M&A and Financing Trends in the Car Wash Industry Today. A presentation by Commercial Plus Group

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1 M&A and Financing Trends in the Car Wash Industry Today A presentation by Commercial Plus Group

2 Agenda About Commercial Plus Group 2017 Scorecard Current Car Wash M&A Environment Sale Considerations Types of Buyers Financing Trends Concluding Thoughts M&A and Financing Trends in the Car Wash Industry Today

4 M&A and Financing Trends in the Car Wash Industry Today About Commercial Plus Group

Today s Presenter George Odden Investment banker of over 23 years, having worked for multinational banks conducting billion dollar transactions, as well as working with middle market companies to

5 Today s Presenter George Odden Investment banker of over 23 years, having worked for multinational banks conducting billion dollar transactions, as well as working with middle market companies to find the right partners and reach business owners goals. Former US Navy officer, having served in support of Operation Desert Storm Worked on Wall Street at Dillon Read and UBS, on mergers and acquisitions (M&A), and debt and equity financing transactions Led M&A efforts of two Fortune 500 companies, Rockwell International and Honeywell Aerospace Returning to investment banking, Mr. Odden now serves small and middle market clients, primarily helping private owners sell their businesses Earned a BA from Cornell University and an MBA from Columbia Business School

Key Commercial Plus Team Members Jeff Pavone Acquired Commercial Plus in 2005 to provide mid-level businesses with exceptional service and added value at every stage, and facilitate the best possible

Built Commercial Plus into a full-service firm offering a complete range of business services, from car wash real estate brokerage, to commercial mortgage and M&A advisory Oversaw successful closings

6 Key Commercial Plus Team Members Jeff Pavone Acquired Commercial Plus in 2005 to provide mid-level businesses with exceptional service and added value at every stage, and facilitate the best possible results for buyers and sellers. Built Commercial Plus into a full-service firm offering a complete range of business services, from car wash real estate brokerage, to commercial mortgage and M&A advisory Oversaw successful closings of hundreds of commercial transactions with value over $800 million Previously co-founder of Law.com, where he assisted in the sale of the business to the largest legal publisher in the US Founder and previous president of National Law Resource, Inc. and lawstuff.com, and also founded medical.com Jordan Geotas Mergers and acquisitions advisor, licensed attorney, commercial real estate agent, and commercial mortgage broker, advising commercial real estate and commercial mortgage brokerage clients on diverse topics. Licensed attorney for 25 years Over 15 years of investment banking experience Ownership positions in multiple private companies, having served in active roles including operations, sales/marketing, and financial positions Earned a BA in Political Science and Philosophy from Rutgers College, and a Juris Doctorate from Arizona State University

7 Commercial Plus Group Your Trusted Business Advisors for the Car Wash Industry Commercial Plus Group is an active leader in the car wash industry #1 broker of car washes in the nation, specializing in the purchase, sale and financing of multi-site chains A team of seasoned real estate, M&A, legal, and finance professionals with decades of experience helping clients achieve their strategic and financial goals Whether acquiring or selling, we take a hands-on, customized approach tailored to each client s needs Our combination of competencies and extensive list of completed transactions makes us the pre-eminent provider of car wash brokerage and M&A services in the country Wide knowledge of the car wash industry, with strong relationships among key buyers, sellers and financiers Legal, tax and structuring expertise Attention to detail in transactions Currently working with eight of the top 50 multi-site chains Transactions in the current 12 months of $200+ million

8 Commercial Plus Group Broad Range of Car Wash Relationships For over 11 years, we have helped buy, sell, or finance dozens of car washes for a number of clients

9 M&A and Financing Trends in the Car Wash Industry Today 2017 Scorecard

10 Last Year s Messages Operational and Technological Change Express Wash Pay Stations Monthly Pass Industry Dynamics Market Fragmentation New Builds Car Wash Environment Macro Dynamics Increase in Disposable Income Broad Economic Growth Capital Markets Cheap Debt Plentiful Capital Non-Traditional Lending M&A Environment

11 Year in Review Growth According to market researcher IBISWorld, actual revenue for the industry in 2017 was $11.0 bn, surpassing the $10.5 bn estimate 2018 revenue is estimated incrementally higher at $11.2 bn Trends Commodity prices are expected to rise, which may reduce profits Washes with value-added services are more likely to be insulated from these changes The number of express washes continues to grow with consumer demand for convenience M&A Activity Acquisition activity remains strong, with large industry players and private equity groups consolidating Ancillary service companies also being actively targeted Car Wash Industry Projections Revenue $ 10.5 bn $ 11.2 bn Profit $ 1.8 bn $ 2.4 bn 5 Year Annual Growth 2.4% 3.2% Number of Businesses 61,127 62,486 Select Transactions Date Target Acquirer Dec 2017 ICWG Roark Capital Oct 2017 DRB Systems New Mountain Capital Jul 2017 Goo-Goo Express Wash (50 sites) ICWG Apr 2017 National Car Wash Solutions AEA Investors Car Wash Sites Mister Car Wash Source: IBISWorld and other sources.

