Deal Killers: What Tanks Car Wash Transactions After the LOI

What really tanks car wash M&A deals after the LOI? Behind The Business hosts Chris Jenks and Jeff Pavone break down the biggest post-LOI pitfalls—from quality of earnings gaps and messy corporate allocations to over-optimistic projections that don’t survive KPI tracking. They explore real estate red flags like environmentals, lease assignments, estoppels, and encroachment risks, plus the role of specialized legal counsel and a disciplined process in keeping timelines intact. The duo also exposes financing risks on the buyer side and why out-of-market offers often can’t clear credit.

What You'll Learn

• Why weak financial discipline, four-wall vs. fully burdened confusion, and deferred maintenance hurt Q of E
• How buyers track KPIs post-LOI and re-underwrite when projections miss
• The real estate issues that blow up deals: environmental, ground leases, assignments, estoppels, and encroachment
• Why your real estate attorney may not be the right M&A lawyer—and why the buyer’s team is so deep
• How to de-risk financing failure with vetted buyers and backup bidders
• The process tools that matter: data rooms, request triage, and strict timelines
• Smart structuring: when to avoid earnouts, use seller notes, and secure deferred payments

If you’re preparing to sell, this episode is your practical playbook to move from LOI to close with confidence. #CarWashMNA #MergersAndAcquisitions #QualityOfEarnings #PrivateEquity #BehindTheBusiness

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Transcript

SPEAKER_00 0:00

You have to understand that all of these sellers, all these buyers are buying your company one way and you as a seller operate your business another way.

SPEAKER_01 0:07

It's really important, I think, to have very clear corporate allocations and how you think about corporate expenses in your business, but more importantly, when you come out of that corporate picture because you're kind of shooting the hip.

SPEAKER_00 0:17

Having somebody, an advisor, or somebody that understands what is an acceptable normalization atback is critical because at the end of the day, otherwise they're going to do the math for you. And when the buyer does the math for you, you're never going to come out ahead.

SPEAKER_01 0:31

Unfortunately, your go-to real estate attorney is probably not the right person to get the deal done. So as I think about other deal killers, it could also be just have the wrong representation of the vendor side, especially the legal side. Today I want to talk about deal killers. So what actually tanks transactions after the LOI. And, you know, getting a deal and getting an LOI signed is one thing, but you know, at the end of the day, you don't dance until you're in the end zone, right? There's a lot of complexity that happens. And we often say, you know, once we get an LOI, that's great. But the reality is that's when you really roll up your sleeves. That's where a lot of the uh you know the difficulties in a transaction will arise as you kind of enter that stage of diligence. So today I want to talk a little bit more, provide a candid behind the scenes of you know what are some of the common reasons why a transaction may fail uh between LOI and close, and maybe even broaden that a little bit more, talk a little bit more about why processes fail. So with that, let's jump into it, Jeff. In your assessment, what is the number one deal killer in a transaction?

SPEAKER_00 1:46

So number one could be quality of earnings. So, you know, when we we get your financials, we're we're taking your financials and you know, we're running all of our adbacks and doing what we need to do internally. But your ever you have to understand all these all of these sellers, all these buyers are buying your company one way, and you as a seller operate your business another way, right? So a seller operates it as a typical mom-pop owner-operator business, do what they want to do with their financials. A s a buyer on the flip side of it represents a partner. They they represent limited partners, and they've got a fiduciary to make sure they know exactly what they're buying. So when they as soon as they you get an LOI signed, they're gonna buy your company a grand a number and it's based on a certain uh amount of EBITA, and so they will hire a third-party accounting firm to do a quality of earnings. So if that quality of earnings um checks out, there's a there's a good chance that that deal is gonna move forward and close. On the other hand, if a lot of what you put in your financials does not check out with quality of earnings, at that point you could you've got a moment of truth to say, okay, wow, we've got less we've got less income than than what we represented. Now what do we do? And so that that that I would say would be a big concern. At Amplify, we try, we've got a very, very strong back office team of analysts and VPs that have a lot of experience. Very rarely will this happen when we're when we're digging in deep, but occasionally um there are things that are out of outer out of our control. The quality of earnings will dig up because we were just, it wasn't, you know, an example could be you didn't report a full month of rent or a few of, let's say a full couple months of chemistry cost. And if you're running a big enough company, you know, all of a sudden that shows up that you have got $300,000 less profit than you said you did because you didn't pick up that that expense. There's a real real example of something that if it's missed, it's gonna be it's gonna cost you some money. Uh so all we can say is that the tighter the books, the better a chance it gets through quality of earnings. I think you're you're a long way to getting a deal closed.

