A friend of mines father has asked me to help him value a car wash (self-serve) that he is considering purchasing. Let me know your thoughts on how you would go about valuing this. Here are some rough estimates: -$15,000 revenue a month -Expenses have averaged ~30% of revenue per year -Land is estimated to be worth ~500k -Equipment will need to be replaced every 5 years at 100k -Real estate appreciation potential is deemed average (not a high growth area) Would the best way to value this be a straight forward DCF? What type of considerations should be given to factors such as illiquidity etc… What are some other pieces of information that you would request to be able to make the most accurate valuation assessment? Is there any type of creative structures that I could consider proposing to the current owner that would help reduce his tax liability? I am thinking he would be in line for a large taxable gain upon the sale of the business. What type of structures would be appropriate? Would it make sense to consider a sale/leaseback?
I can’t imagine why a car wash would be worth any different than land + replacement cost - depreciation. Is there anything special about this location? Do people have particular loyalty to Sam’s Car Wash? Do they own a patent for special soap? Complicated structures for getting out of capital gains taxes are just a problem in everyone’s life (and a sales/leaseback would have the current owner paying capital gains taxes, not owning his own car wash, but operating it which is surely not the intent here).
Log on to bizbuysell.com (or whatever it is) and try to find comps. Make sure you look at the bank statements and the tax returns NOT the company’s “books” when coming up with that margin estimate. Sounds like replacement costs should be considered, too? Land costs $500k, machines cost $100k thus business is worth $600k?
as far as tax, he will already have a substantial depreciation benefit because car washes are depreciated over 15 years
IMHO, as a person who works in commercial real estate appraisal, this should be valued not much differently than typical, income-producing commercial real estate. There are 3 primary ways to value commercial real estate: income capitalization, cost approach, sales comparison approach. DCF is, by and large, considered a highly unreliable method in commercial real estate valuation circles because it requires the appraiser, who presumably does not specialize in the business of the tenant of the Subject, to make estimates about long-term growth of cash flows as well as long-term growth in expenses (a terminal value is a must with DCF valuation of real estate). It also requires the application of a discount rate to be applied for many many years, which in reality is a highly dubious process. DCF is, therefore, not the preferred method of appraisers. If your friend wants a general, very rough valuation of the property, use LoopNet, RC Analytics, or CoStar Group or some type of resource that can help you determine a fair cap rate for the area. Take 2007 net operating income and divide by a reasonable cap rate. You’re done. If he wants a more “exact” or professional valuation, he needs to contact the professionals.
So exaplin to me the difference between taking current net incme and dividing by a cap rate and a DCF approach (they are the same with a whole bunch of simplifying assumptions in the DCF approach). The only reason for prefering the cap rate approach is to avoid false precision, but it is a much richer approach.
Joey, the cap rate approach is not even remotely similar to DCF except for the presence of division. The cap rate approach studies the typical one-year return on cash flow. For example, if you see that 5 multifamily properties sold in the last year in your area at cap rates of 5%, 5.2%, 4.8%, 5.1%, and 4.9%, one could reasonably conclude to a 5% cap rate in the area. So, if your Subject property in the most current year yielded a net operating income of, say, $100,000, then you would divide $100,000 by 5% and reach a value conclusion of $2,000,000. It’s a very easy approach, but one that’s also taken as one approach in an holistic evaluation of a property, which includes rent evaluation. The DCF approach attempts to estimate over many years expenses, revenues, needed capital investment and, above all, discount rates over the long-term. Please, somebody tell me what a good discount rate on cash flows will be in 2010. How about 2015? Please, give me some insight into the growth in expenses and revenues of, say, car washes in Murfreesboro, TN. Because there are so many unknowns that INVARIABLY lead to arbitrary numbers attached to long-term cash flows, there would be wildly different value conclusions reached by different valuers. Using uniform area cost charts, income capitalization, and sales comparison in an holistic manner, as well as other relvant methods, skilled valuation professionals can come to much more uniform conclusions about value in commercial real estate. The ONLY time my firm uses DCF in the commercial real estate valuation process is to value things like tax credits, and when the client specifically requests a DCF. But it’s the policy of most commercial appraisers to NOT use the DCF method to reach a valuation conclusion unless it’s one of many methods used to make a reasonable conclusion.
Heck, if realtors start using DCF analysis then the real estate market will really crash!
A car wash is nothing like a multifamily. Realtors love to quote you cap rates on business properties i.e. hotels, gas stations and car washes primarily because they have no other metric they understand and a quantative method sounds good. Business real estate is single use RE with limited utility. Folks may disagree with me but I think what best applies is a simple model and ROI calc and a careful eye on the qualitative aspects of the deal. Here is my 10 cents; (1) Due the due dilligence on enviro; the zoning and will it stay the same (2) Ask to see tax returns; biz owners sometimes lie, inflate income (some even pay extra tax) to get rid of property (3) The labor situation; huge problem in areas with no immgrants (4) Setup a model and run a simulation on how quickly you can recipu your investment at current income & if income drops 10-15%. 3 years is avg. Longer than 5 is a no go. (5) Creative deal structure to reduce tax liability? Thats the sellers problem. He should have thought of a 1031 exchange. Some sort of a leasing arangement also works but can get messy. There are other off shore games you can play but they are not worth the cost for deal less than $1 Million.
1moreQ reminded me of something that applies to this: I was thinking about buying a small apartment building in brooklyn that came with a coin operated laundromat on the ground floor. The owner took a lot of revenue in cash (errr I should say “unreported” coinage?).
kkent Wrote: ------------------------------------------------------- > Joey, the cap rate approach is not even remotely > similar to DCF except for the presence of > division. The cap rate approach studies the > typical one-year return on cash flow. For example, > if you see that 5 multifamily properties sold in > the last year in your area at cap rates of 5%, > 5.2%, 4.8%, 5.1%, and 4.9%, one could reasonably > conclude to a 5% cap rate in the area. So, if your > Subject property in the most current year yielded > a net operating income of, say, $100,000, then you > would divide $100,000 by 5% and reach a value > conclusion of $2,000,000. It’s a very easy > approach, but one that’s also taken as one > approach in an holistic evaluation of a property, > which includes rent evaluation. > > The DCF approach attempts to estimate over many > years expenses, revenues, needed capital > investment and, above all, discount rates over the > long-term. Please, somebody tell me what a good > discount rate on cash flows will be in 2010. How > about 2015? Please, give me some insight into the > growth in expenses and revenues of, say, car > washes in Murfreesboro, TN. Because there are so > many unknowns that INVARIABLY lead to arbitrary > numbers attached to long-term cash flows, there > would be wildly different value conclusions > reached by different valuers. Using uniform area > cost charts, income capitalization, and sales > comparison in an holistic manner, as well as other > relvant methods, skilled valuation professionals > can come to much more uniform conclusions about > value in commercial real estate. > > The ONLY time my firm uses DCF in the commercial > real estate valuation process is to value things > like tax credits, and when the client specifically > requests a DCF. But it’s the policy of most > commercial appraisers to NOT use the DCF method to > reach a valuation conclusion unless it’s one of > many methods used to make a reasonable conclusion. Think harder…