Why the car wash industry is ripe for disruption 

Here’s why owning a car wash actually has the potential to be a great little earner – and why the industry is ripe for disruption.

Skyler White was onto something. Running a car wash is a great business. It isn’t quite perfect – but it’s closer than you’d think.

Like all vices, my interest in car washes started with a gateway drug: Vending machines. 

As I discovered last year, vending machines can be pretty lucrative cash cows. You can read about how I almost bought a seven-figure vending machine business here.

In my mind, car washes are similar to vending machines, but on a grander scale. 

The upfront CAPEX cost and the running costs are reasonably predictable. Sales ultimately come back to location and demand. 

Interested to know more, I did some desktop and scuttlebutt research on the Australian car wash industry.

Here’s what I learned.

  • The industry is super fragmented – owned and operated by mostly mum-and-dad operators. Some owners operate multiple sites, but there are no known consolidators in the market.
  • The owners are mainly baby boomers.
  • Demand for car washes is heavily weather dependent. On a clear summer day, there’s a high demand for folks to wash their car. In wet weather, less demand. And yes, this is for obvious reasons – why wash your car when mother nature and do it for you!
  • Whilst there are ‘digital’ payment options, many car washes still operate on a cash basis. Accordingly, organised crime types (i.e. bikies) love owning them to, erm, ‘wash’ their money. Yes, it’s a real thing!
  • Despite being CAPEX heavy, the businesses themselves have pretty good margins and are predictable cash flowing machines – as long as you stay clear of labour-intensive hand wash models. 
  • It’s quite common for owners to own both the car wash business and the underlying real estate.

The economics of car washes

Car washes come in all shapes and sizes. The revenue and profit boils down to location and the mix of equipment you have available.

Here’s the industry lingo:

  • Auto Wash Bays – Your typical drive-up, automated car wash
  • Laser Wash – A fancy “brushless” car wash (the jury’s still out on whether these are actually effective)
  • Tunnel Wash – The crème de la crème car wash with the conveyor belts. These are big in the USA.
  • Self-Serve Bays – DIY car wash (a shed with some soap and a Gerni)
  • Hand Wash – Backpacker and student labour, armed with squeegees and old rags
  • Dog Wash – It’s a car wash, but for your dog

Side note: I’m not interested in labour-intensive hand wash models. I want machines that can run autonomously.

Curious to learn more, I downloaded the memorandums and financial statements of some car washes that were for sale.

I was pretty surprised by what I found.

Here’s the redacted financials of a couple of car washes, located in the surrounding suburbs of Brisbane (where I live).

Car Wash #1

Fit-out

  • 1 x automatic laser wash
  • 2 x self-serve bays
  • 2 x vacuum bays
  • 1 x dog wash machine

The owner managed this site part-time, so I factored a nominal wage of $80k per annum. Even with this, normalised EBITDA margins are a pretty neat ~40%.

This one was the best-priced of the deals I found, priced at a 4x – 5x EBITDA multiple in FY21 and FY22. I’d need to understand why sales grew so much from FY20, but from what I gather it’s related to water restrictions in QLD.

Of course, this doesn’t consider the age of the machines – the last thing you want to do is buy a car wash that needs an extra couple of hundred thousand dollars to get back to working condition. But on face value, it was a fairly good deal.

Accordingly, it got snapped up pretty quickly. (The land was not available for sale.)

Car Wash #2

Fit-out

  • 2 x automatic laser wash
  • 3 x self-serve bays
  • 4 x vacuum bays
  • 3 x dog wash machines

This was a fairly large car wash doing a lot of trade.

The asking price was pretty high relative to cash flow – with EBITDA multiples at 7x – 10x. 

The broker explained that the machines were in good nick, hence the high price. The business also had an employee that could service and maintain the machines.

This was also sold by the time I downloaded the information memorandum.

OK, so what do the returns look like on a spreadsheet?

Let’s crunch the numbers.

Let’s run a scenario where I hypothetically buy car wash #1.

Assumptions are:

  • We finance 50% with a bank loan at a 9% interest rate, paid over 7 years
  • We’re able to grow revenue by 10% in the first year and by 5% every subsequent year. How? I’ll get to that later.
  • Expenses stay the same and also grow at 5% per annum. (Inflation!) Rent stays fixed because we negotiate a good deal with the landlord.
  • We budget an additional $10k a year for maintenance CAPEX – repairing broken machines etc.
  • In year 5, we have an assumed sale of the business at a 6x EBITDA. The assumption is that buyers are willing to pay a premium because of strong branding, a solid P&L and turn-key operations.

Running these assumptions through my financial model, the returns are pretty solid:

  • Internal Rate of Return (IRR) of 31%
  • Multiple on Invested Capital (MOIC) of 3.4x

In layman’s terms – $440k of cash equity turns into approximately $1.5M (including dividends) over five years on the assumption that I sell it.

Even if we don’t sell it, the business spits out a cash yield of 15%. 

Again, a tidy little earner.

Want a copy of my model? Subscribe to my newsletter and I’ll send it to you.

How to grow returns

So, what makes the returns so good?

The returns are driven primarily by:

  • The use of leverage
  • The assumption I can grow revenue

Use of debt to acquire the car wash (i.e. leverage) can amplify returns in good investments, because the purchase price is augmented with debt. 

This debt has a cost, of course, but if the free cash flow generated from the car wash is greater than the interest and principal repayments of the loan, the business can partly fund itself. 