SPEAKER_01 4:13

Yeah, I think weak financial discipline is by and large the biggest culprit there, right? Uh but also too, I mean, as we think about it, we we often talk a lot about you know four-wall performance versus fully burdened. And just a level set there and provide some definitions, you know, four-wall, as the name would suggest, is just the performance of that store, right, within those four walls, just that box. And what that does, that eliminates all the corporate expense. And generally speaking, when a strategic is looking at your business, they're gonna underwrite it based on four-wall performance because they already have the scale of their corporate infrastructure to benefit from. That said, um, you know, really important, I think, to have very you know clear corporate allocations and how you think about corporate expenses in your business, but more importantly, what you pull out from that corporate picture, because if you're kind of shooting from the hip, um, you may have unclear corporate allocations in which you know it may not allow you to pass Q of E or it may allow for adjustments on behalf of the purchaser to adjust for and ultimately take a downward revision to EBIDA. But I think you know, another thing to think about too is you know deferred repairs and maintenance, right? A lot of groups that are kind of entering that stage of selling, that that will show up in your books, right? So don't pull back on chem costs, don't pull back on maintenance just because you're getting ready to sell. That will be teased out in quality of earnings and a group will be able to assess that profile of how you spend in your business historically versus where you're at present. Um so there's no hiding from that, right? Um, the other thing that's related to financial reasons, but not necessarily quality of earnings. You have to keep in mind here, right? The diligence process will last every bit of 90 days. And if you are providing projections for your business or forecasts for how the year is gonna play out, you have to ground that within reason. I think that is by and large one of the biggest areas to trip up for any group that's selling today is you're looking at your business, you're gonna put together some just ridiculous growth assumptions for the year ahead to try to get as much credit as you can to boost your valuation. Over the course of the 90 days, the buyer will get readouts to how you're performing. And they're gonna be looking at how you're tracking those projections. And I think, Jeff, that's one area where we spend a lot of time when we're taking groups out to market, is really kicking the tires on those projections to make sure they're reasonable, to make sure they're defensible, but more importantly, to make sure that this is something where the business could actually hit. Because again, you're gonna have a 90-day window here where a buyer's looking at the performance of your business and they're gonna see if those projections are real. So I think that's one one cautionary area as well to ensure a greater outcome.

SPEAKER_00 6:40

I I think that's spot on. I think at the end of the day, when they sign that LOI, they will be tracking all your KPIs. They're going to be looking at how many cars you're washing, how you're how you're targeting against your performer. All of a sudden they see a drop-off, that's that that's that that that probably is um when we think through it, you know, one of the real reasons somebody would walk out, right? If they if all of a sudden you're tracking at at X amount of volume and and it drops by 20 percent for some unknown reason, and you're saying, well, you know, you'll say it's weather or something, but the fact of it's a car wash open up across the street, right? So they're gonna be looking at that and saying at that point they've they they've got to underwrite it differently. Um the other the other real thing to try to understand is the an operator negotiating with a with a private equity buyer alone is sort of really at a disadvantage because there is a there is what we call normalization. And so when you're looking at your your operating your numbers you're selling, you're gonna give them a number and they're gonna give you an offer based on your number. The question is you're going to there's certain adbacks and that can be normalized. And and you may go to the extreme of saying we can operate with less labor than what's normal, they're gonna they're gonna start adding that back. Uh it goes both ways, right? At the end of the day, if you're excessively high on chemicals and you can normalize it to market, um, we'll add that back. And so having having somebody, an advisor or somebody that understands what is a an acceptable normalization add back is critical because at the end of the day, um otherwise they're gonna do the math for you. And when the buyer does the math for you, you're never gonna come out ahead.

