Patrick H. Crowe compared and contrasted two of his most recent adventures in carwashing - "New Versus Old" - building a brand new self serve and rehabbing a run down existing one. Judging by the numerous compliments on the article, it seemed to have struck a chord with quite a few of our readers. As many of you know, there are just not that many of those old "fixer uppers" out there waiting to be snapped up and transformed into "money machines". So we're doing a follow up on one half of that "New/Old" article. It's an edited and augmented "composite discussion" on what criteria and considerations Pat has when it comes to deciding on whether or not to build a new self serve wash. He has some insightful and interesting opinions on this subject. And, as our regular readers would expect, a number of Pat Crowe's opinions will be considered controversial if not flat out provocative ... at the very least, wide open to debate. Pat may have some Liberal leanings when it comes to his politics (check out his thoughtful comments in the "Letters" column of this issue), but his approach to carwash investments is quite conservative. With that said - pull up a chair, take the load off, and listen in on some pointed chit chat and Q & A on points of interest to anyone considering building a new wash... Where Ya Gonna Go?!!
SSCWN: Judging by the number of existing washes you have purchased over your last 25-plus years in the business, you seem to have a preference for them (2 built from ground up, 1 fairly new /existing, and 5 total rehabs.) So what's kept you from building a new one in the last few years?
Pat Crowe: First, it's a little tough to find a neighborhood or area that's not already being served. There's simply more competition than in earlier years. Despite that I found a good location not too long ago. It was a commercial corner, zoned correctly, and priced fairly. The lot was 80' x 125' (10,000 sq ft) and seemed perfect for a 5-bay ... or maybe a 6-bay. I was plenty excited and felt the same old thrill as I began to visualize my new, state of the art facility - a 100' long, 25' wide building with 6 bays, each 15' wide plus the equipment room would fit nicely across the 125' and, depending on setback requirements, I might even get in 7 bays.
SSCWN: Well, what stopped you?
The Incredible Shrinking Wash PC: I was particularly excited because I was not going to have to fight rezoning. I had seen that take a long time and I'm fully aware carwashes are not welcome improvements to some neighbors and so rezoning can be very difficult ... a long, slow, tedious process. I had owned a carwash in this municipality before, but hadn't built one there. When I made my preliminary inquiries I found very restrictive regulations. The usable length of 125' which would have allowed the 6 or 7 bays was about to vanish. First I was told that there was a special rear setback of 25' because the property adjoined duplex zoning. That left 100' of usable length. There was also a front setback of 25' from the street so I was down to 75' of usable length. But that's not all. The city thought it might widen the street at some future date and so they imposed an additional setback of 15 more feet from the street. The usable length had shrunk from a potential of 125' down to only 60'! The property would now accommodate a 3-bay wash (3 bays each 16' wide with a 10' wide equipment room) if I placed the building lengthwise on it. So, hard to deter as I am, I thought I'd use the 80' of width and squeeze in a 4-bay. Especially so when I was informed there was a new regulation requiring 5 cars of stack up room behind each bay! While I could not build a building on the land required for setbacks I could at least use it to stack cars on. But the side setbacks took their toll. On one side 5' and on the street side another 25'. That meant there was only 50' of width on which I could build. So here was a commercially zoned piece of property containing 10,000 square feet of land and the largest possible building could only be 60' by 50'! That might work for a multi story office, but not for a long, narrow carwash. When you put a couple of bays on a 10,000 foot lot, that ratio of 5,000 feet to one bay is 3 to 4 times what is needed - playing havoc with per bay land cost. This is just one specific example of a generally common problem nowadays - namely, municipalities have become increasingly difficult to deal with. That foiled my attempt ... as well as the one before it. The earlier one would have involved a zoning change and - though in a different municipality - the city development staff there made it very clear they would oppose a carwash on my proposed site with all the fervor they could muster. I recall asking the director of that city office to take the city map and point to any location in the southwest quadrant of the city where he would approve a carwash. He looked at the map ... shook his head ... and then suggested I try another city!
SSCWN: Okay ... sure there can be obstacles to getting city approval for a carwash. But new carwashes are being built all the time ...even in your area, Pat. How do people do it?
P.C.: The city seems more willing to allow them in some areas than in others. Second, I suppose some carwash builders are better at toughing out the building permit and zoning demands than I am. I could name 3 or 4 people who'd do one in the southwest quadrant of this city ... if the city would grant the permit. I know of two people besides myself who have proposed them. All have been denied. Carwashes have had a bad reputation. And the politics of building them in certain areas are just very difficult. Besides that, requirements for very large stack up areas can force the ground costs way out of sight - too few bays and too much "dirt". How Much Is Too Much To Pay For The Land?
SSCWN: So how much is too much to pay for the "dirt' ... the land? How do you determine how much you can pay for ground for a carwash?
P.C.: Before dealing with actual land costs allow me to make four introductory points about evaluating any potential investment.
Point One: To an investor the critical bottom line question is - What can I reasonably expect to be the annual Rate of Return on a proposed investment? Rate of Return on investment is a clearly defined financial concept. It is determined by dividing the net annual profit from the business by the total amount of the investment. Invest $10,000 in any venture, a year later receive $1,000 in profit and you have earned an annual rate of return on investment of 10%. Of course evaluating proposed business like carwashes is not that simple ... as you'll soon see.
Point Two: Basic investment theory states that the annual Return On Investment should be directly proportional to the risk involved in the investment. The higher the risk, the higher the expected rate of return should be. Carwashes can fail - "go belly up". There is risk in investing in carwashes ... certainly more risk than investing in government guaranteed Treasury bills. Therefore, logic and economics demand that folks considering investing money in carwashes should expect a substantially higher rate of return on their money than "safe" investments - like T-Bills or CD's.
Point Three: Starting, buying, or investing in a business like carwashing can be motivated by all sorts of vastly differing concerns. Some people start businesses primarily because they want "to be their own boss". To such people the rate of return on investment is a secondary concern. Some people buy businesses (or start or invest in them) because they cannot find a job. Or because they took early retirement and are bored. Or because they have kids or other relatives they would like to see put to work. For some people owning a business fulfills a psychological need or a lifelong dream. Their concern about annual rates of return can be minimal. To some people, if the business will simply generate enough profit to pay the necessary bills and "feed the family" they will deem it a "success" ... regardless of ROI. These kinds of personal needs and concerns are not well suited to financial analysis. They are real, genuine, and meaningful to the people involved. But they defy financial analysis. They're so very personal. How does one assign value to "being your own boss'? I can't. But I will address the fundamental economic notion of Annual Rates Of Return on carwash investments.
Point Four: The financial analysis of any business has to follow the same general outline. The five steps in the analysis are: Stepping Into Analysis
Step 1 - Based on known facts about the type of business being analyzed, how much can a potential investor/owner reasonably expect to take in each year? In business terms - what are the projected Gross Annual Revenues?
Step 2 - What fraction of the Gross Annual Revenue is commonly needed in this type of business to pay for the costs of operating it - the Annual Operating Costs?
Step 3 - Deduct the annual operational costs from the gross annual revenues and the difference is the expected Annual Operational Profit.
Step 4 - Divided the expected Annual Operational Profit by the total amount of money invested to determine the annual Rate Of Return.
Step 5 - What do the numbers mentioned in the first 4 steps tell a potential investor? How can they be used to determine what is a fair and reasonable amount to invest in a carwash? Calculations based on these numbers will dictate reasonable land, building, and equipment costs. Summing Up - A potential investor/owner, expecting to make a reasonable rate of return for the risks involved in carwashing can use projected gross annual revenues, expected operational costs and some math to determine how much is reasonable to spend on a carwash project. That's what I propose to do starting with Land Costs.
