Signs of Life — Part I: Prospects for Start-Ups
Although it has been difficult to write positivity about the car wash industry for some time, there are signs suggesting growth again. Some of the external drivers thought to influence demand for car washing are vehicle sales, income, unemployment, population, and availability of capital.
New-vehicles sales are trending upwards according to Ward’s Automotive. Per capita disposable income has grown at 1.0 percent on average since 2010. Unemployment is normalizing and cash-rich companies are poised to hire more. Population provides a steady undercurrent, growing at 1.0 percent. Arguably, the greatest challenge for start-ups or expanding a wash is capital.
According to a recent survey conducted by the National Small Business Association (NSBA), 43 percent of respondents said that during the last four years they needed funds and were unable to find any whether through loans, credit cards, or investors.
NSBA found lack of capital prevented 53 percent of respondents from expanding and caused 32 percent to reduce the number of employees. The most common sources of capital were line of credit (43 percent), credit cards (37 percent), earnings from business (32 percent), and bank loan (29 percent).
Problems with line of credit were banks reducing limits and calling credit lines in early. Loan rejections and change in terms were due primarily to credit score, insufficient collateral, and banks’ internal risk assessment on loans. However, unlike athletes facing a challenge exceeding their ability, it may be possible for small business to lower some of the hurdles.
For example, 10 years ago part of my business was writing self-help books. I no longer write books because sales are dismal. The reason is information on car washing is wide spread because of the Internet and search engines.
Although I am capable of writing superior books, no one is willing to pay. So, like others who lose a portion of their business, I had to redesign my business model. Likewise, start-ups that once dreamed of carving out a living and adequate return by investing in the car wash industry and building a new store will need to consider a different trajectory.
Let’s examine signs of life for car wash start-ups. Experience shows the car wash business is resilient with average annual wash revenues hovering around $20 billion.
The trade area for a car wash is fairly small allowing a start-up the opportunity to create a discrete presence in a market as long as it’s not in someone’s backyard.
The reasons why some folks entered this business in the early- to mid-2000s has greatly diminished — such as developers and investors who built self-service strictly as a land play.
Moreover, some owners haven’t kept up properties, creating opportunity for entrepreneurs who want to make car washing a vocation to come in and buy them out.
Arguably, a good opportunity for mom and pop is not building new but rather buying and re-making an existing car wash business. Here, the keys to success in borrowing money to help fund the venture are opportunity (location) and management.
What to do with such car wash properties depends on the location and opportunity that presents itself, which requires a different process than the one used during the days of build-it-and-they-will-come.
The reason is banks and other external sources of funds now look for reasons to reject rather than approve a loan for a start-up and will only consider an “excellent” opportunity. Excellent means there is unmet demand, shortfall in supply, and public need based on analysis of demand and supply balance.
Consequently, start-ups should be prepared for a lot of probative discussion related to the venture and should know their market opportunity and the car wash industry as if they were already in the business.
Banks and other lenders also now place a lot more emphasis on management experience and skills. In other words, does the start-up have what it takes to exploit the market opportunity?
Next month, the discussion will focus on what start-ups can do to lessen the slope of this learning curve.
Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at firstname.lastname@example.org.