SPEAKER_01 8:27

You know, another area as we think about some issues to address as you're in that stage through LOI diligence, to me, the real estate is always kind of a big question mark, right? It could be everything is simple from you know making sure your alta surveys and your as builds are up to date and that you know there's no encroachment utility easement, or it could be something like environmentals. Um, you know, to me, you know, we're doing a lot more today, Jeff. I think a lot of it's just a byproduct of the geographies where we're seeing a lot of deal flow, specifically in the Northeast. But a lot of those car washes are you know, usually are most cases on ground leases or on leased real estate. And I think about leased properties, I mean, there's a lot more complexity with those deals and making sure that you're prepared and understanding kind of you know provisions around assignments of those leasehold obligations, you know, making sure that you know those memorandum leases are recorded, making sure that, you know, if you do need an estoppel for the purchaser, what is the landlord's obligation to respond to those estoppels? And generally speaking, anytime you open Pandora's box, that landlord will take that opportunity to take their pound of flesh. Talk about the real estate side of things. I mean, to me, I just hit a few things that I see as being common issues here on the real estate side. But I mean, a lot of what is so attractive about Car Wash MA is the fact that it is single-use real estate. A lot of times these are fee simple acquisitions, which that real estate comes along with the transaction. You agree with that? Probably real estate's number two on the list there behind financials?

SPEAKER_00 9:55

Yeah, it's uh and for multiple reasons. One is just from an environmental standpoint, two, it could be um knowing who who could be potentially building. So if somebody's gonna pay you, you know, seven, eight, nine, ten million dollars or or or more for an asset, um you've got to know who's coming in your in your in your area. And so checking with the city about new permits um is imperative. So I'd say, you know, up front, up front you could get an offer that looks very attractive because they're they're buying it based on X risk. So when they when they when they look at making an offer to buy your company, the buyer, they're buying it assuming we're gonna pay you this money, but we're not assuming your risk. So when the diligence process starts, let's assume they get through quality of earnings, they're basically now looking at saying, is there anything that's going to risk us hitting those numbers that you're selling us? And one of the biggest factors could be uh your real estate and and who's coming in next, yeah.

SPEAKER_01 10:56

Couldn't agree more. We uh we we often do a lot of market tours of potential buyers and you know, find a great car wash location with a lot of emerging retail, but you find that one empty pad that's kitty corner there, and immediately the light bulb goes off where there is encroachment risk that could be possible there. Um yeah, that that's an interesting one. Um, you know, other things that I think about, you know, too, as we talk about potential risks. I think vendor selection is a key one, um, specific on the legal side, right? I think a lot of groups they'll kind of call up their real estate attorney that's helped them put together their land deals and they want them to represent them through an MA transaction. If you are thinking about selling or if you're in the process of selling today, I cannot tell you how important it is to make sure you have the right legal representation, especially if some of these deals become more and more complex, right? Whether there be a seller financing component, um, whether there be deferrals, reps and warranties. I mean, there are a lot of things that you should be thinking about that are specific to the transaction. And at the end of the day, unfortunately, your your go-to real estate attorney is probably not the right person to get the deal done. So as I think about other deal killers, it could also be just have the right the wrong representation on the vendor side, um, especially on the legal side.

