Auto Laundry News - April 2011

Car Wash Financing — There are Less Obvious Fund Sources

By Robert Roman

There are different ways developers can obtain funds to build a new car wash or buy or expand an existing operation.

One source of funds is a conventional loan from a local bank. People new to the industry stand the best chance to get a loan if their family has a long-standing relationship with the bank.

If this relationship doesn’t exist, it may be possible to buy debt for a car wash project through government-backed loan programs in conjunction with the Small Business Administration or United States Department of Agriculture (rural areas).

Car wash developers can also shop around for loans with the assistance of a broker.

In trying to buy a wash, it may be possible to obtain seller financing for some portion of the asking price. A less obvious source of funds is to raise the money on your own.

Under the Investment Advisers Act of 1940, as amended, developers may qualify for private advisor exemption that would allow them to raise money for a new car wash project through the sale of shares of series A preferred stock at some dollar amount per share.

The next step in seeking external funds is to understand the current environment. Today, weak consumer demand and less overall demand for new retail stores have tightened up the supply of credit available to the retail sector.

Unwilling to assume greater risk, banks have made it more difficult and expensive for people to buy debt for new retail development and expansion plans, including car washes — borrowers are required to put more of their own money in projects.

Another technique banks use to mitigate their risk is to apply a fine-tooth comb in evaluating the retail market and the borrower’s ability to grow and sustain a car wash business.

These requirements are less of an issue for veteran car wash operators because they have a history. With a good history, banks assume less risk as compared to someone new because there is simply less of a chance for an accident to occur.

Consequently, the argument made to obtain external funds for a new car wash project must be very strong and convincing. The place to do it is the business plan. Of the elements that go into a business plan for start-up or expansion, the executive summary is the most important. If the person reviewing the plan is not enamored with the likely success of the project within the first two or three pages, he or she will read no further.

Pundits suggest the argument to obtain funds can be enhanced by describing in a plan how individual pieces of equipment will contribute to the bottom line or be the driving factors of increasing profitability of a wash. This is sound advice.

However, most people who would entertain a developer’s proposal today are going to place the most emphasis on knowing two things about a project: how good is the retail market (location), and how good is the developer.

The location problem is solved quantitatively based on the analysis of demand and supply balance; is there unmet demand to support another wash in the defined trade area, and would the wash be reasonably convenient and useful to the public because it meets this demand?

The litmus test for management is qualitative because investors who provide capital for new ventures invest in people not business models. So it is crucial for developers to form relationships and a management team early on in the quest for money.

Frankly, fundraising has never been easy for people new to the industry, and raising cash for proof of concept is very different from obtaining a construction loan from a bank.

For example, a bank will want security (collateral), charge interest on a loan, and seek repayment of capital. Conversely, cash generated from founders, family, friends, and business angels is unsecured, fully at risk, and may not have defined repayment terms.

In exchange for equity, investors would want a stake in the company. As shareholders, the investors’ returns are dependent on the growth and profitability of the car wash.

Consequently, investors expect transparency in business plans providing clear evidence for an experienced and ambitious management team as well as growth prospects and a realistic exit opportunity for shareholders to realize their investment.

Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.

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