Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / Why Private Equity Is Buying Up Car Washes
Transcript
- Lucas: Luna, have you ever pulled into a car wash and noticed it’s part of a chain with a monthly subscription plan? Because that’s not an accident. That’s private equity. Luna: You’re going to tell me that the car wash industry is being rolled up the same way they did with pest control and HVAC? Lucas: Exactly the same playbook. And the numbers are pretty striking. So, Mister Car Wash—that’s the biggest chain in the country, over 450 locations—went public in 2021. And what they proved is that a car wash can behave like a SaaS business. Luna: A software business? From washing cars? Lucas: It sounds odd, but listen: Mister Car Wash now gets over half its revenue from unlimited wash plans. You pay twenty to thirty dollars a month, you can wash your car as often as you want. That’s recurring, predictable revenue. And retention is surprisingly high—around 80 percent year-over-year. Luna: Okay, so the subscription model stabilizes cash flow. But aren’t car washes still expensive to build and operate? Lucas: They are. A modern tunnel wash—the kind where you drive in and the conveyor pulls you through—costs three to five million dollars to build, depending on the real estate. But the margins are fantastic. Industry EBITDA margins run north of 35 percent once you’re at scale. And because it’s a cash business with low receivables, there’s very little working capital drag. Luna: So private equity sees high margins, recurring revenue, and a fragmented market. Sounds like a roll-up dream. Lucas: Exactly. The car wash industry is still dominated by independent operators—about 80 percent of the roughly 80,000 washes in the U.S. are single-site or small chains. So PE firms are buying up independents, putting them on a common operating platform, and driving that subscription adoption. Luna: Who are the biggest players doing this? Lucas: Besides Mister Car Wash, you have Take 5 Car Wash, which is backed by the private equity firm Sentinel Capital Partners. They’ve grown to over 200 locations. Another big one is QuickQuack Car Wash, backed by Golden Gate Capital. And then there are regional players like Zips Car Wash, which was acquired by an investment firm a couple of years ago. Luna: It feels like every corner in my city has a car wash being built or renovated. Is there a risk of overbuilding? Lucas: That’s the big question. Some markets are definitely getting saturated. In Phoenix, for instance, there’s been a building boom. But the argument from the PE side is that the subscription model creates loyalty—people stick with one wash because it’s already paid for. So you want to be the dominant player in a given metro area to capture that recurring revenue before anyone else does. Luna: And the real estate itself is also valuable, right? A car wash site is usually on a high-traffic corner. Lucas: That’s a huge part of the thesis. Car washes are often built on land that’s zoned for commercial use but not necessarily suitable for a big retail center. So the real estate can appreciate over time. Some PE firms actually underwrite the deal assuming they could sell the land for redevelopment down the line if the wash doesn’t work out. Luna: That’s a nice hedge. But what about the multiples? How much are they paying for these businesses? Lucas: Typical acquisition multiples have been in the 12 to 14 times EBITDA range for larger platforms. For smaller independents, you might see 8 to 10 times. But because the subscription model boosts recurring revenue, buyers are willing to pay up. Mister Car Wash, for example, trades at over 20 times EBITDA. Luna: That’s rich. But if subscription adoption keeps growing, maybe it’s justified. Still, the whole thing makes me wonder: what happens when we all switch to self-driving cars that clean themselves? Or when EVs make drive-through washes less appealing because of battery concerns? Lucas: Those are real long-term risks. But for now, the average car owner washes their car about 13 times a year. And the industry is still highly fragmented. So I think PE will keep piling in for the next few years at least. Luna: It’s funny—when you think of a subscription economy, you think of Netflix or Spotify. Not a tunnel of spinning brushes and soap. Lucas: Right. And if these conversations have moved your work forward in some small way, you might consider supporting the show. We keep it ad-free, and listener support is what makes that possible. If you’re inclined, you can find us at buymeacoffee.com/fexingo. Luna: Yeah, it’s a simple way to help us keep digging into niches like this. No pressure, but every bit helps. Lucas: Now, one more angle on the car wash roll-up that I find interesting: the technology layer. These chains are installing sensors and cameras that track every vehicle through the wash. They use that data to optimize chemical usage and water consumption, which cuts costs and environmental impact. Luna: So PE is also investing in operational efficiency, not just aggregation. Lucas: Exactly. A typical site might use 40 gallons of water per car, but with modern reclaim systems, they can cut that to 10 or 15 gallons. That’s a big deal in drought-prone states. And it also helps with regulatory compliance. Luna: What about labor? Car washes are still pretty labor-intensive. Lucas: They are, but automation is creeping in. Some newer washes have fully automated payment and even robotic arms that dry the car. The subscription model actually helps here too—if you have predictable volume, you can schedule staff more efficiently. Luna: So the play seems to be: buy up independents, slap on a subscription plan, optimize water and labor, and maybe sell the real estate later. That’s a clean thesis. Lucas: It is. And it’s why you’re seeing PE firms like TPG and Leonard Green & Partners also making moves in this space. I think we’ll see a few large national chains emerge in the next five years, maybe even a public offering from Take 5 or QuickQuack. Luna: I’ll be watching my local car wash to see if it gets a new sign and a monthly plan. Lucas: If it does, you’ll know exactly what’s happening behind the scenes. That’s the Buyout Show for today.