Investing In NEW Coin-Op Carwashes Summary

reprinted from Fall/96

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1. Most carwash ventures involve borrowed money so analyzing leveraged Rates Of Return is a necessary phase in the planning process and in obtain ing financing. Earning a higher rate from the borrowed funds than what's paid to borrow them is essential.

2. The Return On Investment takes a bit more math to calculate than the simpler Return On Assets but it answers a basic question: will the "profits" cover the loan payments and with how much to spare?

3. Borrowing money adds risk to a deal but good rates, terms, and conditions are the key to mini mizing those risks.

4. Adjustable rate loans are fairly standard for carwashes. They can be very risky. Fixed payment schedules and/or caps can reduce the inherent risks.

5. A 5 year term for most carwash loans is just too short; 7 is better, but still risky; aim for a 10 year term.

6. "Balloon notes" can be very risky. And over collateralizing a loan should be avoided.

7. Temper your optimisim when it comes to expecting stable, low interest rates. Hope for the best ... prepare for the worst. Sometimes a banker's refusal to make a proposed loan can offer new insight into potential prob lems.

8. Almost everything about a loan is negotiable. There are lots of banks and they compete to attract borrowers. Make them earn your business by persistently shopping for the best rates, terms and conditions.

9. The SBA can be helpful. But be sure to explore the possibilty of flexible terms through owner financing.

10. A personal note ... When I built my first self-service carwash in 1964 I didn't know an ROA from an ROI and had never even heard of an Internal Rate Of Return. It was fierce determination, hard work, and a lack of competition which led me to Profit City in those very early years. A need for cash, a growing family, a seemingly endless string of low paying part-time jobs and a full time job that paid less than $5,000 a year also helped provide incentive.

In those days an extra $50 a week meant a helluva lot less macaroni and cheese ... maybe an occasional steak. Self service car washing was in its infancy. Persistent nagging was my "loan proposal technique", $1,000 cash my total liquid assets, and leasing the land my only possible option. Today it's a tougher ball game more complex, riskier, more competitive.

But if there's a young lad or lass out there in a situation like I was in back in 1964, please don't let all this financial analysis deter you. It's little more than common sense laced with financial jargon and held together with a little math. Use it as best you can. But remember to balance it with grit, determination, and a real willingness to work. These always have been and shall remain the critical factors in making the American dream come true. "

A Tale Of Two Carwashers" One of the first things a novice investor needs to appreciate is the amazing earning power of Compound Interest interest paid on earned interest over a period of time. The following whimsical story helps illustrate that important principle ...

Once upon a time, two 20 year old lads, Mike and Pat, began their careers in carwashing. They were both mod erately successful. Time passed ... 45 years in all. Operating on opposite sides of a large city, they never met. But, as fate would have it, the day before their retirement at age 65 that the two just happened to meet in a midtown pub. They began to swap stories about their years in car washing. Pat mentioned one of his most unusual customers a spinster named Ms. Annabelle Eccentric. From the first day she opened her wash, Ann Eccentric had been a faithful weekly customer and remained so for exactly 10 years. Then she disappeared.

Mike was amazed. Could Pat be talking about the same Ann Eccentric who had been Mike's faithful customer for the last 35 years?!! She was indeed the very same customer. First 10 years of weekly washing at Pat's, followed by 35 years at Mike's. Pretty strange. Suddenly their conversation was interrupted by a messenger who handed each an envelope. Pat's letter read ... Patrick: As you remember, I was one of your very first customers when you opened for business 45 years ago. And for the first 10 years of your career, I washed my Model-T each and every week at your "Pat's Carwash". In appreciation of your excellent service (and as an unspo ken token of my affection for you) I deposited $2,000 each year of those 10 years in a trust fund for you. It has always earned 8% interest, was compounded annually and (as an irrevocable trust) was tax deferred. Had it not been for that most embarrasing incident at your wash involving my corset, false teeth, arch supports and dearly departed chihuahua, I would not have switched my allegiance to "Mike's Carwash" way on the other side of town. I harbor no hard feelings. You'll receive the proceeds of the trust at your retirement dinner tomorrow. Sincerely, Ms. Annabelle Eccentric

Then Mike opened his letter. It read ... Dearest, Michael, I have been a faithful weekly customer of yours for the last 35 years. I came to your wash after a regrettable incident (best left unrecounted) at a competitor of yours. I had washed there for a full decade and had planned a special surprize for the owner upon his retirement. But I ended my efforts after 10 years. Soon after I became a your customer I realized what a fine fellow you are and I planned a retirement surprise for you too. For the last 35 years I have been depositing $2,000 a year in an irrevocable trust for you. It has always earned 8% interest compounded annually. And you'll receive the proceeds at your retirement dinner tomorrow night. My Warmest Regards, Anna

The two carwashers each read the letter of the other. Whereupon Mike turned to Pat and said: "Ya know, Paddy, I feel awfully guilty about all this. I sorta stole your customer and then she ends up giving me $50,000 more than she gave you. "It's just not fair, my friend. I'm sure that 'regrettable incident' whatever it was was not your fault. So I'll tell you what, I'll give you a chance to trade trust funds! Whaddya say? C'mon ... lets flip a coin. Heads you win, tales I lose. Okay?" Not missing a beat, Mike deftly picked a quarter from the barkeep's tip jar, flicked it into the air, quickly snatched it and slapped it onto the bar. "Well, sunnuva gun, Pat you won! I'll have my son the lawyer draw up the papers for you to sign this very afternoon. Okay?"

Mike acted a bit annoyed when Pat seemed lost in thought. But Pat's mind was flashing back to his high school algebra class and good old Miss Gimwitch who forced him to learn about geometric series, compound interest, and made him memorize formulas with little more motivation than a "some day you'll thank me". Pat scribbled some quick calculations on his napkin and did the unexpected he hauled off and decked Mike on the spot! He then spun on his heel, stomped out of the bar, went to the nearest florist and sent good ol' Gimwitch a big "Thank You" bouquet.

Why? The moral of this little fable is that when it comes to compound interest "time is money". In a sense,time is even better than money! And our tale of two carwashers proves that. Mike received a whopping $70,000 from his secret admirer. While "poor" Pat had received only $20,000. But upon retirement, the story takes an amazing twist. Mike's $70K grew to about $372,000 over the 35 year period. On the other hand (believe it or not) Pat's $20K grew to almost $463,000 over 45 years! Yes, thanks to the remarkable investment power of just 10 more years of compounding interest, Pat received almost $90,000 more on an investment of $50,000 less!

....Pt. 2 Pg. 6

Pt. 2 Pg. 8....

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