Finishing Line - June 2009

Exit — Making the Most of a Bad Situation
By Robert Roman

 
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When a car wash fails to meet expectations, the owner is invariably faced with the decision of turning things around or exiting. With the former, the owner will need to overcome the resistance of reaching out for help and burden of spending money to identify and fix what is wrong. If the owner decides to exit, there is the daunting task of trying to sell a wash that is struggling mightily or losing money. Solving this problem involves dealing with constraints.

A constraint is anything that limits a person’s ability to achieve a goal. A physical constraint is something like the capacity of a machine. A conveyor chain will break at the weakest link. If you wanted to prevent this, you would strengthen the weakest link. A non-physical constraint is something like a person’s outlook. It is usually very difficult for most people to make good decisions when they are suffering from anxiety and depression.

Therefore, the first step would be to do whatever is necessary to overcome the emotional aspects of exiting and get mentally prepared to make the best decisions possible. The next step would be to define an appropriate goal.

The goal of selling is to obtain the best price possible. With this in mind, the seller would want to make an offer that a buyer would find hard to refuse. This means selling value, not a price or product. The next step would be to identify and prioritize the constraints that limit progress towards this goal.

Brokers and sellers use deal tombstones to provide information to attract buyers and direct them to the seller. However, if superlatives like “one-of-a-kind investment” or “sit back and watch the money roll in” don’t correspond with the information, a tombstone can stop buyers dead in their tracks.

The seller can improve the likelihood of drawing buyers into negotiations by putting the wash in the best light possible. This can be accomplished by preparing high-quality marketing materials that emphasize value rather than price.

Negotiation that results in a transaction means pricing the wash to yield a positive return on the buyer’s equity (new buyer) after all operating costs and overhead. However, establishing the “right” price for a going concern that is struggling or losing money is going to be very difficult for the seller.

Since goodwill greatly affects the worth of a car wash, the seller should obtain an opinion of value from a qualified consultant or specialized appraiser who understands the industry and the intricacies of individual markets. For example, it may be possible for a specialist to find hidden value in a wash that is struggling or losing money. This value could be used to support a price that is higher than can be obtained with income multiples.

The seller should also be prepared to exploit constraints that become obstacles to a transaction. Buyers may disagree with price and reasons why the wash has failed. To get them to buy-in, the seller will need to build trust as to what the real problem is. The best way to accomplish this is to gain a strong consensus by obtaining opinions from qualified specialists. This could be accomplished by having a specialist prepare the sales brochure as the inverse of an offering or begging letter.

Even if there is consensus, the buyer may become skeptical as to whether the solution will actually deal with the symptoms of the problem so the hidden value can be realized. In this case, the seller would want to provide a step-by-step explanation of how the solution would eliminate the symptoms.

During negotiations, the buyer will usually have “yes, but” reactions concerning various aspects of the deal that may become a significant barrier to a transaction. To overcome these obstacles, the seller will need to show clearly that the solution contains practical ways to address them without negative side effects.

Completing a transaction will also require collaboration. For example, the seller will need to accept the fact that price is going to be affected because the wash is struggling or losing money. The broker survives off transactions; the lower the price, the less the commission. The buyer is going to want to exact a lot for buying a wash that has gone/is going bust. This will mean a good price and possibly carry-back or seller financing.

In the final analysis, the seller will need to become well-prepared to deal with the constraints that are involved with selling a wash that is struggling or losing money. In addition, the seller will need to be completely forthright to avoid fraud allegations — and patient because it will take time for a buyer to complete due diligence and evaluate the seller’s solution to rescue the business.

Bob Roman is president of RJR Enterprises - Consulting Services (www.carwashplan.com) and vice president of Bubble Wash Buildings LLC. You can reach Bob via e-mail at bob@carwashplan.com.

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