12 M&A and Financing Trends in the Car Wash Industry Today Current Car Wash M&A Environment

13 Current Car Wash M&A Environment Car Wash M&A Volume Strong With the industry s key factors of fragmentation, capital availability, express wash adoption, and improving economic conditions laying the groundwork, car wash M&A is expected to continue Over 200 car washes were purchased by the top consolidators alone in 2017 Commercial Plus estimates car wash transactions totaled over $1 billion in Car Wash M&A Count and Average Disclosed Value ($1,000s) $1,200.0 $1,000.0 $800.0 $600.0 $400.0 $ $- Transaction Count Avg Disclosed Value Car Wash Chains of or more or more Source: CoStar and proprietary data, as of 4 Apr 2018.

14 3.x 4.9x 4.8x 4.6x 4.8x 4.1x 5.x 5.1x 5.6x 5.1x 5.6x 3.6x 3.7x 3.3x 3.5x 4.x 4.x 3.3x 4.1x 4.4x 5.1x 4.7x Current Car Wash M&A Environment General Transaction Activity Robust M&A Deal Volume and Value (US and Canada) $600.0 $500.0 $ x 10.x 8.x 8.7x 8.1x Median EV/EBITDA Multiples 9.2x 8.8x 8.2x 8.1x 8.3x 6.6x 10.0x 10.2x 10.3x 2000 $ x $ x 500 $ x 0 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q Q1 Q $0.0.x Transaction Value ($bn) Transaction Volume Debt/EBITDA Equity/EBITDA Valuation/EBITDA Source: PitchBook. * Data as of October Source: PitchBook. * Data as of Dec 2017.

15 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Current Car Wash M&A Environment Capital Markets Substantial capital is available at historically low interest rates and favorable terms, enhancing growth opportunities for car wash operators Leverage Multiples Average Debt Multiples of Middle Market LBO Loans Credit Spread Moody s Baa Corporate Bond Yield Average 6.0x 10.00% 5.0x 4.0x 4.7x 5.6x 4.5x 4.2x 4.3x 4.5x 4.8x 5.3x 5.3x 5.3x 5.5x 9.00% 8.00% 7.00% 7.97% 3.0x 2.0x 3.3x 6.00% 5.00% 4.00% 5.46% 4.82% 4.73% 4.66% 4.27% 1.0x 3.00% 0.0x YTD Source: KPMG Corp. Finance Q Credit Markets Report YTD as of Sep. Source: St. Louis Fed, Dec 2017.

16 Current Car Wash M&A Environment Private Equity Aggressively Deploying Capital Private equity investment activity is strong Total investable dollars (dry powder) over time has grown significantly Dry powder is currently estimated at over $874 billion as of March 2017 Private equity groups are seeking fragmented sectors with opportunity for growth Private Equity Dry Powder ($ billions) * 874 Source: PitchBook. Represents latest available data as of Mar 2017.

18 M&A and Financing Trends in the Car Wash Industry Today Sale Considerations

19 Sale Considerations Now is a great time to consider a sale Strong macro-economic and sector-specific trends Robust valuations Increasing competition Available capital New, sophisticated buyers

20 Sale Considerations Why are car washes such attractive investments? Excellent cash flow High margin Relatively little capital required (after initial investment) Very little working capital Limited employees, particularly in the express model Monthly pass smooths revenue, pays fixed costs on the first of the month Real estate element offers unique financing options Plentiful debt and equity capital Fragmented market Low barriers to entry

21 Sale Considerations Value Determinants Multiple locations Strong books and records Operating history Real estate location Strong IT and POS systems Age and condition of building and equipment Local competition Growth in the local market Market demographics Monthly memberships

22 Sale Considerations Keys to a successful sale Competitive Process = Value Maximization Be prepared Have a realistic view of value based on comps Make aggressive but plausible add-backs Have data ready to go at the outset Be well advised Insist on a strong NDA (non-disclosure agreement) Know what they ll ask for minimize surprises Remember: Most buyers know more about buying than you do about selling

23 Sale Considerations Biggest Questions to Ask Do you have the money? How much roll-forward interest is required? Will you require a carryback note? Who will manage the business? How much additional capital is committed? What is your investment horizon? Is my stock the same as yours? Will I have to sign a non-compete? Do I have the right advisor?

