Finishing Line - April 2010

Scope it Out — Conceptual Studies
Provide Early Answers

By Robert Roman

The foreclosure cycle found in certain markets suggests some car wash projects should have been eliminated from consideration at an early stage. The fact that they were not implies the possibility of the “go/no-go” decision being “no” was somehow forgotten.

In the car wash industry, a bankable feasibility study has come to mean that the project is feasible. This means the study shows the car wash project would make money thereby meeting the definition of feasible. However, it is possible for a car wash project to be feasible but not economically attractive or financeable.

Unfortunately, this possibility sometimes got lost in the translation and was compounded by lenders who relaxed standards when profits were high and the focus was on making loans — not ensuring that the underlying security was adequate. Consequently, when the economy tanked, it exposed some borrowers to debt in excess of the value of the secured property, getting them upside down with the loan.

To avoid this pitfall, investors should follow more stringent steps in project development.

One of the first things that should be completed for a new car wash project is a conceptual or scoping study. This is a preliminary evaluation of a car wash project and is based mostly on assumptions and relies more on experience and industry standards. As a result, the accuracy of a scoping study is typically 35 percent to 40 percent.

Skipping this type of study to save time and money is not recommended. Scoping studies may lack accuracy but experience has shown that only 50 percent of small business projects survive even a conceptual study.

A conceptual study should describe the general features of a new car wash project and include an estimate of capital requirements, operating expenses, and anticipated returns. A study of this type is valid in determining whether a new car wash project is worth advancing to an engineering and feasibility study, but it is not enough to obtain a loan or to operate the business.

The purpose of the conceptual study is to reach a general recommendation of viable or not viable. Viable means the core dimensions of the project meets critical values and the project could advance. Not viable means the project is weak or strong rather than commercially viable. In this case, the project should be stopped for further examination or it could be abandoned.

A conceptual study should include an analysis of the core dimensions of the car wash business and it must use reasonable and rational assumptions. The core dimensions are market, technical, business model, economic, financial, and management.

A market assessment should examine population, income, competition, and other key location factors to determine if the market could sustain additional car wash outlets. The assessment should also examine the property to determine if it has the physical characteristics that make it suitable as a car wash site.

A technical assessment should examine property, market potential, capacity, basic design requirements, and other factors to arrive at an indicated cost to build the car wash project.

The business model assessment should examine the uniqueness of the model in terms of competitive advantage and the ability to create wealth.

The economic and financial assessment should examine how the business intends to make money and if the anticipated operating income is sufficient to cover the cost of financing the project.

The management assessment should examine knowledge and skills; ability to recruit, train, and delegate to staff; and suitability of management to ensure an efficient and effective customer-centric operation.

In the past, many car wash investors skipped preliminary studies and went straight to a “bankable” feasibility study because it was relatively easy to obtain financing. By bankable, I’m referring to the level of detail incorporated into the study, not the outcome.

Today, lenders have upped the ante with requirements for larger down payments and more stringent loan guidelines that will likely continue for some time. Banks that do lend to car wash projects are placing more emphasis on market and management feasibility. This means having an excellent market opportunity and demonstrating strong relevant experience.

A conceptual study is an effective way for investors to determine whether or not a car wash project should be advanced to the next phase. A finding of not viable doesn’t necessarily mean the project should be abandoned. However, it should alert investors to the possibility that individual dimensions of the business model fall below critical values, making the overall model not viable.

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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