Amid the rapid-expanding car wash industry, the small-town in-bay automatic (IBA) or self-serve operator is likely to feel some trepidation about potential threats of competition, especially that of an incoming express tunnel.
By Mel Ulrich
Amid the rapid-expanding car wash industry, the small-town in-bay automatic (IBA) or self-serve operator is likely to feel some trepidation about potential threats of competition, especially that of an incoming express tunnel. While this anxiety is not necessarily unfounded, there may be options available to compete with the over-eager, incoming express model to ward them off completely and retain the local market share.
Private Equity (PE) groups have in the last couple of years consolidated both at the operator and vendor levels of the industry. This rapid consolidation, coupled with an eager growth mentality has already seen its effect on over-saturated markets resulting in an overflow into smaller and smaller communities. The IBA wash, which has dominated markets in the small towns across the United States, is suddenly seeing the express model popping up in areas which would have been unheard of several years ago.
The IBA wash has a true advantage, however, if the ownership group can muster up the tenacity to think slightly out of the box. In this article we will briefly discuss five items as an aid to anyone contemplating an upgrade from an IBA to a mini tunnel. First are the considerations themselves, then development of the team and creating the plan. Lastly, some observations will be shared on some actual conversions with a few data points from that build.
Of utmost importance is access to capital funding. For a project of this scope, one can anticipate the need for funding somewhere in the range of $500,000 to $2 million depending on the size and quality of the upgrade. Secondly, there must be adequate land to expand a bay either towards the entrance or exit end of the existing building without excess slope. Ideally a car will need to slope into and then away from the conveyor. The third consideration is competition. If you are aware of any incoming competition or competition that is already there, how do you compare to them now? How will you compare to them after the expansion? If they are a nearby larger express tunnel, will you be able to compete?
The fourth consideration is the municipality. It is probably a good idea to check with the city to verify your plan will be acceptable before paying for plans. Other items to check are easements, requirement of a civil engineer, code changes, other upgrades, and any plans submitted by competitors. The final consideration would be any upgrades to complete while under construction. This may include pricing out vacuum systems, reclaim or water processing upgrades, POS units, signage or landscaping, and lighting.
If the considerations are favorable, the hard work now begins. First things first moving forward. A team should be put in place, and number one on that list is you. You are the driving force, accountable, the data gatherer, team leader, and inspiration behind the build. Another big part of the “you” is the company itself, including not only your team members, but the clarity of your company. While much can be said about company culture and clarity, the most important here is understanding whether you are a value or premium company. The value company tends to be more focused on expenses and might have a “save money to make money” mentality. The premium company will be focused on quality materials, and equipment with a moto of “spend money to make money.” The value company is focused on high volume and a customer wanting the cheapest price. The premium company is focused on high revenue per car and its customer is the one who desires the best product. This is important in establishing the team because having company clarity will guide the build itself and, while no company is value or premium in its truest sense, understanding this will help in planning.
Second on your team will be your financial group, whether that be you (and your spouse), a PE group, partners, or the bank. Of course, they will probably not commit until they see the financial plan, so while it might be obvious who they are, they are probably the last piece of the puzzle to put together since you need all the data to submit a proposal to them for approval.
Next on your team is your equipment manufacturers and distributors. This will include the wash equipment, POS, water processing, vacuums, chemicals, and other items. Take your time here, especially with the distributor because this is a key component.
Fourth on your team is your architect and civil engineer. The civil engineer may or may not be necessary depending on the extent of the build and the municipal requirements. Anything involving underground sewage, like the addition of reclaim tanks or changes in water detention will likely require this addition. The architect is an important and likely mandatory team member because they will develop the plans for both city permitting and the bidding process.
The final member of the team will be the general contractor, unless you feel you have the money, time, and experience to handle the build process and the management of subcontractors yourself. This will likely be one of the costliest items and possibly the riskiest as GCs seemed to have joined the ranks of attorneys for a notorious dubious reputation. Our recommendation is to vet them well. Also be on guard against change orders (COs), which should be denied, unless you and the architect have made changes to the original plan. In our experience, this team member is both most important and most risky in potentially causing the greatest stress and headache regarding meeting time constraints or budgetary goals. If you find an honest GC, hold onto them, and hold them accountable daily.
