Are you wondering how to set the table today for a successful scale or sell opportunity in the future? Listen in to hear industry tips and tricks from John Whalen and Ryan Weir of Matrix Capital Markets Group. John and Ryan share their thoughts about what to consider as you grow your business, and they discuss practical strategies that you can implement today to strengthen your business so that you can find good opportunities to help you grow.
Don’t miss this illuminating discussion between your host JT Thomson and John Whalen and Ryan Weir of Matrix Capital Markets Group as they share best practices for car wash owners who are looking to grow.
“One thing that I think is important to keep an eye on is when there are multiple shareholders involved, making sure of sort of the next steps — be at the next step from a growth perspective, from a financing perspective, or even from a sales perspective — that the shareholders are aligned. It’s pretty common for us to run into a circumstance [where we] hear the story, sort of model the opportunity, maybe develop the cap structure, and even think through an M&A assignment — maybe they want to sell, maybe they want to bring in somebody as an equity partner to continue to help them grow, which is effectively a sale of a portion of their company — only to find out sort of midstream, or later in the stream, that shareholders are not aligned on the path. So, early on in the process, one of the things that we try to do is just make sure that there is alignment of shareholder interests and priorities so that everybody’s sort of marching in the same direction.”
~John Whalen
Check out this outstanding Scaling Car Washes episode with John Whalen and Ryan Weir who share valuable tips for how to prepare your business today for scaling and selling success in the future. To connect directly with John and Ryan, check out John’s page and Ryan’s page on the Matrix Capital Markets Group site.
A Little More about John Whalen
John serves as Head of the Capital Advisory Investment Banking Group and is responsible for client development, all facets of capital intermediation and transaction execution, as well as advising clients on capital structure & efficiency, liquidity, and go-to-market strategy. Having structured, underwritten, and executed $200B+ of complex debt transactions as lead arranger, John is well-versed in the bank loan, leveraged finance, structured credit, and private debt markets.
John joins Matrix after a 30-year career at M&T Bank Corporation. As head of M&T’s Investment Banking practice, he founded and was responsible for all components of the Bank’s Debt Capital Markets platform, as well as the Bank’s Leveraged Finance and Private Equity/Sponsor Coverage businesses, the Corporate Finance/Mergers & Acquisitions team, the Alternative Asset portfolio, and Corporate Securities origination function. He served on the Bank’s Senior Loan Committee, Alternative Asset Committee, Securities Transaction Approval Committee, and arbitrated all market risk positions assumed by his teams.
John’s industry experience includes extensive work in healthcare, food & beverage, transportation & logistics, financial institutions, consumer products, and general industrial (including building products, specialty chemicals, and paper & packaging). Throughout his career, he has structured and led complex bank loan market transactions (pro-rata, ABL, institutional term loans), non-bank direct lender credits, uni-tranche structures, second lien, mezzanine and bridge loans.
He serves on the Board of Directors for Property Insurance Company of America, Inc., Juvenile Diabetes Research Foundation, Health Care Initiatives, LLC, and various other non-profit entities. John received his Bachelor of Arts degree in English and History from Williams College.
A Little More about Ryan Weir
Ryan is a member of the Capital Advisory Investment Banking Group and is responsible for new client development and co-managing all aspects of client transactions. Having structured, underwritten, and executed $50B+ of complex debt transactions as lead arranger, Ryan is well-versed in the bank loan, leveraged finance, structured credit, and private debt markets.
Ryan joins Matrix after a 14-year career at M&T Bank Corporation. As a Vice President in M&T’s Debt Capital Markets platform, Ryan led all facets of capital intermediation and transaction execution, as well as advising clients on capital structure & efficiency, liquidity, and go-to-market strategy.
Ryan’s industry experience includes extensive work in retail automotive, seasonal retailers, transportation & logistics, mortgage servicing rights (MSR) financing, and general industrial (including building products, and specialty chemicals). Throughout his career, he has structured and led complex bank loan market transactions (pro-rata, ABL, institutional term loans), non-bank direct lender credits, uni-tranche structures, second lien, and mezzanine loans.
