Car Wash Advisory Podcast

Welcome to the car wash advisory podcast, your trusted source for stories, strategies and insights from some of the most influential leaders in the industry. Let's dive in.

Hello everybody, and welcome to the car wash advisory Podcast. Today, we have a very special guest being that of Richard Harmon, focused on the ESOP type transactions, and we couldn't be more excited to have you, Richard. So thanks so much for joining us. Harry, thanks for inviting me. It's pleasure to be here absolutely and we have a lot to discuss here, because until recently, and until you and I became acquaintances and friends, I couldn't, for the life of me, digest or wrap my head around this whole thing of ESOPs, but maybe before we jump right in there, you can give a bit of a background on yourself, CSG as a firm and tell the listeners sort of a bit about yourself. Sure, sure. I'll just give you kind of a brief thumbnail sketch. You know, back in the day, I've been a CPA for 40 years. I call myself a recovering CPA. I haven't practiced public accounting since the 80s, just to date myself. And along the way, I became a financial systems gun. I would build financial systems from Main Street to Wall Street, and in the 90s, built a company to about 500 programmers who were doing assignments on all the fortune 500 companies, and sold that company to company, went public, started a bunch of small businesses, and one was a financial staffing businesses. So I did CFO controller bookkeeping work, initially Silicon Alley, New York based technology companies, but then we, we broadened it, and then I got to 2007

and the Great Recession starts kicking in, and my market's collapsing. I'm losing like 70% of my revenues, and I dusted off my CPA certificate and sharpened my pencil and took one of my own assignments as the CFO of an ESOP owned ESOP is employee stock ownership plan owned manufacturing company in New York. It's a company called Pauling Corporation. And Pauling had started in the 40s. They used to do the the seals, the rubber seals, on on ammunition cases, and they expanded over the decades. It's really the talk about company town. The company's named after Pauline Corp. It was the biggest employer in town, et cetera. And the CFO had been there 27 years. Was retiring, and I knew somebody on the board, and I ended up taking that CFO position. And there were two factories, there were 400 employees. They were third generation. Were running the two factories, two cousins and and I began to learn a lot about employee stock ownership plans. Now this was a plan that was seasoned. It had started in the 90s. The second generation used the ESOP to get liquidity and financial diversification. But now we were in the third generation, and most of the employees had been in retirement status, and the impact on those retired employees was incredible. I mean, these are people making, you know, back in the 2000s 15 bucks on the line, and they're getting these great, great, great retirement benefits through the plan,

by happenstance, and this is kind of the end of that story. Larry Kaplan, who's the founder of CSG partners, nation's leading ESOP investment bank, was playing golf with the audit partner of Pauling. And Larry said to that guy, this guy, Luke eversold, was his name. He said, Hey, who do you know who can do due diligence for all our transactions in the tri state area? You should talk to Richard and his back office company. So we had a conversation, and next week, I hit I just finished out my 14th year with CSG as a managing director, and it's been my joy to have completed a couple billion dollars in transactions, several dozen transactions, and, and I'm just thrilled that you and I got to chat a few weeks ago, and it was one of my favorite conversations I've had a long time. A, you have so much energy and, and B, we went on for hours because you were just layering everything that I do in line with everything that you do and and I, again, thrilled that it resulted in this call today. I assure you, the feeling is mutual. I'm so glad we met Richard, and I'm so excited to bring everything that you know and everything you can do to this space. So

as the listeners know, anybody listening to this, it's it's not the case that all these car wash companies that have built such successful businesses should necessarily sell to a third party, and this

alluring, yet seemingly complicated transaction type of ESOP is so very difficult, admittedly, for me as well as anybody else, to decipher when standing from the sidelines without having some.

Be as smart and well versed as you are in it. So I guess for everybody, maybe we can frame sort of what the heck is an ESOP? Why do it, and what's going on here from a high level. So you know, the brief, the brief history of an ESOP is, was

a gentleman in the 50s, Louis Kelso, and he wrote a book called The capitalist manifesto, literally his answer to the Communist Manifesto. And his which is, you know, he opined the underpinnings of ESOP, which is, America's a capitalist society. Wealth is concentrated. How do we inspire owners to share equity with their employees, because the more people that we have invested in capitalism, the stronger the Republic, right? And so after from the 50s all the way through the early 70s,

he was able to get that into Congress. And when, when Congress passed the employee the employer retirement income Services Act of 1974

ERISA, for short, when they passed ERISA in 74 it created three things. It created IRAs. It created for one case, and it created an employee stock ownership plan, which was a methodology where an owner could sell a stake in their business to a retirement trust that would benefit for their employees.

So 10 years after that, to continue the history lesson. So in 74 we had the passage of ERISA and the first ESOPs. In 84 Congress expanded that benefit. They wanted to come up with more reason to inspire owners to sell a stake. So they came up with something called a 1042 rollover provision. For those of you familiar with real estate, it's like a 1031 exchange, except for it's much broader. You have a full year if you sell 30% or more to this retirement trust, you have a full year to reinvest your proceeds in what's called qualified replacement property, which is defined as stocks and bonds. Of Us, operating companies actually manage real estate. You're not allowed to do munis, treasuries, passive things, because Congress said, Hey, we're going to give the owners this benefit, but we want it to juice the economy on the side. So they wanted you to reinvest in US operating companies. Most people, if they sell their company, they're going to spend about 30% on capital gains taxes to whatever state they're in, plus plus the IRS and and so here you've got that opportunity to put that money to work for you. So that was in 84

and then in 98 for tax years starting in 99 Congress made another shift. There was some lobbying going on. ESOPs had somewhat fallen out of favor because LLCs and S corps were very popular, and there was one level of taxation. And if you did an ESOP from 74 all the way through 98 you had to be a C corporation. And while there's tax benefits to doing an ESOP, because a whole transaction deductible, you know, while you're C corporation, so you don't pay taxes for a number of years. After you you do an ESOP transaction, you end up becoming a tax paying C corporation forever. So

to reignite interest around ESOPs, Congress passed this legislation that allowed you to become 100%

S corp ESOP, starting in January 199,

so to dial into a big picture, there were some very large ESOPs by this point, 100 million in profits, paying 40 million in taxes a year. Literally, that C Corp could elect S corp as of January one and the k1 instead of going to individuals, you know, because now there's k1 it goes to the retirement trust. The retirement trust does not pay federal or state taxes with a couple of exceptions, and so you're literally that company became tax free in perpetuity. So you have a US operating company that's tax free in perpetuity, and the IRS was a little bit apoplectic. They said. Then there were hearings that went on for two or three years. How can this be? How can Harry's car wash, netting $5 million a year, paying 40% taxes, compete against my car wash? I'm making 5 million a year and I'm not paying any estimated taxes. And Congress said, well, it serves the greater good. And so we've had this 100% S corp now for 26 years and counting, and that was a game changer. And then there was one other piece of information, which is kind of complicated and tough to unpack, where in 2004

the IRS.

