee Car Wash
Jim Mulholland | Owner

Ducky’s Express

I have been a multi-site developer and operator in the car wash industry for over 30 years. Four years ago, a partner’s health concern forced me to sell a portion of my portfolio, and during that process, I was introduced to Jeff Pavone of Commercial Plus. I was immediately impressed with Jeff’s knowledge of my industry and his volume of successful deal closings. In a very short period of time, Jeff found the right buyer at a very fair price, and the transaction closed shortly thereafter. I was looking for a team with honesty, integrity, and a proven track record of success, and I found all of that in Jeff.

Ducky’s Express
Richard Miller

Trademark Car Wash

These are some of the most exciting times for car wash owners. As we grew 350% in revenue in just one year, we recognized the time to partner up with a top-tier team that has mastered growth in retail and specifically the automotive industry. Amplify Car Wash Advisors had helped us acquire, raise capital, and was the perfect partner to help us reach this next chapter of the Trademark story.

Trademark Car Wash
Andrew Goldberger