SSCWN: That sounds fine, but let me make two requests. I know you'll probably include it, but, in addition to land costs, tell us how to determine what makes a good carwash site. And second - you may not like this - for our readers not fond of mathematical calculations and statistical analysis, can you give us some "quick and dirty" rules of thumb about costs. We all know that could oversimplify a complex situation and may not explain all the how's, whys and wherefores of the conclusions. But those rules of thumb are about all the math some of us can stand. No offense intended to those who are mathematically inclined, but you math teachers (Pat's a math prof at a local college) sometimes overdo the number stuff. "Quick 'N Dirty Rules"
PC: I'll do just that. I'll start with my own "quick and dirty" rules of thumb and then and only then dig into the details. You're about to see that's almost always how business people begin their evaluation of a proposal. Only if it passes the "quick and dirty rules" is a proposal worthy of detailed analysis. Here we go on land costs ... Don't spend more for the land than you have good reason to believe the carwash will take in each year. Land cost should not exceed projected gross annual revenues. Here's how to make your best estimate of gross annual revenues. First, I'll show how I do it for my area. And then I'll give data about other parts of the country. But in the end, each investor has to make his own estimate for any particular site. First, you need to know the average Price Per Minute for self service carwash cycles in your locality. To determine that you simply go to several representative carwashes and check out their pricing. Time the cycle and divide the number of minutes you get into the cost of that cycle. Here in Kansas City the average price is about 33¢ a minute. The most expensive I've seen is about 40¢ a minute and the cheapest I've found is still just over 28¢ a minute. In averaging the results of 5 or 6 local carwashes it would be wise to drop out the data for the cheapest and most expensive. Once that's done you have the average cost per minute for your area. In Kansas City that figures out to be just a little bit more than a 33¢ a minute. On the East and West Coasts it can be double that or more ... and even here it's finally trending up. A potential carwash investor should base his income projections on that number ... on his market's average Price Per Minute. To start a business believing you could charge substantially more than that would be very risky indeed. I'd have to hear strongly compelling reasons before I'd ever believe I could start a successful carwash and charge substantially over the market average for a given area. I'd advise anyone who's considering that to cite the reason why he believes one can charge more and then test the theory on people. Ask people if they would pay half again as much to wash their car at a carwash that was super fancy or lavishly decorated ... or whatever. I'm sure there are exceptions, but I just don't believe self service carwashing targets the luxury market. Bottom line - knowing what price a given market will bear is a key factor in evaluating a proposed carwash. Back to the point ... once you know the standard for carwash pricing in your area: Multiply your market's average PPM (Price Per Minute) times the number of MPD (Minutes Per Day) each bay can reasonably be expected to operate. My personal data - based on my almost 30 years in the business and owning 8 self serve carwashes - tells me the range can be from as little a 100 MPD to as high as 200 MPD. Narrowing The Range that's too broad a range to evaluate a particular site in a specific region of the country. To provide more specific information, I used some basic math in combination with data compiled in the 1996 self service carwash statistical surveys published in "Professional Carwashing and detailing" (Latham, New York) and "Auto Laundry news" (New York, New York). I developed these broad regional guidelines for the number of Minutes Per Day an average bay operates: REGION Average MPD Northeast 100 MPD Southeast 132 MPD Great Lakes 152 MPD Plains 115 MPD Mountains 92 MPD Southwest 138 MPD West 145 MPD For purposes of projecting carwash revenues I believe these numbers are as reliable as any we can obtain. I'll be the first to grant that any statistical survey can have biases and errors. Personally I found them credible after checking these numbers against my own operations. What this tells me is that if I want to consider a new carwash in the Plains region I should base my projections on about 115 MPD of operation for each bay. Further, It's pretty clear that anyone basing projections on the basis of 200 minutes of operation for each bay each day is dealing lots of "blue sky". Not impossible ... just unlikely. The further you go beyond these averages the less likely it is to happen. At this point, a potential new carwash faces two bench mark numbers. First, the Price Per Minute which is being charged by the competition in the specific area. Second, the average number of Minutes Per Day that carwashes in that region are currently operating. These are critical factors in determining projected Gross Income - which determines what can be realistically spent on any project. Take for example an area where 30¢ is the common Price Per Minute and each bay can be expected to operate 100 Minutes Per Day. The projected daily revenue per bay would be $30 (.30 X 100). Based on that, a 6-bay would generate $180 a day and produce annual revenues of $66,000. To obtain the total annual revenues, income from vacuums and vending must be added. Based on surveys, personal experience, and anecdotal consensus such revenues range from 15% to 25% of gross wash receipts ... so I use 20% as a working average. That works out to be $13,200 in this example giving us projected Total Annual Revenues of $78,840. So it's likely that this 6-bay would produce in the range of $70,000 to $90,000 per year. Of course, you need an appropriate carwash site to produce appropriate income ... Competition And Demographics To sharpen the focus to a particular proposed site consider Competition and Demographics. Existing competition is known. Future competition is unknown. But there is a fundamental rule of economics which states excessive profits can breed ruinous competition. To believe that the absence of present competition means a virtual monopoly is foolishness. Moreover, how the existing competition will react is difficult to predict. Will they completely update while you're under construction and cut prices as soon as you open? To me what is necessary is demographic data demonstrating that there is sufficient customer base to support at least as many bays as are currently in the proposed area as well as the new ones you're considering adding. I know of case after case where there are simply too many bays in a given area and the business winds up being split so many ways that it's very difficult for any of the washes to be more than marginally profitable ... at best. Demographic data is available. Many municipalities will provide the data. The local Chamber of Commerce can be a good source to find out what info resources are available in a city. Libraries will have it in the form of census statistics. And there are companies that specialize in such service. Here are two firms that I know of that provide such data: National Decision Systems (619-942-7000) and Equifax Marketing Decision Systems (800-877-5560). Your Yellow Pages may list others providing these services. Such companies will take a specific location by street address and provide the numbers of households with in a one mile (to three mile) radius of that location. They can break out the data by age, by sex, by race, by income, by property value, by marital status ... almost any way you'd like it. The data is to be primarily used to determine if there is a sufficient customer base close enough to the proposed site to support additional bays of self service carwashing. The are no absolute rules of how many customers will be sufficient. My own bench mark figure is that within a 2 to 3 mile radius of a proposed site I want 10,000 people for each existing and proposed bay of self service carwashing. If there are too few people or too many existing, competing bays then the site becomes questionable. I'm sure there are knowledgeable carwash people who will find my bench mark figure too high. Some will say it is "way too high!!!" And I know there examples aplenty out there "proving" it to be too high. Let me admit I have here an urban figure - not intended to be applied to small towns but to cities.
Supply And Demand Rule I defend my figure on these grounds: I've seen many self serves go belly up ... most often due to competition which can get terribly fierce in this business. Supply and demand always rule! To believe that somehow a new wash will kill off the competition is silly. Equally silly is the "Build it and they will come" philosophy. Prudent financial judgment states otherwise ... especially for carwashes. Those who point to fast food restaurants and suggest that they group themselves close to one another are correct. But the trend is that people are eating out more and more. I do not believe there is a trend toward washing cars more and more often. Everybody eats several times a day ... every day. They wash their cars only when they're dirty and only when the weather is favorable. Moreover a variety of foods appeals to people's tastes in a way that carwashes are not apt to appeal. Finally, my reading of the fast food industry suggests their level of competition has put the squeeze on their profits. We need to kill the myth of any correlation between carwashes competing and fast food restaurants ... yesterday! I'll offer one final defense of this figure. I hope it won't sound immodest to state my revenues are well above average. Some part of that is good management. But most of the success is due to the fact that there is a sufficient customer base for me and my competitors to divide. Our level of competition is not so fierce as to dictate that any of us MUST take the other's business in order to be successful. Build where the customer base is thin if you like. Tell yourself the neighborhood will grow. Tell yourself that people will flock to a new wash because it's new and going to be exceptionally well managed. Tell yourself carwashing is like fast foods and that skilled promotion will attract customers from a far. In my opinion, such hopes rarely overcome an inadequate supply of customers ... nor do much to compensate for too many bays for too few people. Defy the law of supply and demand at your own peril. Still More Site Evaluation Factors A sufficiently large customer base is the first requisite, but there's more to site evaluation. The type of customer base, the traffic count, and the visibility are all factors. I’ll illustrate each with examples...
TYPE OF CUSTOMER TRAFFIC: I know of a local wash built just a few years ago where there were ample people within a 2 mile radius of the site. The people did not mainly live within 2 miles, but worked within the area. The particular site was within view of one of the most successful convenience stores in the city - open 24 hours and very busy. Moreover there were people coming and going around the clock because many of the commercial enterprises there operated 24 hours a day. The wash, however, has been only marginally successful. To me it tested the theory about whether people would be willing to wash their cars on the way to or from work. In the main, that's not when and where people wash. For whatever reasons, they tend to wash close to home. The best type of customer base is households - the proverbial "rooftops" - and obviously those households need to own cars. All of which is to suggest that mere numbers of people near a proposed site is not necessarily sufficient. Clearly downtown New York would have great population density. But few of these people own cars and the land costs would make a carwash totally unrealistic.
TRAFFIC COUNTS ... are important, but must be weighed with care. Beyond the count of the traffic, there's the speed of traffic to consider as well as the type. Couple the traffic count with visibility and easy accessibility. I know of a 12-bay wash that went bankrupt largely because it was difficult to see from the main street which by all measures had a good traffic count. It was less than 300 yards from the street, but it was at a lower level and there were other commercial buildings between it and the main artery. The bank got the wash back and found no other carwash owner wanted it ... even at half the price it cost to build it! Data on traffic counts can usually be obtained from city traffic or street departments.
Judgments about visibility need to be made on an individual basis. I look for traffic counts no less than 2,500 to 3,000 vehicles per bay, per day. The ideal count would be about 5,000 per bay ... provided the traffic moves no more than 35 mph. Small Town Ways And Big Town Bays Before evaluating these numbers (in terms of what one can pay for carwash ground) let me offer a disclaimer of sorts.