Came out with a reg 409 P which allowed the selling shareholder, or anyone actually to retain a stake in 100% S corp ESOP disregarded for tax purposes, so you could end up with warrants or options or stock appreciation rights, the rights to buy back equity in that 100% S corp ESOP, but they're disregarded for tax purposes. So you can have up to 49% what's called synthetic equity in an S corp ESOP disregarded for tax purposes. Wow. So ESOP started as a defined contribution pension plan like a 401 K and an IRA, and it evolved to a full blown corporate finance transaction with these little events that I just described, to the point it became a tax enhanced leverage buyout of your own business, where you can literally put leverage on your company, you can defer all your capital gains by selling a stake to the ESOP. 30% or more. You can get to the point where

you'll sell a majority of shares to the ESOP trust. You'll redeem another chunk of equity for warrants, and the company can become tax free in perpetuity. And when you put all that together, it allows here's the

we should frame this part. The owner gets liquidity. They get diversification. Most owners of privately held businesses have 80% of their net worth tied up. This allows them to get money outside, working for them independently, so that no matter what happens to the business, they've they've got, they've got outside investments,

the company gets to deduct the whole transaction, the employees end up with this stake that becomes valuable over time. That's and then, and then, you know, what are the other moving parts, right? So you need to sell 30% or more to be able to defer all your gains. That's that's one thing. So we almost never do a transaction less than 30% a lot of times, we'll sell 30 to 49%

and then

then we'll step up to get you to probably 75% or so on a second transaction a few years later. So at that point, you've harvested 75% of the enterprise value, and then we'll have you redeem that remaining equity for a good chunk of warrants, often 40% warrants, and the company will become tax free. The company itself gets to deduct the first transaction, the second transaction, so it stays very tax efficient, and then it becomes tax free, and then the owner gets the first bite of the apple, the second bite of the apple, and then those warrants in the outer years become very valuable because the company is accumulating excess cash because it's not being drained on a quarterly basis of estimates. So that's a lot to unpack. I'll take a big breath right now. No, I mean, so this is why it's so very exciting. So here's, I mean, we'll get to the impacts and the effects, which you've been teaching me so very much about, and which, at first glance, I think it's fair to say. And nobody would hold it against you if you were thinking to yourself, This has got to be a joke. It's too good to be true, right? We're talking about turning an entity into perpetually owing no taxes. The owner being able to take proceeds out and not pay taxes on that, and you're rewarding your employees all while doing this. Yes, yes. But before getting into that, you mentioned something that I think most people, at least I did, I struggled so much with, which is, why is the government encouraging this? And that timeline you gave was fantastic, because it seems, and you told me, if I'm off here, it seems like the government's continuing more and more and more to try to incentivize these why you say it serves the greater purpose? Why does the government want more ESOPs? Both sides of the aisle have embraced ESOPs from the beginning. You know, Republicans love owners getting liquidity and diversification on a tax advantage basis and still retaining governance. So there's we'll get into governance in a bit likely.

Democrats love the idea of employee ownership and employee stakeholders, and so it's been aligned on both sides of the aisle. What's happened with these Ops is is, you know, during the Great Recession, they laid off a third less people. There's more engagement. ESOP companies outgrow their peers by 3% or more per year. Sometimes I wonder whether it's the Tax and Benefit benefits that drive that, or it's the employee engagement. I suspect it's a combination of both and

and, that's what it's been, you know, in the industry, initially, from 74 all the way through the early 2000s the ESOP advisors were mostly

ERISA attorneys, you know, pension plan attorneys, just putting documents in place. And when we got involved, you know, when some of these other elements came, you.

Into being, you know, we realized, oh my gosh, it's a tax enhanced leverage. Buy out of your own business. We can put leverage on the company. You end up continuing to govern the company. You have upside. You know, we, we,

you know, our claim to fame these days is we raise more capital with no personal guarantees to finance these transactions than all other advisors. So at some point we'll, we'll say, hey, let's sell 30 to 49%

and we'll do an analysis. We'll say, Look at what you're going to do over the next five or 10 years here, you know, here's the growth you expect, here's all the taxes you're going to pay. And then we'll,

we'll show you

one of 400 flavors, or one or two 400 flavors of an ESOP to dial in what makes the most sense for you, and we'll show you how much of those tax dollars we can repurpose for you to get liquidity and diversification as a selling shareholder, what it does for the company, and then what it does for Your employees. And I think those powerful impacts have just resonated, you know, it's very few issues that resonate on both sides of the aisle, you know, as you can imagine. So this makes sense to me, but then there's the part, and that's very helpful to understand, but so remind me again and everybody who's listening, why is the government encouraging companies to no longer to go into a form or a structure where they don't pay taxes to the government anymore. They just, I think it was some successful lobbying effort just saying, you know, we should allow these S corp B stops, and maybe initially, not thinking it through. And afterwards, again, there were debates in Congress that went on for three years. One time, I was talking with a partner one of the partner one of the big firms who is in those hearings, you know, testifying, and they just came down on the fact that, you know, over over the many decades, wealth is getting more and more concentrated and and if You don't have a mechanism for employees to benefit. You're You're gutting the middle class and

and what I what I've seen is the owners I work with are already abundant. They're already very successful, folks. But they get liquidity, they get diversification, and then they create this benefit for their team. And once in a while, I'll have a transaction where we'll do an ESOP, and 345, years later, they'll sell to private equity or third party. The The owner will end up, the selling shareholder will end up with more cash than they would if they didn't do this first, because they didn't have to pay tax on all the money they took out. And the employees will end up a stake they never would have had. You know, I mean, when I, when I sold my technology staffing company in the in the in the 90s, and they went public, you know, we bonused our managers. I don't think we went down to the line level, maybe some minor bonuses. But, you know, I've had circumstances where, you know, an owner said to me, Hey, you know, I made millions more doing the ESOP first prior to having my final exit, and then when I did the final exit, my employees got five times their annual salary INTO THEIR 401, k and i netted millions more. And that was just a, you know, that's just the Win, win outcome. Now go ahead. Well, I was going to say, So is it fair to say the government's okay with this, and they're okay creating entities that they're not collecting otherwise corporate tax that they would be getting, because they're one redistributing wealth appropriately to the middle class and to the employees who are well deserved, rather than keeping it concentrated. And then secondarily, there's this sort of, albeit less tangible argument here measurable, that doing this structure and rewarding your employees actually results in stronger US companies. Correct, both of those are but there is a kicker here, right? Because the IRS, what are they doing? They're giving up near term capital gains income, right? Which creates this benefit for the employees. When the employees are allocated these shares, they don't pay for them, so they don't have any basis in them. And at when they hit retirement milestones, or if the company sold, the company will make a market for their shares at whatever the market value is in the future, right? So what does that mean? Right? Now, I have a client where it's a very successful company, and

particular employees who've been there 10 years or more have a million or more in their ESOP accounts. And if you're 55 years or older, you get the opportunity, if you've been in the plan 10 years, to sell 25% of your stake. So one of my friends just came up to me said, Hey, I just got to sell 25% stake, which in their case, was worth 360,000

that 360,000

goes into their IRA, or 401, K, where they can keep deferring it. But when they retire and they pull that money out, they pay ordinary income on it. So here's.

The closing loop where the IRS is still kind of good with it, because at the end of the day, they get long term appreciated ordinary income, as opposed to near term capital gains taxes. So that's where it balances out on the tail end, when the employees are pulling out the money from the retirement accounts, paying that ordinary income in the retirement years, that's, that's where, that's where the economic equation pays back the system a little bit. But here's the thing, Richard, just to be super clear there, because there's so much going on here, and you're such a wealth of knowledge, and you know all the intricacies, just to, just to be clear on that last point, because if taken out of context, it almost sounds like a negative, right? Because you're saying, hey, guess what? This money that the employees are putting in their IRAs or retirement funds, they're gonna have to pay ordinary income tax, which they otherwise wouldn't have to have paid, great but it's money they would have otherwise not had. It's a huge, huge thing if I'm if I'm gonna give you a half a million dollars, Harry, and you gotta pay ordinary income on it, or I give you zero, right? That's what I want to make sure we're all clear on, right, right? It's, it's still incrementally, incredibly valuable. And statistically, employees end up with about four times the value in ESOP companies than they they they do if they just have 401, K investments and the like. So it's very powerful for them, and I got to see it firsthand back at falling Corp, you know, back in the back in the day and,

and, yeah, it's just, it's just been so what I love about it is, again, the owners I work with are already abundant. They're already successful. They're typically making, you know, low mid seven figures. Sometimes they're making high eight figures, you know, in terms of profits on a yearly basis, but it creates this wonderful

trail of gold for the employees. I always like to tell owners to caution their employees, it's an opportunity, not a promise. The company needs to be valuable in those future years. Once you do an ESOP, there's an independent valuation every year, and the employees receive a statement, and they're allocated shares over a long period of time. Here's how many shares you're allocated, which is based on your w2 salary relative to the other employees. Here's how many shares you're vested in. You vest over six years. Typically, here's two through six, 20% a year. You

can also do Cliff vesting, but almost nobody does after three years. And here's the value per share. And so after they get vested, you know, typically the first few years, the company's paying down the debt

