Mastering Car Wash Metrics for Premium Valuations with Chris Jenks, CFA Part 3

In part three of the series, Chris Jenks, CFA dives deep into the crucial car wash metrics that drive premium valuations. Explore how private equity dynamics, historical tax legislation, and strategic real estate approaches are shaping the M&A landscape for the car wash industry.  

Learn why now is a critical time for operators to understand their business's true value and how to prepare for potential sale or investment opportunities. This discussion offers invaluable insights for buyers, sellers, and anyone interested in the future of car wash M&A.

What You'll Learn:

• The importance of lifetime member value and operational discipline in increasing car wash valuations.
• How the current private equity inventory and dry powder create a unique M&A opportunity.
• The impact of bonus depreciation and 1031 exchanges on car wash real estate investment.
• Why stronger brands and operators command premium pricing in the sale-leaseback market.
• The expected M&A trends, buyer mix, and financing strategies for the car wash sector in the next 18-24 months.
• Essential takeaways for operators considering a sale, focusing on KPIs and process design.

Don't miss this in-depth analysis of the factors driving car wash M&A and how to position your business for success in a dynamic market.

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Transcript

SPEAKER_00 0:04

Right, I think a lot of operators they get focused on just hitting, you know, I want 4,000 members, I want 5,000 members. But this really helps shift that focus to what is the value of each individual member. And in general, the stronger the lifetime value, the more attractive the membership base looks to a buyer. So buyers will look at labor not just as a cost line, but as just evidence of overall operational discipline and management quality. Well-run labor models signals that a business is scalable and controllable. Every operator should be focused on kind of margins, margin control, but more importantly, how do I better manage my labor to align it to demand, delivering this exceptional customer service, but doing so in a way where I'm not introducing too much bloat in my PL. All right. Want to transition transition next to the last section here. You know, this really takes a step back from today's KPIs and look at the broader setup for car wash MA over the next 18 to 24 months. And this includes, you know, trends in private capital, real estate, and just general macro conditions. So, you know, first I want to start with, you know, a little bit of a backdrop here in terms of the private equity landscape here. And, you know, a lot of the consolidation, as mentioned earlier on in the presentation, has been driven by this uh growing interest amongst private equity sponsors. And you know, what I really want to highlight here, we're looking at this slide is you know, we're showing how many companies private equity firms currently own relative to the number of companies they have not yet sold. Okay. So first and foremost, as we look at the top of this slide here, today there are over 13,000 US private equity backed companies in inventory. All right. As we look at those companies, over 62% have been held by more than four years. So to take a step back, why does this matter? How private equity operates, right? They'll raise money from their limited partners, they'll get committed capital. Over time, they deploy that capital. And what they need to do is they need to return that capital back to their limited partners. Most funds will have a life in, you know, let's call it 10 to 12 years being that maximum threshold for a fun life, but they'll generally hold companies for a five to seven year time horizon. So, as I mentioned, you know, one important metric that private equity manages to is this metric called distributions to private to paid in capital. And that just simply measures how much cash and money they return back to their limited partners relative to the amount of money they put into their fund and commit to. Um, so what's important here is you know, I mentioned that five to seven year timeline here. That's typically, you know, the time horizon in which private equity is looking at making an investment. As mentioned here on this side, 62% of portfolio companies are held more than four years. In fact, 16% are now held in that eight to 12 year mark here, which would be the outer edges of the fund life itself. Uh, that creates a little bit of a problem, especially when you look at the inventory to exit ratio today across private equity. If we look long term, the ratio of private equity portfolio companies to private equity companies that have been sold is historically about 6.9. Okay. So around seven is a long-term average. Today, the inventory to exit ratio is 10.9x, so 11 times, which again states that there are 11 times as many portfolio companies for every liquidated portfolio company. So what this tells you is that there's a significant amount of inventory that needs to be liquidated in private equity today. This is this is a pretty significant development here. And you see this kind of balloon out as we've seen an overall, you know, benign global MA