Past Issue

Exit - Bowing out Gracefully

By Anthony Analetto

08/01/16

I’ve heard it said that “every exit is an entry somewhere else,” but that doesn’t make creating your strategic exit plan any easier. Whether you have a vague plan of someday selling to the highest bidder, handing over your car wash legacy to your family, or selling one car wash simply to finance the construction of several more, you must have a plan for the succession or transfer of ownership of the business you’ve worked so hard to build. So where should you start? Let’s take a look.

Knowing your EBITDA will give you a general idea of how an investor will begin to determine a price at which it makes sense for them to buy your business. EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is certainly a mouthful, but really very simple to understand. Basically subtract expenses from revenue, excluding interest and taxes, without depreciation and amortization (what you pay for tangible and intangible assets), and the remaining number is your EBITDA. This number provides a potential investor a rough idea of your car wash’s profitability as well as its ability to pay back interest or debts. Although an investor will never rely solely on EBITDA to value your property, it can serve as an advertisement that screams out “this wash merits close examination!” Basically, it’s an important number to know that you must take into consideration — whether you’re planning to sell or not.

THE IMPACT OF COST ON EBITDA

First, making the right business choices, cutting unprofitable expenses, or expanding sales, can significantly impact your EBITDA. Start with what we’ll refer to as “ghost” expenses. These small, seemingly trivial but recurring costs can start to add up quickly. Whether it’s $10 per month for an online directory listing that no one has ever clicked or $30 per month for a cable hookup on a TV that currently runs a looped video promoting your wash, it’s common for many washes we encounter to have $300 or more in “ghost” expenses that are repeatedly paid month after month. Here’s where the math begins to matter. $300 x 12 months = $3,600 per year. If an investor is willing to pay 6 times EBITDA, those “ghost” expenses will cost you $3,600 x 6 – meaning a $21,600 reduction in the selling price.

Once you’ve eliminated “ghost” expenses, turn your attention to staying on top of any preventive maintenance (PM) that can artificially increase your chemical, water, or electrical consumption. Whether it’s nozzles that are wasting detergent, a poorly timed rinse that’s wasting water, or incorrectly timed blower activation that’s wasting electricity, like “ghost” expenses, these can add up quickly. Again, it’s common to see $500 or more in wasted chemical, water, and electric costs per month. It may seem odd to think of PM when trying to maximize the selling price of your wash, but it’s not. $500 x 12 months = $6,000 per year. At a 6 times EBITDA selling price, you just lost $36,000.

The next step to understanding how to best present your car wash’s EBITDA isn’t related to cutting costs, but instead how to present them more accurately. You may, for example, work from home and have additional utility, travel, and other expenses to maintain that home office. The salaries you pay yourself, or other key members of your management team may be higher than what the new owner anticipates paying, or if they operate other car washes, may already have some functions on their payroll. The buyer would add these expenses back into the value of your car wash to calculate an adjusted EBITDA referred to as a “field” EBITDA. Your real-estate brokers’ understanding of the special considerations at a car wash is critical to make sure the field EBITDA accurately reflects your business. At the same time, your effort to categorize these items separately on your financial statements can save time and improve accuracy. For most car washes, it’s not uncommon to see $3,000 or more in monthly expenses that may be eliminated from your “field” EBITDA. Bearing in mind that $3,000 x 12 months = $36,000. At six times EBITDA, it can represent a $216,000 difference in the value of your wash.

THE VALUE OF PREDICTABLE REVENUE

Making money washing cars is as predictable as the weather. Everything you can do to demonstrate predictable revenue, regardless of the weather, will help make your property more attractive to potential investors. One way to do this is by developing a strong base of fleet accounts. Keep accurate books. Your effort to show consistent revenue generated from this segment helps demonstrate predictable revenue, which, in turn, lowers risk. It’s also a good idea to broaden your definition of what constitutes a fleet account when keeping your books. Obviously, the car rental agency, dealership, or police department qualify for this distinction, but what about smaller organizations? You may have worked out a deal with several local businesses or other groups that provide their employees or members with a discount code at your wash. Provided you track this separately, and accurately, this too can show a consistent revenue stream. 

Monthly wash clubs can also help make your wash stand out in the market place. These programs allow customers to pay a recurring monthly fee in exchange for unlimited washes. Being able to show a predictable sum of money deposited to your account each month, rain or shine, can do wonders for increasing the attractiveness of your car wash to a potential investor. 

A LOYAL CUSTOMER BASE

You may know how many washes you sell each month, but do you know how many individual customers you have? Can you pinpoint how often they wash and what packages they purchased over an extended period of time? Normally when a car wash evaluates a POS system to track customers by license plate, club card, RFID tag, or other means, the return on investment calculations are based on potential revenue generation. There’s more to the story. Whatever detail you can provide that demonstrates a loyal customer base will facilitate the sale of your business at a higher amount when you ultimately decide to exit the industry. If you’re able to match that customer, and their wash history, to an e-mail address, or mailing address, you are now selling a customer base, in addition to selling your car wash.

Even if you’re not tracking your customers, don’t be discouraged. Keeping careful track of how many loyalty-club members you have can also be significant. This doesn’t have to be complicated. Imagine, for example, that you distribute a simple punch card that gives the 10th wash free. Every time you print a box of cards, keep a ledger with the amount you printed. Every time someone redeems a card, keep the monthly total in the same ledger. Now you’ll be able to say, “we have X thousand loyalty cards in circulation and average X wash redemptions per month.” Wouldn’t that information make you feel more comfortable when buying a business? 

Here’s the kicker; whether you’re looking to sell your car wash in the next two months, or retire in the next 30 years, every action I outlined above will increase the profitability of your wash in the meantime. Make more money every day until you decide to bow out gracefully — that’s what I call a strategic exit plan.

Good luck and good washing.

 

Washing cars for over 30 years, Anthony Analetto serves as president of SONNY’S The CarWash Factory, creator of the Original Xtreme-Xpress Mini-Tunnel, and the largest manufacturer of conveyorized car wash equipment, parts, and supplies in the world. He can be reached at Aanaletto@SonnysDirect.com or at (800) 327-8723 ext. 104.



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