Ryan received a B.A. from Hobart and William Smith Colleges, and an M.B.A. from Johns Hopkins University. He is also qualified as a FINRA Uniform Securities Agent (Series 63), Investment Banking Representative (Series 79).
Please note: The contents of this publication are presented for informational purposes. This information is not an offer of any services or products for sale and is not intended to provide enough information to make financial or investment decisions. Matrix assumes no responsibility for errors or omissions in this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.
Matrix Capital Markets Group, Inc. is registered with the Securities and Exchange Commission.
Interested in the episode but don’t have time to listen right now? See the full interview below!
JT 0:01
Welcome to Scaling Car Washes. I’m your host, JT Thomson. I built my first car wash in 2002. And since then I’ve been involved at every level of the car wash ownership experience. I’ve built and sold my own car washes, and as a Sonny’s distributor, I’ve helped other owners build and operate their car washes. Along the way, I’ve been a multi-unit restaurant owner with 23 units in five states. We’ll talk to experts in the car wash industry and related industries that can share insight information that will help you build, scale, and ultimately exit your multi-unit car wash platform.
Well, hey everybody, welcome and good morning to the podcast Scaling Car Washes. I’m here with two great guys. These are guys have been doing a lot in capital raising on the finance side. We’re seeing a lot of that come into our into our industry these days. I’ve got John Whalen And Ryan Weir. They’re with Matrix Capital Markets. Morning, guys.
John 0:53
Good morning!
Ryan 0:54
Morning, JT.
JT 0:55
Why don’t you guys give us just a quick background on what you guys do? And how you got into looking at the car wash industry?
John 1:04
Sure, JT. It’s John. Thank you very much. Yeah, so at Matrix, Ryan and I are responsible for a practice that we call Capital Advisory. And the basic function of our practice is working with operating companies that are looking to access third party capital to support their growth initiatives and other activities. So, Ryan and I serve as something as an outsourced to capital markets function. And we assist clients in the development of everything from financial models, to sourcing and competing providers to provide whatever capital is necessary for their event driven activity, and that capital sort of transcends traditional banks. And it applies to everything from equity to minority preferred equity to mezzanine capital and other sort of bespoke structures that companies might need to scale their businesses. Ryan and I came from a banking environment. So, for the two of us, to say that we know where the bodies are buried is a bit of an understatement, having probably led or originated somewhere in the neighborhood of a half of trillion dollars in transactions in our combined 45 years in this business. But, Ryan, I don’t know if you want to supplement at all?
Ryan 2:17
Yeah, I mean, the other thing I’d add is Matrix, at its core, is a sell side investment bank. And we came on just about a year ago now to supplement that sell side strategy. One of our kind of bread and butter kind of core businesses is our downstream energy practice, which is very complementary to the car wash industry, as many of the operators in the convenience and gas space have car wash platforms that are either kind of on site or kind of tangential to their current CNG Business.
JT 2:49
Okay, so when you say energy, you’re talking gas and convenience.
Ryan 2:53
That’s right,
JT 2:54
Like retail? Okay. Yeah. So, there is a good parallel there for business. Interesting. How big is you know… Well, let me start with this, how small do you guys get to? Because, you know, car washing is… Listen, these deals are getting bigger and bigger. So the numbers are definitely getting a lot more interesting. But a lot of our listeners are guys and gals that are looking at growing their business, and they’re looking at, you know, how do they capitalize and fund that growth? And I think that’s one of the things that, you know, interested me about your background is that you’ve got a lot of that experience. So I want to talk a little bit today about, you know, what are some things that, you know, if you’re advising somebody trying to capitalize the growth that they’ve got projected? Like, how small like… You know, at what level do you guys get involved?
John 3:42
Well, honestly, JT, it is great question, because clients that are evaluating opportunities, in some cases, they have existing platforms. So Ryan referenced, you know, convenience, gas and retail, and a natural sort of correlation with an opportunity to develop car wash assets. So for us, you know, for companies or owners that have existing platforms, we get in at a very low level, in some cases, to advise on what it’s going to take to develop, you know, perhaps construction financing, and some modest operating financing to support a ramp up in a specific asset. In some cases, you know, there are opportunities or businesses that are looking to develop for more than one at a time. So it could be two to three to four to five units. And then, obviously, there’s a scale associated with that. But we tend to get in very early and help companies model growth to understand exactly what it’s going to take from both a financing perspective and operating liquidity perspective. And even think through sort of intermediate and long term objectives. You know, what is strategy, be it working backward from an exit? What do they want to do for personal cashflow reasons? Is this an opportunity to create wealth? Is it an opportunity to subsidize or supplement what they’ve already got going on? So, we actually spend a lot of time on strategy, modeling options, preferences and priorities before we even get into discussion about the capital itself.