Nearly all veteran owners know of carwashes in small towns which are very successful ... without population densities or traffic counts which would meet my standards. I know that. You know that. And it is possible to cite examples where a very successful carwash operation takes place despite seemingly poor demographics and questionable location. All site selections involve trade offs.
For example, my traffic numbers are not applicable to rural areas for obvious reasons. We all know most rural cars have to be washed and you can more easily dominate and "own" a rural market. On the flip side of that, small town markets tend to be far, far less forgiving and able to absorb new direct competition. My efforts are to generalize and to set fairly flexible bench marks from which one can form a reasonable basis for site evaluation.
No set of numbers can substitute for good judgment. And good demographics rarely compensate for bad management. Still, I believe my approach is reasonable-to-safe for site evaluation in most cities. Now back to the point about land costs for a proposed location.
Here I'm assuming: 1. Large enough customer base to support more bays in addition to existing competition. 2. Reasonable traffic count and visibility. 3. Knowledge of the PPM (Price Per Minute) in the area and the average number MPD (Minutes Per Day) a wash bay can be expected to operate each day. heroes how I calculate what I’d pay for such land. That is, how I'd determine if the site has the financial feasibility to support a self serve carwash. Bear in mind that many sites which have all the necessary demographics will be too expensive for carwash land. Simply multiply the MPD each bay is expected to operate each day times the PPM charged for wash services to determine the daily gross revenue per bay.
Take that number times 365 and you have the projected annual revenues for each bay. Multiply that by the number of proposed bays, and then add 20% for vac and vending income. Here's an example from my area among the Plains States - the Price Per Minute averages I find in Kansas City. The survey tells us bays in the Plains average about 115 minutes per day of operation. Typical PPM here is 33¢. And 33¢ times 115 minutes indicates each bay will gross about $38 a day. Multiply that times 365 days and the per bay annual income will be almost $14,000 - total annual wash bay income of $84,000. Then add another 20% for gross vacuum and vend income - national surveys and personal experience show me a range of 15% to 25% for vac/vend revenue. The gross annual revenues all add up to about $101,000.
And that's the maximum price I'd pay for most land - no more than one year's gross revenue. Beware! An eager buyer can easily convince himself to pay more by arguing that he'll charge more per minute and operate more minutes per day than the other washes in the area. The more of that sort of reasoning - optimistic speculation! - that goes on the less realistic the situation is. But that's easy to do because of the multiplier effect of the numbers. For example, all I have to do is convince myself that I'll be able to operate 150 minutes each day (instead of 115) and that I'll be able to charge 38¢ a minute (instead of 33¢). Now the numbers are telling me I can pay almost $21,000 a bay. Then add an optimistic 25% for vac/vend income (instead of 20%) and the figure goes to $26,250 per bay.
The feasible price for a 6-bay site just jumped from a maximum of about $100,000 to a cool $155,000 plus. That's a 50% increase over what I consider a safe projection. Be skeptical of income promises from salesmen who do this sort of quick shuffle and massaging of the numbers. it's clear that there are many locations where the best use of the ground is simply not self service carwashing. No one would consider putting one on a typical downtown office building site ... the ground is just too expensive. that's why there are none in Tokyo. What I'm afraid happens is that often someone sees a site that seems ideal for a carwash.
Usually It's a high traffic count that gets the attention of a would be carwash operator. They see 20,000 or more vehicles a day driving by a vacant, available site with little direct competition. It seems "perfect". They hear the price and automatically conclude that a carwash will work on the site. What I'm saying is, look at the numbers very carefully. there's definitely a top limit as to what should be paid for single use carwash sites. I know of a recent case that makes my point. A 4-bay unit I used to own was sold not too long ago. This unit had the highest per bay income of any carwash I had ever owned at the time I sold it ... about 7 years ago. Despite the great carwash revenue, the new owner sold it and it was torn down to use the ground for more profitable purposes. The new owners paid about $18 a square foot for the property - an out-of-sight price for carwash land in this area. there's no way the income from a self serve carwash there could generate a reasonable return on such a heavy investment in the land.
The following table shows what I consider to be reasonable costs per square foot of carwash land ... under particular conditions. To use the table find the Price Per Minute in the left column - that's the PPM at which you can expect to operate given the existing competition. Next find the average number of Minutes Per Day each bay can be expected to operate ... in the row across the top. In the box to the right of the PPM and below the number of MPD operation each day will be found what I believe to be a reasonable approximation of the maximum cost per square foot for carwash land. For example, if 30¢ a minute is the going rate for self serves in a particular area and bays in that area can be expected to operate 100 minutes a day then the table indicates reasonable land cost might be in the range of $6.25 a square foot. Caution ... This table should not be used to "prove" that if land were purchased at $4 a square foot then the carwash is guaranteed to be a rip roaring success. Rather, the table suggests that IF all the other factors (like population, visibility, type of customer base, etceteras) are in order then and only then are these reasonable costs. Moreover, good judgment has to be used about the amount of land.
In general terms, self serve carwashes can be comfortably built on sites providing about 2,000 square feet of overall land for each bay. A bit depends on stack up requirements and on whether a drying area is to be provided. Sites with less than 1,500 square feet of land per bay are going to be very tight. Sites with over 2,500 square feet of over all land per bay are ample to generous. One must remember that while extra land is always nice, it costs money and is going to have to be paid for by the carwash revenues. It is possible to buy too much land - more than what is needed or can be comfortably purchased with wash income. What the table is intended to provide is bench mark, reasonable costs per square foot for carwash land under varying competitive conditions.
A fair reading of that data would be that it suggests to anyone considering paying $16 a square foot for carwash land that heed better have solid evidence that the market will bear a PPM cost in the range of 50¢ a minute. And that carwashes in that area are operating an average of 150 Minutes Per Day. Then, if all the other conditions are in concert (population, traffic, etceteras) the price is reasonable ground cost ... provided one buys no more land than is genuinely needed for the facility. Safety Or Sorry
The final cautionary note has to do with "dirt" costs which are well below what the table suggests. In major urban areas there's a fair chance that a piece of ground could at least squeak by the demographic conditions, be priced well below the per square foot guidelines, and yet be dubious as a self serve site. here's why: Sad though it may be to report, there are areas in many major cities where few people are willing to get out of their cars for any reason. The traffic count may be good, the land cheap, the demographics adequate, and the competition sparse. Safety (or often perceived safety), however, can be a major consideration. The perception of not being safe renders such areas questionable for business purposes ... especially for self service carwashes.
Unlike banks, there's not going to be armed guards around to make people feel more safe. The question to be asked about such land is whether the dirt costs are so much below other areas that the cheapness of the ground is an adequate trade off for what a potential owner will have to do to attract customers under these conditions. I'm not prepared to try and answer that question beyond stating that I'm not suggesting that self serve carwashes are doomed in urban cores. I know That's not true. I own a very profitable one. At the same time,
I know this locality well enough to state that there are certain sectors within the urban core in which I would not build a self serve if I were given the ground! It's neither stiff competition nor poor demographics which causes me to make that statement. Rather, it is that instinctive inner voice telling me It's too risky ... for me. At the present time and crime conditions, there are a few areas which I stay out of. That attitude certainly does not apply to all of the urban core, but I believe most people who are longtime residents of major cities probably understand what I'm saying. And no doubt they, with me, yearn for the day when these areas will once again become - in fact and in perception - reasonably safe places to do business.
Fudge Factor SSCWN: You apparently intend these land costs guidelines as maximums. Just how hard and fast are they? Is there any set of conditions under which you'd pay more than $8 a square foot for land in your area ... how about $10 per foot? Is there an absolute limit? P.C.: No ... They're not absolute, never to be violated maximums. Given the right circumstances I would go over them. By the right circumstances I mean some convincing evidence that either the cycle price can be set higher than the average price. Or convincing evidence to believe that the bays will operate well over 115 minutes a day ... or both. I can cite an example here in Kansas City - a 4-bay carwash, 3 enclosed bays and one open bay.
There's literally no competition for miles around. This particular unit falls far, far short of state-of-the-art condition. On top of that, it has poor access and limited visibility. And yet I know (after considerable personal observation over time) that it operates well over the average 115 minutes per bay per day. It's clear to me the neighborhood could easily support another carwash. The area has demonstrated its enthusiasm for self serve washing by keeping those old bays stacked. The area has middle to upper middle class residents - people with discretionary income as well as a real appreciation for a new state-of-the-art facility.
Now I would not pay any price for carwash land in that area. But I would go well over $8 a square foot. Moreover I know a number of other knowledgeable carwash operators who would do the same. Someone will get it done eventually. There are compelling reasons to do so. At the top of the list is a lack of competition. And, importantly, little chance of future competition due to there being almost no vacant land and severely restrictive zoning regulations. Add to that ideal demographics, lots of apartments, the decrepit nature of the existing competition and you have a situation that justifies paying above the carwash norm for the land. I'll cite another example.