environment. Today we're seeing private equity to private equity inventory building up at an extraordinary pace. But what's more important than that, as I've kind of highlighted here already in this slide, is that inventory is aging out. So today, there's roughly $3.8 trillion of unrealized private equity uh uh portfolio value. And 39% of those companies are now held for more than five years. And if we look at the average holding period at exit, it's seven years, which is near all-time record highs. So this is telling you now that private equity is holding on to companies longer. And so it's not just that inventory, it's high, it's aging, right? This slide builds on the last one. It's not just that private equity owns a lot of companies, it's not that they've just been holding them, you know, for for longer. Um, you know, private equities, they don't want to hold on to assets forever. At some point, they need liquidity for their limited partners. And a larger share of sponsor-backed companies are being held beyond the traditional hold period of five to seven years. And what that does, that increases pressure on sponsors to find liquidity solutions. Okay. Um, the longer hold runs, the more likely that we see renewed deal activity and recaps and alternative exit structures. Um, so what we're seeing here again is that we're seeing that the inventory of portfolio companies is growing, that inventory is aging out. And something that's really important as you think about this in context is not only do they have the need to create liquidity, there's also a tremendous amount of dry powder that still needs to be put to work. So today there's over $1.3 trillion of committed capital that is awaiting deployment. Okay. So this is a tremendous amount of dry powder in the buyout ecosystem. Um, this slide shows the amount of private equity money that private equity firms have already raised but have not invested into new companies. And in simple terms, this is capital that's just sitting there on the sidelines looking for a home. Okay. So on one side of the equation, you have sponsors that have assets that they need to sell, their growing account, they're aging, and on the other side, they have money they still need to deploy. Okay, so a meaningful portion of that capital comes from older vintages that are under pressure to deploy. So this setup is really unusual, right? Sponsors need both exits and they need new deals. And that is a very favorable backdrop for sectors that still fit the buy box, right? And Carl Washington today, based on what we're seeing in deal flow and activity, remains one of those sectors that fits squarely in the buy box. So, you know, one important takeaway here is we think about the private equity sector today, you know, that log job jam of just pent-up aging inventory, it's destined to break. And we're starting to see that here in real time, right? Uh mounting limited partner pressure uh to return capital starting to break that log jam in the second half of 2025. In fact, as we look at kind of global buyout backed exit value at 2025, we saw $717 billion worth of activity, which represents 47% growth year over year. Um, so I think we're starting to see those early stages of that log jam breaking. We're starting to see a significant pickup in global MA, especially coming off pretty low two years in 2023 and 2024, and really think that this is just the start of something that could be more substantial in the years ahead. Now, what does this mean for the car wash sector? Uh, this is really the synthesis slide, right? Um, you have record dry powder, aging inventory, and a reopening exit market, which should theoretically create strong tailwinds for sponsor-led MA in the car wash sector. Um, as I just mentioned, you know, the car wash sector sits squarely in that buy box because it offers recurring revenues, real estate optionality, uh, the ability for multiple arbitrage by way of the levered roll-up strategy. And it's still, despite a tremendous amount of consolidation amongst the top 20, a highly fragmented industry. And there's also an element, you know, a lot of groups talk about this. It is somewhat macro resilient, right? Um, there are some parallels and some analogs that look to the gym industry during the financial crisis, which would suggest that that backdrop of the membership base for you know strong unlimited membership programs in the car wash sector provides a tremendous amount of resiliency through uncertain economic times. I think we're starting to see some of that come to play in real time here as a consumer sitting here with all-time low sentiment. Uh, but as we think about this, you know, again, the sector checks many of the boxes that institutional capital is looking for. And that doesn't mean that every asset gets a premium, but it means that the category remains highly relevant to capital allocators. It's important as you think about your business today, again, in a sector that's attractive for private equity institutional capital, really understanding the overall attractiveness of your business. All right, take it one more step further in terms of what this means for the car wash sector here. Um here we're doing is we're looking at the sponsor-backed platforms that are