Past Issue

Signs of Life — Part II: Raising Required Capital

By Robert Roman

12/05/13

Last month we suggested the principal constraint that limits or prevents a “mom and pop” start-up from investing in the car wash industry is the availability of capital. Now we provide some suggestions to help overcome this hurdle.

A more likely trajectory for a start-up today is to buy an existing car wash property and re-make the business. This could be real-estate-owned property (REO) or a going-concern that needs fresh blood and strong backing.

Generally speaking, if the REO is not bank-managed, as in closed for business, the market value of the car wash property is real estate only because there is no going-concern.

Start-ups should expect banks to want a “sizeable” down payment, personal guarantee, interest payments
on principal, repayment of capital, and a charge over assets of the company.

A going-concern may also require a sizeable down payment but could offer “seller financing” with more flexible terms than banks but secured by the property being sold. This means the seller has the right to repossess
the property if defaulted.

The reason for “sizeable” is lenders simply want start-ups to take on more of the investment ownership and business operating risks. This means start-ups today need more cash on hand when investing in a car wash than, say, 10 years ago.

Consequently, raising cash is a key in obtaining a loan for a start-up. Quite frankly, the more cash the better, because cash reduces debt service and the start-up’s business operating risk.

Business angels and investors (i.e., friends, family, partners, etc.) that would consider a start-up will want a stake in the company in exchange for equity invested. They will also expect a venture proposal that is “investor ready.” Investor-ready focuses on market opportunity, management team, and exit strategy.

A car wash start-up suitable for private equity should offer the prospect of significant turnover growth within three years. Turnover is the amount of revenue a company generates through sales. Here, the goal is to predict volume of business or how many customers will come and how much money they will spend.

It is suggested a start-up company like a car wash should not expect to capture more than 25 percent share of total potential sales in a market. So, an excellent opportunity would show a start-up has greater profits at this level of sales when benchmarked against peers. Profit is the sum remaining after costs and taxes have been deducted.

These figures should be supported by general assumptions of the business model, current available capital, and financial analysis including start-up cost, profit-and-loss and cash-flow projections, and profit-by-sales volume (breakeven).

Business angels, investors, friends, relatives, and others who would invest their cash in new business ideas and start-up companies invest in people not business plans. Consequently, a start-up must demonstrate it has the management experience to exploit the opportunity as well as identify any skill gaps and how they are mitigated.

For example, start-ups can appoint experienced people like dealers, suppliers, and former owners to an advisory board. They can form working partnerships, hire consultants, and use other means to fill in gaps when growing a car wash business.

Just as banks are most interested in loan repayment, business angels and investors are most interested in knowing the exit strategy — how and when their money will be spent and how and when they will receive a return on their investment.

Although angels and private individuals provide smaller amounts of finance to start-ups, the return on invested capital must be great enough to be of interest. Taking into account market conditions, a realistic return on cash for a car wash start-up on a .5-acre lot with enterprise value of $1 million would be 50 percent or more.

When approaching business angels, private investors, or a bank to make a pitch, the venture proposal should be clear and concise — maximum of two pages plus illustration of project and summary financial table. Angels and private individuals expect to be provided with information to maintain their interest and allow them to quickly evaluate the investment opportunity rather than reading a book.

If this all sounds like a lot more work than obtaining a pro forma from a dealer and an SBA loan from your local bank, it is. However, raising a lot of cash may be the path of least resistance today for a start-up looking to purchase REO or a going-concern.

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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