I paid over my own guidelines for my 1990 purchase. The compelling reason in that case was that it was an older, high population density neighborhood with very little vacant ground ... and virtually none large enough to accommodate an 8-bay carwash. The site I discovered was the exception - vacant, large enough for 8 bays, and it was properly zoned. New businesses coming to this area are now doing so by buying out older businesses, tearing them down, and building the new ones where the older ones used to be.
If carwash competition is going to come to this area They're going to have to do that. Their land costs are going to be astronomical when the costs of the existing business and demolition are included. Watch out for those old buildings ... especially those with asbestos. Construction costs could very well end up being double ... even triple! ... the cost of building on vacant land. In addition - no potential future competitor will "Smell blood in the water if he comes nosing around my market. I operate a state of the art facility that's kept clean, neat, and operational. So competitors will not be attracted to this market because they see unmet customer needs.
So competition would have - at best An up hill battle. That's not to say no competition will ever come. Such a venture would be very high risk ... truly a foolish investment. But you know what they say about "a fool and his money". So, yes, I will exceed my guidelines for buying land ... when special, desirable circumstances tip the odds in my favor. As in the example I gave, the decision was based on the assessment that future competition was not very likely. That traffic count and population demographics indicated bays working well over 115 minutes per day.
And it was all reinforced by the site being vacant (no demolition costs) and having favorable zoning in place. After 5 years of operation there, I know I made the right choice in paying over $9 per foot. My annual revenues at that location are excellent ...well in excess of the land costs. A Profitable Business ...Or A "Piggy bank"?
I can't leave the topic of ground alone without one final comment. People have all sorts of reasons for wanting to be in business ... for wanting to own a self-service carwash. To some folks the financial reward is only one factor ... perhaps even a relatively small and uncertain one. I've often heard people say they would gladly continue to work at their regular job and manage the carwash for nothing ... if it would simply pay for itself in any reasonable length of time.
Their plan being to eventually sell the carwash and use the proceeds to retire on. It seems to me such people think about carwashes as if they were like "Big piggy bank" - an easy way to force themselves to stash and save some money. Such people seem to have no idea what it takes to run a carwash. And if they build one that manages to just pay for itself, then their motivation is not typical. It may suit their own particular needs, but the fact that it does not more directly compensate them for their investment, management time, and efforts simply proves to me that it was not financially feasible ... not by my standards.
I've also seen carwashes built which seem to reflect the owner's personal priority to satisfy his own ego needs rather than meet reasonable standards of financial feasibility. If that's the way a person wants to spend his money that's his choice. But such carwashes aren't really built for profit, and anytime a business is started for other reasons its success is nearly impossible to evaluate.
To Lease Or Not To Lease SSCWN: we've all heard those stories about those characters with too much money and ego ... but too little brains and investment sense. And, yes, some of those guys build carwashes. But the vast majority of operators, however, are very practical and down to earth - they do want a reasonable return on their investment ... in light of the risks involved. Many operators get into carwashing by leasing the site. How risky is leased land? Does leasing jeopardize profit?
P.C.: I prefer to own the land rather than lease it. The obvious risk in leased land is that at the end of the lease (if it can't be renewed) the land owner becomes the owner of the carwash building ... though not the removable equipment under most cases. There are at least 3 sets of conditions under which a potential carwash owner should consider leased land. Incidentally, of the 8 washes I have owned 3 have been on leased land. Here are the reasons to consider a land lease. Of course all of these assume that the land being leased would be a good carwash site:
Reason#1: The potential carwash owner lacks the capital and credit to buy the land AND do the carwash. Most of us rented houses or apartments until we could afford to buy a house.
Reason #2: The terms and conditions of the land lease are quite favorable to the leasee. it's possible that it's actually cheaper to rent than to buy. This doesn't happen often, but I’ll tell of such a case in a minute.
Reason #3: The site is strong and the land simply can't be bought. Perhaps the land owner is simply unwilling to sell or the parcel is part of a development which would be extremely difficult and cumbersome to divide - like a portion of a shopping center parking lot where there's shared access or other conditions making a sale unlikely. Many potential owners of carwashes reject the notion of leased land out of hand.
They argue that the risk is always too great that the land owner will wind up with the carwash after years of operation. Maybe, maybe not. It all depends on the terms and conditions. I'm suggesting that despite my preference for land ownership the leasing of land can be a viable, desirable option. By the early 60's, I was a married high school teacher with an expectant wife. I'd always had part time jobs in addition to teaching.
What little money we had managed to save was used for a down payment on a house. I made less than 5 grand a year teaching. It was increasingly obvious to me that my financial life was going to be a constant struggle. At one time I had 3 part-time jobs besides teaching. None paid well. I wanted my wife to devote her full time efforts to raising our growing family rather than trying to be mother and bread winner simultaneously. I know that must sound very old fashioned or even sexist, but remember it was the 60's. And in my shanty Irish Catholic view, motherhood is a full time vocation ... deserving of far more respect and affirmation than it currently receives.
Then I saw my first self service carwash and the fire in the belly was lit. This had to be a better solution to financial struggles than an endless string of part time jobs - clerk at Sears, house painter, ticket taker, tutor, and others. I'd work every vacation period and nights after school just to pay the bills. I quickly learned that someone in my financial position was not a desirable borrower of capital for business start up.
But finally, by taking in two partners (we each put up $1,000) we managed to lease a piece of land and build a carwash. I was at the absolute limit of my capital and credit to build the wash. There was no way for me to consider buying land. I'd been turned down by lenders, by leasing companies, and was only able to lease that land because one of my partners looked financially strong ... on paper. Leased land allowed me to get started in the self service carwash business.
A personal example of the first reason to consider leased land: a lack of funds, collateral, and credit to buy the whole business ... including land.
SSCWN: Beyond getting started on minimum capital, why else would anyone consider building a carwash on leased land?
P.C.: You should realize that many - perhaps most - small businesses are in leased facilities. Almost all shopping center space is leased and often buildings are built on land that has a long term lease. There's nothing inherently wrong with leasing land. It just depends on the terms and conditions of the lease. The lease has to be long enough to justify the cost of the building over the term of the lease. And the rent has to be low enough to allow for a reasonable profit. You better believe I've been offered lease deals I'd never sign. But I recall one which I did sign that turned out better than I could have hoped. It's also a good illustration of "Reason #2" - favorable terms.
It was a case where the land was simply not for sale. The owner was adamant about that- there was no reasonable price at which it could possibly be bought. There was a carwash on the land and I had made an offer for the carwash. The offer was accepted on the condition that a satisfactory lease could be worked out. The land owner was receiving $400 a month rent and the lease had 8 years remaining.
While the rent seemed reasonable the term seemed a bit short, so I asked the land owner for an option to renew the lease when it was up. The owner showed no interest ... until I mentioned paying $800 a month. His eyes lit up and he agreed to two 5-year options to renew at $800 a month. The thought of his rent doubling was too much for him to resist. Inflation...Not All Bad But now think about that - land with a fair market rental of $400 a month now and 8 years later the rent will be $800 a month and remain so for 10 years.
Can you think of any 18 year period in our lifetimes when costs didn't more than double? In real dollars (adjusted for inflation) I'd be paying far less rent at the end of the lease than I was at the beginning. All during the first 8 years (with the rent at $400 a month) as inflation increased my rent payments decreased in actual value. When/if the rent jumped to $800 a month 8 years later that would be an increase in real dollars, but over the next 10 years of the lease the average rent, in real dollars, steadily went down.
I sold that wash long before the end of the lease. it's still operational today and still on leased land. I tried to buy the land at one point, but the property is part of a large parcel. The owners didn't seem very interested in selling and so I didn't push very hard for a sale. Yet the property illustrates a point which I believe is noteworthy. It shows how tricky predicting the future can be.
I had a good lease, but wanted to own. After being 5 years into the lease I'd have paid a premium price for that land. Today that land is not worth much more than it was years ago. The once prosperous strip mall adjacent to the wash has fallen on hard times. There's high vacancy and some marginal tenants. Recently the neighborhood has shown economic decline rather than growth. The point again, is that all property values are not guaranteed to steadily grow. Some are in decline.
Some go up and then go down. It's difficult to predict what the value of a particular property will be 15 or 20 years from now. At the time I negotiated the lease inflation was in double digits ... now it's below 3%!
Based on my predictions about inflation at the time I signed the lease, it seemed very good. Hindsight showed me that the lease was not as good as I had thought. I didn't foresee the economic decline of the neighborhood nor the reduction of inflation rates to below 3%. Had I enticed the owner of the land into selling by offering a premium price I could well own a piece of land worth less today than what I paid for it. I’d bet the owner wishes he had sold. I'm now glad I was the tenant and not the owner.