SPEAKER_00 12:11

Yeah, I think the um, you know, when you look at things that can kill a deal, having having a the the wrong legal advice, again, coming out of it from a real estate perspective, um, we've seen too many of those deals drag out, and that ends poorly. Having an when you look at the buying side of it, and you gotta say the buyer is going to have one of the top law firms in the country, and they're gonna have MA attorneys sitting on the other side, you need to have somebody who speaks that speak, right? So when I um when we look at most of the deals we're involved in today, I'm gonna tell you, even small ones, they they they can have 10 to 50 people under team doing diligence in one way, one respect or another. So for us at least, the the amount of energy and effort going behind the diligence of getting a deal closed is enormous. And so the the best help we can have is as a is going to have a seller who has got the right team in place. Even from an accounting standpoint, having a CPA that did your, you know, financial is different than having somebody who is going to give you advice on allocation and and tax consideration post-sale. So you're going into this thing as educated as possible. Now, too many guys look at this thing and saying, I don't want to spend, let's say, $200,000 on a lawyer, it's really expensive. The most expense you can have is a a failed deal, too, is a bad deal, which is even worse. And and so having having a team that is sophisticated enough to deal with the other sides uh uh legal and tax is going to be critical.

SPEAKER_01 13:50

Yeah, you get what you pay for there. And I think um, you know, we're doing a lot of talking about what could go wrong, but I think what solves a lot of this is just again having the right representation and knowing that the right experts and domain experts to pull in to help you solve for these problems. Whereas we talk about Q of V, I think a lot of it goes into kind of our our pre-marketing work that we do on the amplify side. I think one thing that's you know interesting when when we take a deal out of the market, we're we're literally gonna look at it from the buyer lens, right? We know how buyers look at these deals. We're gonna put our critical hats on, we're gonna kick the tires on as if we're underwriting the deal for our own personal investment. And I think again, a lot of the issues that can arise from that LOI through closing stage could be solved by just making sure that you're you're putting together the right roster and the right team behind it to get you through the transaction. On that, I think you know, another area where things could go awise, you know, financing risks specifically, financing on behalf of the buyer, right? And I think from our standpoint, you know, we we have a good understanding of who's out there, who's real, and how the cap stack behind them is formed to make sure that we're putting together deal terms that not just reflect the best interest of our of you know the client we're representing, but also the best chance of a successful outcome here. And I think um having an understanding of who's on the other side of the table, their ability to get to the closing table and see the transaction through successfully is going to be an important one here.

SPEAKER_00 15:10

So I would say that's probably one of our more important roles, right? At the end of the day, we see new groups all the time that come out of nowhere and will offer something way out of market uh for buying their car washes. And and and we're doing simple math. We're sitting here saying, okay, let's say they give you $40 million for something that's generating $4 million of EBITDA. You know, their cost of capital is still gonna be close to 10%, right? So if they're offering you $60 million, we just know that that math's not gonna work. From a financing standpoint, the the underwriting from the credit providing the capital to close the net deal are very well educated. There's there's the car wash business today is a mature market with having real data on on how to underwrite this business. And so you we've got to make sure from our side of it, we're we're we're double triple checking to make sure that whoever that buyer is has, you know, forget forget how big they are. They've got to have a line of credit that's still available to close on a deal. They've also got to, you know, they've got to have it's gotta be within range that we we we know the deal makes sense. But I'll tell you, Chris, the the other key key piece that we do and and financing is at Amplify, we run a process, right? And so we're we're really, really careful about bringing multiple buyers to the table, and so we have a backup plan. And when you when you are a seller going all out with one buyer, and that buyer can't perform, you sort of just spent a lot of time, energy. Your team could be involved in this transaction, and and you're emotionally fried in this thing. Having a backup buyer sitting in the wings keeps that buyer um honest, and the likelihood that that deal closes goes way up, and closing under the terms that you negotiated.