currently within this space. And we're looking at the uh timeline of their the sponsor investment relative to their typical hold pattern here. Okay, so um, this slide shows where many car wash sponsors sit in their hold period today. And what's important to take away from this slide is that a number of platforms are already moving into that window where sponsors may start considering liquidity or recycling op uh recycling um capital and different options to do so, right? So that creates future for MA opportunity both for sellers and for buyers alike, right? Some sponsors will look to exit, others will look to recapitalize and continue to grow. We're already starting to see some interesting activity kind of with different sponsor-backed platforms recapping the business, bringing on some debt to offer some form of liquidity, uh, potentially entertaining going into a continuation vehicle to extend the value creation cycle of that investment. Um, so either way, you know, holding period dynamics are likely to drive activity across the sector. So, you know, as we look in our crystal ball, I think, you know, we'll we certainly expect to see some interesting movement. In particular, probably a fair amount of consolidation activity amongst the top 10, because what we're seeing here, um, you know, again, as we look at this page, a lot of the top 10 sponsor-backed platforms are kind of aging out their investments. And I think they're going to be looking at all kinds of different options here to create some look, some liquidity in their investments. Um, on that topic, you know, I already mentioned some of the tools in the two toolbox here for different groups to provide liquidity. Um, you know, as whole periods extend, sponsors are using a broader toolkit today. That could be dividend recaps, which allow partial liquidity when leverage markets are open. And despite some pressure and private credit, you know, anecdotally, we have had a number of conversations with some of the largest direct lenders in the space. They're still very eager to deploy capital within the car wash sector. So, you know, while leverage markets are still fairly open here, dividend recaps offer a nice tool to kind of introduce some more leverage to performing businesses and redeploying that leverage back to limited partner pockets. Uh, continuation vehicles, you know, another option here, talked about that. This allows a sponsor to hold great assets you're performing for longer while still delivering liquidity options to their existing LPs. Minority recaps, you know, this is becoming increasingly attractive, um, not just for sponsors, but for founders who want liquidity without a full exit. Uh so it's really important to know kind of the toolkit, but more importantly, how different groups are thinking about capitalizing their business and really, you know, the overall broadening of the menu for transaction types beyond just a simple sale of the business. All right, shifting gears a little bit here, um, you know, this is a really important macro backdrop that's important to understand. Um, you know, mentioned earlier on that the one big beautiful bill act um, you know, was a big source of you know, tailwinds for car wash MA in the second half of 2025. Large reason for that, 2016, under the first Trump administration, they introduced the Jobs Act, which introduced this concept of bonus depreciation around CapEx activity. And again, car washing, in addition to having operational intensity, is capital intensive in nature. And what this allowed was a tax arbitrage for many investors in car wash real estate to immediately realize the expense of heavy CapEx and you know, kind of equipment and just the general um engineering of a facility to support that equipment. The issue was that bonus depreciation was phasing out over time. And what happened with the one big beautiful bill act in July of last year is it restored into perpetuity 100% bonus depreciation, actually took an expanded view of what's eligible for bonus depreciation. So the tax backdrop has become more supportive for sell lease back activity, particularly given the amount of wealth creation that's been in real estate markets, right? So the 1031 exchange concept, something that's highly important here and relevant. Uh, 1031 markets allow owners of real estate to liquidate certain real estate investments and within a set window roll those proceeds forward to avoid paying capital gains taxes on their gains in the real estate investment. You now layer in bonus depreciation, and car wash real estate has become a very attractive place for private capital to park money in a highly tax efficient manner. Okay. Um, so after bonus depreciation return, we saw listing activity in car wash triple net real estate surging. So that tells you that the demand for tax advantage net leases, triple net leases in the car wash real estate sector remains strong and it really unlocked a new pool of capital for car wash real estate, right? Uh the leveraging or the sell lease back process in itself offered a very valuable source of off-balance sheet leverage for consolidators of car wash assets, right? So, in other words, um if you come in, you buy a car wash operation with the real estate at, let's say, 10 