The one necessary feature of that lease - any proposed lease - is that the terms must be long enough. The lease term should allow the tenant/operator sufficient time to recover his investment while making a profit. Plus, enough time needs to remain on the lease (preferably through options to renew) that the business can be sold and the lease transferred to a new owner without the lease ending before the new owner has time to recover his investment.*
SSCWN: You mentioned a third reason to consider leasing is land which, for one reason or another, cannot be bought. Why wouldn't a potential owner simply keep searching for a comparable site which could be bought?
PC: My third experience with a land lease was just such a situation. It was a run down - but profitable wash - and was already on leased land. It was the land owner's core belief that "We never sell our land!" Obviously (because it was an existing wash) searching for another site was impossible. I had to evaluate the terms and conditions of the lease and see if the project were economically feasible. I did so only after the owner convinced me that his conviction in "never selling" was unshakable. It came from family tradition and his tax situation. He just would not sell at anything close to a reasonable price.
This particular land owner did have a reputation for fair treatment of his tenants. In addition, his reputation for honesty was known to me because I had once taught his son and worked with the lad on some social projects. The owner demanded no more than reasonable rent and would grant almost endless options to renew ... while adjusting the rent for inflation. The owner and son did not want to operate a carwash. They would be perfectly content to collect a reasonable rent on the land for as long as I was willing and able to pay it. But sell the land ... never! Every aspect of the lease seemed fair and reasonable ... and would remain so.
My partners and I signed the lease and rehabbed the carwash. Later we sold it and the land owner was equally reasonable with the new owners. It was clear that the carwash could easily afford to pay the land rent and make a profit. The wash has since gone through a second major renovation (I first owned it 20 years ago) and was put back on the market a year or so ago. I called about it. Same land owner, same reasonable terms. Its statements showed that it remains a good money maker and I believe it will continue to do so ... while the carwash operator will never own the land.
Fair And Reasonable"
SSCWN: Okay ... so there are conditions under which a person should at least consider leasing the land. you've made pretty clear that the land lease must be relatively long term and should include options to renew. How do you determine what's a "Fair and reasonable" monthly rent to pay for land?
PC: I determine the same two basic facts needed to project reasonable sale prices. Namely, what's the Price Per Minute a potential owner can expect to charge, and how many Minutes Per Day can each bay be expected to operate. Once again, the product of these two numbers is projected daily income per bay. Multiply times 365 and you have the projected annual income per bay. Take that times the number of bays, add 20% for the vac/vend income and that is the projected gross annual revenues for the carwash. For example, in an area where washes charge 30¢ a minute and operate 115 minutes per day the product of these numbers gives the projected daily revenue of $34.50 a day. Multiplied by 365, this tell us that each bay has a projected annual revenue of about $12,600 a year. Add 20% for vac/vend and you show a 4-bay with projected gross annual revenues about $60,000 a year.
For an 8-bay about $120,000 a year... IF the additional number of bays reflect traffic volume, neighboring rooftops, and competition. (Remember - more bays do not necessarily mean more income.) In my view, 12% of gross annual revenues is about the limit of what I'll pay for rent. In the case of the example above (4-bay is grossing $60,000) I'd want the land rent to be a maximum of $7,200 a year ... about $600 a month. In some land leases the tenant is required to pay the real estate taxes on the land as condition of the lease. My guideline of no more than 12% of gross revenues devoted to the land lease means the total cost of the lease to the tenant. If I as a tenant had to pay the taxes then I want that to come out of the 12%. There's one other condition I always ask for (but seldom get) in a land lease.
I ask for an option to buy the property at some future point. To entice the owner to grant such an option to buy, I offer a price above what the land is worth at the present time. If land values increase sharply then the option may make an eventual purchase worthwhile. If land values do not increase then I simply do not exercise the option. While few land owners are willing to grant options to buy, most are willing to grant a "right of first refusal". A right of first refusal guarantees the tenant to right to meet the price another willing buyer has offered the owner. It may seem like a minor thing to ask for, but it can be worth a lot ... as you'll soon see.
Lease A Wash...Lose A Wash?!!
SSCWN: But isn't there a terrible risk that when the lease is up the owner of the land will become the owner of your carwash?
P.C.: Yes. I know of a case where the owner of a particular carwash discovered that his competitor was on leased ground. Claiming to be just a real estate investor interested in acquiring commercial ground he went to the owner of the land and made a very attractive offer. Now owning the land the new buyer simply waited for the lease to expire and acquired his competition. Most leases allow the tenant to remove anything he can from the property at the end of the lease. But the used equipment is worth only a tiny fraction of what it cost and removing a brick building clearly isn't feasible. And, of course, if the tenant had gotten a right of first refusal, the wash would have not changed hands.
As I mentioned the first carwash I built had to be on leased ground because of my lack of capital. I got a 10 year lease and long before it was up I negotiated a lease extension at a reasonable increase in rent. Before this extension was up I offered the owner considerably more than the land was worth. He refused my offer and discouraged any future offer. He said in his family, "We do not sell our land!" I continued as a tenant for 20 years. Then - just 30 days before that 20 years was up - the owner of the land sent me a letter telling me I had to go. To this day I think of him as eccentric.
There was to be no negotiating. He didn’t even want to hear offers of higher rent. He had acquired the land under the adjacent filling station and he had given that other tenant the same notice. He was firmly convinced that the two pieces of land together would bring much more rent than renting each to a separate tenant. And that was that ... period. I was disappointed and hurt to be treated that way. And what made losing my wash of 20 years even more painful and exasperating was that it was because of a faulty theory: that one large tenant will necessarily pay substantially more rent than two tenants on the same divided property.
Fortunately, a few years earlier I had bought a piece of land in the neighborhood ... just in case I was ever forced to build a new wash ... and move I did. But that 20 year lease did get me started in the business and the self serve wash there generated a good profit every one of those 20 years. There is now a single tenant on the site ... finally ... a Wendy's fast food. But that land sat vacant, subject to taxes, and not generating any income for 3 whole years - tens of thousands of dollars tossed right out the window! I'm glad to say that my new location has proved to be superior to the old one. Still ... my being on leased land did cause me to lose my first carwash.
Financial Feasibility
SSCWN: We've all heard more than a few anecdotes about how difficult some city planners can be. Of course, It's the "Horror stories" that everyone remembers ... and talk about. All those projects that slide right on through the system Ñ like grease through a goose Ñ aren't candidates for conversation. So let's assume the zoning is in place, there are no problems with city approvals, and the price of the land is below your maximum. Now, what's next?
P.C.: Now it's a matter of establishing financial feasibility - which really all comes down to the question: will the projected income from the operation justify the required investment? it's a matter of total costs versus projected revenue and profit. I'll give my own "Quick and dirty" rule first: After making your best estimate of the gross annual revenues for the proposed carwash, do NOT spend more than 3 times projected gross annual revenues for the entire project. That's for all the costs - the land, building, equipment, landscaping, paving, lot lighting, legal fees. My bottom line is that if the project costs more than 3 times gross annual income (after the net profit is figured out at the end of each year and the final return on investment is calculated) that rate of return is apt to be below what is a reasonable rate of Return On Investment ... involving the risks which are inherent in self service carwashing.
I realize there are exceptions. I'm sure there are readers out there saying, "I spent more than that and I'm doing well". There are all sorts of ways to define "doing well". There are many different reasons to own a business. Let me put the rule in gentler terms: investors spending much over 3 times the expected annual revenues for a carwash should have solid reasons to believe that they can operate more efficiently than most of us. Or be prepared to settle for a rate of return below what veteran carwash investors would find acceptable. I'll grant there are owners - successful, happy, prosperous owners - who are bored by calculations about final rates of return on investments. Some of these owners may even feel all these "numbers" take the fun and adventure out of building a new wash. So be it. What follows may not interest them. it's an effort to explain the details of how the above conclusion was reached. And indicates how I might depart from my rule ...
Here's how I arrive at that maximum cost for a proposed carwash. Once again the two basic numbers are the Price Per Minute and the estimated Minutes Per Day each bay will operate. These are key factors in determining the projected Gross Annual Revenues ... which in turn determines anticipated Rate of Return. Multiply the MPD each bay will operate times the PPM of wash time. that's the daily revenue per pay. Take that product times 365 and that's the annual revenue per bay. If the cost per minute is 30¢ and the bays are expected to operate about 120 minutes each day then 120 x .30 x 365 gives a projected annual revenue of just over $13,000 per bay per year. Adding 20% for vac/vend income would give a total approaching $16,000 - a per bay, benchmark indicator as to how much to invest in the building ... just as it would determine how much is reasonable to pay for the land.
Put another way, projected gross annual revenues tell a potential owner how much he can take in each year. Out of those revenues the owner can anticipate a net profit. That net profit (when divided by the total cost of the project) tells the potential owner his Rate of Return On Investment (cost of the project). If the rate is too low (compared to the risks in carwashing and the returns and risks of other investments) then the project isn't financially feasible. More about that in a minute. But first ... One needs to know about land costs as a separate item in order to search for a site that is within reasonable range. we've determined those already. The next figure that's really needed is what is it going to cost to design/build, pay fees, equip, pave, and landscape the carwash.