SPEAKER_01 17:04

Could not agree more. Um, I think that's one of the things you mentioned process too. I think that's important that you you have a group that maintains structure and discipline on how to manage the process, specifically keeping groups accountable to the timelines. Uh I'll tell you right now, one of the biggest deal killers that's not a functional aspect of diligence, but it's just time in itself, right? Time kills deals. And and making sure that you know you're keeping things to a structured timeline, you're keeping groups accountable, and you're you're keeping your arms around just the rapid fire back and forth questioning across the domains of operational, legal, financial due diligence is so critically important. I'm telling you right now, you you can't have a business broker run a low-to-middle market MA process and have a successful outcome because that backend management is so critically important to make sure things don't go south in a deal. So interesting here as we talk about stats around deal failures. Um do a little research and my my assistant here, chat GPT, lower middle market, 70 to 90 percent failure rate going from LOI to close here. So I think that's uh I I'd have to say that's not our success rate. We're we're we're much higher in that form, but I think again, highlighting understanding kind of some of these areas where deals could go south, it's it's pretty important to make sure that you're prepared. On that topic, Jeff, what are some things you'd recommend for groups or prepare to kind of avoid some of these common pitfalls or or blind spots in a in a process post-LOI to get to the finish line?

SPEAKER_00 18:31

Yeah, so you know, one thing is to focus um on what they want the outcome to look like, right? So for us, you know, we're you know, everybody talks about price. Somebody can say we're gonna give you the X dollars and you're gonna get all excited, and you sort of take your eyes off the rest of the terms and other things. So I would say make sure that you're focused on the right outcome, which includes price, terms, and even culture, right? It's it's gotta it's gotta fit within you you built this company and and the average I would say majority of operators tell me the thing they the thing they worry about most is their employees because they love their employees and they love their customers. So so being able to interview multiple buyers is the perfect is is the perfect way to to go put a transaction on. So so I would say the the first step is making sure you understand that negotiating the price is is is gets you maybe 25% of the way there. It's that next 75% having experience of knowing what you need to do to get this thing over the goal line. And and I and I think Chris, the advice about having the proper team aligned up uh immediately, not not waiting, making sure that the terms that you need the terms are negotiated up front so this doesn't drag on and and and all of a sudden become a a complete time suck, making sure the buyers got you know the proper capital to close on a deal, and and it's and it's gotta make sense. So uh, you know, I would say getting that uh the getting getting that proper advice in the next 75 percent is as critical as the is the first 25 percent. And and there's and there's just other smaller things. It could be, you know, you know, when they're wanting to do diligence, a buyer wants to do diligence, you know, letting you know confidentiality amongst third parties. You know, we've seen we've seen deals, you know, blow up, having third parties walk on a site, do things, all of a sudden all the employees know now you got you got disruption in your company, and and it the goal has to be is the getting your deal done with the best price, best terms, but but doing it as confidential as is possible so there's no disruption in your business. Uh all that's easier said than done, um, because there's a lot of gotchas in that in what I'm saying. But but for us, it's it becomes really running a very strict playbook and keeping real discipline around that buyer. So they're they're just not running running you over.

SPEAKER_01 21:00

That is number one on my list is I think about kind of the three levers that you could pull to to prepare yourself and better manage to a successful outcome post-loy. You know, buyer selection is definitely, I think, number one on the list. General just preparation before you run the process is important. And again, controlling the diligence process itself. I mean, I think the practical playbook here, if you're anybody that's looking to sell and help yourself kind of throughout that process to ensure that you you get the deal done here. I mean, again, one thing that we talked about, Jeff, is finding that right group that could pre-underwrite the business before you even go to market, right? Have the right representation that could that could look at it from the buyer lens. One thing we didn't talk about, though, to also highly recommend. I mean, if you have a deal of size, it's probably worth kind of doing a sell side Q of E. Um, you know, if justified here, just to make sure you could do your own internal quality of exercise, quality of earnings exercise to potentially clean up the books for any shortcomings before you actually get to that point of having LOI. Super important. But also, too, as we talk about the advisor, you On the brokerage networks out there, setting valuation expectations early and honestly is so, so important. You have to calibrate. I mean, one thing that could throw a deal sideways is just in a complete misalignment between bid and ask on the buyer and seller. And if you get to a point where you get a buyer to lean in on a deal that may not necessarily meet expectations, they're going to be that much more stringent as they go through the diligence process. So I do think one thing that we can do on the fringe is, you know, making sure that you're setting those valuation expectations reasonably and having frank and honest dialogue about what a business is worth. Because if you have a buyer going in with unrealistic expectations, um, that can be a recipe for disaster as you move throughout the process here because you're gonna have a buyer at the other end that's not gonna feel good about the deal.

