What's up with all these car washes??

I get this question about 5 times a week on my Twitter profile.

Why are there so many car washes being built?

Do we really need all these? Will they make money?

Yeah, if you do it right, you can start out with a little capital and build a $500M company in 5-10 years.

Here's how:

(This is based on conversations with people actually doing these deals, but all this stuff can vary widely)

First off, we need to make a distinction. 95% of the new car washes being built are tunnel/express washes.

These are the long washes that you drive into and then a conveyor belt runs you through a brush system and spits you out on the other side.

A typical deal to build a new one might look like this:

Land cost: $1.5M

Construction cost: $3M

Equipment: $1M

Incidentals (interest, design, permits etc.): $500k

Total: $6M

Ok, now most companies with good credit will put about 25% down on a construction loan and land, right?

So right now our actual equity/cash injected is $1.5M.

Ok, now how much we can make off this thing?

Most of them take about 3 years to get to mature operating capacity.

Once they do, its very common for these numbers to play out:

Revenue: $2.5M

EBITDA: $1.5M

Yep, >50% EBITDA margins are very normal.

Not bad, right?

But wait, that doesn't really answer the question: why are they these building these everywhere?

First off, there's a huge tax advantage. The car wash companies can write off 80% (previous years it was 100%) of the entire cost of the building and equipment right now.

So for our example car wash that means that in year 1 the paper loss is somewhere near $3.2M (($1M equipment + $3M building) x .8) for one location.

Car washes are unique in that you can write off the building with bonus depreciation too. Most can't.

You can see how as the company grows and does this multiple times a year they likely won't be paying taxes for a long time.

This benefit can be passed through to investors too (although it is passive losses for the investors).

But we have a problem: we need to invest $1.5M into each deal, but it takes 2-3 year for each location to spin off that kind of cash. What now?

That's where our friend the sale leaseback comes in.

Investors in stable properties like this are happy with 6% cap rates (don't ask me why - but they are selling at these rates every day now!) And car wash companies are comfortable paying about 30% of EBITDA for a lease.

So some simple math tells us that .3x$1.5M = $450k annual lease / .06 cap rate = $7.5M.

Yep we can sell this building and land in less than a year for above replacement cost. So we get $7M back after broker commissions, pay off our $4.5M construction loan (plus interest) and after some depreciation recapture etc, we've got our $1.5M that we put into the deal back in our pockets.

We basically just got a "free" car wash in less than a year!

We're also banking some nice cash flow that the mature properties are spinning off. And we're very likely not paying taxes on any of it.

You can see how this is a pretty attractive model. If we can build up a system for developing and operating these quickly, before long we'll have a nationwide chain.

If you had 50 locations averaging ~$1M in EBITDA (remember we're paying rent now on these car washes, so our EBITDA went down) you're banking in the neighborhood of $50M/year in profits.

And the vast majority of that income is locked into a sweet "MRR" or monthly recurring revenue model (since monthly wash membership programs are the norm) which investors LOVE.

With $50M/year in profits that company could easily trade at 10x earnings, if not more, so you're looking at a ~$500M company.

One broker I spoke to said his client has built 74 locations in ~5 years and expects to sell the whole company for $700M-$1B in the next few years or IPO.

From zero to 9 figure exit in 5 years. Those are Silicon Valley-like growth numbers - with car washes.

Get it now?

Of course this will all reach saturation at some point and the returns will go down. In many areas, especially the sun belt, it already is saturated.

That's why we're focused on the smaller deals and self-serve/touchless car washes, which are already built but need a value-add playbook. That's exactly what we're developing.

We're hoping to spin up a similar model and create a nationwide chain of high-quality car washes that wash all the cars the big tunnel washes can't wash.

Make sure you're following me to see if we do it... or fall on our faces and go broke. I'll give you the scoop either way.

Kriss Berg, Car Wash Guy