or 11x, you can blend that down that multiple by selling the real estate to a triple net landlord and exchange that real estate for proceeds. And what you're doing now is you're you're taking the value of that real estate and exchanging that for lease or rent obligations now uh in the form of a triple net sale lease back. Um, so this is really important because again, this has been a big funding source for car wash consolidation consolidation where groups come in, they buy a car wash operations with real estate, and then they sell that real estate to help blend down that entry point, um, ultimately offering tremendous amount of off-balance sheet leverage and the restoration of bonus depreciation by way of the one big beautiful bill act was a significant accelerate to car wash sale leaseback activity. In fact, if we were to look at November 2025, uh we saw 289 car wash sale leaseback marketing sheets compared to 100 in July, which represents 189% growth from July to November 2025, due again solely to the restoration of bonus depreciation. All right, this slide shows you how the market is pricing car wash real estate now. So cap rate is just essentially the way that real estate investors measure valuation, right? So lower cap rates generally means stronger pricing. So if you have a lower cap rate, assuming the same level of rents, that means that you have a higher valuation on the real estate. So just to make this a little bit more intuitive, you know, let's say you have a piece of car wash real estate, and let's say that car wash real estate is paying rents to the tune of $200,000 a year. At a 7% cap rate, that car washed real estate is worth $2.8 million. Now let's assume that same level of rent at $200,000 at a 5% cap rate. That would imply that the car wash real estate is worth $4 million. And really, you know, what we saw here is an interesting dynamic here. Um, what this slide is showing is that the demand for car wash real estate remains strong enough to push pricing higher to a certain extent. But what's interesting is if you look at you know the average monthly list price um for car wash real estate from August 2025 through November 2025, while you've had you know cap rates come down, you've seen that listing prices and valuations have come down. What that means is that owners of car wash real estate that have been participating in the sell lease back process have been a lot more diligent and prudent and disciplined with how much valuation that they put in that real estate, ultimately not overburdening their business with very expensive rents. So to me, I think that's encouraging, right? I think the big thing that I already mentioned here is that MA activity and consolidation in this sector is already starting to represent discipline and a greater focus on fundamentals and operational excellence. This to me is encouraging because this continues to support the thesis that this next wave of consolidation is primarily for sustainable, healthy growth. And I think the handling of car wash real estate, again, with setting more appropriate levels of rents, not over-leveraging the real estate and burdening the business with the expensive rents is to meet a sign of health of discipline. And that's definitely something we're starting to see, not just necessarily in the cap rate environment, uh, but in the average list price of car wash real estate in the sale leaseback market. Looking at um, you know, brand premium by operator, you know, lower cap rates are definitely a reflection of just the overall strength of the brand itself. Um, you know, not all car wash real estate is priced equally. Stronger brands command tighter cap rates and better per site valuations. And this slide shows exactly that, right? Not all car wash real estate trades the same way. Uh better known, better positioned brands tend to get stronger pricing from real estate buyers. So, in simple terms, brand quality, operator quality matters a lot in the real estate market, too. Uh that reflects tenant quality, credit perception, the growth profile of the business, and buyer confidence in the operator. And you see here that, you know, the tightest cap rate that we've seen so far in the sale leaseback market for CarWASH real estate is at about 5.7%. The widest is just over 7%. So about 150 basis points spread in bearing quality as we think about cap rate spreads uh across some of the different operators that are participating in the sale leaseback process. All right. So, what does that mean for our outlook at Amplify Capital Group? You know, we definitely expect to see the next 18 to 24 months being constructive for car wash MA. Uh definitely expect to see volume move up significantly supported by the need for sponsor exit. Um, definitely founder fatigued, improved financing options, a little bit of FOMO, right? I think, you know, again, a lot of groups at some point in time were waiting for multiples to recover to those 2022 levels. And I think the realization now is that, you know, there's a flurry of activity. You have some well-capitalized buyers in the space today. This may be a great opportunity and as better of a time as ever to participate in the sale of your business. Um, we definitely expect multiples to remain bifurcated. You