to the selling shareholders in the bank for the transaction. But after about year three, they start to see a real hockey stick in their in their statements. But you know, the company needs to be valuable when it comes time to sell. Well, the good news is, you know, once you get to be 100% s, Corp, B, stop, you know, even if you're in a non tax, you know, a state that doesn't have tax, like Texas or Florida, you're still saving 37% a year in cash flow that would go to taxes that can be used for working capital, for expansion, for all these things. So you've got a lot of extra horsepower. You've got a lot of extra rocket fuel to stay successful in the future, and so, so that's, that's the world I jumped into. And it's, it's, it's just been wonderful. And part of why it's wonderful for me is is our team just executes at such a high level. You know, the way we write the financial memorandums that we do when we do our analysis, the success in our capital raise process, we run a competitive auction to raise capital, our structuring. You know, we've just been swimming in this pool for for over 20 years now, the company has been in place since 2000 we were

a middle market investment bank affiliate of American Express, and we rolled out and started in 2000 rolled out in 2002

and then kind of repositioned ourselves as as as these seminal changes hit in the ESOP space and and we've done some $25 billion in these transactions. Right now. We have, typically, will close 20 to 25 a year. In 2024 we close 30 by by the end of 2025 we'll have hit 40 this year. It's been quite something. I've been remarkably impressed. And for anybody who knows me personally or has listened to my stuff, you probably realize I'm not the brightest person in the world, and I'm kind of dense. You're pretty bright. I have not been able to no I have been avoiding I appreciate the compliment, although I don't know if it's true, but you were able to explain this to me in a manner where it's very hard to understand this without somebody who lives and breathes that I am positive of that. But I want to make sure that we because I am furiously taking notes, to make sure that I try to stay somewhat organized, because there's a bazillion things we have to cover here, I want to make sure that we recap, or at least go through so we've kind of gone through. Why the government allows.

1000 that makes sense to me. The primary benefits, here's what I've got, Richard and you let me know what I'm missing. One is your corporation no longer pays taxes, right? Two is, you get to reward your employees via the plan, and we'll get through the mechanics as to maybe some of the initial trepidation, or, you know, issues somebody could have with. Maybe, do all employees get? We'll go through that. But your employees get paid, and they get a vested interest in the company. Your company no longer pays taxes. You get cash out today that you don't have to pay taxes on if you use it for certain means. And then additionally, and we'll go through this next. Maybe the common sort of

pitfalls, or potential pitfalls that somebody says, All right, well, what's the catch? And I think we can maybe go through some of those. Am I missing any of the primary benefits that this provides? Well, I would say no tax. Once in a while, I'll have a client

become 100% tax free immediately. And if they're a C Corp, and they close their transaction and then elect S corp the next January one, that's a very short path to becoming tax free. If they're an LLC, taxed as an LLC, a lot of LLCs these days are taxed as S corps. If you're an LLC, taxed as an LLC partnership. You can do what's called 351, exchange,

tax free exchange. You can close your ESOP as a C corporation, and then anyone, any January one subsequent to that, you can elect S corp and become tax free.

Now, if you're an S corp and you close your ESOP as an S corp.

You pay capital gains taxes. Why? Because, when they created the 1042 there were only C corps around, and the 1042 regs are tied to you being a C Corp, and if you are an S corp,

in most cases, it makes sense to close as a C Corp. Why? Because you got not going to pay hardly any taxes at all

after your first ESOP transaction for a few years. And then you do second ESOP transaction, and then you'll, after you've taken this money off the table and deferred all your gains, then you'll re elect S corporation. But if you're s, and you close as a C, in order to defer your gains, you have to wait five tax years to get back to s. So if you're C, you can get right to s, if you're an LLC and go LLC to C to s. But if you're, if you're an

an S corp, in order to get that benefit you close this to see. So once in a while, I'll have a client, they'll say, hey, Richard, I'm in Florida. I'm only going to pay 20 or 23.8% capital gains. I'm just going to become 100% S corp immediately. We do that analysis, we say, okay, that may make sense on paper, but look at how much tax that you're paying that you don't need to pay.

So

my point is, when you close as a C corporation, you get to deduct the entire transaction. If you sell 10 million to the trust, or 20 million or 50 millions of the trust, you get that amount in tax deductions. So typically, you're not paying taxes for several years, or paying very little taxes while you're a C Corp, but you're not tax free. You're paying a little bit of taxes until I get you to that 100% s and then you're tax free. So to point number one, it's not no tax right away, although it can be, actually can't be, because you'll end up paying capital gains if you just become 100% S Corp.

Just last, you know, I've been traveling a bunch, but so I guess it was three weeks ago. I was in Arizona. I was presenting to a company, and I said, guys, you're gonna pay $50 million in taxes over the next 10 years. By the time we were done with our analysis, they were an S corp, closing them as a, as a C, and then getting them back to s, and then becoming tax free. They were paying 3 million in tax. So we took 50 million down to $3 million and we do that all the time. Richard, let me ask you one thing, so here's where I'm and I'm gonna I'm beating up ESOPs right now, right? Because it's so hard to conceive the magnitude of benefit, and it seems so ludicrous that this kind of transaction is allowed. So let me ask you this immediately, what comes to my mind from a sort of naivety based vantage point, okay, but certainly, those are temporary benefits. Are you? Is it like, is it accelerated depreciation type mechanics, where I'll use it all up and then I go back to normal? Am I paying the pipe for? Well, back in the day when there were only C Corp, so you had to be a C Corp. So you had to be a C Corp. If you're an ESOP, you couldn't, you couldn't shift to a LLC or an S. You had to remain a C Corp back then, you know, let's say you're, you're, you're making 2 million a year and you're selling 10 million to the ESOP trust, right? Well, you're not going to pay taxes for five years, but now you're a tax paying.

C Corp, your six in the future, forever, right? Right? That went away when they came up with 100% S corp situation. So, so it's, it's not a temporary benefit. I think what you need to do, though, is you kind of surf the structures, right? So we look at whatever structure you are. So if you're in an LLC is taxed as a partnership, you're in a cat bird seat, because we can close you as a C and the very next January one, you can become tax free.

I'm not going to get into the weeds as to why, even when we have that opportunity, we might have you wait an extra year or two, it's not worth getting into. But you know, I'm kind of considering myself at this stage to be an ESOP evangelist,

because so many owners never hear about this option. And the reason I think they never hear about the option is everyone who's in the investment banking space. Everybody is doing M and A or selling you to a third party, we all get greater fees, including us. You know, because we do some of that work, we all get more money if we sell you to third party. So think you've got this, this beautiful house, it's, it's worth $10 million

and if I use this real estate agent, I'm going to make 6% I'm going to get a $600,000

Commission, which I'm going to split, however, I'm going to split, however, if I do this ESOP thing, maybe I'm going to get 200,000 and then we're going to split that. And so it's just not interesting.

We found, and we go up against private equity constantly. We'll do a compare and contrast. We'll say, Hey, here's how much you're going to end up after tax. And typically, typically doing an ESOP transaction, you'll end up with a couple of additional turns. So if you're selling it 6x

with, you know, you need to hit 8x with private equity to net the same six. You know, I've had one recently where the ESOP was at 10x and private equity would have to hit for 14x you know, we'll talk about this in a little bit. I think what determines value in this process, Congress said to these ESOP trustees, these institutional trustees, which, there's not all that many of them. There's about 10 at the moment, that are that, are that, that, that are institutional trustees that just specialize that Congress said to that trustee, you're allowed to buy shares for the trust on behalf of the employees. Do not pay more than fair market value. Do not pay more for more than fair market value for the shares. So there's a whole belt and suspenders process in place to make sure you're not paying more, because if the shares are worth 10 million and you sell them for 20 you've just taken advantage of your employees. And so there's a whole process there. But what does that mean? It means that an ESOP is a financial buyer. Typical private equity transaction is a financial

buyer. If you're in an industry, often Software, Software as a Service, things like that.