JT 5:07
Interesting.
Ryan 5:08
I’d add to that, particularly in those early stages, it’s a lot of table setting, in terms of preparing for scalability, particularly on the financing side, when you start to get more involved. I mean, obviously, private equity has made a big push in this space. But when you look at more sophisticated financing structures that are going to require a level of financial reporting and diligence above and beyond sort of your standard QuickBooks.
JT 5:34
Yeah, no. 100%. I did a podcast with a guy from RSM, Mike Pitney, on exactly that right? You’ve got to make sure you have clean books. And as a buyer of these businesses, you know, that’s always a big deal. And you mentioned setting the table, right? And that’s a big focus of this podcast is, you know, what can people do today to help themselves create a platform that is more valuable tomorrow, right? And a lot of times, a lot of these guys don’t know what to do, right? They’re just, they’re running their business. And, you know, a lot of times are, quite frankly, it’s a hairball for us, right? We have to get in because there’s a lot… You know, the financials are not real clean, there’s just not… The way it’s structured has kind of got some hair on it. So, talk a little bit about that. So you go into a business… Say I’ve got four locations right now, and I’ve got a vision to hit 12. So that’s, you know, by time you build out eight car washes, you know, you’re probably $40 million of, you know, of growth capital that’s going to be needed to fund that outside of just working capital. Talk a little bit about what you would do for somebody in that scenario.
Ryan 6:46
Yeah, I mean, I think to John’s point, I think a key step is modeling some of the assumptions in the near term around what that ramp up looks like, evaluating various capital sources. More often than not, at that scale, it’s more of a your traditional banking partner, a local community bank that helps bootstrap that type of growth. But we’re seeing a lot more entry into this space, outside of private equity, but the private credit markets, that are providing ever expanding leverage and, more importantly, structural flexibility. And there’s really that economic and structural trade between getting run rate adjustments, and additional kind of flexibility on the construction side that afford operators, a lot more runway to operate their business within a set of kind of broader guardrails than a traditional bank is really constrained to. Beyond that, as I said before, prepping the books, in terms of coaching them on getting audited financial statements or, at the very least, reviewed, because once you start moving into higher commitments, whether it be community bank or private credit provider, they’re going to expect a level of diligence on that front as well.
John 8:03
Yeah, one of the things, JT — sorry to interrupt — that we’re fortunate to have in our downstream energy practices view into what I’ll call best practices at other closely held platforms. So that, you know, as companies are preparing to take that next step… You referenced four to 12 units, right? As companies are preparing to take that next step, we’re fortunately in the position to share insight, given our experience with other platforms that could lend credence to advice and to the path that a potential operator is on.
JT 8:36
This is a an interesting topic from a seller’s perspective, because a lot of these guys don’t know where to start. So they, like I said, they’re running their business, right? That’s kind of what they do. They don’t understand how to… You know, when you talk about kind of setting up the books, or, you know… And it’s where do they begin today? You know, is it hiring a CFO? Do they first get a controller in? So there’s kind of a lot of these first steps that a lot of these guys are just kind of neophytes into this growth side. So I think it’s a new concept for them to bring in a professional that, you know, can kind of advise them on a lot of these type of things. Is this something that, you know, like people in your business, do they charge for that? Or is that part of the financing? As part of that you guys take a fee out of the financing? Talk a little bit about that side because I have people ask me all the time, you know, how does that work?
