Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Car Washes
Transcript
- Lucas: If these conversations have moved your work forward in some small way — maybe you've used one of these deal frameworks, or you've taken a closer look at a fragmented industry because of something we covered — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: Yeah, it's a small group, but it keeps the show ad-free and independent. We don't run ads, so the economics are pretty straightforward. Lucas: Exactly. And it's easy to find — just buy me a coffee dot com slash fexingo. Now, let's talk about an industry where private equity is quietly building big positions: car washes. Luna: Car washes? I feel like I see a new one on every corner, but I never thought about it as a private equity play. Lucas: That's exactly the point. It's a classic roll-up story, but it's happening under the radar. The car wash industry in the US is still heavily fragmented — about 80 percent of the roughly 60,000 car washes are owned by single-location operators. But over the last five years, private equity firms have been consolidating it aggressively. Luna: What's driving the interest? I mean, a car wash seems like a low-margin, weather-dependent business. Lucas: It used to be. But the game-changer has been the subscription model. Instead of paying per wash, customers pay a monthly fee — typically between 20 and 40 dollars — for unlimited washes. That turns a variable, transaction-based business into a recurring revenue stream. And recurring revenue is exactly what private equity loves. Luna: So it's like the SaaS-ification of car washes. How many subscribers do these operators need to make the math work? Lucas: The rule of thumb I've heard from operators is that a single tunnel wash site — the kind where you drive through an automated tunnel — needs about 1,500 to 2,000 subscribers to break even on the monthly plan. Above that, the margins get really attractive. The incremental cost of an extra wash is just water, soap, and a little electricity, so once you cover fixed costs, the marginal profit per subscriber is high. Luna: And the big roll-up players are Mister Car Wash and some regional platforms, right? Lucas: Mister Car Wash is the largest, with over 400 locations. It went public in 2021 and has been a bellwether for the industry. But behind the scenes, firms like Leonard Green & Partners and KKR have been building platforms. For example, Leonard Green invested in a company called Quick Quack Car Wash — that's about 150 locations in the West. And KKR backed a platform called Flagship Carwash, which operates mainly in the Mid-Atlantic. Luna: What's the typical deal structure? Are they buying mom and pops and rebranding them? Lucas: That's part of it. But many of these firms are doing build-outs too — constructing new car washes from scratch. The thesis often includes a real estate angle. A car wash site is a relatively cheap piece of real estate — you can buy a lot for maybe one to two million dollars, build a wash for another two to three million, and you've got a five-million-dollar asset that can generate a million or more in annual free cash flow. Luna: That's a 20 percent cash-on-cash return before leverage. No wonder firms are piling in. Lucas: Right. And you can lever that up with debt because the cash flows are predictable. So the equity returns can be quite high. But there are risks. The biggest one is overbuilding. In some markets — like Houston, Atlanta, Phoenix — there are already too many car washes. You see price wars, and the subscription churn rate climbs. Luna: What does churn look like in a car wash subscription? People just cancel when they find a cheaper option? Lucas: Exactly. The average monthly churn across the industry is probably around 5 to 7 percent, meaning you lose six to eight percent of your subscribers each month. That's high compared to, say, a gym membership. But the acquisition cost to replace them is lower — you can run a sign-up promotion at the wash and pull in new customers pretty cheaply. Luna: So it's a volume game. You need to keep the pipeline full. Lucas: Exactly. And that's where the roll-up advantages kick in. A larger platform can centralize marketing, negotiate better deals on chemicals and equipment, and manage real estate more efficiently. Plus, they have better data on which sites perform and which don't. Luna: I've also heard that some firms are bundling car washes with oil change services or detailing. Is that a trend? Lucas: It is. The idea is to increase the revenue per customer and reduce churn. If someone is paying for a monthly car wash, you can upsell them on a discounted oil change or an interior cleaning. Some platforms are adding express lube bays. It turns a single-service business into a multi-service convenience hub. Luna: And the exit strategy? Do they sell to another PE firm, or is there a public market appetite? Lucas: Mister Car Wash is public, so that's one path. But many of these firms are building for a sale to a larger platform or to a strategic buyer. There's also talk of a REIT angle — because the real estate underneath the car washes is valuable. You could potentially spin off the real estate into a REIT and lease it back, unlocking a higher valuation. Luna: Interesting. So the car wash roll-up isn't just about washing cars — it's about real estate, subscriptions, and data. Are there any red flags investors should watch? Lucas: The biggest red flag is over-leverage. Some of these deals are done with a lot of debt. If a recession hits and people cancel subscriptions — even a 10 percent drop in subscribers can wipe out the interest coverage. Second, weather. A mild winter or a rainy summer reduces demand. Third, environmental regulations — water usage restrictions could cap growth in drought-prone areas. Luna: And what about the labor side? Are these businesses easy to staff? Lucas: Most modern tunnel washes are fairly automated — you might have three to five employees per site. Labor is a cost, but it's not the main driver. The bigger operational challenge is maintaining the equipment. A tunnel system costs hundreds of thousands of dollars, and if it breaks down, you lose revenue quickly. Luna: So the private equity playbook here is classic: consolidate a fragmented industry, add a subscription model to stabilize cash flows, leverage up, and either build a public company or sell to a larger buyer. What's next for the industry? Lucas: I think you'll see more cross-border consolidation. Canadian and European operators are looking at US markets. You might also see technology differentiation — apps that let you skip the line, or ai powered wash quality monitoring. But the core thesis remains: car washes are a simple, cash-generative business that scales well with private equity discipline. Luna: And if you're an independent operator listening — is now a good time to sell? Lucas: If you're in a growing market and you have a solid subscriber base, yes. Multiples are still high — I've seen deals at 7 to 9 times EBITDA for well-run platforms. But it's competitive. The PE firms are sophisticated, so you need to have clean financials and a defensible market position. But the window may not stay open forever if interest rates rise further. Luna: Good advice. So next time I drive through a car wash, I'll know there's probably a private equity partner behind the curtain. Lucas: And probably a data scientist figuring out how to get you to upgrade to the platinum plan.