SPEAKER_00 22:45

So it's managing that diligence team. So when you look at um, you know, our team, for instance, our back, our back end team is probably bigger than our front end team, right? For a reason. You know, when you look at getting an LOI and starting diligence, you're going to have a quality earnings, so you'll have an accounting firm with, I don't know, five, five or more people who are going to be digging into your financials. Um, you know, you'll have legal diligence. You'll have a law firm specifically hired to do all your legal diligence. Separate from that, you'll have a real estate diligence going on, you'll have an insurance diligence going on. So you'll you could have you'll have an HR diligence going on. And so the the question from an owner standpoint, you know, you know, this is where you know we get heavily involved. We manage, we manage that diligence side internal with our team. We're on we're we're the front line of the calls, keeping, keeping those requests to an absolute what what is a what is a must-have versus what it what is just an ask, and and then communicating with the owners of saying, here's what we need, here's what we don't need. So you're not sitting there answering a hundred questions that you don't need to answer. So that's that's I would say really important to have is how who's managing from your side all of those different disciplines that that that seller is gonna demand.

SPEAKER_01 24:04

That was literally the next answer that you took the words of my mouth there, Jeff. You the best way to control the process by having structure and have that team there. I mean, having data rooms with, you know, that are defined and built well, you know, response protocol in place. So that way you kind of go, you know, one thing that we'll do is, you know, if a buyer is asking for information and we're working with the seller, we'll kind of have a staging room just to make sure that we're reviewing all the data and making sure that we're sufficiently answering the questions being asked. Um, but I think you know, having owners over work streams, using data rooms, and um, you know, having that process and having that that team in the back end is probably the the next biggest thing for sure.

SPEAKER_00 24:41

You know, uh the the the one thing I would I would say to in wrapping up is going to be the the one thing is you today in today's world you're seeing deals, some of them are all cash, but some of their structure. Not all structure is the same. And so having having an experience on that side of it, you know, we try to shy away from earnouts, but there's a way to get you know guaranteed cash payments. The where experience matters is how do you protect your interest in making sure that you have ironclad quality guarantee behind whatever you're going to defer and that deferred payment. Uh that's a whole nother level of of, I would say, things to make sure you're you're you're you're keeping an eye on because and and the bigger the deal, the the likelihood that there's some sort of structure to making a deal work is gonna happen, but making sure you're protected in every which way um is critical to how how you navigate that.

SPEAKER_01 25:37

Yeah, I mean the devils are in the details, right? And earnout is a very generic statement here and how you actually go about the process of defining the earnout, what metrics are hit, you know, revenue versus even a base earnout, two totally different risk profiles for a seller. Um, as we talk about deferred payments, um, do you put it simply as just a cash deferred, or do you potentially structure it more as a seller financing component where you could tack on some interest and even potentially securitize that note by putting a first lien position on the operating assets? Um, and to your point, Jeff, in uh any environment um in which capital markets show any form of stress, structure becomes more evident in deal making, especially uh to get to valuation expectations for the seller. Um, so I think you know, that right representation to think through all the all the gaps and you know that could be presented uh with structure in a deal, that that's critically, critically important.

SPEAKER_00 26:29

Appreciate the time today.

SPEAKER_01 26:30

So, with that, thank you for joining us in our podcast behind the business. Uh, really hope you enjoyed it. If you want any additional information, please go ahead and visit us at amplifycapgroup.com.