Is it Time to Sell? The Decision Is More Difficult to Make Than Ever
By Harry Caruso
The car wash market is more active than ever — more active in all ways: transactions of all types, acquisitions, new builds, new entrants, external investments involvement. The car wash industry has been propelled to an unseen level in most capacities over the past five years, with the past 18 months being particularly and exponentially active.
This environment makes it more difficult than ever before for owners of all sizes to not consider whether it may be the right time to sell.
THE RIGHT ANSWER
The truest answer to this question is the least fulfilling and will be addressed first and foremost here. There is no simple “right answer” as to whether or not you should sell. This lack of a singular answer applies equally to multi-site wash owners and car wash companies just as as it does to single-site individual owners.
Although no singular answer for all, there certainly is a right answer specifically for you and your washes, but it needs to be evaluated and decided on a case-by-case basis. The right answer must be specific to you, your washes, your goals, your company, and your situation.
With that inescapable but less satisfying truth out of the way, it’s time to discuss what the current car wash market has going on that is causing this question to be asked more frequently than ever, and why for many, the decision is more difficult to make than ever.
TEMPTATIONS TO SELL
The temptations to sell are grander, larger, more unavoidable, and more incessantly vocalized than ever before. There is so much on the surface that points towards selling now being the obviously correct move:
All-Time Record Valuations and Sale Prices
Car wash valuations have never been as high as they sit today.
Furthermore, these valuations are far more than theoretical; they are being transacted at. Mega-sized transactions fill the news. The sizes and both relative and absolute valuations of these transactions, regardless of what sort of complex or simplistic valuation methodology you want to use, are far above and beyond anything the market has seen in history. These mega-sized transactions include those such as Golden Gate Capital’s involvement in Tidal Wave and Mister Car Wash’s initial public offering.
Markets At the Top?
It’s essential to recognize that although potentially seemingly similar, the location of where we stand today (top, bottom, or somewhere in between) is independent and separate from the objective fact that the market is currently at an all-time high. In other words — and I in no way advocate this exact thought but more so think it’s illustrative of the point — just because a market is at all-time highs does not mean it cannot keep going higher or persist at current levels for a very long time.
That said, if you are of the firm belief that the car wash market has hit a ceiling and doesn’t stand to either continue its upward trajectory, or even to persist at current levels, this is a large and overwhelmingly strong reason to factor into consideration of whether it may be the right time to sell.
Determining whether we are at a top is not a simple exercise. The good news is that the increased media coverage, financial disclosure of certain companies in the space, and discussion surrounding the industry as a whole all does provide more tangibly and intangibly visible datapoints and subjective color, which one can use to form an opinion.
In my opinion, one can make a proper and somewhat justifiable argument that car wash markets will persist at their current levels for some time. As to whether it increases further from here, that argument is much “harder” to make, and one I would have a hard time being convinced of. Recent public market transactions would suggest that the longest tenured and largest industry veterans agree with me here, but the read through there is a larger discussion. And the probability of further and significant increase above and beyond current levels, especially as pertaining to valuations, is extraordinarily unlikely.
Buyers by the Plenty
If you are an owner in the car wash industry you’ve undoubtably received unsolicited calls, letters, e-mails, and cold communications about selling your car washes. This, beyond naturally and inherently prompting one with the question of whether it’s time to sell, can also make the market appear more liquid and more attractive. Both these are true — but there is more to the equation.
Not all “interest” or perceived desire is the same. For the purpose of illustrating the second level of what’s going on with increased buyer interest and solicitation, let’s classify potential buyers of car washes into two categories. The first are those buyers that, if given the opportunity, would actually close on the transaction (“real buyers”). The second we will call “interested parties.” This second category contains the largely innocuous, though not ready to pull the trigger, parties.
If prior to recent times there were a theoretical 10 total potential buyers that showed proactive interest in buying a car wash, maybe two of those 10 people (or 20 percent) would have been “real buyers.” With the recent surge in industry interest and recent growth of the industry as a whole, what was just a few years ago 10 total potential buyers approaching you, it’s now more like 100. However, and most importantly, what has happened with the increase of the total number of proactively interested buyers is the concurrent decrease in the proportion of these parties that are “real buyers” as opposed to “interested parties.” So now, out of that 100, maybe only five (or 5 percent) are “real buyers,” with the remaining 95 percent being “interested parties.”
