Beyond the Multiple: Hidden Factors Driving Car Wash Valuations with Jeff Pavone

The car wash acquisition market is undergoing significant changes. Join us as industry expert Jeff Pavone breaks down the current trends, what buyers are really looking for, and how sellers can navigate the increasingly complex M&A process. From rigorous due diligence to understanding valuation drivers and avoiding common pitfalls, this episode provides essential insights for anyone looking to buy or sell a car wash business. Discover why quality deals are closing and what it takes to achieve a successful exit in today's environment.

What You'll Learn:

• Why the car wash M&A process is more tedious and disciplined than ever.
• The current state of the car wash buying market and why quality deals are closing.
• Key factors that influence car wash multiples and valuations beyond surface numbers.
• The importance of robust preparation and what buyers scrutinize during due diligence.
• Common red flags that can deter buyers or lower a deal's value.
• Strategic advice for sellers, including avoiding single-buyer negotiations and resolving liabilities.
• How external factors like interest rates and competition impact the selling window.

Equip yourself with the knowledge needed to succeed in the dynamic car wash M&A landscape.

#CarWashMA #BusinessSales #DueDiligence #SellerStrategy #JeffPavone

Connect With Us:
https://www.facebook.com/AmplifyCapGroup/
https://x.com/i/flow/login?redirect_after_login=%2FCarWashAdvisors%2F
https://www.linkedin.com/company/amplifycapgroup/
https://www.youtube.com/channel/UCyy2-_zM-liZr95drgKDX3g

🎙️ Listen to the #podcast on your favorite platform: https://open.spotify.com/show/0xIAku0j0lr6D178d9apsW?si=dca92125f10c41ba

Listen in for the latest car wash mergers and acquisitions updates and pulse on the industry. Hear monthly from our team of experts as well as industry icons and thought leaders.

Transcript

SPEAKER_01 0:00

The process of getting a deal closed is far more tedious and detailed than it ever was before. If your numbers are trending down, you know, month over month, year over year, you know, that's a problem. The days of a buyer overlooking something or taking word for it is over. The buying community today is far more disciplined than they've ever been before. If you have something of quality and a good market, it's a great time to sell. All of a sudden, you know, we've seen a very robust third quarter, and we started seeing some really high quality deals closing, and we expect that, you know, that'll follow through for the rest of the fourth quarter.

SPEAKER_00 0:44

Yeah, it's a great question.

SPEAKER_01 0:46

I mean, um I I'd say we've seen more deals left of I would say uh quality deals closing now than we have in the last three years. So I would say, but I I would d definitely say it depends on what you're selling, right? So it's interesting. We've seen a lot of smaller deals stall out um and some bigger deals getting done. I I can only tell you the the buying community today is far more disciplined than they were ever than than they've ever been before. So if if you have something of quality and a good market, it's a great time to sell. Um I would tell you the the days of them of of a buyer buying something that's that's not performing is a much more different answer.

SPEAKER_00 1:38

Yeah.

