One of the new services I'm offering at SmartHelping is a deal screener for buyers of $500k to $10M small businesses. I'll walk through a potential deal with buyers and run all the data through a template like you see below. Note, in the video there are many variables and parts that I can't complete unless it was an actually real-world engagement where there was more due diligence available from the seller and NDAs were signed. However, you can see the detailed process.
Here's a pre-built financial model for car wash startups to work from and here are more templates for the automotive industry in general.In the above deal, there was $325k of gross revenue and $180k in annual adjusted net income. The listing also labels that $180k as EBITDA so if I were actually doing pre-diligence work on this it is important to understand what the seller's adjustments are as that can dramatically effect the potential valuation. The real estate was included in the purchase.
It was labeled as an 'absentee ownership' situation (the owner was not involved in doing any work that involves a salary) so the $180k figure may be close to the actual cash the buyer can expect as a return per year if nothing changes. In the video I put in some fictional 'earnings adjustments' to show how that may effect the deal metrics.
At a purchase price of $900k, that means you are buying in at roughly a 2.76x multiple of revenue and 5x EBITDA. Without knowing much else as far as required renovations / repairs or other things that could raise initial costs or effect ongoing operations, the purchase price needs to come down to $700/800k.
That price suggestion is only my opinion and some things that may make the original purchase price make sense is if the buyer thinks they can raise sales and EBITDA substantially over a few years. Big factors include the feasibility of growing memberships, improving equipment / parking lot / features / POS upgrades / marketing and so forth. If you can double sales, that means your stabilized going-in revenue multiple may get down to 1.38x instead of 2.76x.
At the end of the day you want to know the hassle you are taking on, the expected amount of time it will take to pay off the initial investment with earnings, and if sales are trending in the right direction or there is clear opportunity to be able to make that happen.
The risk is in the leverage. If you only put down 20/25%, it could mean larger returns on the actual invested capital, but if operations are slow to start and your debt coverage is getting close to 1 or negative, there is risk of losing it. That just speaks to the durability of revenues and any unforeseen costs.
In the analyze process, I also look at many qualitative and risk factors that are more of a judgement call rather than directly related to the numbers. This gives a more comprehensive view of the target business for the buyer as they try to get a feel for the potential acquisition.
In my analysis process, there will be an overall deal score, and individual deal scores for:
- Financial Performance
- Valuation & Returns
- Debt & Downside Protection
- Revenue / Customer Quality
- Operational Quality
- Management / Owner Dependence
- Market & Competitive Position
- Deal / Diligence Risk
If you are looking at potential car washes to buy and what pre-diligence insights, check out my deal analysis services.