All these costs plus land are the total projected cost. From projected gross annual revenues the costs of operating the carwash have to be deducted in order to arrive at the yearly operational profit. About how much of the gross revenues are to be used for operational costs? Operational Costs Recent national surveys of owners report operational costs (not including debt service or depreciation) which ranged from about 35% of revenues up to around 45%. There are notable exceptions to that spread. In a wash that's about to "belly up" the costs could be 100% (more or less) of revenues. Of course, for a wash with higher than average revenues the operational costs are a lower and lower percentage of the revenues because as revenues go up the fixed costs (like insurance) remain constant and the percentage of revenues devoted to operational costs declines.
For purposes of determining financial feasibility of a projected wash these extremes are not considered. The operations I own are within the range reported by the survey. My gross revenues have been steadily increasing. But increasing as well is the percentage of gross revenues devoted to operational costs. In recent years a good portion of the increase in gross revenues is due to the increase sales of vending items. that's been true industry wide. Most operators have 3 or 4 times as many vending machines as they did a few years back. Of course, the 40% - 50% profit margin on vendor sales is not as "fat" as is the 60%-70% margin on bay services and far less than 1/10 that of those good old vacs. I'm in no way slamming vendors.
I'm only pointing out that in terms of overall profit-to-cost ratio the vendors represent a greater percentage of cost than do vacs and bays. For this reason my overall operational costs are now up as a percentage of gross revenues compared to years when I sold very few vending items. That's part of the reason I find holding operational costs below 40% very hard to do. There's another reason I'm hesitant to project operational costs as less than 40% of gross annual revenues. I do see financial statements of carwash I consider buying that have low operational percentages of gross revenues ... perhaps 30%. I look carefully to see how much cost is included for management. Often none is. Especially for owners who do most of the work themselves and do not charge the business for their time. Their operational profit is high, the operational costs low. But that's not exactly correct ...
Free Management?
All owners know how much time it can take each day to fill machines, fix pumps, emptying vacs, clean up/pick up, and miscellaneous repairs. Then There's the paper work - ordering supplies and bookkeeping, tax reports, and licenses ... on and on. And don't forget the frozen bays, stopped up sewers, burned out bulbs, vandalism, changer maintenance, vault dumping and bank deposits. At times it seems almost endless.
The point is that some modest cost for a part time attendant will never cover the time it takes to do all the things necessary to the successful operation of a self service carwash. There needs to be a projected cost for management which will include some or all of the above mentioned items. To realistically project the cost of operating a carwash management cost should be included. Personally, I consider 45% to be a safe bench mark for operational expense ... provided average gross revenues. If gross revenues are well below average, operational costs as a percentage of revenues shoot up and could hit 65%. But it does vary, so in the table below you'll see operational costs from as low as 35% to as high as 65%.
What's a fair and reasonable Return On Investment for a self serve carwash? Folks are likely to disagree on the exact number. But at the same time, let's agree that fundamental economic theory does state that the return should be proportional to the risk - higher the risk, higher the ROI. If asked, "Is self serve carwashing risky?" The answer would have to be "as compared to what?" The factors to be weighed are the rates of return on other investments and the actual risks inherent in carwashing. Rate Of Risk The "safety factor" in carwashing is nothing like that on a investment in an insured bank CD ... which are paying less than 5% lately. The returns on stocks through mutual funds have been great these last few years ... typically 20% to 25%. Of course, the stockmarket does flatten and on occasions crash.
How much of a risk of a "crash" does the typical carwash run? There is a litany of risks that can slam a wash: government regulations - such as pit dirt being classified as "toxic waste". Drought conditions - which may be a boon in some areas can severely washes in others. Unfavorable weather patterns - lots of rainy weekends and little snow, as witnessed a couple years ago throughout much of America. Economic downturns - we now know self serves may be recession resistant, but certainly not "recession proof" as many were led to believe. And last, but by no means least, competition - there's no guarantee that the market you have all to yourself today won't be whacked in half by some foolish interloper building right down the street.
To me that kind of risk warrants a 20% return. Some might say that's "greedy". I say it's fair and reasonable. you'll have to decide for yourself. Lets consider some variations on a carwash cost/profit scenario. Take a wash with some typical numbers - gross annual revenues of $100,000 and operational costs of 45% ... generating an operational profit of $55,000 a year. If the total investment in that project was, lets say, $100,000,000 the wash is showing a 5.5% return. If it cost $500,000 the investor would get an 11% return. For it to meet my expectation of a 20% annual return, it could cost no more than $275,000. For those expecting a 25% return their money the total cost of the carwash can't be over $220,000. Those satisfied with a 14% return on their investments could pay about $400,000 for such a wash. I'd say the numbers bear out my very simplistic guideline about not paying more than 3 times gross revenues for a wash - assuming that 20% benchmark ROI.
Let me recap... From the section on land costs, the reader had to determine how many Minutes Per Day each bay could be expected to operate and what their Price Per Minute would be. From these we determine daily/monthly/yearly gross revenues. Next I made the case for using 45% as a benchmark operational cost estimate. And then I explained why I consider 20% an appropriate Rate of Return On Investment. So what does this tell me about carwash costs? it's all in the table at the bottom of the page. Table The Costs To use the table - select the figure in the left hand column which is your best estimate of the monthly per bay income.
Then select what percentage of gross revenues you can reasonably expect to spend on operating the carwash ... these percentages are found at the top of the table. To the right of the expected per bay monthly gross income and below the expected percent of operation will be the number representing the maximum amount which I would spend for each bay of a carwash project ... including all costs. You can abuse the table guidelines. By picking the highest monthly income and the lowest percent of operational costs and you could, for example, "justify" a project costing $62,400 a bay and pay about $375,000 for a 6-bay. You would need very favorable circumstances all way "round - volume, price, market, management - to warrant such a projection.
For areas of the country where land and construction costs are so high that a carwash could not be built for less than $62,400 a bay, the table indicates that gross incomes over $1,600 a month per bay are required to make such costs financially feasible. The table also has clear implications for building and equipment costs. All that has to be done is deduct the land costs from the total cost and the remaining number is what's left for building and equipment. Using the example of a 6-bay wash that's going to gross $1,200 a month, operate on 40% of gross, and has a total cost of no more than $260,000 - I would look for land priced under $10 a square foot. A 6-bay is going to need about 12,000 square feet of land - no less than 9,000 for a very tight location, perhaps as much as 15,000 for a generous location. what's quite clear is that a 12,000 square foot site at $7 a square foot will use up $84,000 of the overall budget and leave only $175,000 for building and equipment - just under $30,000 a bay.
Would that be sufficient to build such a wash? Yes, in some areas. No, in others. Not only do construction costs vary widely across the country, but some areas must have bay floor heat and others don't need it. Some very hot and sunny areas must put in shaded drying areas while others don't need them. Potential owners and investors should reach a balance between land costs and building/equipment costs while staying within the overall guidelines set out in the table. What's it cost to build and equip a self service carwash today?
Rick Marvel, the owner of Pendleton Carwash Contractors in Goodlettsville, Tennessee has built hundreds of carwash buildings from one end of this country to the other. He specializes in turnkey operations and often works in conjunction with suppliers of carwash equipment. I asked Rick for a ballpark figure to build a carwash. He said, "$15,000 a bay is a good approximation of what it will cost for a building made of split face block". But, he pointed out, it's very easy to run the costs up from that figure. He also noted that it's difficult to predict some local costs.
Typically Rick sends a generic plan to a local architect for modification to meet existing codes and when he gets the modified plan back he can pin the costs down still further. But ordinarily the costs do not get much over $15,000 a bay. The figure is for the building only ... neither the site improvements (paving, curbs, landscaping, etceteras) nor the equipment (pumps, heaters, lights, etceteras) are included. Some of the many factors that could bump up that $15,000 figure are things such as his 75 foot limit on how far he'll be able to run the sewer and water lines at that price. More than 75 feet, more cost, but in most cases the distance is under that limit.
Lighting and electrical are an option adding another $2,500 per bay. Still, it's pretty clear to me that decent self service carwash buildings are being built under $20,000 a bay ... provided the owner does not want a lavish unit. Of course such things as a wildly sloping lot, unreasonable building inspectors, or trade union abuse can drive the cost out of sight. Equip And Pave The remaining costs are for equipment and paving. I have a recent equipment quote showing costs (including one vac per bay and all the usual services) of almost $12,000 per bay.
That includes bay floor heat, freeze protection, two bill changes, vaults, foaming brushes and spot free rinse, water softener, heater ... plus 10 drop shelf vendors. In areas where bay floor heat and freeze protection is not needed, the per bay cost for this equipment would drop to about $10,000 a bay. Of course, I've seen quotes that are much higher, but there may be quotes that are even lower.
