Impending Exits: Private Equity in the Car Wash Industry Reaching the Rinse Cycle?

By: Colin May

Beginning in 2020, there was a wave of announcements for private equity firms entering the car wash industry. It seemed like every month there was news that private equity firm “ABC” acquired or invested in car wash chain “XYZ” with a plan to grow rapidly. The reasons for this influx of investment activity are well documented but include: the industry’s attractive profit margins; market fragmentation; POS systems adoption to substantiate the “cash” portion of the business; and a recurring revenue subscription model – all combined with a low interest rate environment created a perfect storm. This active M&A market continued for almost three years until mid-to-late 2022 when interest rates increased rapidly, making it much more expensive to buy or build new car wash locations.

If you are not aware of the fundamental private equity model, it is simple: buy (or invest in) a company, grow profits through increasing sales, cutting costs and/or add-on acquisitions, and then sell the larger, more profitable company for significantly more than it was purchased for. The length of time it takes to accomplish this goal, called the “hold period”, is typically between 4-7 years on average.

What comes next?

Like the flurry of private equity firms entering the car wash industry, I expect a similar “exit” wave over the next three years as most of these firms reach the end of their typical hold period and seek a sale. As shown in the chart below, several platforms are already at, or past, the four-year mark of their initial investment, with almost a dozen more approaching it over the next 12-18 months.*

I suspect we would have already seen several of these exits were it not for various factors including high valuation targets relative to market demand. Due to expensive acquisitions made during the “gold rush” of 2020-2022, many PE-backed car wash platforms have a relatively high cost basis and required a high valuation multiple to achieve an acceptable private equity return for their investors. These lofty valuations have been unattainable recently due to the aforementioned high interest rates, market saturation and increased competition, and other variables which created uncertainty and slowed dealmaking appetite in 2023 and 2024. Through additional growth, site maturation and a decreasing interest rate environment, many platforms will be in a better position to achieve an acceptable exit in 2025 and beyond.

Who will be the buyers?

An interesting question. Understanding this landscape may influence the business planning decisions of <10-site car wash owners at the smaller end of the market. Let’s review the traditional exit opportunities and applicability to the car wash industry going forward.

Strategic Buyers: Most industries have at least a few (and sometimes many) well-established companies that are very large and may seek to acquire other competitors to expand geographic presence, add a new product/service, among other reasons. In the car wash industry, the two largest companies, Mister Car Wash and Driven Brands, are public companies with lagging stock prices that are currently not in a position to make large-scale acquisitions. The majority of the remaining top 30 companies are either other PE-backed platforms likely to also be seeking a buyer in the near-term or family-owned regional chains like Crew, Brown Bear and Autobell which typically only seek small acquisitions in their specific target markets. It is also very rare for a smaller company to acquire a much larger company and therefore unlikely any companies outside the top 30 step up to be a significant buyer.

Larger Private Equity Firms: It is common for PE-backed platforms to be acquired by larger private equity firms with more capital available to continue the growth trajectory, such as SkyKnight Capital’s sale of WhiteWater to Freeman Spogli & Co. Private equity giants KKR and Warburg Pincus have already made platform investments and, putting valuation challenges aside, it is likely that several other larger PE firms enter the industry at some point soon, but probably not enough to absorb or recapitalize all of the available platforms.

Public Markets: It is possible that a few of the car wash platforms with strong growth and financial performance pursue an initial public offering (IPO). A strong car wash IPO could potentially overcome the investor skepticism created by Mister Car Wash and Driven Brands and open the door for a few other platforms to follow suit. The cheaper cost of capital in the public markets and the ability to use stock as part of the compensation in an acquisition could accelerate consolidation of the larger portfolios. Like the restaurant industry and other “multi-unit” businesses, it may also be feasible for mid-sized and/or regional car wash chains to eventually pursue an IPO as an exit strategy if the public markets become more receptive to car wash businesses.

Alternative Solutions: I would expect to see other alternative options used by certain platforms to extend their hold periods. An example is a “continuation vehicle”, whereby a private equity fund completes an “internal sale” of its portfolio company from the current fund to a new fund which extends the runway by several years to give its platform more time to deliver on expected returns – sort of a “reset” button. Additionally, some private equity firms are backed by more patient investors allowing them to hold on to an investment long-term beyond the typical hold period and wait for a more optimal time to seek an exit.

Activity creates opportunities

Private equity’s decisions impact the options available to car wash operators of all sizes.  Understanding those options is where the FOCUS Investment Banking car wash team can help, because we are embedded in this sector alongside you.  Whatever ends up happening over the next few years in the car wash industry, it will a fascinating demonstration of capitalism and the economic forces of supply and demand in a free market economy.  Reach out anytime to discuss this and other topics.