Car Wash Valuation: How to Clean Up
As Rose Royce sang in their 1976 single, “you might not ever get rich, but let me tell ya it’s better than diggin’ a ditch.” Many things have changed since the disco era, including profitable opportunities in the car wash industry. A major factor in the industry has been the increase in private equity activity. In an August 2022 article titled “Private Equity Wants to Wash Your Car,” the Wall Street Journal highlights trends in private equity and the industry itself that have driven the growth in volume and multiples of car wash acquisitions.
The most noteworthy and proven success case of the car wash industry is Mister Car Wash, Inc. (“MCW”) which was acquired by Leonard Green & Partners L.P. in 2014 and later IPO’d in 2021 for $4.4 billion. MCW currently operates 407 car wash locations in 21 states and trades at approximately 15x. MCW provides a nice roadmap to success.
The Numbers
Data from DealStats indicate car wash EBITDA multiples of 2.7x to 4.8x and revenue multiples of 0.6x to 1.4x. The ranges in multiples are wide and indicate the significance of the factors discussed below in determining transaction prices.
Size
Similar to other industries, the cash wash industry sees a direct correlation of multiples and revenues. As the business grows, there are increased opportunities for economies of scope. A car wash business is considered “large” when revenues exceed $1.0 million in revenues. These “large” car washes tend to see much higher multiples.
Wash Model
Models of car wash fall into a few general categories: (1) full service, involves hands-on detailing labor; (2) express, where a car gets on to a conveyor belt; (3) flex, a hybrid of full service and express; (4) in-bay, where the car does not move and is cleaned by a machine; and (5) self-service, where the customer cleans the car. Full service and flex see the lowest multiples while express sees the highest. The express model allows for maximum volume and minimal labor but typically requires a significant upfront capital expenditure.
Memberships
Historically, private equity has avoided investing in car washes due to its cash-intensive nature and weather dependency. Cash dealings can cause inconsistency for accounting as well as posing additional risk and expense to maintain. Precipitation has historically driven down car wash volume and lead to volatility. Here, we can take notes from MCW which as of June 2022 had 1.8 million monthly members. These memberships provide regular monthly revenues billed directly to customers’ credit cards. The prevalence of membership programs has helped the car wash industry solidify itself as a recession proof business.
ESG & Sustainability
Environmental, Social & Governance (“ESG”) performance and Sustainability have been a hot topic in the acquisitions and private equity space, a trend that is expected to continue. There’s evidence to suggest premiums paid for businesses that have identified and made plans to address any environmental issues. In a water and energy intensive industry like car washes, there are many planning opportunities.
Underlying Property
Lease and rent factors are significant for purchasers evaluating a car wash. Ideally, the property is owned directly or leased from a related third party. This allows any potential issues to be controlled. Commonly, a purchaser would also buy the underlying real estate. As an alternative, there has been an appetite for institutional investors to purchase only the land through a sale leaseback. This allows the investor to capitalize on the consistency of the car wash industry without having to invest directly. It also allows operators to achieve higher leverage at lower risk with a large liquidity event and still continue to run their business.
The Towel Dry Finish
Whether you’re planning to exit next year or in 10+ years, there are ripe planning opportunities for your car wash business and individual needs. At DKB, our professionals are experienced in the full range of exit and succession planning activities and can guide you through a successful journey.