And car washes straddles the line, right? It straddles the line. Yeah, there are. So what line does this rattle

when you have a strategic buyer? Right? Who's going to pay? As it's happened in the car wash space a couple of years ago, what? 22x

right? Not a good ESOP transaction, because even after you pay all your taxes, you know that trustee is going to be able to pay what a financial buyer would pay, which in your space is 10 or more EBITDA, but it's not 22 so when we have a company that that you know, think about when Google slash alphabet bought YouTube, was a strategic acquisition. It had no profits, and they paid 1,000,000,004 for it. Right? Most companies in America sell as a function of their discounted cash flow, which is the present value of their future earning stream, or based on comps, private and public comps. And so we run that whole process. But typically, whenever there's a normal PE buyer, we crush it. What's the trick? A lot of times, we're selling 30 to 49% initially, and and we want the owner to be have enough capital so they can reinvest that, and then we'll step them up again. If they're selling to private equity, they're selling, you know, 75% 80% sometimes 60% they have to roll the rest. They're getting more they're getting a bigger check at closing, but they're paying capital gains on that check. So when I've got an owner who's got a runway of, let's say, three to five years, they're going to harvest a lot more money after tax, going the ESOP path than just stroke.

In that track to private equity, and I'll give you one example of that.

And I always, I've worked with so many entrepreneurs. Back in the days, I was with Coopers and Lybrand now Price Waterhouse Coopers, I was the founding member of the emerging services business group, and I I ended up doing consulting for all kinds of companies. And of course, that continued when I was building financial systems for so many companies. And

the idea is, it's really hard to be a successful entrepreneur. You know, nobody knows who has not sat in that seat. How many decisions have to be made on a yearly basis? It's probably at least 5000 10,000 decisions. Two thirds of those have to be right for you to be able to stay in business. You're dealing with, you know, competition, you're dealing with, with all kinds of regulatory matters, etc, etc, and, and I just really have an appreciation for entrepreneurs. So I had a friend of mine who had a business in California that's worth $50 million

and his buyer said, well, we'll give you 30 million at closing, and we're gonna have you roll 40% and you're going to become plugged into this platform company. We've already got three other companies like you and and we think that your 40% you're going to roll with us, is going to be worth, you know, multiples of,

you know, increased value in the next three or four years, to which I said to them, I said, Look, if they really thought it was going to be worth multiples, there wouldn't. They wouldn't have you roll 40% they would have you roll 5% because they'd want all that upside for themselves anyway. So So bring it all home. And this, this particular business, the person had been running it for for decades, was at a kind of retirement milestone, on the cusp of 70 and

and I said to him, I said, so what does that do for you after tax? Well, you're you're in California, you're paying 37%

capital gains tax, plus, when I got into the weeds of his LOI.

They were doing something clever. They were

they were doing the transaction as a stock purchase, but they were treating it as an asset purchase for tax purposes. So I'm way too far in the weeds. But what did that mean? It means they could take their assets, because they had a lot of plant and equipment that was on the books at two or 3 million, they could write that back up to about $12 million

and what that did to him on the $30 million it took 12 million of that 30 million and turned it into ordinary income in California. So of that 12 million, he had to pay 53% on, and then of the remaining

18 million, he'd pay capital gains on. So I said to him, I said, Hey, you're going to net. You're giving up control. You're going to net 18 million after tax, something like that, right? We did the analysis. I said, I can sell 49% of your company for $25 million

get you 22 million at closing, with 3 million as seller notes, and you're

not going to pay any capital gains on the 25 and you're still going to own 51% of the company.

And now wait two or three years, and now sell to that private equity firm, and you've made out like a bandit, right? And what did he do? What do you think he did?

He sold, he sold a private equity. And I said, why? And he said, Well, he goes in my space, and he was in an aging industry. He said, in my space, there's a couple of clients, he has some concentration risk that he was significantly concerned three, four or five years later may go away. And so his concern was better to take money. Now,

you know, now

the, it's a, it's a, it's a funny thing, because I said to him, I said, what you should do is, because he was very much involved as the operator of this business, working five, six days a week, 910, hours a day. He didn't have to commute far. The company was, you know, 2030, minutes from his his home. But, you know, he was working really, really hard, and he'd been making good money for a number of years. And

and I said, you know, do the ESOP take the 25 million off the table? Reinvest that spend a little of your EBITDA to get your replacement in place? Maybe that's one person. Maybe that's two, but spend the next couple of years getting off the front lines. And this is good for any M and A transaction, because if you're the company's dependent on you, you're going to become an employee, which is what happened to him. And I just was with him, and I said, How's that going? And he I said, I said, are you able to cut back? And he goes, No, I'm working harder than I ever had.

Have in my life, right? And and I, and I understand his decision, and coming back to my point about working with entrepreneurs,

that's their baby, that's their asset, whatever they want to do with it, my job is to educate them. And when he called me up and he said I sold a private equity versus doing the ESOP, you know what I said? Congratulations. Nobody gets hurt. Taking profit, you know, the difference in the millions isn't going to make a difference in his life, at that at his stage, because he had a lot of resources outside of the business over, you know, running a successful business for many years and but I love people to explore. Hey, what does that path look like, Oh, now I know I've got that option. I've got another arrow in my quiver. So here's what I think, Richard, if you if you get rid of all the noise, because there's so much benefits, there's so much complaint, but like at the end of the day, here's the way I look at it, assuming that you're in an industry where strategics are not paying an inordinate premium to that of a financial buyer. So in layman's terms, your competitor, the Mr. Car washes in the car wash space, the whistle expresses they're not paying a higher multiple than a new private equity entrant who's acquiring a platform which is indeed the case and correct right now in the car wash base, given the dynamics in the market.

Then putting that aside. When does an ESOP make sense? Makes sense to me, from my limited knowledge that I'm vastly increasing every time I talk to you and you're so gracious with sharing with me, it makes sense for for you when you want to realize the value of your company, and you want to do so in a manner where you care about the legacy and feel the legacy and the future of the company is better in the hands of the employees than it is a private equity sponsor.

And, and everybody knows kind of what happens when you sell to a private equity spot. I have no idea what you're talking about. And, and I had a buddy of mine

who was CEO of Bantam double day Dell back in the 90s, and I just had lunch with him. He's, he's 84 now, I guess. And, and when we were selling our company, he said to me, goes, Richard, goes, you know, I rolled up all these publishers, and I would sit them across the room from me, and I said, you're going to get a really nice check, but once you cash that check, you've been bought. Life changes. You know, you're not the king, prince, queen, Princess anymore, right now. You're you're part of this other thing. And that was great advice back then, and it's still good advice now, I think that, you know, as somebody preparing for their eventual exit, I love the idea of making sure the the company can function without you, so that when you do end up

rolled up into a private equity opportunity that they're not dependent upon you, you know, so you've got your life and you've got the check, you don't have the same control, etc. But you know, for this whole period of time when you have an ESOP in place, even if you sell 100%

you know the board that's in place when you do the transaction continues to govern. So the trustee is a directed trustee. They're not on the board. So even in the case, in some cases, I have where 100% of the shares are owned by the ESOP trust, and the trustee is voting those shares for the interests of the employees. The board advises the trustee how to vote for the slate of directors each year, and the board, the board can replace the trustee. So for all intents and purposes, this was one of the things that that was a challenge to solve governance stays in place with with the team that kind of created all the wealth my my metaphor is, you don't want the tight end all of a sudden call and plays for the football team, right?

You know, the person that's great at whatever their specific job is is likely not the person to truly understand all the variables involved in any particular business decision. So governance ends up staying in place. So anyone who has created, you know, I like to see, I think the firm likes to see three to 5 million in earnings and profits, or more, 10 million or more in revenue, 10 million more in revenue, because the banks will play, you know, when you're you're under 10 million in revenue. You know, once a while, have a company 8 million revenue and 4 million in profits, and it's still a more challenging capital raise, because it's a different it's a different caliber of banker that that plays in the under 10 million revenue space. So we like to see the three to 5 million of equity, you know, Car Wash space. To your point, it's a lucrative space.