Private equity investors typically use leverage in their acquisitions (hence the term ‘leveraged buy-out’). In my experience, lenders will typically allow up to 50% loan-to-value ratio on business acquisitions. I’ve assumed this in my model.

How to grow revenue

The advantage of buying businesses over other asset classes like real estate is that there are more levers you can pull to grow your return. 

In a business, you could reduce costs and increase output by systemising and automating processes. You could invest in marketing and sales, or switch up the pricing model to increase revenue. 

In typical real estate investments, there’s not much you can do to increase your return except for the annual rent increase and perhaps a renovation/subdivision. 

This is why I choose to invest in private businesses, personally. I like to think I have some form of control or influence over the outcome – good or bad.

For my business to work, I’d have to grow revenue by 10% in the first year, and compound it by 5% every following year.

Here’s how I’d do it.

Branding 

Most of the car washes I researched didn’t have a memorable brand. I’d aim to solve that first.

As a child, do you remember that feeling the first time you used an automatic car wash? The big brushes, the goop all over the windows? The goal would be to make car washes fun again. Transform the experience from a sunday afternoon chore, to an experience for the whole family. 

Build a family friendly, light-hearted and trustworthy brand – basically what Ray Kroc did with McDonalds. Market to the kids as well as the adults. 

Here’s my totally original concept brand:

Pricing model 

Most car washes are still pay-per-use, but a trend emerging from the USA is a subscription model. Unlimited washes for $X a month. 

The main advantage is recurring revenue – predictable, stable cash flow which attracts higher multiples. It all goes back to the psychology of gym memberships. People will pay, but not always show up.

Digital experience 

Most car washes don’t even have a website! Build a nicely designed website on Shopify with an app to elevate the digital experience for users. Allow members to schedule their wash, upgrade membership, update billing details, order merch etc.

Viral marketing 

Build virality with TikTok memes, ASMR shorts (who doesn’t love those slosh and *brrrrrr* sounds at a car wash) and guerilla marketing with branded air-fresheners that come with your monthly membership. 

Market to millennials with young children, as well as Gen-Z – who I bet ain’t using the family garden hose to wash their Camry.

There are many more tactics you can use to grow revenue, but this is a start. 

I’d roll this out for the first car wash to test and learn from it.

Once comfortable that the model works (and that’s not a foregone conclusion – it may not!), I’d roll out the playbook across more sites. 

Rinse and repeat.

My consolidation strategy

Car washes are big business in the USA, and there are a number of consolidators and franchises in the car wash game there. 

For example, NYSE-listed Mister Car Wash Inc. (NYSE:MCW) has a market cap of USD $2.7B and generated over USD $870M in sales last year.

In Australia, I couldn’t find a national brand. The industry is super fragmented, and owned and operated mostly by boomers. Some owners operate multiple sites, but there are no real consolidators in the market. 

So why is this the case?

I don’t know – but in my research, I came across the story of a failed franchise attempt back in the late 90s. Who remembers ASX-listed CarLovers? 

Eyeing off the growth of car wash businesses in the USA, CarLovers was a small group of self-serve car washes. It shifted to national expansion via a franchise strategy led by a bloke named Robert Lapointe – the same man who helped bring the Sizzler franchise to Australia. #RIPcheesetoast

The model was simple. Sign up franchisees to operate car washes; support them with product, sales and marketing; and take a clip of the ticket.

Although the company initially experienced growth through operating its own leased sites, its franchise growth remained stagnant. The company also committed to costly leases, spanning up to two decades, for locations where the car washes failed to generate sufficient revenue to sustain them. 

This lease predicament was exacerbated by a more significant issue – an escalating number of franchisees withheld franchise fees because CarLovers failed to deliver on service promises.

It all came to a crashing halt in early 2003, when the company fell into voluntary administration.

I don’t know what was behind the decision to follow the franchise model, as opposed to keeping the business corporate-owned. But based on the margin profile and upfront CAPEX requirements, my view is that this business is better suited to a buy-and-hold strategy – with 

bonus points if you can buy the underlying land with it.

Operational risks and headaches

The numbers stack up on a spreadsheet. But of course, there are risks we need to manage:

  1. Repairs and maintenance

Ignore Tai Lopez – there’s no such thing as passive income in business. Speaking with owner-operators in the industry, the common feedback was that it really helps to have the skills to maintain and repair the machines yourself. 

Either that, or have a handyman on payroll to service multiple locations (to leverage scale economies). If you don’t have handyman skills, which I don’t (I only got those soft keyboard hands), profits can be quickly eroded by contractors and downtime of broken machines.

You also want to ensure the business you buy has machines in great working condition. If not, you may face having to spend hundreds of thousands of dollars replacing the existing machines. That cost wasn’t in my spreadsheet and would quickly kill the economics.

  1. Theft and damages

Industry insiders mentioned that break-ins are common. People would regularly try to rob coin machines and the safe, and the costs of repairs and security add up. 

But this can be reduced or even eliminated with a cashless payment option. I mean, who carries cash anyway? It’s 2023 FFS?

Oh, that’s right, a lot of car washes are deliberately coin-operated. Did I mention that bikies love owning them to wash their dirty cash? 

Definitely adding ‘getting shivved’ to the lower right quadrant of my SWOT analysis. 

But again, these are all headaches that an industry veteran would easily manage.

Anyway… car washes!? 

Great little business. I think it’s got legs.

What do you think?

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