Investing In NEW Coin-Op Carwashes Reality Check

reprinted from Fall/96

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For openers, I did not fudge the arithmetic. The $400,000 wash is a theoretical example, but a realistic one. There's no problem with the theory or formulas for Rate Of Return. Difficulties, however, can arise in implementation.

The first part of the theory assumed that an 8-bay self serve could be built (or bought existing) for $400,000. And secondly, we expected this wash to pro duce $80K a year in profit ... in Net Operating In come. Were these realistic assumptions or pie in the sky?

First, the cost assumption: In many areas of the country it would be no great trick to build an 8-bay self serve at a total cost of $400K. That's $50K per bay. It could be done for considerably less ... as was demonstrated in Part One of this article in the "Spring '96" issue. And, sure, you could pay more than $400K, most knowledgeable car wash veterans would surely agree the $400K number is realistic, reasonable, doable.

Next, was the assumption about this wash generating a Net Operating Income of $80K per year. Is that level of NOI a reasonable expectation? Maybe. Maybe not. Could an 8-bay gross $150K a year? Sure. I own one that does well over that. A $150K gross a year breaks down to each bay doing $1563 per month. National surveys demonstrate many washes can do that ... even more can when vac and vending income are included.

So if this 8-bay grosses $150K a year (and if it can be operated on a fairly typical 45% of gross) then the NOI is $82,000 a year. That supports our theoretical model. Even if it only grosses $125K, and the cost of operation was 40% (not at all unusual) of gross, the NOI would be $75K ... but, of course, the ROI is starting to slip. If the wash only takes in $100K, then it's obvious it's not going to generate an annual NOI of $80K. Actually, with gross revenues dipping that low, there may be trouble ahead.

It's a fact. Gross incomes per bay range widely ... sometimes wildly. They can go from "making out like a bandit" to workable to "deep doo doo". The fact that income performance varies so much (given vari ables of competition, market demographics, traffic counts, operating costs, weather patterns, etcetera, et cetera) is the reason I stress the absolutely critical im portance of realistically predicting revenues for the wash. So stifle giddy optimism, strive for accuracy, but prepare to err on the conservative side of an in come projection. If you have overly generous expectations in this department, serious trouble will follow.

I'll conclude my defense of the plausibility this theoretical wash by acknowledging that many operators would be very satisfied owning this 8-bay if it only produced a NOI of $60K and, therefore, a return of just 15%. There are plenty who would consider that a handsome pay back indeed. So I'm sure that such folks probably go "ga -ga" at the thought of raking in those hot 'n juicy yields of 40%, 50%, and more staggeringly higher than Certificates of Deposit, Money Market Accounts, or even successful Mutual Funds.

That concerns me. Such exciting numbers can cause some would be owner/investors to lose sight of these projections being based on number of assumptions. If the assumptions (about future competition, traffic, population, etcetera) are wrong then the analysis is questionable ... perhaps worthless. The projected yields simply will not ma terialize. Carwash Surveys: Are We Getting Skewed? Allow me to raise one more cautionary flag. I justified the reasonableness of the assumption I made on the $80K NOI of this 8-bay based on the performance of my own washes and on data from national surveys compiled by "Professional Carwashing" (Latham, New York, 518-783-1281) and "Auto Laun dry News" (Fort Lee, New Jersey, 201-592-7007). These surveys provide the best data we currently have.

But I have to remind myself that the respondents to such surveys are "self selected" they volunteer to respond. These respected publications are totally up front about this and will point out that fact in their analy sis of and intros to the data presented. Still, what's your best educated guess as to who's more likely to respond to survey ques tionnaires? Is it the owner who's doing well or the owner who's having a tougher time? My gut instinct tells me it's probably the more successful owner. The big winners in this business tend to be those most involved and "plugged in". They read the trade mags. They participate in associations. They attend trade shows. And, to no one's surprise, they probably respond disproportionately to surveys too. If my hunch is correct and it's only a hunch then the data in these surveys could be getting skewed toward the high side. And that phenomenon may be compounded by the fact that there are hundreds of operators out there who are also suppliers and builders of carwash facilities. They're certainly "involved". And they tend to be more accomplished then your average Mom 'n Pop operator. But beyond that, distributors have a direct and vested interest in representing carwashing in its most attractive light. Might they be dedicated survey respondents? And might some tweak their numbers a tad?

On the other hand, might the operators with "nothing to sell" (other than wash time for cash) be inclined to tweak their numbers in the other direction? And might that serve as a counterbalance that ultimately helps makes the survey averages meaningful and accurate? I guess it's anybody's guess. I guess all that speculation boils down to: A carwash investor should rely most heavily on his own very careful projections about the particular site under consideration and apply the prevailing local in comes of known washes to those projections.

Coming To Terms With Loan Terms I've made my theoretical case that the cost is reasonable and the NOI is plausible for the 8-bay ex ample. The only facet of the plan that's somewhat con trary to my own experience the part that is very difficult to pull off is obtaining the $300,000 loan at 10% interest for 10 years. For me this has been and remains a pretty tall order. It's not the amount of the loan, nor the size of the down payment. Rather it's the fixed rate and the 10 year term which could prove very challenging.

Such leveraged deals can look so very good as theoretical models when proposed by some selling new wash packages or an agent selling an existing wash. If such favorable terms are not generally available, the whole analysis changes ... often dramatically. Entrepreneurs report that one of the most difficult challenges they face is obtaining adequate capital large enough loans at reasonable rates and terms. My experience with getting carwash loans sure supports that. I'm not looking to borrow 90% of a project and only put 10% down ... not at all.

I would be very happy to find a loan that requires a 33% down payment. That's what I'll ask for, but in the case of a loan I obtained just 2 years ago, the bank insisted on about 50% ... from someone who has an excellent credit record. I've never missed one loan payment ... never even been late on a payment. And I have a successful track record owning 8 washes and never having lost money on a single one. There's nothing in my past to cause a banker to turn down one of my loan proposals. And yet I cannot find one of those so called "friendly bankers" who's wants to loan money at reasonable terms to an experienced, responsible, and moderately successful carwash owner.

Pt. 2 Pg. 3....

....Pt. 2 Pg. 4

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