How to Value a Car Wash
Businesses in the car wash industry clean, wash, and wax various automobiles. This primarily includes passenger cars, vans, trucks, and trailers. According to IBIS World, the car wash industry can expect growth in the coming years. This is due to an increase in vehicle registrations as well as falling gasoline prices. These conditions are ideal if you are looking to buy, grow, or sell a car wash. However, it is important to note that this industry is extremely fragmented and competitive. To succeed, it is helpful to learn about how to value a car wash.
The best way to learn about valuing a car wash is to obtain a business valuation. As part of a business valuation, business appraisers assess the strengths and weaknesses of your car wash. In addition, they will use various valuation techniques to determine the fair market value of a car wash. With this information, you begin to maximize the value of a car wash.
Peak Business Valuation is a professional business appraiser. At Peak, we work with car washes on a regular basis. We are happy to provide you with a business valuation for a car wash. Additionally, Peak can answer any questions you have on how to value a car wash. Schedule your free consultation with Peak Business Valuation today!
How to Value a Car Wash
When valuing a car wash, valuation analysts consider several business valuation approaches. In many cases, the business appraiser will use the market approach and/or the income approach. Each method uses a different basis of valuation. As such, the business appraiser will determine which method(s) is best for your car wash during the appraisal process.
Valuing a Car Wash Using the Market Approach
The market approach is common in small business valuation. To understand this valuation approach, consider the real estate appraisal process. When valuing a property, real estate appraisers assess similar homes that recently sold in the area. This helps them accurately calculate the value of a property. When valuing a car wash with the market approach, business appraisers consider similar companies that recently sold on the market. If the company is private, the expert refers to private transaction databases to gather information.
Multiples for a Car Wash
When using the market approach to value a car wash, business appraisers rely on valuation multiples. These are financial ratios that measure a car wash’s value based on various metrics. These metrics often include cash flow, earnings, or sales. To find the proper valuation multiples for a car wash, business appraisers apply the appropriate NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a car wash.
SDE (Seller’s Discretionary Earnings) Multiple for a Car Wash
- SDE multiples measure a car wash’s value in relation to its seller’s discretionary earnings. This valuation multiple is common when valuing a car wash.
EBITDA Multiples for a Car Wash
- EBITDA multiples reflect a car wash’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation analyst to understand the return on investment (ROI) a car wash can generate.
REVENUE or SALES Multiples for a Car Wash
- The REVENUE or SALES multiple assesses the value of a car wash based on the amount of revenue or sales it generates.
To learn more about how to value a car wash using the market approach, see Valuation Multiples for a Car Wash.
Valuing a Car Wash Using the Income Approach
The income approach is another common method for valuing a car wash. When using the income approach, business appraisers assess the future cash flow potential of the car wash. In addition, they assess the risks associated with buying, growing, or selling a car wash. We highlight a few of these risks below.
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- Competition: The car wash industry is very fragmented and competitive. To succeed, operators need to create diverse revenue streams and differentiate from competitors.
- Equipment: Operating a car wash often requires various types of equipment and/or machinery. It is important to ensure your equipment and machinery is functional and reliable.
- Financial Performance: Many car washes have struggled to increase revenue and profitability in recent years. It is important to have strong financial planning and budgeting skills to increase profitability.
- Location: The location of a car wash plays an important role in its success. Car washes should avoid areas that are heavily reliant on public transportation.
Methods to Value a Car Wash Using the Income Approach
There are many variations of the income approach for valuing a car wash. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a car wash using these income approaches.
Capitalization of Cash Flow Method
The capitalization of cash flow method is ideal for car washes with long and stable histories. When using this approach, valuation experts determine a reasonable amount of cash flow for one period. The cash flow is then divided by a capitalization rate to determine a reasonable rate of return an investor can expect. The capitalization of cash flow method also analyzes the risks that may prevent investors from meeting expected earnings. We discuss some of these risks above.
Discounted Cash Flow Method
The discounted cash flow method is best for car washes with strong financial histories and reliable forecasts. This approach involves projecting future cash flows over a 3-5-year period. The appraiser then applies a discount rate to the future earnings which takes the time value of money into account. Keep in mind, the discounted cash flow method is less common because it is limited to future cash flow estimates which can be subjective.
Summary
Business appraisers consider many valuation approaches when valuing a car wash. Each method offers a different perspective on the value of a car wash. To learn how to value a car wash, it is best to receive a business appraisal. As part of a business appraisal, a valuation expert calculates the fair market value of a car wash. The appraiser will also discuss the risks and opportunities of your car wash. This information is vital if you are looking to increase the value of a car wash.
Peak Business Valuation, business appraiser, is happy to help! We work with many car washes across the nation. As such, we are happy to provide you with a business appraisal for a car wash. Additionally, Peak can discuss any questions you may have on how to value a car wash. Schedule a free consultation with Peak Business Valuation today!
For more information see Valuing a Car Wash, Value Drivers for a Car Wash, and Valuation Multiples for a Car Wash.
