Valuation on CRE as cash business without tax returns?

Question

When you are looking at a Mom & Pop deal like self-storage or self-service carwash -- and the seller absolutely refuses to provide financial statements or tax returns -- because they have been running this as a cash business and avoiding taxes ---- how do you determine the property's true CF and value?

Obv there is risk and it would be easy to say -- just move on etc etc

But there might be gold in them there hills -- how to figure this out?

Cason Acor · Answer

Low ball them and tell them that’s the best they’re going to get because they won’t provide the information to justify a higher price.

Carolyn Yates · Answer

So you are purchasing the going concern?  Or are you looking at this as just a real estate deal?  As the others have said you have to reconstruct the operating statements and they are only as reliable as the available data.  Some appraisal firms specialize in property types such as car washes or self-storage. With the amount of data they have on similar properties/businesses, they may be able to reasonably reconstruct the operating statements and provide a good indication of value.  Even if the owners do provide the statements if it is not what they report on their tax returns it may not be reliable either.

Joseph Gozlan · Answer

Two realistic options:

1) IF they deposit it in the bank, ask for bank statements.

2) Ask to spend 2 weeks on-site at the beginning of the month to see how much cash they actually receive.

Henry Clark · Answer

Car wash.  Don’t do it.  Labor intensive if not new.  You have to be mechanically inclined and available.

Michael Margarella · Answer

You can create your own pro-forma using P&Ls, rent rolls, income statements, etc.

The reality may be that, with less information, your offer will be lower.  And it is ok to tell the seller as much.

The other big issue is financing.  Most lenders will require tax returns and financials.  We've been in situations where sellers will not provide tax returns and had to rely on relationship lenders to get the deal done.  Lenders that we have not done business with previously did not want to touch it.

Chris Seveney · Answer

@AP Horvath

I would low ball them and I mean really lowball them since they cannot confirm company is profitable

John M. · Answer

You can't determine the true value unless you have sales figures.  Generally speaking small businesses can trade 2-3 times income depending on the size.  Since this deal includes real estate you can certainly look at the county records to get some idea of at least assessments.  I would talk to every car wash owner and broker within a 30 mile radius to determine what these businesses can do in revenue.  Make sure the equipment is in good condition as well.  Since you are a developer you should also look to see if there is something else you can do with the property.  There is a guy in Nashville that converted an old car wash into several eateries within each bay which I thought was interesting.  Check it out at :https://www.eatwash.com

Paul Moore · Answer

Hi @AP Horvath! I agree with the comments above. I would start with a very lowball number and tell them they are going to need to owner finance as well since "what bank is going to touch this deal?"

I also agree that the finances can be estimated by reconstructing. This is where being part of a mastermind or having a mentor would be really helpful. I was in residential real estate for over a decade and when I hired a mentor in commercial real estate almost a decade ago it was extremely helpful. Without having a team of experienced people around you I would not touch one of these deals. Good luck and happy investing!

Henry Clark · Answer

Ok watching Glass Onion a detective movie.  Made me think of what my buddy who owns a car wash said.

Car wash:

Revenue estimates: 1.  Ask to see the monthly water bills.

2.  Same electric bills

3.  Same gas bills

4.  Ask for soap bills.  Cash:

A.  Is it totally cash?

B.  Do they operate it themselves?

C.  Do they have people operating it for them?

D.  If they have people operating it they are loosing 20%.   Which is good for you.  Immediately put in credit card only.  Card sales program and daily revenue control sheet. E.  Unless it also has employee car wash attendants. Then

Equipment:

How old?

If older do a total replacement of all the electric relays and harnesses.It’s cold in Texas.  The pump house should stay warm enough.  Make sure the wands have a weeping system or a recirculating system.

Can’t remember the rest of the things he said why he would sell the car wash if it wasn’t tied to his laundry mat.  And he was a farm boy and good with repairs.

Ronald Rohde · Answer

You must recreate your own.

For RE, (not your examples), the biggest expenses are property taxes and insurance. You can confirm those very accurately.

For revenue, you have unit counts and sizing, you should know what market is. Secret shop them to find out occupancy and rates. The rest is just math--algebra level math.

As others noted, lowball to start and let them counter.

Valuation on CRE as cash business without tax returns?

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