Jose Costa estimates he’s bought over 2,000 car was units Whistle Express Car Wash. At the Charlotte Smart Business Dealmakers Conference, he said that as the company’s CEO and board member past two and a half years, he’s seen trends in the industry change.
“I've seen probably the early innings of consolidation,” Costa says. “A lot of large private equity firms trying to get in. They like the unit economics. They like the membership model, reoccurring revenue — about 70 percent of the revenue is reoccurring. So, in the early innings for a single unit, you could pay eight to 10 times. For anything bigger than three units, you could pay 15 times.”
He says fewer units are being opened since the fourth quarter of last year. There are about 20,000 car washes in the U.S., of which some 4,000 are consolidated, 16,000 are moms and pops (they own somewhere between one and 100 units. Today, the options on the table have significantly shifted.
“Multiples are going down,” he says. “We've acquired in the last 10 months about 45 units, and anywhere from low single digits. The highest we've paid is probably nine to 10 times, not more than that. Rewind that 24 months ago, those numbers go up exponentially. The other thing we're seeing right now is a lot of seller-held real estate, so you can play with the rent factor. That's one option. The other option, today, that is more available, that wasn't here two and a half years ago, is earn outs. In car washing that wasn't a practice, but today it is. And then the last one is sale leasebacks. There's a lot of sale leasebacks for sellers that don't want to hold the real estate. It's an attractive time to buy car washes.”
A good process starts with trust. That can mean taking the time to go visit the seller, even if it's one location.
“I drove to a very rural place in South Carolina and had lunch with a potential seller,” he says. “And I do that every single week, sitting across from them. And for many of them, if it's one unit or 15, it doesn't matter. It's their baby, it's their employees. They really care about the success of that company, and especially if they're going to give an earn out. If they're going to sign up for an earn out, you want to make sure that both sides are very comfortable.”
He says he also does a lot of due diligence. If it's a single unit, it's 90 days. If it's more than that, it's usually 120 days or longer. Additionally, for some 70 percent of the acquired talent, they show them a career path. There can be four to five employees actively on the site at any given time, with 15 on payroll. For every 10 units, there is a mechanic. And he says all those individuals want to see a career path.
“So, for about 70 percent of them, we show them what (a career path) looks like,” he says. “The other 30, they don't want to stay; they can make some money, and they think they're winning the lottery, and they move on and do something else. So, it's a combination of trust, showing a career path and ultimately paying the earn outs. We really like paying the earn outs, because if we pay you an earn out, you're going to turn around and tell your friends and anyone in the car washing community that we are paying the earn outs.”
Sharing data when there is an earn out is important because, as a type of investor, they want to know how the company is performing. So every month, he says they are very transparent in sharing all the information so they know how the sites are performing, and through that, how much money they can make.
Something else he says they do is roll out equity down to the district level so that every district manager in the company is an equity owner. That has galvanized their efforts to really push performance.
The company has an in house M&A team sources deals for the singles to 10 units without any advisers. But anything bigger than that, they bring in advisers.
He says they are very disciplined on where and how they grow.
“Sometimes a red flag is people that are not disciplined, people that are not transparent,” Costa says. “In the age of social media, there's very few secrets, so you can find a lot online. We mystery shop multiple times every location. A red flag for me is when they don't allow you to go in the back of the house and look at the equipment, because there's probably something to hide. Everyone buys from the same two equipment suppliers, the same four point of sale suppliers, so it's not like you have a secret that I don't.”