The paving costs depend not only on lot size, but on whether one uses concrete or asphalt. Competitive bidding on concrete should hold the cost between $1.50 and $2 a square foot. Although it can vary quite a bit regionally, asphalt typically is about 30% less expensive than concrete. The amount of overall paved lot per bay involves a minimum of 1,000 square feet of surfacing. Around 1,500 is adequate. Going over 2,000 square feet usually begins to pile on excessive land and paving costs. Let's consider some examples of per bay costs across the ranges given.
First, for a unit with no bay floor heat, no freeze protection, and put on fairly tight lot paved in asphalt. Building $17,500 Per Bay Equipment $10,000 PerBay Paving $1,500 Per Bay Total Cost $29,000 Per Bay Put the same building on a generous sized lot in an area requiring bay floor heat and freeze protection and then pave the lot in concrete and you can see the costs go up to $35,000 a bay. These cost figures indicate that a theoretical 6-bay (one grossing $1,200 per bay a month, operating on 40% or less of gross revenues) could be placed on $7 a square foot land (in areas needing no bay floor heat) under the projected maximum cost of $43,200 per bay.
In areas requiring bay floor heat to have the project come in under those costs, the prudent investor would either find cheaper ground, more competitively priced equipment, or be convinced the per bay monthly income will exceed $1,200. The final option to still make the project go would be, of course, to settle for less than a 20% ROI. The essential message here is that costs matter a great deal. The primary task of the would-be carwash owner is to see to it that costs don't get out of hand. That can paint the owner into a corner where he must generate exceptionally high incomes to achieve a reasonable rate of ROI. Thrill Of The Frill And "Taj Mahals"
Make no mistake about it, a carwash owner/builder must monitor the construction costs very carefully. He should consult with the architect on the cost of each of the building's features. One architect I used kept adding features that I had to keep eliminating because of the costs. For example, he suggested concrete walls with brick facing. Sure, they were very attractive. But I chose fiberglass panels instead. It wasn't just a matter of my being a cheapskate. I decided against deluxe brick because I just could not see how it would substantially increase income.
In affluent suburban communities there may be a little more need for a really fancy building. Perhaps those kinds of customers are more sensitive to aesthetics than the typical carwasher. Still, I do not believe a carwash is like a restaurant where the atmosphere - "ambiance" is a major factor. I seek to have the most profitable carwash that is possible ... not the most lavish one. The ultimate profits and rates of return are influenced by the original investment in the facility. Let me offer a comparison on two 6-bay facilities. In the first case the owner paid $5 a square foot for 15,000 square feet of ground ... a total of $75,000. By carefully monitoring costs and rejecting lavish accouterments he spent $30,000 a bay for 6 bays of equipment, building, and paving.
The carwash and land was an investment of $255,000. In the second case, the owner spent $9 a square foot for 20,000 square feet so he could have an extra large drying area. He built a trendy theme type facility with the same services as the other facility, but a much more stylish building and very expensive decorating and landscaping. He wound up at $40,000 a bay and the total investment came out at $420,000. Assuming operational expenses at about 45% of gross income and $1,200 per bay monthly revenue, then each wash will gross $86,400 per year. Deduct the 45% operational expense and the net operational profit is about $47,300. On a $255,000 investment that's a return of about 19% .
But on a $420,000 investment that's only an 11% return. Which is more preferable? Put another way, to be equally good investments - to have equal rates of return on invested capital - the more expensive facility has to gross $145,000 to make a 19% return. While the less expensive wash had to generate only $86,400 in revenue to produce the same 19% return. The simple question is: will a lavish unit, with grand landscaping and a large drying area gross $145,000 a year when a comparable 6-bay (except for the extras, all the same equipment and services) grosses $86,400. that's $58,400 a year more or it has to do ... over 60% again what the more modest unit does. I simply don't think it will.
The SSCWN article on the construction of carwashes ("Summer "88") should be mandatory reading for anyone considering building a carwash. It should be read with the thought in mind that certain optional costs of construction must be evaluated with extreme care. Things like complicated exterior design, the use of brick where concrete block would do, large covered drying areas, trendy architectural themes - all these types of things drive up costs. The case I want to make is that each of these sorts of things must be carefully evaluated in terms of the extent to which they are likely to increase the gross income. I remain unconvinced that a wood shingle roof will bring in more business than a simpler, cheaper, and easier to maintain roof of composition shingles ... or a basic, flat roof with a mansard. Cost do matter. Failure to cautiously control them is risky business. An Encouraging Word
SSCWN: Frankly, your safe'n simple guidelines are not without complexity. Plus the variables and qualifiers leave room and opportunity for error. On top of that, these numbers sound like your tossing a cold, heavy Wet blanket" on some would be carwash ventures. Do you have any words of encouragement or reassurance for folks who feel like they want to get into this business ... folks who are really determined to own a carwash?
P.C.: I agree that's needed ... badly needed. I've never started a business that I didn't find plenty of people offering me friendly warnings about the possible dire consequences. there's never a shortage of that kind of thinking. Let it be known there is genuine joy in owning your own business. The sense of independence and of being your own boss is hard to put a price on. The financial feasibility of a new business is only one dimension of the decision making process for starting a business. there's lots more to it. Give me a person with fierce determination and a firm and confident attitude that says "I will make it work" and half the battle is won.
When that attitude is driven by a high willingness to work you have the makings of a successful enterprise. These human factors can overcome questionable numbers ... to some extent. People with such attitudes are usually resourceful and determined enough to see to it that costs are held down one way or another. They may build their own equipment, or pour their own concrete, or do some of their own plumbing. Simply put, they're high energy, resourceful problem solvers who get the job done ... they "make things work'". Their instincts are generally reliable, and what they may lack in terms of being able to make feasibility studies they make up for with these human factors. "The numbers" are seldom going to stop such people.
Hopefully those numbers will steer them in the right direction, provide them words of caution, maybe help them avoid some of the mistakes I've made or seen others make. Decisions about starting a business aren't perfectly clear cut and always depend as much on the personal entrepreneurial characteristics of the individuals involved as they do on those numbers. The use I see for stats and "bean counting" is to provide a realistic focus on how costs directly affect the rate of return on the investment ... from success to failure.
Although their survival rate is several times better than most new business start ups, carwashes can fail. I've seen income projections that I know were grossly exaggerated. When the numbers come from experienced owners I trust them much more than when they come from salesmen who have a vested interest in selling new carwashes or carwash equipment. I truly believe my perspectives represent a realistic picture of this business. Admittedly, my approach is to play it safe. I hope my conservative preferences do not discourage would-be owners ... just provide some balance to their enthusiastic desire to build a carwash. Not So Automatic
SSCWN: You are not alone in many of your points of view ... they do represent some not uncommon attitudes in this business. Yet there are many who would take exception to your self serve carwashing investment strategies - your insisting on simple, inexpensive design/construction ... your conservative income projections ... and then there's your apparent attitude toward in-bay automatics. You do not have any! Why is that?
P.C.: Clearly there are advantages to automatics. So I am tempted ... yet reluctant to take the plunge. And I sure would not suggest every new wash automatically get an in-bay automatic ... as it seems many do nowadays. There are two reasons I'm skeptical of automatics. The first comes from my long experience in the business. here's what I've seen happen to automatics ... at least in my neck of the woods. Of the first 6 carwashes I ever owned 4 of them had automatic bays. All 4 were removed. Why?
Well, first note that the time frame is quite a few years ago - more than 15 years. I saw automatics become very popular and then seem to fade away. Robowash was one of the biggest. I knew one of the founders. Robo went from a one room office to a multi-million dollar international company ... and then into the toilet. Expensive, hard to maintain equipment which did a marginal job of cleaning cars led to the demise of many of the early automatics. While that was the original basis of my skepticism, that's surely not true of today's automatics ... which are better in every way.
Now I'm skeptical for an entirely different reason. The reason for my current skepticism is simple. Competition ... oil company competition. I gather It's not true of all parts of the country, but in this area there are now many oil company owned automatics. It seems like each time I get serious about an automatic the oil guys make a move which discourages me. In the early days some of the gas station automatics were free. Not just the perception of being free while charging higher prices for gas. Not at all. I recall one in my area which gave a free wash with any purchase. You could literally buy a soda for 29¢ and they would wash your car without additional charge.
That was as free as free can possibly be! Others required a minimum gas purchase ... few if any charged over a dollar. To me that's stiff competition ... even if they did only a so-so job of cleaning a car. The more recent trend is to charge for the carwash while giving a substantial discount for gas purchases. But along with this trend the oil companies have gotten really serious about the equipment they are putting in these washes. In earlier years it was always a roll over, brush type ... lots of friction. These were known to sometimes scratch and haze the paint; rip off the antennas, mirrors, and moldings ... especially if they were poorly maintained ... which they often were. But now gas stations are going big time into state of the art touchless equipment.
