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car wash pricing

what's the deal with car washes being priced at 5x the net? Correct me if I'm wrong but if I have to work for 5 years (plus the intersted on note) to recoup the my investment it sounds like a really bad business to me? And does not even include the real estate. So, you buy a 1.5 mil car wash that nets 300K and has 10 years remaining on the lease. By the time you break even you only have 5 years left to make that "high" net. Sounds like a really bad deal to me. I'd like to hear your thoughts.

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The BAF Group LLC
MD

Jason, you can use any multiple you want, ask Accountants for their appraisal of Value, use far more sophisticated calculations to determine Cash Flow, and more. But what it really comes down to is: What is a Buyer actually willing to pay? ANY business is only worth whatever the Buyer is willing to pay.

There are other, mitigating issues. The Buyer may offer 5X Net, but is he able to pay in Cash. Because a Lender is not apt to offer 5X Net.

But what is Net? How has it been defined? How has that been analyzed? By whom? Is the Seller not disclosing all of the Cash he is reporting on his Taxes, and is he trying to charge you with that unreported Income? (This is common in many businesses that deal in large amounts of Cash.)

But it is not uncommon for Car Washes, Laundromats, Liquor Stores and some C-Stores to demand, and sometimes have Buyers that are willing to pay premiums for such businesses. There are two reasons for this, from our perspective. First, many such Buyers are unsophisticated in their approaches to buying a business and may not understand the impact on Cash Flow and how it is used to measure prices in small business purchases.

The second reason is simply the fact that these businesses are in high demand and low availability. The classic "supply and demand" approach to pricing would push any business to high - sometimes unrealistically high levels.

Without actually seeing the books on the business you are considering, I can't be more definitive than this.

Oct 12, 2009

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