know, premium assets will command strong pricing, uh, but definitely a subscale or underperforming assets will lag here. You know, again, so I think for those groups that are out there today throwing, you know, mid-teens multiples out as being market comps, that's definitely not reality. Reality. Uh we're seeing a clear bifurcation today. And there are definitely groups that are leaning in on quality platforms where there's an abundant white space, but the other side of it, you're not seeing the same enthusiasm if you don't have those those markings to support your business. Um, so you know, in general, you know, the the multiple environment, definitely expect that to be bifurcated. Um, expect the buyer mix to remain predominantly sponsor-led. I personally think that you know we're starting to we're gonna start to see a lot more family offices look at this space. Um, we, I cannot tell you, every week we're getting a number of inquiries from the family office community. And I think as we look at private equity, again, I mentioned private equity, they they typically optimize holdings in their portfolio for five to seven years. What's different about the family office segment is they're patient long-term capital, right? They're looking for cash-flowing businesses that could sit their portfolio of holdings for their family office. Um, definitely start to see spenser-led activity, but a different set of sponsors to include maybe more activity across family offices. Also, definitely believe that we'll start to see more of a hybrid capital stack, which will include more use of debt, different debt solutions, including direct lending facilities, Unitronic facilities, uh, more sell lease back activity continue to pick up here, as well as some more minority equity. Um, you know, I think there have been a lot of the you know blue chip private equity sponsors that have been circling the space. They believe in the thesis, but they've yet to really find the deal where they can really cut a sizeable check given the size of some of these PE funds that are out there in the marketplace today. Could certainly envision to see some of these newer entrants come into play here as some of the you know older aging platforms are breaching the outer bounds of their holding period and you know, some minority recap with it with some fresh sponsor money uh coming to play here, you know, could certainly foresee that being a big part of the 2026 and 2027 outlook. But overall, you know, top operators growing, expect to see a lot of consolidation, that top 20 board here. Uh, but the overall, I think, view from an amplified perspective is next 18 to 24 months compared to the previous 18 to 24 months, a lot more activity, a lot more consolidation, but underwriting models that are underpinned in discipline and extreme diligence and understanding kind of just the overall quality of the assets that they're buying. All right. So to wrap up here, you know, I'd like to leave everybody that's listening, which is really three three key takeaways here. Um, you know, first, if you are considering a sale, the window is open, but it is certainly not permanently open. Second, if you're not looking for a sale, this is highly relevant. KPIs win the room, right? Tightening those core operating metrics ahead of a process directly enhances value. But again, even if you don't want to be um involved in a process, right? If you're a seller, if you're an operator, we are all in the business of creating value. So it's really important to understand what good looks like and how do your KPIs trend to those metrics. Um, I cannot tell you, despite how much growth we've seen in this industry, there's still that fundamental lack of understanding of what good looks like. So KPIs win the room. Third, process design matters more than most operators realize. I cannot tell you how important this is, guys. If you have a broker and advisor that's knocking your door saying, hey, I'm working on something in your market, would love to bolt it on together. That's not optimal. You know, we're big believers running a competitive bid process, big believers running a confident, um, excuse me, discrete confidential process, but at the same point, really understanding the buyer pool, the cap stack behind the buyers, and ultimately understanding which groups are likely to get to the finish line here. So the right buyer universe messaging and structure can merely can materially change an outcome for a seller here. Um, really the best time to prepare for a sale is well before you decide to launch the process. You know, really putting the legwork here to really optimally position your business and get maximum value. So, with that, you know, again, thank you for listening here. Hope you found some of these insights useful. Whether you're a buyer, seller, operator, or somebody's just curious about the car wash sector, please know that we're here to be a resource. We are always happy to provide the depth of resources and information that we have here at Amplify Capital Group. For any more information, please feel free to visit us at www.amplifycapgroup.com or always call our home office in Scottsdale 480 581 1000. Thanks till the next time. It's been great. Talk to you soon.