24 M&A and Financing Trends in the Car Wash Industry Today Types of Buyers

Types of Buyers Two Key Categories Buyers can be either strategic or private

perspective Strategic / Hybrid Private Equity Overview A company that already

sponsor focused on cash return, likely to re-sell the business in 3-5 years Price

25 Types of Buyers Two Key Categories Buyers can be either strategic or private equity, each of which can approach a transaction from a slightly different perspective Strategic / Hybrid Private Equity Overview A company that already participates in your market, or wishes to enter the market Overview Financial sponsor focused on cash return, likely to re-sell the business in 3-5 years Price Price Ongoing Ownership Ongoing Ownership Ongoing Role Ongoing Role Employee Participation Employee Participation

Types of Buyers Characteristics of Private Equity There are approximately 2,300 active PE funds based in the US ¹ Fund sizes range from less than $1 million to over $24.

26 Types of Buyers Characteristics of Private Equity There are approximately 2,300 active PE funds based in the US ¹ Fund sizes range from less than $1 million to over $24.7 bn Characteristics vary, but there are common elements Usually seek five or so platform businesses per fund Hold period of 3-7 years for each platform, then sell or recap Often ask owners to roll equity Sometimes ask owners to carry debt Look to start a new fund as old one closes out Fees are paid by LPs (Limited Partners) in the form of cash fees plus carried interest PE brings discipline and balance to a market ¹ Source: PitchBook. Based on PE funds with at least one acquisition in the most recent three years. Data as of 12 Apr 2018.

27 Types of Buyers Private Equity: How It Works Three Phases Capital Raising Capital Deployment Capital Recovery PE Fund Partners and Employees

28 Types of Buyers Capital Raising LP LP PE Fund Types of LPs Pension Funds Sovereign Funds Insurance Companies LP

29 Types of Buyers Capital Deployment LP Deploy capital through Acquiring platforms Acquiring add-ons Investing in growth Platform A Add-On Add-On LP PE Fund Platform B LP Add-On PE Managers Platform C Add-On Add-On Add-On

30 Types of Buyers Capital Recovery LP Recover capital through Sale Dividend Recap Platform A LP PE Fund Platform B LP PE Managers Platform C

31 Types of Buyers Variations on a Private Equity Theme Family Office Wealthy individual or group of individuals Tendencies differ Employ less leverage (debt) Have a longer hold period More flexibility Independent Sponsor Private equity fund without funds Finds transactions, then raises money Less certainty of close Terms could move Interesting way to attract unique talent

32 M&A and Financing Trends in the Car Wash Industry Today Financing Trends

33 Equity Mezzanine (Sub) Debt Traditional (Senior) Debt Financing Trends Financing Sources Traditional Debt Mezzanine Debt Equity Senior in pecking order Typically collateralized with assets of the business Lower interest rates (4-8%) Conservative approach to underwriting Covenants can be restrictive Interest is tax-deductible Key terms: amortization of principal, duration Sub debt Subordinate to senior debt in the cap structure Higher interest rates (12-20%) to compensate for risk Often includes an equity kicker (minority stake, or warrants that entitle the lender to a stake) Breach of coverage ratios can be punitive Potential terms include balloon payments, PiK interest Considered the most expensive of financing sources Unsecured, maximum exposure to business downside, greatest potential for upside Historically, equity has been raised on a site-by-site basis Current trend toward larger, sophisticated investors on a multi-site basis

34 Financing Trends Additional Financing Sale Leaseback Sell the property and building, retain the business Retain equipment (sometimes) Enter into a triple net lease (NNN) with buyer Efficient means to raise capital Increases risk in a downturn Valued based on a cap rate The cap rate is the return (rent) to the investor So higher cap rate means lower purchase price Many buyers REITs Individuals, often seeking a 1031 exchange Cap Rates and Value Rent: $100,000 Cap Rate Value 6 $1,666,667 8 $1,250, $1,000,000

35 Financing Trends Sale Leaseback Example Before Revenue: $ 1,000,000 EBITDAR: $ 500,000 Investment: $ 4,000,000 Debt: $ 3,200,000 Debt / EBITDAR 6.4x Investment / EBITDAR 8.0x After Revenue: $ 1,000,000 EBITDAR: $ 500,000 Rent: $ 200,000 EBITDA: $ 300,000 Cap Rate: 8.0 Property Value: $ 2,500,000 Debt: $ 700,000 Debt / EBITDA 2.3x Investment / EBITDA 5.0x

36 M&A and Financing Trends in the Car Wash Industry Today Concluding Thoughts

37 Concluding Thoughts

38 Thank You M&A and Financing Trends in the Car Wash Industry Today Commercial Plus Group Please come see us at Booth 2436

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