Children’s literature star Chicken Little, renowned for predicting the sky is falling, also moonlights as economist, pragmatist, accountant and loan officer. The diminutive alarmist isn’t referring to the literal sky but is forewarning us about the importance of fiscal responsibility, diligent planning, cautious spending and realistic forecasts. If you doubt that Chicken Little isn’t working for your local bank, go in tomorrow and ask for a loan!
Car wash borrowers need to heed this prudent poultry’s warning. Car washing comes with its share of financial challenges, regardless of whether you’re dealing with startups, additional sites or ongoing operations.
First consider the industry’s unique attributes. Car washes are capital-intensive, minimal-inventory cash generators. Most conventional financial institutions don’t like car washes. Fortunately for us, the Small Business Administration does. Why?
Car washes are single-purpose buildings. If the bank has to take them back, they can’t easily be converted to another use—not a good thing in the eyes of lending institutions. The SBA looks at car washes and says the failure rate is minimal, profit margins are high, and the learning curve is short.
While the bank asserts car washers are notoriously poor record-keepers unable to provide audited financial statements, car washers respond by saying audits are too expensive: “I’m a small business owner, why should I provide this detail?” But the reality is the more the documentation you furnish, the easier it is for a lender to make a decision. Audited statements on business performance give bankers something to sink their teeth into.
Car washes are site specific. Just as you can’t fit a square peg into a round hole, not every site can accommodate the three types of car washes: self-serve, in-bay automatic and tunnels.
Self-serve or wand-style car washes (where you provide the washing stall and the motorist provides the labor) are financially predictable; the amount of debt to revenue is site specific. Part of the reason is self-serve washes can generate only so much revenue, constraining how much you can invest and remain profitable.
Whereas self-serve car washes depend on the population, automatics and tunnels rely on traffic. Automatics are also relatively predictable. The difference between them and self-serve is the ability to process larger amounts of vehicles and, as a result, the ability to afford a larger investment.
A single automatic in the right location under the right circumstances could wash 200-plus cars a day at about 70 percent gross margin. Automatics and tunnels are traffic dependent allowing us to estimate the potential of a given site. The rule of thumb used is .5 to 1.5 percent of a 24-hour traffic count. For example, if there were 30,000 cars a day passing a site, potential at 1 percent would be 300 cars a day. Add to this the number of washing days-let’s say 300—a year in your market and you’ve forecasted annual volume for this site of 90,000 cars annually.
Over time, we’ve seen one automatic can easily do 30,000 cars per year. Therefore, if the site potential is 60,000 or 90,000 cars annually, the site could support two or three automatics. The average tunnel car wash averages slightly better than 60,000 cars per year. So, if your site was in that rung or better, a tunnel may be the best investment.
All car washes fall into relatively simple financial models. Self-serve revenues for a specific area are predictable; therefore, we can back into the investment number needed to meet our financial goals. For most self serves, ground cost peaks close to $8 per square foot. In bays can be twice that number. We normally look at “B” sites for self-serve washes and “A” sites for automatics. “A” sites sell to those users who have a predictable capture rate. As a car wash investor, you’re competing against fast-food and other chains for a commercial site.
It’s not uncommon to pay $25-plus per square foot for a top-notch location. If the site can do the unit or dollar volume to deliver you the required return, you do it. Why? Because underlying all this talk about car washing is the real investment premise of being a real estate developer. The first rule of thumb is “highest and best use,” meaning the revenue made from the business generates the required return on the ever-appreciating value.
Realistically, we all know there’ll come a time when the car wash can’t support the land value. And at that time we exit. Until then, we have the responsibility and obligation to be profitable, never losing site of our main objectives to manage the balance sheet and income statement. Your asset is appreciating and, to maximize your return, revenues must keep pace with value.
Fred Grauer is president of Grauer Associates and executive vice president, investor market and conveyors, for Ryko Manufacturing Co., a car wash equipment manufacturer in Grimes, Iowa. He has made a lifelong career of designing, selling, building and operating car washes. He can be reached at email@example.com.