John 9:29
There are many ways to approach it, to be honest with you. For the most part when evaluating an opportunity and engaging with an owner operator, early in the process, we tend to do a lot of upfront sort of forensics work to evaluate sort of how they do things today, and where we might see an opportunity to make some change so that they do have the ability to provide the financial information and tell the story the way that they want to tell it. Usually that work sort of dovetails directly into an assignment, be it a capital raise assignment, or an M&A sell side assignment. And when it comes to compensation for our services, it usually follows the initial sort of, again, forensic work that we might do to help tell the story and create the narrative, the real work and the compensation is for the value add associated with either the capital raising activity or the sell side M&A process.
JT 10:21
I can tell you from a buyer of these businesses, the businesses that are well organized, better structured, have a cleaner platform, you know, do Command better value. So there might be some costs associated with that. But it definitely pays off if they do it right.
John 10:39
Yeah, I would say that early work, and the cost for the early work, is much more modest than perhaps some people anticipate. And it’s also illustrating, to a certain extent. Worst case scenario, when you engage Matrix, you sort of get a second set of eyes on how it is that you do things today. And generally speaking, it’s informative, but most of our work is focused on prepping borrowers, and getting them to the point where they can tell that story the way they want to tell it.
JT 11:11
Where are you seeing? So, you know, at what point does somebody move on from conventional bank to other more non-traditional sources?
Ryan 11:20
Yeah, I mean, I think a bit of that is just a matter of what the growth objectives are with the platform. As I was getting into previously, it’s a bit about looking at that structural and economic trade. When you look at what the private credit market is willing to do, just given the valuation multiples in the industry, I mean, kind of smaller regional operators can probably afford as much as five terms of cash flow in the form of leverage and those with greater scale, kind of somewhere in the six times EBITDA context.
JT 11:55
I’m going to unpack that a little bit, because a lot of people don’t understand this. So when you talk about five turns are leveraged. Specifically what does that mean?
Ryan 12:02
It’s a multiple of the overall platform’s cashflow. And really, it gets down to blending into the enterprise value of the organization. So generally, they’re going to look at 50% loan to value on the enterprise. Not looking at your traditional banking sense of 75 or 80% on the real estate. But really, looking at, okay, your real estate is worth X, the enterprise value is worth Y, and the sum of that really kind of gets to the heart of what the overall organization is valued. And that’s where private credit is able to really extend beyond your traditional bank financing because of the regulatory environment.
JT 12:44
And I think that’s where I think a lot of people are interested in going. So, take a business that’s got six or seven units, they’ve got $5 million of EBITDA, when you talk about five turns, you’re talking about $25 million of enterprise value, right?
Ryan 13:00
Well, five terms of debt leverage.
John 13:03
Leverage.
Ryan 13:04
Yeah, I mean, a platform like that is north of $50 million. So…
JT 13:09
So their borrowing capabilities could be… They could they could use that platform and get probably a credit facility of up to 25 million, is that kind of what you’re…?
Ryan 13:20
That’s right. And I think the other economic structural trade is the enhanced cash flow that comes with it. While you might pay a higher rate overall, from a economic cost, you’re looking at reduced amortization, 1 to 3% a year versus commercial bank that’s going to look for something much heavier on an annual basis. So that extra cash flow allows you to reinvest those proceeds into new store, growth, capex, etc.
JT 13:49
How does somebody find private credit like that?
Ryan 13:52
I mean, that’s something that we do here is…
JT 13:54
Obviously, that’s one of the things that you guys do. I mean, is there like a whole network of those people?
Ryan 14:01
There is, and as private equity has followed into this space, there’s certainly a cohort of lenders that are very familiar with the industry and the nuances of looking at NTI sites and providing run rate adjustments for new startup locations, things of the like, that the banks really can’t do as well.
JT 14:23
What is an NTI site? I’m sorry, I don’t know what that means.
Ryan 14:25
New to industry. A little carryover from a CNG cohort.
JT 14:32
So with these private capital lenders, do they typically do like a credit facility, where they can draw for that? Talk a little bit about that. So I’ve got… I’m going out. You know, so this is a very typical scenario. I see this all the time. I’ve got four or five sites already under operation. Some of them are mature at three or four years. I’ve got one or two that are one or two years old, maybe less than a year old, so they don’t even have a trailing 12. But I’ve got four or five new locations that I want to go develop. And so I want to tie these things up, you know, I’ve got to do whatever I can and take them down, because I feel like I can, you know, grow that out. And that would come close to doubling their platform in a fairly short amount of time, but it takes a lot of money, right? You know, to build out five of these things, you know, by the time you figure working capital and everything else, you’re probably close to $25 or $30 million.