Check out most issues of the Journal of Petroleum Marketing and you'll soon see that these oil folks are determined to get into carwashing in a more professional and ever expanding way. The good news - such as it is - can be found in that they are viewing carwashing as a serious profit center. The days of the freebee wash with gas are virtually over. We're now seeing a basic automatic wash typically being sold for $2 to $3 ... with gas purchase. The oil companies may be giving up on giving away carwash services, but their washes are still somewhat deceptively discounted ... and they sure are convenient. I know they are pulling traffic out of our bays - both wand and automatic. "McGas N Wash"
Another development worth noting is the recent teaming up of 2 corporate giants - McDonalds and Amoco. They are going to test market combination gas/car care C-store/fast food and, yes, carwash facilities in Chicago. The plan is to launch 50 to 75 more "McGas" stations in the next year. I'm sure these facilities will have top notch equipment, management, promotion, and instant credibility. Supposedly, they will be located on prime sites - locations probably too rich for self serve carwashing bays. And, therefore, not likely to offer too much direct competition to wand washes.
Still ... these guys warrant a watchful eye. I'm sure they'll impact the industry's future in more ways than one. Here and now - I'm hesitant to add automatics in my particular area because the oil company competition has gotten so fierce. I believe that competition is healthy. It's good for business and good for the consumer ... generally. For me when it comes to head to head with competition with the gas stations that surround me I have to believe as the wise man said, "discretion is the better part of valor".
So for the time being - in my markets" current competitive environment - I shall remain discreetly "automatic-less". Automatic Advantages Despite all my personal reservations about waging competitive warfare with gas station automatics, I am aware that they are a major factor in many if not most new washes, and many owners of existing self serves are considering adding them to wand bays. So let also offer some of the reasons why many self-serve owners might seriously consider an automatic ... or two.
In an area where there's not too many competitors chasing after too few of the right kind of customers, automatics at self serves can be an important profit source: Automatics have far higher income potential than wand bays - about 300% to 400% more income on average. They wash cars faster - about 4, 5 times as many cars per hour - a real advantage on really busy days! Automatics pull in new customers ... they broaden your market base. There are plenty of customers who will wash in an automatic who would never get out of their car and use a self service wand bay.
They could also attract customers who would use the self service bays. For example, during cold winter weather or when they are dressed inappropriately. You cannot deny those important benefits. On the flip side - they're much more expensive then self serve wand equipment. The equipment is more complicated and requires more maintenance. And most owners seem to feel automatics function best with an attendant ... so they're more labor intensive than self-service bays.
Then again, many operators say that an automatic justifies the expense of a full time attendant ... who can be a real asset to the self serve bays too. So where does that leave me? Pretty much right in the middle. They are not for me ... not yet anyway ... not at my current locations which are surrounded by gas stations. Plus there are reasons which are purely personal - my bad luck with employees in the past has soured to the idea of hiring attendants again. Also, I find myself busy enough with my current teaching schedule and wand washes.
I'm reluctant to take on another maintenance responsibility. And I have to admit it's also a matter of my own personal prejudice too. I believe self serve high pressure wand washing is the safest, most thorough, and best carwash value. I am very particular about my cars ... very protective of my automotive investments. I will wash them no other way!
In Summary
SSCWN: Sum all this up for us as briefly as you can. As you see it, what should a would be operator consider before breaking ground for a new self serve carwash?
P.C.:
1. Competition is growing ... it's keener than ever.
2. Tighter government regulations often caused by negative reputations of car washes have made them more difficult than ever to build.
3. There are definite spending limits to what can realistically be paid for carwash ground, buildings, and equipment.
4. I base those limits on projected gross income - the average price per minute carwash services are selling for in a given area and a realistic consideration of how many minutes per day each bay will operate. To exceed the maximum limits on costs there better be solid reasons to believe the projected gross income will exceed industry averages for the area.
5. To me, potential profit is far more important than any other reason for going into business.
6. If capital is tight, it's better to start on leased ground than not start at all.
7. Feasibility studies are an important consideration.
8. The cost of the facility must be monitored ... carefully. "Frills" should be carefully evaluated in terms of the increased income they may produce.
9. I have mixed feelings about automatics. Aggressive oil company competition, more maintenance and attendance cause me to shy away. But their real potential to attract new customers, broaden my market base, and generating additional revenues - perhaps 3 times higher than a wand bay - is all very appealing.
10. Hard work and determination - when based on the right numbers - are the stuff that produce the joys of entrepreneurship: solid financial reward and great personal satisfaction!
After Words Opinions, opinions - needs to be done - from Advertising to Zoning permits! The opinions expressed by Pat in this article are no exception. I think he hit upon an innovative idea with real potential value for this industry - namely, his Minutes Per Day approach to projecting site viability and cost guidelines. I, however, have some misgivings about the technique. every carwasher has'em. And so many opinionated approaches to much the same ends help make coin-op carwashing so dynamic. There is more than one right way to do whatever Unfortunately they (and a number of others) were not expressed in the body of the article ... as they really had been in the course of the actual conversations Pat and I have had on these loaded topics. This "Investing" feature (as printed) was allowed to be more of an exposition of Pat's "play it safe" philosophy and techniques than a true give-and-take debate on the points presented. For the record, I'd like to mention several key aspects of the article that need more development and could have benefited from more balance.
1.) MPD- key to Pat's evaluation of a carwash site is its projected Minutes Per Day each bay is expected to operate. The concept is excellent - a handy, easy to grasp tool when taking the measure of a carwash ... proposed or existing. It's shortcoming is found in its obviously broad generalities ... largely based on regional averages. MPD projections will become much more valuable when they can be applied much more precisely to specific site situations. That will involve a more comprehensive formula that factors in Traffic, Population Demographics, and Competition to predict those MPD. don't be too surprised when Pat at some future date finally nails down that formula and takes MPD's from his "convenient benchmark" to more of an industry standard.
2.) Return On Investment of 20% - Pat's litany of risks that a self serve might face ring true. And yet, I'd expect many operators and suppliers both to look a bit askance at someone insisting on no less than a 20% return. Manufacturers and distributors have sold a lot of wash packages over the last decade or so to operators with proforma that project "only" a 15% ROI ... not exactly an industry standard, but akin to it. And given the very nominal current return of 4%-5% on safe investments such as most Chides and T-Bills, even 15% returns have legitimate appeal - especially if that reflects labor/management costs. The investment can sweeten more if you consider the value of appreciating land astutely purchased in a desirable, growing area - what some investors call "warehousing the property" . That is, generating satisfactory-to-good income as an on-going business while anticipating the likelihood of the site eventually being too valuable for a coin-op carwash.
3.) Automatics - Pat's explanation as to why he has no in-bay automatics is understandable. And while the case for automatics was summarized fairly, the story would have been enhanced by referencing some of the numerous long time, multiple wash owners who insist that they would never build a wash (or rehab an existing one) without installing at least one automatic. The more successful wash chains/franchises are especially committed to automatics- "SpotNots" throughout the Mid-West; the "Wonder Wash" chain of about 50 facilities in Wisconsin; and "Super Washes" with hundreds of locations around the country. Admittedly, this installment of Investing In Self Service Carwashes" does fall short in providing formulas that factor in the basic hallmarks of site analysis of Traffic, Population Demographics, and Competition when it comes to evaluating the important role automatics can play in coin-op profitability. Look to future installments for that. And expect more articles in general about automatics. The ICA has begun to get very serious about its attention to this aspect of carwashing. The upcoming Las Vegas ICA convention this Spring will feature several days of seminars devoted exclusively to automatics. we'll be covering some of those presentations ... distilling and augmenting them for future SSCWN articles.
4.) Frills - one market's "frill" may be another market's "meat"- potatoes". This particular article pounded away relentlessly at the "Taj Mahal" syndrome and the "foolishness" of pumping bucks into cosmetic enhancements of a site and building. For yet another interesting and informative Ñ and very different! - take on one of Pat's fundamental guidelines ("no frills design and construction") be sure to check out the "On The Road To Tampa/St.Pete's" in this issue. Even you hard-core "just the basics" operators may very well rethink your bare bones approach to self serve marketing after taking one of the most colorful tours ever to grace the pages of the SSCWN. Do "frills" pay? You be the judge. Again, this "Investing" installment was hardly an end-all, be-all text book on the subject. But it does provide some innovative guidelines - handy, preliminary - for site analysis and financial feasibility. It was also a worthy effort to provide conservative balance to the claims that have been made by some, shall we say, "very enthusiastic" sellers of carwash packages and the giddy expectations some newcomers leap into the business with. We hope the bottom line message was not missed along the way: if you do your homework and play your cards right, this can be a great business ... providing both an excellent Return On Investment and special personal rewards too.