Car Wash Sellers - Maximizing Value During the Pandemic
By Jeff Pavone
The COVID-19 pandemic will have a lasting effect on many industries as economic contraction, volatile capital markets, and evolving consumer behavior present new challenges for businesses. While we can make a strong case that the express car wash industry will likely face fewer headwinds given the nature of the operating model, which promotes a safer environment for consumers, operators, and employees to conduct business, there will certainly be hurdles that the industry will need to clear in order to maintain a pre-pandemic growth trajectory. This includes a shrinking economy, tightening credit conditions, and increasing competition from well-capitalized peers with accelerating development.
However, even during a period of crisis, there are plenty of opportunities for car wash owners and operators to protect, and even increase the value of their business — particularly for those who are looking to participate in M&A activity. Whether it is with the intent of making a full exit, or pursuing a strategic partnership, the general health of the M&A market has been fairly resilient to the effects of COVID-19. In fact, we surveyed financial buyers from across the country, and found that more than 86 percent of participants are still pursuing acquisition opportunities, despite the current market environment (see Figure 1, below).
Figure 1: How does the current market environment affect your appetite in pursuing deals?
Additionally, an overwhelming majority of financial buyers stated that their return expectations for deals in the car wash industry have remained the same, or even increased as a result of the pandemic (see Figure 2, below).
Figure 2: How have your return expectations changed?
The initial reaction from the financial buyer community reflected more of a “sit and wait” approach but, as May-June numbers have reinforced the strength and resiliency of the express car wash business, there has been a renewed interest from the financial buyers to make acquisitions in this space. A lack of deal flow, an unprecedented amount of dry powder sitting on the sidelines, and a shortage of high-quality opportunities continue to make the express car wash industry an attractive investment for financial buyers.
We believe that the opportunity for car wash sellers to create wealth is as abundant today as it was before the pandemic, which is why it is critical for owners and operators to take advantage of the current environment to maximize the value of their business. There are some simple guidelines that sellers can follow in order to protect, and even expand valuations during turbulent times.
REVIEW AND REVISE OPERATIONS
During any period of uncertainty, it is critical for operators to thoroughly review operations in order to evolve and meet dynamic consumer demands. Specific to those pursuing a sale, this becomes even more important for the sake of growing the top and bottom lines, thus realizing full valuation potential. The first thing any operator can do during the pandemic is to ensure the overall safety of their team and customers. Effective distancing measures, frequent sanitation, and protective equipment can help minimize the potential disruption that the virus can have on operations. Operators can also make sure that customers understand the importance of safety for their business, alleviating any concern that the customer may have.
The pandemic also allows for an opportunity to grow sales from an expanding membership base. As concerns continue to mount over the spread of the virus, whichis ultimately shaping consumer decision making, the contactless aspects of the membership transaction can be an effective marketing message, which will help increase recurring revenues from a membership base. The current environment is an ideal time to refine the sales and marketing message to promote the contactless nature of the membership experience.
Finally, operators should stay focused on the fundamental basics of quality and convenience. Revenues may decline as consumer discretionary spending slows, but don’t allow this to compromise the quality of the end product. Managing solely to the bottom line can have an unintended, detrimental impact on customer loyalty, which will ultimately result in weaker sales and lower valuations.
BUILD A SOLID BENCH
One clear implication of the pandemic has been a substantial increase in the rate of unemployment. As governments impose lockdown restrictions, and consumers become increasingly weary of person-to-person contact, businesses have been forced to reduce staff or even shut their doors.
This is particularly relevant in the hospitality and services industries.
As a result, the labor market has transitioned to a looser state (the degree of which varies region-to-region), which offers the opportunity for car washes to add to their talent pool by making high-quality hires that were either previously unavailable for employment, or too expensive to fit into the business’s cost structure. A well-run business has a meaningful impact on valuation multiples, particularly in instances where the seller is looking for a full exit.
The current state of the labor market provides a unique opportunity to build a solid bench, which is a very important consideration for potential buyers.
INSTITUTIONALIZE THE BOOK OF RECORD
Clean financials are important to a successful transaction in any scenario, but this becomes even more important during a period of economic shock. Among other considerations, financials should account for all owner addbacks, and all equipment purchases and capital expenditures should be classified correctly. It is important to remember that with current market valuation multiples hovering near 10x, each dollar that goes to the bottom line could be worth ten dollars in a sale.
Institutional-quality accounting records can provide a tremendous benefit to sellers during an economic down cycle by normalizing current financials to smooth out the impact of a short-term shock. Owners should take the time to clean up their books of record to provide potential buyers with historical context, which will ultimately help preserve valuations in a sale during a period of heightened uncertainty.
BUILD A PIPELINE
Buyers are more willing to pay higher valuations for scalable operations with a potential for future growth. A pipeline of development opportunities adds far more value to the existing operations by providing the buyer with a path for growth. With restaurants and brick and mortar retailers facing a number of challenges as a direct result of the pandemic, there is now significantly less competition to acquire high-quality development sites. Similarly, the economic shock induced by the pandemic has created opportunities to make distressed acquisitions. Building a robust pipeline of development opportunities provides the buyer with a tangible upside, which can allow sellers to command a premium on car wash valuations.
While there is likely to be a lasting effect on many industries, the express car wash industry should be relatively immune to the economic impact of COVID-19, as the risk of exposure to the virus is lower. Consumer behavior is likely to change, and will disproportionately impact companies in industries such as travel and leisure, and hospitality services. Car washes, on the other hand, offer a safer environment for consumers, operators, and employees to conduct business. In particular, the transition to exterior only/express car wash operating models limit customer and employee contact, protecting the general health of patrons and staff. For this reason, we see continued interest from financial buyers, leaving car wash sellers with an attractive opportunity to create wealth. That is not to say that the industry will not face its fair share of challenges. With proper guidance and advice, there is a path forward for sellers to maximize the value of their car wash business.
Jeff Pavone, an industry veteran, is the owner and principal of Commercial Plus.
In his latest venture, he partnered with Bill Martin, owner and operator of Metro Express Car Wash, to found Amplify Car Wash Advisors — the leading advisors in the sale and capital advisory of multi-site car wash chains. For more information, please visit https://amplifywash.com/, e-mail Jeff@AmplifyWash.com, or call Jeff at (602) 757-1514.