Ryan 15:28
Yeah, I mean, they’d typically be structured in such a way where you’re providing, again, that run rate cash flow, adjusted for some of those newer sites, and your existing portfolio, to size that initial term loan. And then you commonly see what’s called a delay draw term loan, or revolver, to help supplement some of the growth capital that’s needed. And what we found, too, is as the platform scales, the provider, in that case, might be willing to stretch further from a kind of leverage perspective, deeper into that cap structure, recognizing that as that scales further, the enterprise value grows as well. So, growing from that five turns to possibly six as that scale enhances.
JT 16:18
So, let me throw you a curveball in that scenario. I’ve got, you know, on the five locations I’ve already got, between SBA or conventional financing, maybe $15 million of debt. How do I deal with that? Because does that become a constraint or a an issue in bringing in a new capital partner?
Ryan 16:39
Well, I mean, if we’re talking about a kind of holistic approach to financing, this would replace that structure that you have today.
JT 16:47
When you guys go in, would you look into… You’d look to their existing debt structure, you’d look at the cap chart, and all the financials, would you help them kind of basically do a recapitalisation of the company going forward? So, you’d take out all the old debt and clean it up, and then bring in a new capital partner that would then finance the whole structure? Is that something?
Ryan 17:08
Yeah, I mean, it might be more efficient and scalable. I mean, when you work with multiple lenders like that, you’ve got different covenant sets, and everything that you need to manage amongst the various partners, and that in and of itself, could require additional employees just to manage that cap structure as you scale. The other thing that I’d say just as it relates to SBA financing, or traditional bank financing… In many cases, you may be looking at more kind of onerous structural things like personal guarantees, having a mortgage on your home, and some of these other alternatives and even more, so I think, through the competitive process that we could run, is that ability to take that burden off of yourself, knowing that you could have a mortgage on your home related to this business and just absolving yourself from that.
JT 17:57
Yeah, I think that’s a big deal. I see that a lot, right? You know, guys have bootstrapped their business. And, at that level, you’ve got to do whatever it takes to get that plane off the runway. And so, you know, personal guarantees, you know, pledging personal assets, like your home, and stuff like that, are part of it. So you’re saying, there’s an opportunity to come in, recapitalize the company, by taking up all that previous burden, and then on a new structure, they could get away possibly from even having to put a personal guarantee?
Ryan 18:31
Potentially, depending upon scale. Yeah.
JT 18:33
Profitability and history, I guess, all that plays a part of it, right?
Ryan 18:39
Yeah. As well as just the the assets involved. I mean, many operators own their their real estate. But if it were more of a leased operation, it just… That plays into the overall kind of collateral support for the lending partner.
JT 18:55
So for an operator that is kind of looking at this… Before you mentioned, you know, having to bring on some resources to kind of manage the cap structure. A lot of these guys — we’ve talked about this in previous podcasts — but a lot of them just have a bookkeeper, right? They’re using QuickBooks. There are bills coming in, bills getting paid, payroll gets done. Everything’s good. Their taxes… You know, they roll that up and send that over to an accountant. And we’ve talked about at what point you bring in a controller, at what point do you bring in a CFO? Now we’re talking about moving to a non traditional capital structure. What did these guys look for in an operator? Are they going to… if they look at this operation, and this guy’s just got basically a bookkeeper. I’m assuming that, you know, they don’t close out their books. And you mentioned earlier about having books, at a minimum, reviewed, ideally audited… and we’ve talked about that as well. It’s money well spent, I think, to get your books audited, but you’ve got to… You have to have somebody who’s actually managing the books and running them. So talk a little bit about if you’re introducing a client to several different private capital partners that could finance this. What are they looking at from a team’s perspective?