SPEAKER_01 1:39

The um, you know, I I would say the activity is is for sure picked up. You know, I think the uh the the the buying communities is is is figured out how to underwrite car washes. They've um digested a lot of what they bought. So if you look at in the early in it in 21, 22, 20, you know, they were just buying, buying, buying. And today, at least they've digested what they bought. They've got an infrastructure in place. They know uh they know how now what to how to how to operate and and what good KPIs look like. So they know exactly what they're doing when it comes now to to making good quality buys. Uh so the answer is, you know, i i it the it the timing is is good. I think there's money on the balance sheets uh that these operators have. So they're they're definitely moving forward with with acquisitions, but it but it's definitely a disciplined process. Yeah, that's my favorite question because the uh we're really, really uh um disciplined about how we put out that information. And and it's more so because that number is is really not a fixed number. Like everybody, you know, you get every broker in the world is calling every car wash owner. I I can't tell you how many car wash guys I've talked to. They've gotten called by brokers and saying we'll get you 11x, 12x, whatever, and and throwing out a number. And I can tell you it just doesn't work that way. You know, I I and I would say the in a if you've got a mul if you've got a chain, small chain to a large chain, you know, you know, is it 10 to 12, you know, feels within range, but the the multiple depends on a lot of factors, you know, the quality of your real estate, um the qual you know how much competition you have in a marketplace. Uh I can tell you the like a Texas market might have a different multiple than than you'll find in the Northeast or in California. Somewhere where it's the the buried entry is much higher, quality of real estate's gonna be more expensive, you can see a higher multiple. The you know, other factors is what's included in that in that multiple. So if you're selling, you know, one, two, three, four, five car washes that are mature, EBITDA, that might go at a lower multiple than if somebody has, you know, let's say that let's say you're buying a chain and they've got a brand new built car wash, and it was eight million dollars to build and it's included in a deal. Well, of course that multiple is going to be up on the overall deal. So anybody calling you and telling you they're gonna get you a certain multiple um without doing diving in deep into understanding what it is that you have is is misleading you. Yeah, I mean, the the you know, the again the good news is that the buyers are out and deals are getting done. I can tell you from our experience is that deals are getting done, but they are uh the process of getting a deal closed is far more uh uh tedious and and and detailed than it ever was before. So as a as a seller, you know, I can tell you the the days of just uh a buyer overlooking uh you know, overlooking something or taking order for it is over. They're gonna be they're gonna be getting updated financial statements, they're gonna get updated uh uh uh sales reports and looking at car accounts it almost till the day they close. And so they're gonna be looking at trends to see if their numbers are going up or down. Um they're gonna be making sure everything matches. Uh every I would say the majority of the deals that are gonna close today, whether it's two car washes or a hundred, go through a quality of earnings, which is a third-party accounting firm that's gonna go through your numbers. Um, they're gonna go through a legal diligence, they're gonna go through insurance diligence. So that that process and and and managing that process, you know, we've got a team on at Amplify that that takes and holds holds someone's hands on that part of it because it could be exhausting to go through that process. And and so what's really required to provide and and and what's an ask, you know, uh takes a little bit of experience in navigating. But but I would say, you know, be prepared because the the the amount of preparation that you should have up front will make that that deal uh getting that deal done much much more efficient going going forward. But it's going to be it's a bit tedious, but deals will close, assuming you know, everything is uh as reported. Yeah, I mean I I I can only tell you I think the big biggest mistake and it hear it all the time is the you get an owner that's pr that's going to be uh called by multiple buyers, whether it's direct a private equity group direct, or it could be a broker calling on behalf of a buyer. Um and and again, and I would say the better the the better your chain, the more calls you're probably gonna get, especially if it's a market that's desirable. And and going down a path with one buyer is the single business biggest mistake. You know, A, you you never know sort of what your what your car wash is really worth. You know, somebody can give you that guidance and tell you that. But but if you had if you've got something of quality and you had multiple bidders on it, you'll know exactly what what your what your what your car washes are worth, what your business is worth. The other thing is it's it doesn't allow for putting pressure on that buyer to perform. So if you got a buyer that's going down a path, and let's say that he's going on a path and he's got some something comes up in diligence and he wants to renegotiate with you. Well, if you had a backup buyer, you know, it's it's kind of easy to sort of you know say, you know what, we're okay with with moving on. Or but but if you're going down the path with one buyer, you could be spending a lot of time, don't know if it's gonna get done. Uh, and it's just an exhausting process. More than more than likely I see those deals fail than succeed. So if you're going to make a decision to sell, I'd say the biggest biggest decision you're gonna make is then do it the right way, prepare your company, and then go out and run a run an efficient process.

SPEAKER_00 7:46

Um so you really make sure you have a great outcome. Yeah, I mean, I I think red flags, you know, start with, I mean, there's a few things.

