Business valuation is a top-down process

by Vinny Carfora

A car wash business might be a relatively uncomplicated business to operate, but determining its value usually is a challenge. Business valuation is a top-down process that starts with an extensive analysis of the overall economic trends. The understanding of the industry’s prediction and risks are also a vital aspect of the valuation process, as the performance of a business is dependent on industry trends, conditions and other external factors. When determining value, a prospective investor will use the historical and prospective financial information on the basis of the anticipated outlook for the particular industry. A business valuation takes into consideration qualitative as well as quantitative criteria. A simple rule of thumb is using a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) or cash flow.

Need to Know

There are numerous reasons one would need to know the value of a business; for instance, if you are considering buying a business or for loan purposes. Whatever the reason for needing to know this information, trying to come up with a valid figure is a major endeavor. A practical business valuation requires more than simply looking at last year’s financial statement. A valuation requires a detailed analysis of previous years of the business, including the operation and opinion about the future outlook of the industry and the economy. Car washes are known to generate steady income due to the necessary and recurring nature of the service they offer. While designs and energy alternatives are continuously changing which may have a lasting effect on many automotive companies, the car wash business will continue to provide the same basic service needed despite the model of car.

Common Approaches
In general there are three common approaches that are used in an appraisal. Certain emphasis can be placed on specific approach when needed based upon the reason for conducting the appraisal. The three approaches are cost, sales comparison and income.

• The cost approach is derived for a property by estimating the current cost to construct a reproduction of the existing structure; deducting accrued depreciation, and adding the estimated land value plus an entrepreneurial profit. This is very common nowadays because several properties are bank owned and not being sold based upon cash flow.
• The sales comparison approach is the process of estimating the value of a property by examining and comparing it against actual sales of comparable properties. In my opinion, it is not a very accurate way of valuating car washes. We have seen several identical car washes in identical markets that have completely different revenues. This does not do much justice for the sales comparable approach.
• Finally, the income approach is most commonly employed by car wash operators and investors. It is the estimate of the market value based on the actual earnings.

The Appraisal

When appraising a car wash it is usually important to remember that the income is attributable to both the real estate and car wash equipment, and perhaps to the business enterprise. The car wash equipment has a considerably shorter economic life than the real estate—and the remaining economic life of the equipment can vary significantly from one car wash to another. Most car wash buyers are particularly interested in businesses with real property offered in the package. It means security; no risk of losing the right to conduct business on the site, and the possibility of enjoying property appreciation.

Most of what you see is that lenders base their decisions on business cash flow; therefore, operators in good financial standing are most likely going to be able to continue with their business investments. This is true because banks are viewing them as stable clients and feel that they have the ability to repay the loan in full and on time. When car washes sell they sell on the basis of their income potential, which is something that potential buyers should remember. Many times sellers claim to generate more profits than they can provide proof for. One should remember that in any cash business if the owner cannot prove the numbers then you should not pay for it. For a proper business valuation you need proof of the figures in order to make any type of realistic assessment.

For more information on valuating your car wash please visit our Web site www.CarWashForSale.Biz or www.CarWashKing.Com or contact Vinny at 954.540.3330.