Over the past few months, Ive attended a number of tradeshows for self-storage as well as the car-wash industry. The buzz in the investor community for both businesses was extremely active. Many people have expressed tremendous interest in acquiring an existing and/ or building a new state-of-the art facility. The question that always comes up is, do you buy or build? To answer this, let me use examples from the car-wash perspective.
|For those not familiar with the terminology, a self-serve car wash is typically one in which the motorist pulls a vehicle into a bay and exits the auto to physically wash and rinse it using the supplied equipment. For an automatic, the customer pays via an automatic teller and drives the car into a bay, triggering a machine to move back and forth over the vehicle while applying detergents for washing, water for rinsing, and air for drying.|
Existing Site A
First, lets look at a fairly typical self-serve automatic combination wash. The site, a four-bay self-serve with two automatics, is in a desirable neighborhood. The property values have risen steadily since opening five years ago and, in general, what started as a B-grade site has transformed into a strong A-grade site. The ground costs were originally $8 per square foot but are now in the $12 range.
The lot is approximately 200-by-200 feet. Drive-by traffic has gone from 6,000 cars per day to 12,000 a day. The site has all the correct permits, demographics are strong, the building is in good shape, and equipment is functional. The financials show gross sales of $250,000, and the last three years have shown modest increases.
The asking price is $2.2 million. The realtor/broker says the net supports the purchase price. You are interested, but wonder, is it a good deal?
Additional review of the financials shows the following:
All businesses have standard multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) an investor uses to initially establish a price for a company. In the car-wash business, the typical is six to eight times; therefore, the value of the business at six times would be $135,000 x 6 = $810,000, plus assets. At replacement value, the assets would be:
So far, we havent taken into consideration the depreciated value of capitalized assets of equipment and building. If the former owner used seven years on the equipment and 31 on the building, after five years the depreciated values would be (approximately):
- Building: $750,000/31 = $24,194 x 5 years = $120,967
- Equipment: $400,000/7 = $57,142 x 5 years = $285,714
Subtracting the accumulated depreciation of $406,681 leaves an estimated value of $2,033,318.
The realtor said the net operating income (NOI) supports the asking price, but does it? Well, that depends greatly on what capitalization rate you feel is an adequate return on your money. Using our EBITDA number as a substitute for NOI, values for the total business at two cap rates would be (the higher the rate, the greater the perceived risk):
- At 7.5%($135,000/7.5) = $1,800,000
- At 9.5% ($135,000/9.5) = $1,421,052
Considering the above, is the asking price reasonable? If you were to use the lower cap rate, the delta is $400,000a significant difference! You would be paying a premium, but is it worth it for the business and the site?
New Site B
Lets say youve found the ideal site, and all the research supports the development of a facility with four self-serve bays and two automatics. The 1-acre site is priced at $10 per square foot, approximately $420,000. Car washing is a permitted use. All utilities and sewer are present, there are no extraordinary development costs, and the project is estimated as follows:
Realistically, youll have additional expenses for legal, accounting and other professionals. These fees could easily approach $200,000 or more, depending on tap, impact, traffic mitigation and other local requirements. So lets assume our budget is $1.8 million. Now, which is the better deal? First, lets take into consideration an average build time from inception to washing of 18 months, plus future values of money spent, out-of-pocket fees, professional fees and other deposits. Then we further assume that the return on cash, if we were operating, is 20 percent, adding more fees. In this case, the total costs would be about $1.86 million.
The question then becomes: Do you want a sure thing on which you can hopefully improve, or do you want to take the risk of starting from scratch, carving out your own niche, stepping into the unknown?
Your decision will ultimately become far less analytical and more emotional. The approach used above can be applied to any business venture. We didnt reconstruct the financial statements of the existing business to reflect what might happen under new management, so youll want to do this to project impacts on future values.
Remember this is just one of many ways to analyze business opportunities, and it doesnt imply any performance guarantee. Other professionals in the accounting and legal fields should be consulted, regardless of whether the buy-or-build decision is right.
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 protected].