SPEAKER_01 7:59

One, it's it could be just trends of numbers. So if your numbers are trending down, you know, month over month, year over year, you know, that's a problem, right? And why is that? Is that because you have encroachment from competition? Is it uh just the way you're operating? I mean, so they they will dig in, and I would say the pro the number one red flag for any any deal is just numbers that are consistently trending down. So they get they will dig and try to figure that out. You know, I I think secondly, you know, separately, it's it's being being under being able to understand from a diligence process when you give somebody financials, they can give you a an offer, sign in an LOI based on your numbers that you've given them. But the red flag is when they start digging in and realize that uh maybe the numbers aren't exactly as represented, you're gonna you can have a problem. Now, the other thing is just I would say red flags become adbacks. You know, you know, we've done a lot of business, so we've got to understand what is a what is a standard adback that's going to be accepted industry-wide. Uh we can we can talk through it. If you've got an adback that you just start taking, you know, you know, as you look at maintenance, let's say your car wash site, so we don't well that's a corporate adback. We'll pull it out. We can, you know, you just gotta know what's acceptable from an adback and what's not, because it's material to driving the what your bottom line looks like. Uh, you know, maybe another area that of concern, red flags, is any any potential liability or risk. So you gotta understand that when when the the today's environment, there's a margin of error is so small. Like so when these buyers, when you look at the cost of money being where it is, their their margin of error is not very high. So they're looking at this and saying, okay, you know, what risk is is in this deal? And so if you have any potential, let's say you got some nagging lawsuits sitting out there, or you've got some un you know, unhappy employees, or you got whatever that risk might be, you need to realize they're not buying risk. They're gonna give you an offer based on buying a a well-run quality company. And if you got risk, that that's that's gonna be a red flag potentially blowing up your deal, unless you can figure out um how to how to get that make that problem go away. Yeah, I mean, I I would say anybody sitting on the fence, and you know, and again, I'm an operator too, so we've got a cars chain. And and and I'm sitting I'm sort of sitting on a fence as well. And so what am I looking at? I and I think the the today's market deals are getting done in closing. So at least there's a window now that we're seeing that's an environment that is uh I would say friendly for a seller to get a deal done. You know, I I think if if if the buyer is waiting for the optimal time to sell and you know he's up there in age and and he needs to get something done, I can I can I can't tell you what next year brings because the the the this business is so fickle, it could be driven by inflation goes up, which will drive up interest rates, changes all of a sudden uh the buying habits of of of the buyers today. And so we've we've had windows where the markets completely collapse and it doesn't take much. You know, the war uh the war in Iran, you know, you know, one minute it's settled, one minute it's back on. You know, so if gas prices, you know, start going up and consumers feel stretched and you start losing members, I mean there's a lot of things that can go wrong that can all of a sudden change the mindset of the buyer. Today I would say we've got a we've got an active buyer that'll buy quality, uh, again, discipline, but still buying, you know, when we get into next year, I I just there's nothing, there's nothing that's going to prepare us for what what what we don't know. And that's sort of the risk that you have to look at. And so if you are an owner and saying you're okay with being in this business for the next five or ten years, and and you and that window of opportunity of selling in in uh in the next year is is a is is you don't care about. It's just if somebody's gonna give you the right offer today, then don't worry about it, right? But it's for the guys that really are looking saying, we want to be out of this by a certain time. I I don't see I don't foresee multiples going up anytime soon. I I don't I don't really I don't foresee multiples going up anytime, you know, in the in the near future at all, because unless unless interest rates or something materially changes to drive that that return, because it's all this is all return driven, right, for the for the buyer. Private equity needs a certain return. And so, you know, what what's going to change that return? It's gonna be things like you know, expenses and cost, interest rate being one of the biggest ones. We just don't see that moving anytime soon. So I would I would say as a seller, if there's a horizon where they feel they they really need to be out by within a reasonable but in the short term, then now's probably as good as any because we can't we can't predict what's going to happen next year.

SPEAKER_00 13:01

Yeah, I mean it um interesting.

SPEAKER_01 13:03

I think the the 26 um and when you look at you know kind of where we're at now, I mean twenty twenty-five was was kind of really slow for for the for the first three quarters, and all of a sudden the fourth quarter, we started seeing real momentum from the buying community saying, we're interested in coming back and and and they're willing that to they got their capital in order, they're they're they they got their lines of credit, they're ready to go, and then all of a sudden you got the the water hit, right? So it was that that gotcha that we're just we don't know how to predict for, and that kind of slowed the the car wash MA market down for the first half of the year. You weren't seeing very much activity getting done in that first half of the year. All of a sudden, you know, we've seen a very robust third quarter, and you know, and we started seeing some really high quality deals closing, and and we expect that you know that'll that'll follow through for the rest of the fourth quarter for the for the next quarter. Beyond that, we just we just don't know what we don't know, but today, you know, we're we're sitting in a pretty good spot and we think deals will get done. Um so you know that's really the biggest change right now is I think we're sitting in a place where buyers want to get deals done unless something gets in their way.

