Features

Private Equity - Potential Exit Strategy

By Robert Roman

02/01/20

Historically, car wash project financing included traditional methods such as obtaining a conventional loan from a local bank or lender, SBA loans, seller financing, sale lease back, and venture capital (i.e., angel investors).

Commonplace for smaller companies are SBA 7(a) and 504 programs. These loans are partially guaranteed by the government, which eliminates some of the risk for the financial institution issuing the loan.

7(a) is a general-purpose loan guarantee provided to lenders to make them more willing to lend money to small businesses that have weaknesses, whereas 504 is a commercial real estate and equipment loan guarantee.

7(a) loans are mostly variable rate, require 20 percent to 30 percent equity, and the maximum loan value is $5.5 million, whereas 504 provides a 90 percent loan at a fixed rate, 10 percent equity, and the maximum loan value is $20 million.

SBA calls for principals to have a business history and an excellent personal credit score as well as meet other requirements.

More recently, private equity has become more involved in the car wash industry because it can support bigger deals than traditional finance methods.

Private equity (PE) refers to investment funds that buy and restructure companies that are not publicly traded. In short, PE firms buy an independent company, refine its operations to make it more efficient, and then sell the business at a profit.

Consequently, PE can represent an exit strategy for car wash owners that have a business that fits in with the PE firm’s portfolio and investment strategy.

For example, one of my clients retired and sold his full-service car wash to the Mister Car Wash chain a couple of years ago.

According to its website, Mister was purchased by Leonard Green & Partners (LGP) LPin 2014. LGP is a leading private equity investment firm founded in 1989 and based in Los Angeles, CA with $23.5 billion in assets under management. Today, Mister is the country’s largest car wash network with more than 320 locations.

According to its website, LGP’s investment strategy is to invest in market-leading growth companies that have multiple ways to win. The company focus is on free cash flow, management, and a flexible approach to deal structure.

In second place is the International Car Wash Group (ICWG) with more than 150 locations in the United States. Roark Capital Group ($10.8 billion in assets under management) acquired ICWG from TDR Capital LLP in 2017.

Roark focuses on leveraged buyout investments in middle-market companies such as franchise/multi-unit, food, retail-healthcare, and business-services sectors. Roark’s investment strategy is to focus on industries it knows, provide capital and added value to support growth, and flexible deal structure.

On the other end of the spectrum are smaller firms such as Red Dog Equity LLC. Red Dog is a private equity firm that focuses on investing in partnerships with driven entrepreneurial business leaders. Red Dog seeks to invest in lower middle-market companies poised for strong growth that typically have between $2 million and $20 million of EBITDA. According to its website, Red Dog has only one portfolio consisting of Mammoth Holdings, LLC.

Founded in 2002, Mammoth now owns and operates a multi-state portfolio of 22 car wash locations. The company pursues a differentiated acquisition strategy focused on partnerships with dominant regional car wash operators.

According to Mergers and Acquisitions, Monroe Capital served as agent on the funding of a $40 million senior credit facility to support the initial acquisitions of Marc-1 Car Wash and Wash Me Fast LLC by Mammoth Holdings LLC, as well as their future growth and acquisition strategy.

Mammoth partnered with private equity sponsor Red Dog, which, through its partnership with the Tom Pritzker family business interests (advised by The Pritzker Organization), provided the equity for the acquisitions and purchased a controlling interest in Mammoth.

Reportedly, private equity’s current presence in the commercial car wash industry is only about 1 percent of the total number of washes in the United States.

Nevertheless, the PE presence in the industry should continue to grow.

The economy is expected to remain strong, car wash operators are making money, and it’s a good time to sell.

 

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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