Financing Challenges When Buying a Car Wash

Business acquisitions that use financing add a layer of complexity to the transaction. Lenders examine each transaction carefully to ensure that it will be successful. Unfortunately, transactions that don’t meet the lender’s criteria get declined.  In this article we cover some of the issues that affect you ability to get funding for your car wash acquisition.

Resource: “How to finance a car wash business acquisition.

1. Real estate is not included in the sale

The location of a car wash is vital to the successful operation of the business. It’s how your customers find one and can make or break a car wash business. Lenders consider the real estate a necessary part of the transaction. Without the real estate, there is no guarantee that the business will be able to keep its location. Consequently, most finance companies are not comfortable financing a car wash acquisition that does not include the real estate.

2. Expecting 100% financing

Most buyers want to minimize the amount of their personal money used for the transaction. Instead, they want to borrow as much as they can. This is common a common strategy by buyers and is called a leveraged buyout (LBO). Most small business acquisitions that use financing meet the definition of a leveraged buyout.

Lenders expect the buyer to put equity in the transaction. They usually require 10% of the acquisition value. The equity injection cannot be financed by a lender nor can it come from the seller. It must come from the buyer and their partners.

3. Financial statements are not available

Most car wash sales are done by independent operators that own one or a few car washes. They are small businesses and don’t always keep accurate financial records. This can create a serious challenge for the buyer and their lender.

From a buyers perspective, do you really want to buy a car wash that cannot justify its revenues and expenses? How can you tell if you are buying a good business? Let’s take this a step further. Put yourself in the position of your lender. Do you think they are comfortable funding an acquisition without reliable financial information? They are not. Without reliable financial statements the transaction will be declined.

4. Asking price is too high

Every seller wants to sell their business for the highest possible price. That is understandable. However, neither you no your lender wants to finance an overvalued acquisition. Lenders will finance only transactions that have a reasonable price.

Financial institutions use ‘rules of thumb’ to evaluate the price of a car wash. These ‘rules of thumb’ are similar to what the Business Reference Guide publishes. Transactions that don’t fall within these guidelines may require an expert valuation.

Note that self service and full service car washes have different valuation assumptions. Here are some sample rules of thumb:

Self service:

  • 2 – 3 times their cap rate
  • 4 times their annual sales

Full service:

  • 3 – 6 times EBITA
  • 4 – 6 times owners net provable income

Notes:

  • Cap Rate: Capitalization rate
  • EBITA: Earnings Before Interest, Taxes and Amortization

5. Environmental issues

Environmental issues are always a risk in car wash acquisitions. They are in the risk profile of any businesses that uses chemicals. Lenders may require an environmental assessment as a condition to financing your acquisition. Transactions for locations that have environmental issues that cannot be mitigated cost effectively will fall through.

6. Buyers personal credit score

Lenders require buyers have a minimum credit score. Lenders that provide SBA backed loans require a minimum score of 650. Lenders for non SBA-backed loans often have higher requirements.

Buyers are often puzzled when lenders inquire about their person credit scores. After all, the buyer is asking for a business loan, not a personal loan. Why is their personal credit relevant?

Let’s look at this from the lenders perspective. Businesses don’t manage themselves. Instead, their owners manage the business. Consequently, they have to evaluate the buyer to make a determination. The personal credit score of the buyer serves as a proxy, albeit imperfect, for how they handle their financial affairs.

7. Looking to become an ‘absentee owner’

Some entrepreneurs look to buy a car wash hoping to become an ‘absentee owner’. Most financial institutions are not willing to finance these types of transactions. They consider ‘absentee owner’ transactions to be too risky. Lenders want to finance transactions with owners that will manage the business actively.

Buying a car wash?

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