SPEAKER_00 14:20

Yeah, I mean, another another great question.

SPEAKER_01 14:22

When when people you know ask us, you know, you know, you know, we we need to get a certain number, we need to make sure we can we're you know, we don't want to waste our timing out the market for a long time. And I and I think that's you know, like a w the way a broker process tape works is you normally take it, you get a listing, they take six months, and you know, they've got this thing that's dragging on. I can tell you the our process is the way they work is usually, you know, we're putting a a really high quality book together, and you know, because our team's experience, it that typically can take two weeks to 30 days, and we're out to market, right? We're going out and we've got a buyer list. We've already know within reason who that buyer's going profile is gonna look like for your your business. You know, and and then I would say within 30 days, we're gonna know what the appetite is. You know, we're you know, we go out and we literally give 30 days to get sort of indication of interest. And I think as a seller, I would tell you within six days of you committing, you're gonna have a pretty good idea whether or not you've got an opportunity to sell or not. And then you make a decision. That decision might be saying, you know what, we might be better off waiting a year to go back out to market because we want to really get some things fine-tuned or get our ramping sites up. Um, but that that decision can be made fairly quick in the process. Um, or if the process is going well, at the end of 60 days, you'll have a pretty good idea of who the buyers are. And then that thing get competitive, and within 90 days, you should be under LOI with the with the buyer of your of your company. And you know, I'd say nine another 90 days from there to closing. So this from start to finish, I would say the process is about six months, but within 60 days, I can tell you pretty close whether or not the buyer appetite is going to be meet your expectations, and you can decide whether you want to stay the process or or navigate to another time. Yeah, I mean, uh you know, any any owner that that is now considering selling, and I mean, I I mean, first off, the things I'd watch out for, right, would be if you know, there are markets that used to be sacred, right, where nobody would build on. You know, I was uh talking to somebody out of Washington, and you know, all of a sudden, you know, they're seeing competitors pop up stores, and these are markets that typically have had you know little uh competition coming up from private equity. Today you gotta you gotta know that from a seller standpoint that you know private equity is is is looking at new white space. So they they built and saturated the southeast and the southwest, you know, now they're looking at the northeast, they're looking at the Midwest, they're looking at, you know, you know, other markets on the West Coast. And so so what I'd say is an owner, you know, what you got to be looking at is first is if you start seeing encroachment coming, you know, now it you're you're already a bit a little late, but but I would say I wouldn't wait until they got five more stores up to decide you're gonna sell. I'd be moving as quickly as possible. You know, secondly, I'd have a well-organized um set of books. And so your financials and books and records should be clean. You should have a good accountant that's working on it. Um they should be able to match your sales reports. I think, you know, if you're working with an advisor or somebody, understanding what what it what an acceptable adback is, because as an owner, you might be in the you might be doing things for your personal benefit running a business. A lot of people do. And so now you've got to more institutionalize your books and records to say what what is a buyer really gonna look and pay me for. And so just I'd say getting getting a good accountant, getting understanding from a legal perspective. If you're going to sell, you know, at some point you're going to need to engage in in in a law firm. And I would say one of the mistakes people use is the lawyer that got them, their their real estate attorney, is not the same guy you're going to use to sell your company. It's going to be an MA attorney. So I'd say you may want to start understanding, you know, what does that team need to look like? Uh, you know, from your operating side of it, you know, everything you can anything you can do to sort of take yourself out of being the dancing bear in a room, you know, if they if your whole business depends on you, if you're managing every bit of your business, you know, that sort of becomes hard to replicate, right? So what what companies are looking to pay for is somebody a company that can be scaled and put gas on and grow. And ideally you've got a team in place that's gonna stick around. Uh and you're and they can they can go on without you unless unless you're selling off and going to bring in an investor who's gonna stand behind you and your team. But I'd say just having having having that that that part of it in order is gonna be important. Um and then like I said earlier, you know, understanding if you've got any potential um liabilities or think problems out there, you know, I try to get those resolved as soon as possible because the problem with with a buyer is they just don't know how to underwrite risk. So they over they over-underwrite it. So if it's a a potential claim that might be, you know, two million dollar claim, they may, you know, they may underwrite it at $5 million just because they're going to be conservative. So anything that's got a potential risk or problem, I'd say try to deal with it up front and and clean it up.