The financial buyers are paying high multiples, and the ESOP competes with those multiples. It's not like it almost can.

Competes. It competes dead on. You know, if you've got otherwise, and they're coming in at 10 or 12, your your ESOP value is going to come in at 10 or 12 if all the other elements are supporting so here's where I'm at. I cannot believe where we are on time. I'm positive. I'm positive that we will get remarks saying that we they people want you back on so we're gonna have to continue this at some point. But I want to make sure that we hit a couple quick points. Couple quick points before we do wrap up here for this episode, which is so we talked about the minimum just now. I'm so glad you brought that up. That makes complete sense. Let me ask you a different question. What is too big?

The largest transactions we've done,

my largest transaction enterprise value is about 1,000,000,008 right now we we sold 42% of the company for 510 million, and the owners took 510 million off the table. They were in California, got to defer their capital gains taxes, saved them 175

million in taxes. Still own 58% of the company. They had a big division that they were thinking of selling off to private equity, which didn't happen. So I'm hopeful to take them from 42% do another ESOP transaction, bring them up to about 75% or so, and then get them to be tax free in California. California, as you can imagine, has a little wrinkle. You don't become 100% tax free. In California, if you're 100% S corp, you still have to pay one and a half percent franchise tax fee, you know, one and a half points, which is still way down from 53 point, whatever it is.

And anyway, so that's what I'm hopeful there. We had an aerospace company where we we, we did a public bond offering, and we sold 36% for 500 million. So it does scale, quite large, I would say the clients we have with. You know, right now I've got a couple of clients that are in that 600 million to a billion enterprise value. I've got two that I'm working on right now. I'm doing analysis for

Richard. Let it suffice to say, there's nobody in the car wash industry for which an ease that is, I mean, even without getting into the theoretical that doesn't apply anyways, there's nobody who's listening to this and is a car nobody that's too big, nobody that's too big, exactly. And then what about what else have we absolutely not covered here that you think is paramount and essential for people to understand? Because this is going to be something that I know, the average person who listens to it and is interested in it will listen to it multiple times because of just how much information was discussed. What did we not touch on that is absolutely pinnacle, I think, two things, a it's essential to explore the opportunity and be the way that we love to do that is we enter into an engagement. We collect five years of historical financial information, a current tax return, some projections, as well as employee census information. And then we go off and we spend three weeks creating an analysis to show you the road ahead. Don't do anything. This is what it looks like going into the future. Here's a couple of leveraged, optimized ESOPs. This is what we think the valuation range of your business is, here's how much capital we think we can raise and at what rates, and if you like, that road ahead, there's a, you know, your your toe in the water to explore that. And so if somebody is looking for liquidity and diversification, the one thing we didn't touch on at all in this conversation is there's also a whole host of estate planning elements related to this. And then there's even the opportunity, when you do these to get it back into the next generation, 20 years later, so it ends up 100% owned by by the next generation. But those are, those are variations on a theme, and I love to encourage folks to explore what it would actually mean for their business. And I'm happy to get on a call, and I can do back of envelope things, but when we do our comprehensive analysis, it's, you know, 4050, page document, it becomes really, really clear. And the fun part that I have for folks in the car wash industry and other industries as they're growing and they're expanding and doing things, I'm like, you know you're creating this equity. You know, each million dollars of profits, if you can come up with this recurring model you're creating in your space, you know,

$10 million in equity, right? It's floating around a 10x

so. So, you know, that's, that's, that's what I like to do. And then, in the, in the broadest sense, I just enjoy having conversations and working with entrepreneurs. It's, it's something that's been part and parcel since I, I.

You know, was wet behind the years working at at Cooper's back in the I don't even want to say which year it was, 1978 when I started with Cooper's library. Which Harry is probably before you were born, 1991

so I will tell you, from my perspective, I have been quite literally, I wish I could say figuratively, but literally, bashing my head against the wall now for seven years in this space, meaning the most fantastic long term business owners that have built incredible businesses, and they have zero intent to sell to private equity. And to me, this is beyond exciting, because it's actually something that allows them to preserve their legacy when the time makes sense, and to actually get the value you've built for which, otherwise there is no mechanism to do that and leave it in the hands of your employees and the people that have built it with you. Right? Great summary, great summary, and, and, and it's just, again, a joy to have been on today. I can't believe we burned an hour and

we covered a lot of ground. Um, episode, I think we're gonna have to do another one. It's gonna have to be on the financial benefits. Because what we didn't do is we didn't maybe we can get some graphics and stuff together. I'll help you. We can work on it. But we haven't gone through the fact that you're making way more money all the flexibility that's provided with the proceeds. This is life changing stuff. What what we'll do next time is, we'll, I'll redirect, redact an actual analysis. We'll, we'll pick the right sized opportunity, and we'll show you what that analysis looks like. And, and, and it's compelling. It's compelling. It's the best thing we do. And, and we'll touch on, you know, what precise benefits are, you know, and we'll pick something that's similar to, you know, you'll tell me what size, you know, and we'll, we'll dial something in that's a lot of freedom to give me. That's terrific, though. And Richard, before, we kind of conclude here, how can people who want to find you, find you? Well, a couple things. I mean, if somebody knows you, and they can always text me, give you my cell number, which is (917) 714- 6437, (917) 714-6437,

just say, Hey, I saw, saw you on Harry's podcast. Can we chat? And I'll give you my calendar, and then you can always reach me. At R Harmon, R, H, A, R, M, O, N, @ C, S, G, Carl, Sam, George partners.com, RHarmon@CSGpartners.com

and I'll send you a link to some great learning materials and the like. We have some some excellent digestible,

you know, meals related to this information that you can you can chew on at your own pace. I've got one more thing that I'm going to punch. I'm going to kick myself if we don't bring up right now, Richard, for anybody who's evaluating offer in hand from a private equity or sponsor backed group or strategic,

is there any harm or foul from evaluating whether or not they're even paying you more than you would? I mean, in some it would be. We do this all the time, right?

And matter of fact, we joke that our favorite ESOP transactions have failed, private equity transaction. Matter of fact, I just closed a large transaction that got right to the edge and and and and fell apart for one reason or another. Why? Because the due diligence typically is not as intense. You've already seen everything go wrong in the other transaction, and then it's it's more of a breeze, you know? But this is only ones that don't work out. Harry, and I know this is your your Valley, wick, and, and, and, you know they don't work out.

But when everybody's when, when somebody's got that, that loi in hand, you know, this process takes four to six months. If they've got the LOI in hand, it's probably could be the same four to six months, depending on due diligence and the like. I think it's really valuable to explore what the option is,

even if you've got to lean toward the private equity deal. Because,

you know, I don't know, with my friend in the California company that was worth 50,

you know, I'll wait another year. I mean, this was just

August when he closed this transaction of last year, and August of 2024 he he closed with them working harder

than ever in 2025 I will talk to him again in 2026 and I'll say, Okay, if you could flip the switch, what would you do? I do have a couple couple of of friends who will say to me,

Richard, before anybody does a private equity transaction, you have them call me first. But they have their place. It's wonderful the way.

Consolidation happens. However, there is some portion of the car wash industry where it's just a legacy play, and here's an elegant way to get liquidity, get diversification, get estate planning benefits, still set things up for the next generation, or set things up for your employees to run. And it's nice to know you have a different door to go through, as opposed to just one PE firm versus another PE firm, especially given all the tax benefits have been put in place to inspire you to take a look. I couldn't agree more. I'm so excited for the next episode. So this was scratching the surface. Richard, I cannot thank you enough for joining us. I know everybody's going to very much enjoy this, and once again, everybody so this is Richard Harmon of CSG partners, Richard, thank you so much for joining us, and please do tune in for our next episode. Thank you, Harry. Thanks, Richard.

0:00  
Thank you everybody for joining and welcome to the car wash advisory podcast. This week, we have a very special two guests from Madison, Capital Group and links Car Wash being that of Anthony Warren and Joe Teague. Thank you for joining us, gentlemen. Thank you appreciate it, Harry.