Now that the team is established, we can begin the detailed planning of the mini tunnel. For this you will need four things: pro-forma, equipment expense, construction cost, and appropriation for expenditure (AFE).
The pro-forma is a financial statement showing projected car counts, revenue, expenses, and return on investment (ROI) and is usually provided by the distributor of the equipment manufacturer. It can, unfortunately, sometimes be used to manipulate a sale using over-valued data. So, a big benefit of owning your car wash prior to a conversion is that you possess very real data to assemble an accurate pro-forma yourself. You can use data on current car counts, revenue, and margin to produce a much more accurate pro-forma. Without getting into too much detail, using daily car counts, and revenue per car, one can project a much more accurate daily revenue flow and, consequently, a more accurate pro-forma to establish estimated ROI.
Before finalizing the pro-forma, you will need to consider equipment expense and construction cost. Construction cost can be estimated once the final plans from the architect are submitted to contractors for bidding. Equipment cost can be finalized after building length and consequent tunnel length have been established.
This is the real key to the conversion process — what length do I build my tunnel to improve my throughput without breaking the bank on capital expenses? One thing that will help is to begin by understanding what your maximum building length potential is without affecting turn radius on either the entrance or exit end of the tunnel. Once that is established, you can fit equipment into that space as needed to make decisions on types, placement, and length. After an adequate length is chosen, the bid from the manufacturer will complete the equipment expense portion of the budget. Please remember to include installation, shipping, and taxes.
The final major cost item is construction, which can be finalized after the size of the building is established. Once established, the architect can finalize the plans for bidding and for submission to the city for permitting. On the bidding process, it is recommended that at least three bids be acquired. Be careful not to simply chose the lowest bid but vet the companies wisely and make sure everything is understood, especially time frames such as start date and completion dat
Appropriation for Expenditure (AFE)
The AFE is basically a line-item budget to be approved by your financial team authorizing the use of funds for the appropriate expenses. This can be completed after equipment expense and construction costs are established and will outline the complete expenditure portion of your project. It will also include upgrades, taxes, legal, architectural, civil, and administrative expenditures.
It is recommended that the AFE include a 10 percent contingency amount included for conservative budgetary considerations. When the AFE is complete, the pro-forma can also be finalized along with the investment proposal to submit to the financial team for approval.
This will complete the team and planning portion of your project, which is also the most prudent and time-consuming work. With everything in place, the build itself will begin. Observations on some of our own projects have given us some practical lessons we can share, including the following:
• Verify the turn radius into the new tunnel is more than adequate for the vehicles. Do not rely on the architect, GC, or distributor for this, but verify and re-verify yourself before the concrete pour. This was one of our greatest failures.
• Use the data you own as an IBA operator to establish your own pro-forma. This data can create a much more reliable pro-forma than that of a distributor.
• In multiple bay sites, keep the other bays open during the build to provide a continual revenue flow and ongoing service to your customer base.
• In multiple bay sites, keep your other bays open after the conversion to offer your customers your original product in addition to the upgraded express tunnel.
• Hold your contractor accountable daily. Do not let them run the show. You run the show.
• Expect conflict between the architect and GC and mediate well.
• Be certain of your tunnel length before architect involvement.
• Build knowing competition will come.
Finally, while most of the data we have will remain proprietary, a few of our data points can be shared:
• Keeping one bay open during the build resulted in 44 percent of our average car count and revenue.
• Keeping our IBA open after the build has continually provided monthly revenue, usually between 20 percent and 25 percent.
• Daily car count record increased 118 percent.
• Record monthly profits increased 51 percent.
• Using our data for our pro-forma — i.e., projected car counts, projected revenue per car, and projected margin — was quite accurate: +/- 1 percent to 3 percent.
While a mini tunnel conversion for a current in-bay automatic owner may not be for everyone, the option is certainly viable and potentially critical for survival in adapting to the fast-moving car wash industry. If the considerations are duly taken into account and are resoundingly positive, that last, most important step of pulling the trigger is all that remains. And, of course, “to pull or not pull?” — that is the question.
Mel Ulrich is the founder and president of the Washhouse. You can visit his company on the web at www.washhouse.com.