Investing in a Car Wash? How to Finance It

car washBuying in a car wash has been a popular way for entrepreneurially minded individuals to go into business. Car washes are ubiquitous and every town has one – or more.

The most common way of investing in this industry is to buy an existing car wash. Buying an existing business is usually less of a gamble than building one from scratch. The acquisition of an existing company allows you to look at performance and other metrics during due diligence. This allows you to make an educated investment.

Financing the car wash purchase

Most car washes are small businesses. There are not as many options as the acquisition of a larger business. The three common options to finance a car wash acquisition are as follows.

a) Your own money

The simplest way to buy the car wash is to buy it with your own money. While this options is simple, it’s not easy. Few buyers have the needed funds to pay for the whole acquisition.

b) Seller financing

The second option is to use seller financing in the transaction. As it name implies, seller financing is a loan from the seller that is amortized over a number of years. Most seller are willing to provide you with competitive prices.

There is also an advantage of tying the seller to the business for a few years. Your ability to pay them depends on the performance of the business. This can help ensure that the seller did not sell you a bad business.

c) Lender financing

Lastly, you can use a business acquisition loan to finance the transaction. The most common type of loan is an SBA-backed loan. SBA-backed loans have the advantage of being easier to get than conventional bank loans. Their personal credit and asset requirements are not as burdensome. Keep in mind that all loans, SBA backed or not, require paperwork and due diligence.

Using a leveraged buyout

Most buyers try to acquire the business using the least possible amount of their own money. This is a strategy known as a leveraged buyout (LBO). Like any strategy, using a LBO has advantages and disadvantages. These must be carefully considered before using this type of structure.

The biggest advantage of an LBO is that you increase you returns by minimizing your personal funds outlay. This also allows you to buy the biggest possible business that your funds allow. This is one way to maximize your investment.

However, leveraged buyouts can be risky. Losses can turn the business upside down, and leave your equity worthless. This is something that you have to take into account.

How to structure the leveraged buyout

There are four possible ways of structuring a small business leveraged buyout.

1) Seller financing for 100% of the business

One aggressive strategy is to ask the seller for 100% financing. At first glance, this strategy may look great. Basically, the seller finances everything. It has some serious challenges though.

The obvious challenge is that few, if any sellers, will agree to this. Sellers want to cash out and don’t want to act as your bank. Furthermore, offering financing is riskier for the seller. They have no assurances that you will manage the business successfully. Few sellers want to take on this risk.

There is a bigger issue though. Why would someone sell a great business and offer 100% financing for it? It doesn’t make much sense. Why not find a great buyer and simple cash out? Wouldn’t you?

Sure, you could be the lucky one that buys a great business. Most likely, the business probably has some serious issues. The last thing you want to to buy someone else’s problem business. The bottom line: be very careful.

2) Seller financing and your own funds

This strategy uses a combination of your own funds and seller financing. An advantage of this strategy is that the seller may provide financing at more reasonable terms than lenders.

This strategy has similar issues to the previous strategy. Why would a seller be willing to finance a large portion of their sale? What is their motivation? Perhaps a bank is unwilling to provider financing for buyers. And if that is the case – why?

Opportunities that depend solely on seller financing require discipline. Go through your due diligence steps carefully and verify their financial statements. If possible, work with an expert to help you evaluate the opportunity.

3) Combination of the three options

Most small business acquisition use a combination of your own money, seller financing, and an SBA-backed loan. The numbers vary. However, the buyer usually contributes 10% of the purchase price as an equity injection. The seller provides financing for 5% – 20% of the acquisition. The rest of the price is financed through a lender.

This strategy allows you to buy the business with only 10% down, while financing the rest. The biggest challenge with this strategy is getting the acquisition loan. As part of the financing process, the lender will perform their due diligence on you and the business. This can take time and sometimes bring challenges.

4) Your own funds and lender financing

The last option is to buy the car wash with a combination of your own money and lender financing. This is the seller preferred method because it allows them to cash out immediately.

In these transactions, the buyer usually contributes a minimum of 10% of the acquisition price. Some lenders require a higher contribution. The rest is financed by a loan like the previous option.

Common acquisition problems

As you can imagine, there are innumerable circumstances that can derail an acquisition. However, there are a few that are common in the industry. Here are some common challenges with car wash acquisitions:

1) Seller can’t provide accurate financial statements

Some small businesses don’t always keep track of their income and expenses. Furthermore, keeping accurate track of cash sales (common in car washes) is not always easy and requires discipline. Consequently, some car washes cannot provide accurate financial statements.

As a buyer, this creates a big problem for you. You never want to be in a position to buy a company that cannot account for its revenues and expenses. Furthermore, no lender will ever consider financing a transaction that does not have accurate financial statement.

2) Real estate in not part of the sale

Location is critical for a car wash. The only way a buyer can guarantee access to the desired location is to buy the real estate as part of the transaction. Otherwise, there is no guarantee that the car wash will be able to keep the location for the foreseeable future. Some lenders will not consider a transaction unless the location is included in the transaction.

3) Environmental issues

Car washes can be affected by environmental issues, especially if they are near a gas station. Lenders consider environmental problems to be serious. These problems can easily derail the acquisition. Transactions may require an environmental assessment to determine environmental risk.

4) Unreasonable asking price

Every seller wants to sell their car wash for the highest possible price. That’s understandable. As a buyer, though, you never want to over-pay for a business. Otherwise, you will loose money.

If you are getting a loan, the lender will check the numbers to ensure that they meet their expectations. Here is one important fact: this does not guarantee you are getting a good price. It guarantees you are meeting the lenders minimum requirements.

Most lenders use “rules of thumb” to determine if a transaction is “reasonable”. These vary by lender, but common ones are:

  • 4 times annual sales (self service)
  • 3 – 6 times EBITA (full service)

EBITA is Earnings Before Income, Taxes and Amortization

If you have doubts about the value of the business consider hiring a valuation expert. A good one can prevent you from making a bad investment.