0:19  
And this is exciting for us. So I think to kick everything off. What would be most helpful for all listeners, viewers and the alike, is maybe if both of you could give a quick background on your personal and professional backgrounds, that would be super appreciated. Yeah, good, Anthony, I'll let you kick it off. Oh, right. So always kind of like to make a joke that you know, sort of wash cars in 17 and never got a real job. So, you know, I've been in the car wash industry 17 years. Started with Audible Car Wash full serve, back in the day, in high school, never with any intention of make this a long term career. Spent five years with the audible team. You know, it was great experience. Learned a lot about work ethic. Guys helped pay for my college. So great organization. Graduated with a accounting degree, kind of the tail end of the recession, and I got a interesting job offer from a group, Sam's Express car wash out of Charlotte, one of the early adopters of the Express model in the Charlotte market. So, you know, I took a, you could call it a gamble, you know, turned out some bank jobs to go take a a job as a site manager with the car wash startup, you know, rolling out an express Car Wash group. So I spent, you know, long time with the SAMS Express team, up until recently, was hired by Madison Capital Group to be the chief development officer to lead the links Car Wash startup. So, you know, we're 18 months into this, and it's been a absolute blast. You know, learned a lot, and these guys have a absolute, fascinating approach to how to do Car Wash funds, how to structure this kind of a different outside perspective than some of our other competitors.

2:13  
Very good. So yes, this is Joe Teague.

2:17  
I when I graduated from college a long time ago. I practiced in public accounting for a while. Then we went back to law school at Chapel Hill, and having a CPA and a law degree, the first thing you get pigeon holed into when you practice law is you're a tax attorney. And immediately got into like kind exchanges under 1031 and over the years, developed expertise in that area, and kind of evolved into commercial real estate development. And several years ago, left the private practice law, came over to Madison Capital Group to be their president and partner. And then few months ago, back in the early part of 25

3:01  
I backed away from Madison a little bit as an officer and can. And now I've come over to links car wash and Fresh Stop, which convenience store chain to help run those kind of in startup mode and and there's, you know, there's a lot of tax components to both of those verticals that I think's been

3:23  
my expertise has been very helpful in that. So that's how we got here.

3:28  
That makes complete sense, and it's super helpful by way of background. But you guys really aren't a startup anymore. You've been around the block. You guys are growing quickly. No,

3:38  
no, we are, but it's still startup mods. You know, it's a very fast growing startup.

3:44  
And how many sites are we up to today?

3:47  
Currently, we're operating 14 units. We've got seven development properties, with a couple of them under construction, and we've got several sites that we're closing on in the very short term future.

4:03  
That's exciting. And for all the listeners out there, Anthony and I have had the pleasure to become close with one another over the last two years, I would say, and it's always an absolute pleasure. And one of the reasons that I wanted to make absolute sure that we had Joe and Anthony on the podcast was links and Madison Capital Group are doing something very unique that we've never seen in the car wash space, which is a different approach, really, to the capital structure via utilization of a DST type approach. Is that right?

4:32  
That is correct, absolutely. So Madison capital is one of the larger DST sponsors in the in the country, so we have a lot of infrastructure in place, great wholesale team that you know, works with the different reps and broker dealers to sell the DST interest based in storage, in self storage and multi family. So this will be our first venture, and I think maybe the first DS.

5:00  
T in the car wash space that we just kicked off, just hit the marketplace with it a week ago.

5:08  
Congratulations, and for all the nincompoops out there, such as myself, Joe, would you mind explaining what a DST is?

5:15  
Yeah, sure. DST stands for Delaware statutory trust, and years ago, the IRS acquiesced, through a couple court cases, to recognize that buying a buying a interest in a DST is the equivalent of buying a direct interest in real estate. And while that is in while that is why that is important, is because that allows someone do a like kind exchange into a Delaware statutory trust, because it's considered an interest in real estate and is therefore replacement eligible replacement property.

5:50  
So,

5:52  
you know, it's, it's mainly structured and built for kind of the small, like, kind exchanges. You know, think 100,000 $500,000

6:00  
investor that has an exchange. It's not big enough to really go out and buy, you know, a single asset by themselves. And so it's, it's a marketplace for them to do the exchange.

6:11  
And so we are, oh, go right ahead,

6:14  
Joe, go ahead. Yeah,

6:17  
well, I was going to say just so I can wrap my head around that. So for somebody who wanted to utilize a 1031 exchange in buying a whole property, a DST is an alternative for them to feel that same benefit and be the beneficiary of it without buying an entire standalone unit. That's correct. That's right. That's correct. Our average DST offering may have, you know, 50 to 200 different investors, depending on the size of the offering,

6:47  
and that that DST is a primary securities offering, is that, yes, that's right. So, you know, we do a private placement of the DST interest, that's correct, under a PPM, that's exactly right. And then sort of throw all these questions at you, but um, so then, are those traded in a secondary market? Are they? Is there a lock up period? How does that work? There's no lock up period, but they're not. There's no There's no secondary market for them. There's no liquidity in that market. So

7:19  
it's not much different than a direct from that perspective, is not much different than direct investment in real estate. You can always find somebody to try to sell your interest to, but there's no there's no organized market for that.

7:32  
Is it fair to say that the DST market is more liquid than a single use tenant property? Per se, it is more, I would say it's about the same, yeah,

7:45  
yep. And then the main benefit is that you don't have to go out and identify that property, and you still get all the benefit

7:53  
stuff to identify. The Exchange works exactly the same for the taxpayer. They have 45 days to ID 180, days to close, right? It's typical 1031, exchange. The benefit to DST, like I said, is it's the smaller it's the smaller investor that has the small exchange. You know, if I sell, you know, residential, lot of help for investment. For $75,000

8:18  
it's really hard to find replacement property to work. There's just not that many assets that makes sense and an asset that will pay a dividend, right? And so this gives that smaller investor the opportunity to buy into a larger piece of real estate than one that ideally pays distributions.

8:37  
One more mechanical question as to how this all works, and you'll have to forgive the naivety on my side. I am pretty naive when it comes to sort of this stuff, as well as real estate, more so than the investment banking side. But can you, let's say that you have 5 million of proceeds from a sale and you identify a property that somehow fits the bill for 4 million, can you then take the million remainder and put that into a DST, yes, you could identify up to three pieces of property as your replacement. So it's kind of like a fungible plug to that, yeah, yeah. Is that right? Yep. And this

9:15  
car wash is all cash. There's no debt involved. So if you need debt replacement for your lockdown exchange, this wouldn't work.

9:25  
So, but we're doing this on all cash.

9:29  
So, Joe, so that makes complete sense from an investor point of view, and then from your all point of view. What makes the DST structure both attractive and kind of differentiated from, let's say, a sale, lease back approach,

9:42  
yeah, so we, we like the DST approach, because we're still in control. So we sell the property will be owned by the Delaware statutory Trust, which will then master lease the property to Link's car wash,

9:56  
and Lee's car wash will will pay a rent payment. So.

10:00  
However we control the Delaware statutory trust,

10:03  
as we're the trustee of the trust. So whether that trust buys or excuse me, or when they sell or exit, the real estate will be completely within our control. So it's a way, it's almost like a sell, lease back internally.

10:21  
So it's a way for us to capitalize deals, but stay in control. And the typical exit on the DST is, I mean, you can sell the property, it's called full cycle, and return the, you know, return the money to the investors, and they can do another like kind exchange if they want to keep rolling their gain out. But typically, a lot of times we will look to do an up rate into a private REIT, or, you know, a section, section 721, contribution to an LLC, which are all tax free and and just, you know, try to continue to roll with the asset and the operations, as long as It's cash flowing.

11:00  
And also another benefit, if we do, if you do, if you do an upgrade, into a into a private read or to an LLC, at that point, you can put place debt on the property, do a cash out refi to the investors. All

11:15  
right, you're going to kill me drop. But what is an upgrade?

