Auto Laundry News - May 2011

Year of the Reload — Affordable New Systems,
Attractive Lease Finance Options, Tax Savings

By Marcus McLaughlin

For many in-bay automatic car wash operators, 2011 is poised to be the “year of the reload.” There are tens of thousands of in-bays installed in the United States alone, and many of these machines have aged to the point where operators would benefit from a system replacement. Even older washes that still run well may have lost some market appeal, contributing to declining wash volumes and dollar averages at these sites.

While new construction has still not returned to pre-2008 levels, operators are reloading existing wash bays in significant numbers. There are many reasons for this, including the availability of new systems that offer an extremely rapid return on investment, the relative ease of financing equipment at existing locations, and the timely availability of lucrative tax incentives for capital equipment acquisitions.

IN-BAYS FOR UNDER $80K

In the last year, wash-and-dry-ready touchless machines have been introduced with an equipment price under $80,000. Featuring complete solution-delivery capabilities including two presoaks, triple foam, and two wax applications, these machines equip operators to wash cars profitably — with outstanding cleaning ability and plenty of up-sell options. Because a drier car is a cleaner car, units also include a dual-purpose drying system, offering both drive-thru and on-board drying for maximum throughput and wash-menu flexibility.

RAPID PAYBACK

Wash systems priced below $80,000 are especially attractive for bay reloads — replacing tired equipment in a proven existing bay with the latest new machine — but they’re also appealing for new construction, offering a lower-than-ever entry cost and exceptionally rapid payback. They pay for themselves in as little as one to two years at an average-performing site (See the math in Tables 1 and 2, below). The assumptions in Table 1 are based on the “2010 Automatic Survey,” Auto Laundry News, October 2010: average cars washed annually — 14,598; gross revenue per car — $7.62; expenses include rent (16 percent), maintenance (8 percent), chemicals (7 percent), and utilities (16 percent). The machine price in Table 2 assumes an MSRP of $77,445:

LOW MAINTENANCE

Of course, a new touchless wash is only a good investment when it offers consistently reliable operation and a profitable long life. Preferred systems might include those that keep the running gear away from dirt and grit that can jam the machine’s travel and shorten its lifespan. Look for auto-resetting breakaway moving parts that disengage out of harm’s way in case of accidental vehicle strikes, then reset themselves automatically, maximizing wash bay uptime without human intervention. The better designs also feature greased-for-life automotive grade bearings in the carriage head, and smooth, energy-efficient electric drive.

HANDS DOWN, HANDS OFF IS BEST

The comprehensive value new in-bay systems offer to operators provides a compelling reason to consider them for in-bay reload projects. First, they provide unmatched consumer appeal that makes a big impression on customers — perfect for re-branding a site. Second, most of these machines include a comprehensive suite of wash menu options standard that can effectively drive higher ticket averages.

Perhaps most important, they’re engineered to minimize time-consuming routine maintenance tasks, while the auto-resetting arms, electric drive, and smart control are perfect for “set and forget” operation. Simply put, many in-bay washes are configured as “additional profit centers” (for example, at gas station/c-store sites) where car washing is not the core business, and the operator is looking for a hands-off wash bay that reliably drives incremental revenue without requiring a significant time or staffing commitment.

At other sites, the in-bay may be the star attraction of a retail car wash business where the entire business depends on the performance of the wash bay — but the owner/operator does not want the day-to-day involvement that would go along with operating a conveyorized wash tunnel. This retail in-bay operator may own other businesses, have a day job, be semi-retired, or simply own multiple in-bay sites that make it impossible for the operator to be present everywhere. In both scenarios (gas station/c-store wash and retail in-bay wash), new in-bay washes deliver on this hands-off operational promise better than previous wash systems.

FINANCING

Equipment Leasing Brings Reloads Well Within Reach
A leasing option makes an upgrade well within reach for many existing sites. A machine price of under $80,000 means units are straightforward to finance — with many reloads being funded by leasing companies that are eager to finance proven wash locations at this easily approvable price point.

Finance up to $150,000 with Minimal Paperwork
For reload projects involving an existing car wash, equipment leasing may be a better option than ever. As always, lease funding is typically easier to secure than bank financing and may simply require a one-page “application only” for transactions under $150,000 (depending on the leasing company).

Leasing Can Offer 100 Percent Financing
Another advantage to leasing is that it offers the operator a way to achieve 100 percent financing. Unlike a bank loan that may require a down payment on an equipment purchase, a lease typically includes the entire cost of the equipment. In addition, the lease can be structured to cover soft costs such as freight, installation, and employee training. This gives operators a true turnkey way to acquire and start using new equipment.

Lease Plus Tax Break
With a “finance lease,” the lease is structured with fixed monthly payments and the lessee has the option to purchase the equipment for a nominal fee at lease-end (often just $1). This provides the ease of funding associated with leasing, along with a payment schedule the IRS considers equivalent to bank financing. Because a finance lease is essentially a purchase plan, the lessee is entitled to the Section 179 deduction — and big tax savings.

Up to $500,000 Deduction
The IRS Section 179 tax deduction is another timely incentive for car wash owners to focus on equipment upgrades in 2011. This deduction allows business owners to deduct the entire cost of qualifying equipment acquired during the year that equipment is placed into service. Thanks to the Small Business Jobs Act of 2010 (SBJA), the deduction limit for 2011 is now $500,000 (it was previously scheduled to be just $25,000). In essence, this allows business owners who make these acquisitions to treat them as operating expenses, versus capital expenses that must be depreciated over time.

Take the IRS Section 179 deduction whether you lease, buy, or finance equipment. What this means is that car wash owners who acquire new equipment and place it into service during 2011 can deduct the entire value of the equipment from the wash’s taxable income for 2011. This is true whether the owner acquires the equipment by means of a finance lease, outright cash purchase, or using a loan such as the SBA 7a loan, which is backed by the Federal Small Business Administration.

In most cases, operators who finance equipment then elect the Section 179 deduction will save more on their taxes than they will pay during the year on the loan or lease. This means operators can acquire new equipment during 2011, and effectively “turn a profit” for the year on the acquisition. Table 3 (below) illustrates the savings for a qualifying $80,000 equipment purchase for a typical company.


* Example for discussion purposes only. Please consult your tax professional for advice on your own situation.

BEAT THE COMPETITION

The good news is that 2011 is poised to be the best year in recent memory for many businesses — both as consumer sentiment and spending continue to improve, and businesses increase their investments that stimulate the overall economy. With competition among leasing companies, the private sector is providing many attractive options for acquiring new equipment with a minimal impact on cash flows. With the Section 179 tax deduction, the federal government is giving small business owners a powerful tool to grow their businesses with minimal impact on their cash position for the year. The question is, will you take advantage of these opportunities — or let your competitors keep the benefits to themselves?

Marcus McLaughlin is a member of the marketing team at Belanger Inc., and was formerly marketing director for the
Jax Kar Wash chain in Michigan.

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