FALL2020_SSCWN_web

TRICKS OF THE
What’s it worth?
Is there a strong rule of thumb for car wash appraisal /
valuation for sale? How to set a selling price? - WASHREGAL
Easiest thing I’ve used was 3 or 4x gross. But,
there’s obviously some flaws to that. But if u
go much higher, then profits become SLIM. -
SOONERMAJIC
Calculate net operating income (EBIDA for a
wash) and then divide by a cap rate for your area.
You can search LoopNet for listings of things like
dollar general, Walgreens and other commercial
rentals to get an idea. If most of those are in the
6-6.5 percent range, you might use 7-9 percent
as an initial guide to see if you think the number
is realistic. Spread might be higher depending on
how good or bad your wash is performing.
…EBIDA is your net income plus add back your
interest expense, depreciation, and amortization.
Divide that number by say 8% cap rate. For
example, if you net $80,000 and divide by 8%
you get $1,000,000 “value”. This will likely be
one component of an appraisal a potential buyer
would want/need. You can play around with that
number based on what other properties sell for to
substantiate a price. Obviously, other factors like
location, land values, age of equipment, etc. all
play a factor too, but this is an important component
because most buyers want to see that return
equate to value. - KRAMERWV
Are commercial real estate cap rates a good thing
to use for car wash valuation? They seem like
very different animals to me. Do you have some
real-life examples of how they are used well? I
think they would be all over the place even in the
same area. - OURTOWN
Cap rate (net operating Income divided by asking
price) is the best way to compare apples to apples
when you’re looking at a cash flow stream for any
investment: rent houses, car washes, apartments,
office buildings...
The gross income multiplier doesn’t take expenses
into account, so there’s no way to accurately
gauge the true profit potential of the car wash.
If I’m looking at two different car washes and
trying to find the one with the best profit potential,
I’ll ask the owners for their actual income
and expense numbers (if they don’t have it, I
keep walking)
WASH #1: Owner is asking $800,000 for his
wash with $100,000 NOI - or a 12.5% cap rate
WASH #2: Owner is asking $1,200,000 for his
wash with $100,000 NOI - or a 8.3% cap rate
Assuming the two locations are roughly equal
in location quality, age of components, etc., then
I’d take the higher 12.5% return on my money.
If wash #1 needs a ton of work, and wash #2 has
been newly renovated, then I’d base my decision on
how much money I have to spend on the front end
of the project, and how much work I’m willing to do.
With respect to cap rates, “safer investments”
like apartments and office buildings in my area
are usually priced at a 4 to 6% cap rate. That assumes
that the buyers of those properties aren’t
interested in getting their hands dirty or working
onsite, so they’ll accept a lower return on their
investment. Car washes often get priced at 10-
12% cap rates because the industry is known for
hands-on owners who want to get paid a good
return for all of the crap that they have to deal
with in running a car wash.
Disclaimer: this is just my .02 from many years
buying/selling commercial real estate. I’m a newbie
in the car wash realm, but using the cap rate
model, I feel like I got exactly what I paid for when
I bought the wash I currently own. - KLEANRIDE
KleanRide’s example is spot on as an example
of how to compare the value of different washes
from an income investor standpoint. Some places
this method may seem irrelevant if land values
skyrocket every year but for a tried and true evaluation
for an operator it’s essential. - KRAMERWV
This is super helpful. Evaluating a potential car
wash investment currently. Using the method
above, it looks like 5.85-8.85 is the range for
retail on LoopNet for my state. Using your formulae,
6.5-9.5 might be a fair CAP range for an
IBA+SS car wash. I’m curious from others is that
range meshes with what you actually purchased
an IBA car wash business (after negotiations) --
what was the CAP rate? Thanks! - CW01
Yeah, I would never pay less than a 12% cap
rate for a car wash. Even then it is a stretch.
Investment real estate selling at a 6% return on
capital is one thing because you have NNN’s set
up and all you do is collect rent.
With car washes you need to hire/fire, fix things,
keep customers happy, etc. it is not a passive real
estate investment.
With the SS/IBA model the expenses are
roughly the same everywhere, so a rough use of
3-4x gross REALLY speaks to a multiple of net
too...because there is economies of scaling the
expenses, a good performing wash should sell
closer to 4 and because the reverse is true a poor
performing wash is worth closer to 3.
With any business you are buying future cash
flows, you should never pay for POTENTIAL,
and you should never pay for 6 quarters to a dollar-
that’s on the seller. - BIGHEAD
3-4 x
gross!
Look at
cap rates!
What’s
the EBIDA?
SSCWN EDITOR CHIMES IN:
EBIDA = Earnings Before Interest,
Depreciation, and Amortization.
EBIDA, according to InvestingAnswers.
com, is a post-tax measure of a
company’s operating performance
and can easily be derived using the
company’s income statement.
If you are seeing retail caps in your area over 8, I’d
start at 10% as a minimum for a wash for the reason
bighead mentions about the work involved.
Also, cap rate is just a starting point or one factor
to determine if the price is even reasonable. Age
and condition of equipment, likelihood of keeping
existing employees (if any), etc. will all factor
into the decision. If EBIDA is $100k and seller
wants $2mm you better run. If they want $1mm
might be worth the due diligence and negotiation.
This board has a lot of wisdom so keep searching
and researching. Good luck! - KRAMERWV
Every other business that I’ve built, or real estate
I’ve bought, I’ve read several books as a part
of researching the industry. No worries on understanding
financials, etc. But in structuring a
deal for a car wash feels like lots of moving parts
(maybe just my perception). I assume it is an LOI
agreement, then due diligence, then closing. Any
tips on the best book/resources to read on deal
structures for car washes? Thanks! - CW01
Bighead is probably closer to what you should focus
on, a multiple of Gross Revenue. Then determine
the risk from competition, from needing to replace
equipment, location. Two people can run the same
place with significantly different results on NOI.
CAP Rates relative to NOI are for rentals where
you sit on your @ss and collect rent checks - which
in non-COVID times can be a great job. - ROZ
Exactly what Roz said. My background is real estate
finance and yeah I would look at CAP rates but the
deal has to pencil out with or without debt.
And car washes are not NNN investments like
a retail strip center, ground lease on a bldg. etc.
there is A LOT of work involved in running a
wash… - RFREEMAN
FALL 2020 • 33