Eyes Wide Open - Do Your Homework Before Signing the Deal

By Anthony Analetto

07/01/14

Buy a struggling tunnel or self-serve, radically transform the business model, grow the business, and repeat. Most of us personally know, or know of, an operator with just such a success story. Turning an underperforming tunnel into an express-exterior powerhouse, or a shrinking in-bay automatic business into a mini-tunnel are the two most common scenarios — but is there more to the story? Of course there is.

Sadly, the business environment in our country isn’t consistent. Most local governments aggressively support business development. It makes sense. Job creation and revenue growth are at the top of every bureaucrat’s “to-do” list. When logic prevails, self-preservation motivates them to bend over backwards to help an investor trying to transform an outdated car wash to a modern facility. Although I’ve never known an operator who doesn’t gripe about permitting and the fees associated with a site conversion, most will acknowledge that the process and cost is reasonable. The differences from municipality to municipality across the country however are dramatic. I was recently visiting a friend’s wash where he purchased and converted an old exterior tunnel to an express exterior with free vacuums. He put in new signage, created a free vacuum area, and retrofitted or replaced nearly every component in the tunnel. When I asked him about difficulties he had with permitting, he looked confused. Not only did he not have to apply for any permits, city officials stopped in from time to time to see how he was doing and compliment him on the improvements. As with most things, when it comes to permitting complexity and cost, there’s a vast majority with an experience somewhere in the middle, and a few outliers on either end of the spectrum. When looking to make such an investment, don’t plan for easy, and don’t even plan for the middle. You must plan for the worst-case possibility. If the investment doesn’t make sense in the worst-case scenario, move on to another opportunity. So what types of situations do you need to account for? Let’s take a look at two projects I know are facing difficulties as I write this.

 

Worst Case #1: Unplanned Delays

Purchasing an underperforming car wash with the specific intention of transforming the business model demands speed. Very often, you have to maintain cash flow from the ongoing operation while acquiring permits for construction. Before purchasing the property, you will already have created a complete plan for any construction, equipment modifications, landscaping and facility updates, and a grand re-opening marketing campaign. That’s where it gets tricky. You will have accounted for all permitting costs in your plan. You will have met with municipality officials to ensure your plan will ultimately be approved and have a clear expectation of the time frame and requirements to make that happen. But it’s unlikely you will have met every personality at the city or town involved in approving your project before inking the deal. The first operator I’d like to introduce has hit that exact wall. He purchased an ongoing full-serve wash, used an architect recommended by the city, and was led to believe that the approval process would take less than three months. He’s now in month six and has made very little progress. It turns out several people on the board he had not met are not in favor of the property remaining a car wash. Everything from landscaping to paint color, in addition to planned site and equipment changes, has been questioned and has required architectural renderings and drawings to be approved before any change can be made. This has cost him a tremendous amount of additional time and money.

Luckily, he’s been able to process vehicles as a full-serve with sufficient revenue to cover carrying costs. Although he never wanted to manage a full-serve crew, or struggle to patch a rickety tunnel to keep putting out cars, the cash flow is sufficient so he will be able to outlast the delays. The reality is that most properties that are ideally suited for a retrofit are rarely capable of producing sufficient cash flow for a lengthy and expensive battle with a local government over changing the business model. Before considering any retrofit project, plan for the worst. More often than not you’ll be pleasantly surprised, but a smart business investment doesn’t rely on luck.

 

Worst Case #2: Unplanned Impact Fees and Expenses

While everyone knows that a property will be reassessed upon purchase and to expect a higher tax bill, it’s easy to underestimate the potential cost of impact fees. Also, unlike taxes, some new investors don’t fully appreciate that impact fees can be interpreted differently by different people in how they relate to your specific situation. That means there is often room to negotiate how a particular fee applies to your project or if it applies at all. But no matter what you do, expect that many improvements to the property may trigger other requirements being met to bring the building up to current standards. Items such as an impact fee to increase the size of a water-supply line are intuitive and easy to plan for. In some municipalities simply repaving the parking lot may incur unexpected costs to adhere to newer ADA (Americans with Disabilities Act) requirements. Items such as creating parking spaces with signage, paths, and ramps for handicapped patrons are costly and must be known before evaluating the total cost of the project. My purpose isn’t to list all the potential expenses to complete your retrofit. Rather, to alert you to plan for them, and share another story of an operator who took an entirely unconventional approach.

Familiar with the municipality and its burdensome hurdles, they took a gamble. They bought a closed full-serve tunnel and, within hours of signing the deal, began gutting the equipment and executing a complete retrofit plan without ever notifying the local government. Their intention was to pass off the improvements as having been there at closing when they bought the property “as-is.” They pushed their luck, and a city inspector eventually stopped in and questioned everything. It’s now a case of their word against the city and they find themselves racing to create “as-built” drawings to document the property as they say they bought it and may have to pay fines. In addition, although they used licensed contractors for all plumbing and electrical work, there remains a bigger risk that the city could shut down the location even after it opens. Did they save time and expense? We’ll have to wait and see. In the end, most of us are better served planning our investments and saving the gambling for the casino.

Determining if a car wash retrofit project is a good investment requires an intimate understanding of the local municipality where the wash is located. Delays and fees should be planned for and included in your evaluation of the property and price you’re willing to pay. Retrofit deals are becoming increasingly popular because they’re a proven moneymaker. Just make sure you do your homework before signing the deal and go into the project with your eyes wide open.

Good luck and good washing,

 

Washing cars for over 30 years, Anthony Analetto serves as president of SONNY’S The CarWash Factory, creator of the Original Xtreme-Xpress Mini-Tunnel, and the largest manufacturer of conveyorized car wash equipment, parts, and supplies in the world. He can be reached at Aanaletto@SonnysDirect.com or at (800) 327-8723 ext. 104.



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