Finishing Line - December 2010

Pro Forma — Trust, but Verify
By Robert Roman

Pro formas are financial statements prepared in advance of a planned transaction such as an acquisition or new capital investment. Pro formas model anticipated results of a transaction placing particular emphasis on projected cash flows.

Car wash investors prepare pro formas to generate information to attract prospective investors. Banks require it to confirm debt-service coverage and other financial ratios for a new car wash project. Since the pro forma attempts to project the future, it also provides a benchmark for operating a car wash business.

Pro formas should be created from the ground up, so to speak, beginning with the investor’s belief that there is unmet demand for a car wash in an area and a need for the business concept.

So convinced, investors will obtain pro formas from equipment suppliers as part of their due diligence and the equipment selling process.

Car wash pro formas prepared by equipment suppliers are very similar. Suppliers will require information such as area composition, location of competition, accessibility and visibility, demography, traffic count, etc.

The location and site information is entered into a spreadsheet where it is compared with an empirical benchmark, or analogue, to define a forecast interval of sales for a new site.

Equipment suppliers also require the cost of land, site work, and construction; hours of operation; anticipated prices and sales mix; as well as the conditions and terms of financing. After plugging this information into the model and adjusting operating expense factors, the spreadsheet shows projections of potential volume, revenue, expenses, and net income.

Should car wash pro formas prepared by equipment suppliers serve as the basis for an investment decision? The short answer is no, because it says so right on the front cover of every pro forma report.

A car wash pro forma is a necessary and valuable tool. However, there is no practical way for an equipment manufacturer or distributor to guarantee the results shown in a pro forma.

Consequently, equipment suppliers encourage investors to obtain an independent opinion as to the viability of a car wash project from qualified professionals. In obtaining these opinions, investors should rely on consultants, accountants, and other experts who understand the car wash industry and car wash development process.

To reach findings and draw conclusions regarding a proposed car wash facility, an analyst needs to examine crucial aspects of location (market and site), customer convenience, customer base and competitive supply, trade area demand, unmet demand, and customer attraction.

The analyst begins by examining consumer demand and the supply of washes within a trade area to determine whether there is unmet demand as determined by standard research methods.

Car wash pro-forma models are not well suited for this purpose; only one research method is used (analogue-based), and unmet demand is not quantified based on a comparison of trade-area consumption with the competitive supply. Consequently, the forecast interval produced by these models can be as narrow as the difference in sales between the stores that are included in the analogue.

The analyst would also need to examine whether the proposed facility is reasonably convenient and useful to motorists. A car wash is thought to be so if it meets the demand of motorists for services as demonstrated by patronage, expediency, and usefulness.

For example, anticipated customers should represent a strong segment of residential households in the trade area. There should be a high propensity for motorists to stop at the site. Motorists should find the value proposition available to them advantageous as compared to the competitive supply.

Given the limitations of car wash pro formas prepared by equipment suppliers, should investors put much faith in the results?

I would say absolutely yes — from the perspective that doing so is crucial in establishing an empirical benchmark for a new project from an experienced and knowledgeable source. Equally important is obtaining opinions from other experts. Third-party opinion is not costless but it is essential to have unbiased viewpoints to bring balance to the benchmark.

In the final analysis, economic conditions and the fact that lenders have become far more demanding forces car wash investors into more careful decision making. In this context, the development of a decision support system based on third-party opinion assumes an increased relevance.

Bob Roman is president of RJR Enterprises — Consulting Services ( You can reach Bob via e-mail at

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