John 20:20
Yeah, listen, I think that the more the company and the owner can demonstrate a level of sort of professionalism, the better the picture, and the better the outcome and the financing structure. So some of it depends on the size of the organization and the growth plans. It’s easy to sort of migrate as things grow, so starting out with a bookkeeper and fairly basic books, to share basic financial information with a bank to get the first couple of units off the ground… You used the term Bootstrap. I mean, it’s very feasible. But there are definitely sort of iterations that follow, and that iteration might be to hire a VP of Finance. And that VP of Finance is going to be the one that’s responsible for very consistent monthly reporting that sort of demonstrates the growth and margins and keeps track of any construction, financing, things like that. And then over time, as the business continues to scale, there comes a point where the owner or shareholders decide that having a professional CFO in that seat is very important to telling the narrative, not only with lenders, but ultimately, if there’s an exit strategy, to sell the business. Again, you’re going to want to demonstrate sort of comprehensive knowledge and depth on your financial profile. But it just a lot of it depends on where the company is, JT, in its lifecycle. I mean, we’ve seen it all. The number of times that we’ve been buried in a GL or a set of QuickBooks to uncover the real story is more than I can count for sure. But it’s also, you know… Having done so much business with closely held and family run companies, you know, we understand that’s part of the growth. It’s part of the trajectory; it’s part of the lifecycle.
JT 22:06
Yeah, the single member LLCs… they tend to be the worst, in our experiences, because usually, what a an owner is doing is they’re running the business, and a lot of their personal life is intertwined with the business. And everybody’s working to not show big profits. Everybody’s working to try to minimize their profit, and utilize tax strategies to avoid paying unnecessary taxes. So, then all sudden, when you get there, you’ve got to untangle a lot of that. So, you know, we call those add backs, you know, and I think everybody’s kind of looked at those. It gets a little hairier when you’ve got somebody who’s got their personal trucks, their son is in college, but his vehicle is paid through the company… I mean, there’s just a lot of that type of stuff that you have to kind of go back and clean up. And I’m assuming you guys help kind of structure that type of stuff.
John 23:04
We uncover a lot of that stuff. And frequently, single member LLCs and smaller companies, earlier in their growth, they end up hiring their accountant to serve as a default CFO or VP of Finance as well in the process. But you’re correct. In a lot of these closely held companies, we do a ton of work sort of uncovering what we characterize as adjusted EBITDA, adjusted cash flow. And it’s adjusted for all of those owner perquisites and things that are coming out of the business based on ownership, based on the tax management strategy, so that we can demonstrate to either a credit provider or certainly to a buyer, you know, this is what normal EBITDA run rate looks like when you extract these owner perquisites and other expenses that are embedded here that otherwise won’t convey to the new owner or won’t impact the company’s ability to repay their debt.
JT 23:58
When I look at it, you see tax strategy, in many ways, is competing with sales strategies, right? And so, you kind of have to untangle some of that. So it takes a little bit of groundwork to… And I think, that’s part of where I think the value, what we’re trying to provide here, is you helping people kind of sort that out early, because the sooner you do it, the earlier you do it, the easier it is to walk into somebody’s office, like your office, and try to move to the next level because everything’s cleaner. So you’re saying, in terms of having somebody on staff, an outsource person is okay, as long as the books are clean and everything else. But if somebody is going to write of a $40 million line of credit to a business, are most of those lenders going to say, “Listen, you really need to have, at least, at a minimum, a Controller or somebody financial on the on the team to get out reports.” What are the requirements from, once you’ve tied into somebody like that… Are they having to get closed books or financials out to that lender on a monthly or quarterly basis? Or, you know, talk a little bit about that.
John 25:06
Yeah, listen, I think that’s fair. Again, you know, for a company that has a small pool of assets, they’re sort of earlier on in their lifecycle. And they tend to finance the growth on sort of a real estate basis with commercial banks. So I need a construction loan, a couple million bucks, I want to build this asset. In that case, you know, using QuickBooks and having a bookkeeper internally is probably acceptable. But as you continue to grow, as you point out, using an example of $40 million in borrowings, the expectation on the part of lenders, be it commercial banks, but certainly, direct lenders and other alternative credit providers, they’re going to want to see some level of professional finance staff in place to provide, at a minimum, quarterly performance numbers. There’s usually going to be some sort of compliance certificate involved. And, certainly somebody that’s in the development phase and is deploying construction dollars and development dollars have very tight rein on, you know, how the money is being deployed. Is it being deployed consistent with the terms of the credit agreement? And very consistent reporting on those development assets. It’s a very fair point that you make that sort of as you get larger, the expectation on the part of all the potential communities — again, buyers, sellers, lenders, things like that — is that there’s a professional finance staff.