Buyers are more plentiful than ever, but it’s important to realize and always take into account that interest and execution are two very different things.
Impending Capital Gains Tax Changes
Capital gains taxes are going to change. As to how, when, and to what extent is simply not clear. Rather than theorize as to the specifics of the aforementioned details it’s important to just recognize the high-level and ubiquitously applicable implication stemming from such.
Tax burdens for sellers is expected to increase over the next five years. Although I do believe the implications of the tax changes being proposed are often mis-explained or not fully understood in the way of their dollars-and-cents impact, the truth is that the changes are coming one way or another and it’s not going to become more attractive to sell from a tax standpoint in the coming years than it is now. This point can and should be argued against as being null and void under the assumption that the proposed change is retroactivity implemented, but the chances of that happening are a coin toss at best.
Reasons to Keep • Reentry More Difficult • Industry Resilience • Accessible, Low-Cost Capital
ALLURE OF KEEPING
Though the temptations to sell are inescapably present, there are some current-market-driven and equivalently strong reasons why owners might consider keeping their car washes:
Mid-Term Re-Entry Becoming More Difficult
If you are under the belief that the level of heightened car wash market interest, activity, and valuations is going to persist or even increase through the short-to-mid-term, and owning your car washes is what you really enjoy doing, this should be a deterrent to selling your washes. Under this belief of future market conditions, buying or building is going to become more difficult, both in the way of site selection and acquisition costs.
Reasons to Sell • Record Valuations and Sale Prices • Markets at the Top • Buyers by the Plenty • Capital Gains Tax Changes
Recently Highlighted Resiliency
One of the several reasons why car washes have been propelled to the limelight of external interest and media coverage over recent times is exactly the same reason why current market conditions may make it so you don’t want to sell: the demonstrable resiliency to unpredictable macroeconomic influence. Despite public markets doing what they have during the pandemic, brick-and-mortar businesses and many small-to-mid-size (to even large, as well) storefront-business owners suffered. Car washes — simply put — did not suffer. The minority of washes, being those that did get directly impacted by the pandemic, by and large were impacted far less than the average brick-and-mortar business in the same area.
Accessibility and Low Cost of Capital
Financing for car washes has never been cheaper nor more accessible than it is today. This holds true for both single-owner operators and for multi-site, multi-state growing car wash companies. This dynamic makes it more attractive and compelling than ever before to not only keep your washes, but to grow.
Refinancing to lower rates is easily attainable and readily available for those that want to simply maintain the course and increase their net profitability via reduction of their debt service expenses. And for those who were thinking of growing, both equity investor capital and debt capital are proactively searching for car wash capital deployment opportunities. This encourages you to grow, build, and buy further and to take your car wash operations to the next level.
The car wash industry is both growing and changing at a pace never seen before. With this level and velocity of change comes the inevitable semi-rhetorical question all car wash owner operators must ask: Given current market conditions and everything going on, should I sell my car washes?
As discussed here, there are compelling reasons purely based on current market dynamics that are starkly in favor of both selling and of keeping your car washes. If you didn’t enter the industry with financial motivations being first and foremost, I wouldn’t suggest selling and exiting without even stronger consideration as to what is right for you, your life, your goals, and your car wash company and team. If you’re on the fence, are current market dynamics strong enough and price differences from historical averages large enough to both rationally and reasonably push you over the fence?
In most cases, yes, they are that strong and large. But you should consider your personal situation and your company’s situation first and foremost.
Harry Caruso is the founder of Car Wash Advisory, a leading car wash broker firm. The firm represents owners and operators looking to sell their car wash. Car Wash Advisory operates nationwide with clientele spanning from single owner operators to large institutions. Harry has a background in investment banking, machine learning, capital raising, and cross-capital structure investing.
Connect with Car Wash Advisory at www.carwashadvisory.com when considering selling your car wash or give CWA a call at (332) 209-4246.