11:19  
That's just a fancy way of saying, we're going to contribute the property to an LLC, tax free. So each Delaware statutory trust investor will contribute their interest in a DST into an LLC in exchange for membership interest, tax free transaction, then that LLC could put debt on the property and return a cash free distribution to the or tax free distribution to the investor. Okay, so the DST entity itself cannot have debt. But if you move the DST into an LLC structure, it can't, okay, it can have debt. It can have acquisition debt from the beginning. Once it's closed, it cannot add debt. Got

12:01  
it? Okay, that's interesting. So you're still, yeah, so you're still,

12:07  
so it's almost like this is grossly inappropriate use of the terminology, but it's almost like a closed end security, like you're locked it terms out, and that's it. You can't incrementally add that on top of it. You're saying, unless you move it into That's right, you cannot, that's right. And that's the 721 of the upgrade would give you the opportunity to put debt on it, and, and investors normally love that, because they're going into tax free distribution of, you know, refinance proceeds,

12:37  
you pay that out as a dividend,

12:39  
yep.

12:41  
And because it's because it's loan proceeds, it's non taxable under the Internal Revenue Code. Okay, so really stupid question, why doesn't everybody do this?

12:54  
Um, well, you know, I think the market of available 1031, investment proceeds is not huge, right? And then, like I said, we, we've spent 10 years developing a reputation in the DST market. It's, you know, the alternative investment market. So when we go to market, people know, hey, this is a good product.

13:18  
You know, someone you know, just doing it for the first time. It's really hard. We started off 10 years ago doing small self storage DSTS, and it was, it was painful for a while. And lot of, lot of meetings in hotel rooms, you know, meeting with reps and brokers and that that, you know, manage money for individuals, and it takes a long time. So it's not, it's not an easy space to get into. However, we're fortunate, because we're into it and other other verticals we own. I think that's fortunate. I think that's a lot of hard work and foresight. Yeah, it's not for free. Yeah.

13:54  
And then, and maybe, well, both of you will probably have a perspective on this, but Anthony, maybe you as well. The what ramifications does this have on the operating side? Any having so we get to operate it almost like a hybrid of a lot of our competitors to do traditional sale lease backs, you know, with your normal REITs out there in the marketplace. But the difference is, is that we always have control of the asset, if that makes sense. So you know, where, typically, if you sold off your car wash site through a sale, lease back, you know, you're never going to get that asset back. You know, that's sold to a independent, third party group, and you know, it can be traded, sold, whatever have you where for us, through a DST, we have the ability, whether it's, you know, at the end of the fund period, or whenever, you know, Joe determines, basically, you know, we have the ability to gain the asset back, you know, where we don't completely separate the operating and the real estate forever. So say we get to the end of our two.

15:00  
DST period in five years. And we want to do an exit, you know, we can buy our DST investors out of the fund, the DST fund, and we buy it back under link, so we can merge the operating company and the real estate asset back together. And so it allows us to operate it very similarly to like a sale, lease back. But all of our competitors that do so don't have the ability to get the real estate back whenever, you know, they take it to market. So, you know, it allows us to have an exit strategy. This is a little more unique. And so, you know, it's identifying the right assets that are going to fit for a DST. You know, these are sites that are greenfield development, or their sites that, you know, just recently constructed, that you know, there's not a big goodwill value. It allows us to buy a site based on the real estate asset value, place it into a DST, then links becomes the tenant, and then at the end of the DST period, then links could purchase the real estate asset back, if that makes sense. It's almost like an in house reads. The best way to put it, yep, that's right,

16:08  
gentlemen, when you say you can purchase it back, and again, you have to bear with me, with the naivety. But that's not a, oh, it's possible. That's a you have the first right to do it correct? That's that's outlined in our ppm, okay, because we are the DSD manager. So can I ask you, is this so I imagine, and Anthony, you're alluding to this, and I'm sure both of you know a lot as to what the correct answer to this is. But does it have an implication at all on in terms of your underwriting criteria. And whereas a different group that, let's say, was planning to use sale leasebacks and maybe Junior debt versus a DST type structure that you're implementing when you're looking at the same wash, do you ever find that the disparity in capital structure or funding model changes the way you're looking at a potential underwriting correct? And so for us, we actually run dual funds. So we have DST fund, and then we have our links Opportunity Fund. This is actually the second one this year. Opportunity Fund two, which is going to operate more like a traditional car wash fund. So that's more of a cash flow. It's not a real property interest. I don't speak incorrectly, but you know the joke, correct me, but for us, it allows us, you know, to raise a fund for sites, and say, more mature assets that have goodwill value. You know, they're a better fit for opportunity fund because it still allows through, pass through depreciation, and it creates cash flow distributions to our investors. So if it's a more mature, stabilized site, they go to our up fund. And then if it's a grower site that's more of a real estate property purchase with, you know, minimal business value, then they can go into our DST fund. It allows us to kind of purchase, you know, in place our assets in the particular fund based on, you know, what the asset is, you know, sometimes it might be a repo with improvements. It might be a site that just CO that has, has not operated as a car wash. Or it might be a site that's six months into operating an open that we buy it, you know, very much like a real estate property, you know, asset, and that's how we do the, you know, the valuation on it and the transaction, yeah, we've, we've, we're raising money in two different vehicles, Harry one, as Anthony says, fund two, which is an opportunity fund that is that gives that pool of investors someone who's looking for a little bit of a distribution check and A big accelerated depreciation write off, right and then, and then, you know, a decent exit, at least get their capital back, plus a little return the DST, then is a completely different investor market who really is trying to complete a 1031, exchange, and is not concerned about depreciation.

18:57  
So it gives us two, two vehicles to attract two different investor pools and and maintain control the real estate

19:08  
in both scenarios, presuming the opportunity fund does not perform sale lease packs. Yeah, yeah, correct. Thanks. So our opportunity fund so far has not performed sale leasebacks because we do a depreciation pass through, and so with, you know, the big, beautiful bill coming through, 100% bonus depreciation, you know, it allows for us to get up to, you know, one and a half times, you know, levered depreciation multiple for investors, so they can take a substantial write off, you know, from The depreciation on the assets so and then it allows for ongoing distributions from the cash flow to stabilized asset. That's right, do you guys, and this is a very pointed question. I don't mean to put you on the spot with it, but it's something that I'm personally very curious about. And mathematically, there's an answer, but I'm wondering if that.

20:00  
Answer does not exactly jive with practicality.

20:04  
The bonus depreciation does that directly impact your underwriting in terms of ability and willingness to pay for assets all else equal? Yes, it's, it's a big part of how we structure our deals. Purchase Price allocation is, you know, one of always make a joke that, you know, whenever you do a deal, it's always like, how much, how quick. And then for us, it's, how is it allocated, you know. So it's always, you know, if you triage it, it's they always want to know, what is the purchase price, followed by, how quick am I going to get the money? And then for us, you know, our big point on it is the purchase price allocation, you know, so to take a look at an asset, and depending on the age of the asset, you know, is it something that's, you know, a 15 year old car wash building that's going to need capex money that we're going to put into it, which then would allow for more depreciation, or is it a New site that we can, you know, capture the depreciation on the equipment in the facility, because, you know, and it allows for it. The big picture for us is it allows us to buy across all different types of car washes when we're out there, where a lot of our competitors are on their fund structures they're looking for, mature, stabilized, cash flowing assets they're buying on an EBIT, on multiple nothing else, you know, where for us, we can buy everything from a, you know, 15 year old remodel that we need to go in and blow it out and, you know, spend $2 million improving the site to, you know, sites that are Greenfield, that Just open CEO Ed, to sites that are mature and stabilized, you know, that are 234, years old, that, you know, already have the cash flow, where a lot of our competitors have to target kind of one acquisition strategy they want, you know, the cash flow and the EBITDA multiple. Or there's guys out there that do a lot of brownfield purchases, you know, they buy them, and they improve them, and then they build the business. Well, for us, we can buy any type of car wash asset, you know, in the

22:09  
from an express Car Wash perspective, if that makes sense, it's on point five acres and it's a full serve with an 80 foot tunnel. Unfortunately, I can't make more land, but you know, if it's got enough, where we can, we can get the same customer experience through that facility, and it meets our demographic and competition density, you know, densification strategy, then we can buy a car wash, kind of from A to Z, and so that's what allows us to do it a little more uniquely than a lot of our competitors. Is

22:38  
anybody else doing this? I don't know of anybody, and it's pretty hard to get things past me in this space, because I'm have no life, and this is all I do. But does that do you guys know of any other group doing this? I do not. DST, yeah, no, our tax attorneys at safe Hart, and he is kind of the premier DST person United States as far as legal goes, and he is not aware of another car wash. DST, that's been done.