Ryan 26:32
And I think on those EBITDA adjustments as well, I mean, it’s not just about how that correlates to an outright sale, in terms of backing out, perquisites, and things like that, many kind of community banks and traditional banks aren’t as adept at kind of peeling the onion back and really understanding the true cashflow the business and that’s where having, whether it be a professional finance staff or an advisor come in to help, again, set the table beyond just sort of the reporting side, but prepare kind of the cash flow story for any prospective lender as to what is achievable, and what the true financing cash flow looks like.
JT 27:12
Great point. I think all this is really valuable. I think, as a lot of people are looking to grow, these are the little kind of granular details that people really overlook, and then they get in the middle of it. And it’s better to kind of think about it and have a holistic plan and strategy, you know? Doubling your business, right… you sort of you go from five or six units to 10, or 12, which I’m seeing that everyday! Right now I see a lot of operators that have a handful of units, and they’ve got big plans. They’re talking about, you know, they’re tying up property. And so now they’re scrambling, you know, because they’re outgrowing kind of what their historical, traditional banking relationships will allow them. And even then, those guys don’t look at the world the same way, like peeling back to the union, is kind of a stretch for a traditional bank. So setting the table today, I think, is absolutely something that I hope people take away from this conversation, like, there’s a lot of little things that help and make a successful move to, you know, capitalizing their business at the next level, they’ve got to do today to get there. What are some other things… Any other pitfalls that you’ve seen in your experience, like, oh, man, if they… Whether it’s partnerships or structure of operating agreements, anything else that you’ve gotten in, and you’re like, “Man, this thing is a hairball! We’ve got to untangle this thing in order to kind of get you this thing sold or get it financed!”
John 28:45
You point out about operating agreements. You know, one thing that I think is important to keep an eye on is when there are multiple shareholders involved, making sure of sort of the next steps — be at the next step from a growth perspective, from a financing perspective, or even from a sales perspective — that the shareholders are aligned. It’s pretty common for us to run into circumstance to hear the story, sort of model the opportunity, maybe develop the cap structure, and even think through an M&A assignment — maybe they want to sell, maybe they want to bring in somebody as an equity partner to continue to help them grow, which is effectively a sale of a portion of their company — only to find out sort of midstream, or later in the stream, that shareholders are not aligned on the path. So, early on in the process, one of the things that we try to do is just make sure that there is alignment of shareholder interests and priorities so that everybody’s sort of marching in the same direction as opposed to fighting at each step. And I use the term fighting loosely, it’s really, you know, just periodic disagreements.
JT 29:49
Well, I’ve seen them fighting! Like I’ve seen it get ugly. And, you know, people, you know… There’s arguments, and so, we’ve seen a lot of that.
John 29:59
Yeah, listen, business, especially closely held business, is emotional. Ownership of a business is emotional, and that’s a good thing. And these are intimate processes when you talk about either bringing in a third party to help you be it on debt or equity, and people are protective of their interests. So, you know, we understand that too. But, you know, we try to make sure early on that expectations are understood and set, and that we keep an eye on those expectations through the process so shareholders are oriented to the same outcome. But Ryan, I don’t know if you have anything you want to supplement. You know, specific things that you’ve seen that get in the way of strong execution or certain lending arrangements that are impacted negatively.
Ryan 30:42
Yeah, I mean, I think your point around organizational structure… I mean, it’s certainly important to sort of look at directionally where you might be headed and assess if there might be different classes of shareholders. It’s possible to kind of work through it in a single member LLC and restructure that in some form, but it becomes a little bit more cumbersome if you’re bringing in different classes of shareholders. I think it’s beneficial to to set the table with a kind of traditional operating company and property company for both kind of tax efficiency, as well as, when you look further down the road, there could be some benefits of looking at separate financing structures, as you think about kind of maybe looking at a real estate financing with your traditional commercial bank, which is going to be less expensive, pretty friendly, longer term amortization, and then looking at maybe a different financing structure on the Opco that kind of looks, again, more at enterprise value lending. But there are trades to that as well, in terms of looking at it on a consolidated basis. So, regardless, I think it’s still important to cleave the two for tax efficiency, particularly in a sale.
JT 31:50
What about… So we’ve talked a lot about debt lenders, what about equity… You know, like, there are individuals that will come in and invest, or are there groups? You know, I’ve seen… People have approached us wanting us to basically take a minor position, but basically fund a lot of their growth. It’s not something we do, so I really don’t get involved in that. But I have a lot of people, you know, that ask about that. Is that something you guys have seen? Is it some you get involved with?
John 32:27
Yeah, there’s no shortage of attention being paid to the car wash space right now. And from an equity capital perspective, it’s everyone from large institutional private equity firms that you might read about in the Wall Street Journal right on down to wealthy individuals in a community that, you know…
JT 32:47
Yeah, so those guys are the… So, you said private equity — those guys typically want a controlling interest. What about somebody who’s willing to take an along for the ride seat at the table?
John 32:59
So there are also, you know — whether it be wealthy individuals in the community who happen to be known, call them friends and family type investors, is how we might characterize that. Then there are also family offices, very wealthy families that look to invest in operating companies with platforms that offer an alternative investment strategy for them as a family office, and they do so on a minority basis. So rather than taking a controlling interest, the idea is they make an investment of equity capital to help the owner operator continue to grow the business. They are passive with respect to the operation, so they’re not directing the shareholder the owner as to what to do and how to do it. Rather, they’re more passive capital that wants to secure a longer term return. They tend to be quieter money; they’re focused on keeping that money invested, and ultimately realizing return down the road. But it’s a very sort of friendly asset class, a very friendly investor type when it comes to facilitating growth. And they, you know, because of their family offices, they tend to be pretty flexible in how they deploy the capital from just a structural perspective. They can buy 20% of the company, 30%, 10%, 40%. But the goal really is for them to invest in what they believe to be a good growth story, and then to basically allow the shareholder who’s the functional expert in developing the car washes build their business.
JT 34:27
Oh, that sounds great. How do I find those people?
John 34:29
Yeah, I mean, listen, we’re happy to make the introductions, and more broadly, I should probably should have stated at the beginning of the call for your audience, you know, we’re kind of a resource. As a firm goes, we know downstream energy, convenience, gas, and retail extraordinarily well. One of the tangential businesses to that space is car washes. And Ryan and I, good, bad, or indifferent, are our capital experts, so we’re a resource. And you’d be surprised at just how many wealthy families are out there that are looking to deploy capital to family run businesses that are growing and that need some support.
JT 35:02
All this has been, I think, really useful. How can somebody get in touch with you guys? So, we’ll wrap up here, but I think… Can you leave people with a way that they can find you guys or find information out about Matrix Capital Markets?
John 35:15
Sure. Listen, it’s gracious of you to ask. We have a website: Matrixcmg.com. Matrix Capital Markets Group.com. All of our industry practices, including Ryan and myself, and our capital advisory group are located on the website, and our detailed contact information is included there. But on that site, you can see everything from the transactions we’ve done to the industries that we support, but we would encourage anyone in your audience that has some questions or needs some additional detail to this podcast to reach out, and we’ll provide it.
JT 35:50
What are your email addresses?
John 35:52
So this is John speaking, my email addresses [email protected] And Ryan is [email protected]
JT 36:05
Well, guys, this has been really helpful, really interesting. I really appreciate you guys taking some time and sharing, you know, just some of that knowledge and experience with our listeners. As I said, I think a lot of people are really kind of struggling: how do they break out of that traditional banking financing relationship and get into something a little bit more bespoke, something a little bit more progressive, to help them grow their business? So guys, thank you so much. I really appreciate it. Everybody, thanks for listening in to Scaling Car Washes. This is JT Thomson. That was Ryan Weir and John Whalen with Matrix Capital Markets Group. So thanks, everybody.
Thanks for listening to today’s episode of the Scaling Car Washes Podcast. Please subscribe to stay current with all of our episodes coming up. Thanks and I’m JT Thomson, your host.