23:06  
This is even Harry. Our our op fund is also very unique as well, because we raise an annual op fund, you know, because we don't do one single blind fund, you know, and then do sale, lease backs to return, you know, capital back to continue to repurchase. Where for us, we ran an annual fund, you know, with a target of how many units and then a return for those investors. So we're able to go year by year, you know, where for us, you know, last year, bonus depreciation was at 60% now we're back to 100 you know. So it allows for us to pivot, whether it's based on current market conditions, IRS tax codes, you know, it allows for us to kind of, across the board, you know, be able to buy car washes, whether it's, you know, a 20 year old full serve, you know that we go in and get and do you know a, you know, $2 million remodel and re and go through and, you know, revamp it, remodel it to sites that are stabilized and mature, that a lot of our competitors buy. So it allows us to not, you know, limit our options from an acquisition perspective, yeah. And I think our op fund is unique. Carrie, I think Nancy, correct me from wrong, but our op fund is buying the operations as well and then paying management fee to Link's car wash. So if you're an investor in our op fund, you're participating in potential upside in the cash flow. Yeah, help me with that more. Yeah. So how does that differ from being an LP and a close just normal private equity fund investment, but I think it's different than a fund that's just by this, just serving as the landlord. So if your fund is just buying car washes to triple net lease them to an operator, you have no upside. Your rent payment is what it is, right? So in our structure.

25:00  
If you knock it out of the park, you're going to, you're going to participate in the upside in that fund, yeah. And so it allows, compared to two, yeah, it allows, like, for a lot of them, it's three, you know, like, a lot of these REITs out here, have investors that invest just in being a landlord. You know, within their our car wash competitors raise a fund for the Opco. You know, our opportunity fund blends them together, and so they get the upside on the real estate, and they get the upside also on the operating company, because our safety net, that's a little bit different. If you look at what the cost was to develop a Express Car Wash five years ago versus currently. You know, there's the cost to develop an express car wash over the last five years, conservatively, has probably gone up 50% if not higher, you know. And so for us, it's the appreciation and the asset that we don't let go, if that makes sense. So for like our op fund investors, when they invest in our op fund five years from now, look at the replacement cost for 100 foot Express tunnel on one acre with 20 vacuum spaces. You know, what is it going to take to build a facility like that? You know? And so that's something that the REITs get to benefit from. But you know, the our our competitors out there that raise an Opco fund. It's tied solely to the operations performance of that particular asset, you know? And so, you know, that's where it's we're able to kind of mesh them together into something that is backed by a real estate asset that we don't let go. And so, you know, that's, that's, you know, Madison capital as a whole is a real estate equity group, you know, a little bit different approach to how we do this than the traditional private equity. It's not private equity, is it? Because a realist, it's more real estate focused. And I'll tell you, I've gotten time and time again, I've talked to investors who are LPs and funds that say, Well, when I first invested, my first invested, we were going to keep all the land, and now we're not, and now I'm no longer privy to any of that. We basically sold it all up at a predetermined cap rate, at market, prevailing rates, and that's it. No more land upside, right? But the OP Fund and the DST fund are very intentional in in their structure, yeah,

27:23  
correct, correct. And that's that's for us as an organization, you know, whether it's storage, multi family, our C store group, you know, we are a real estate equity firm, first and foremost, you know, we're a real estate developer, everything from, you know, we've got an in house contracting group. We built these things in house ourselves, you know, we've got Benco that does our construction and development in house, you know, we've got property management folks. It's also just bolting on Car Wash operations team. And so for us, you know, it's utilizing the vertical integration that Madison capital already had in place, you know. And so it's not just simply, we're doing M A and acquisitions in the car wash, Car Wash space. We can also, you know, develop it Greenfield, you know, because there's times in the market no different than, you know, Harry, where, three years ago, the guys that could build them, you know, were doing extremely well. They're tough to build and develop. And so there's times where you should be more acquisition heavy, there's times you should be more development heavy, depending on the market. And it allows us, we're doing both. And so we can, you know, right now, and say, probably 80% acquisition with 20% development. But when the if the market turns, you know, interest rates drop, you know, then we have the ability to spend, you know, and do more development and less acquisitions. Because, you know, the Ryan Hanks had built a group, you know, that from A to Z everything from the real estate acquisition, the construction development entitlement, all the way through the operations, you know, and so we basically bolt an operations company onto car wash, you know, asset that we could build and develop in house or acquire, depending on the market. Right now. Are they expected? And goodness knows, I'm not trying to get into the territory of predicted returns or anything like that, but is the return profile tremendously different or differentiated, given all the tax deferment, any of that, or is it just different risk profile? I think ours is probably a little bit more conservative, because we the big value prop for our

29:36  
our investors, is the tax savings. Whether you're an upfront investor and you get the depreciation pass through, you know. Or you are a DST investor, and you have 1031, funds that you need to place, you know. So for us, a lot of our a lot of our competitors out there, the ratio fund, you know, it's not backstopped by anything. It's not backstopped by a real estate asset. But then at the same time, it.

30:00  
Has to be pure return, IRR, you know, and so for us, it allows us to be a little more conservative. But then, if you look at it from a fund investment perspective, it's what's your depreciation, and how much are you going to save on your taxes, you know, from a depreciation write off, and then the return, or for our DST in particular, you know, allows for them to place 1031 funds no different than they would on like a net lease purchase, but they could buy a portion of or a real estate interest of, and they don't have to take down the whole thing.

30:35  
What is the most misunderstood? Because I get yelled at all the time for making these two long gentlemen. So let me ask you, I guess, my big, my big finale question here is what is probably in each of your minds the most misunderstood part as to what links and Madison capital is doing in the car wash space that you wish you could get out to more people. Maybe it's just that you exist. Maybe it's just this differentiated approach. But what is it, if given your opportunity to speak to the masses like us? What? What should people know?

31:09  
I think the biggest thing for you know from the business and acquisition side is that, you know, we purchase and we structure it like a real estate asset purchase, whether it's for fun or whether it's for, you know, a, you know, our DST fund, you know. And so for us, it's the the biggest piece is we don't have, we can't get into a bidding war at 1213, 15 million per unit, like a lot of our competitors do, you know, and that's because, you know, we have to backstop it with the real estate equity and the real estate value. So the difference is, is that, you know, because we're not spinning the real estate off, and we're not running an Opco fund, you know, it kind of puts a top on it for us, you know. But at the same time, you know, because we purchase it like a real estate asset, we do, you know, real estate contracts is how we structure them, with some business provisions. It allows for us to simplify the transaction process. You know, we're cash buyers with limited contingencies. We've got working capital internally. But then it allows for us, you know, not to involve a bunch of investment bankers on each side in real estate teams of 10 to 15 people. No offense, Harry. Now I always make a joke. The only thing worse than a real estate broker is a banker. That's being a real estate broker, you know. And so that's where these comp, you know, especially for you know, the single or, you know, few unit acquisitions, it's very intimidating, you know, for a lot of these groups, when, you know, a big institutional group or private equity group rolls in with a, you know, an acquisition team of 15 people, and you know 10 different attorneys, and they're using their family attorney, you know, that's not done a lot of transactions. It allows for us to line it a lot closer to what they know on buying real estate or buying a real, you know, a building or whatever have you not as much of a business acquisition with, you know, a binding loi and the provisions behind it. You don't, you're not a fan of the 200 page purchase agreements. I'm not, believe it or not, how many deals we killed because of that. Okay, let me just make note of that. Yeah.

33:27  
Here, I think what differentiates us is we're trying to, it's the old saying of, you know, all rising boats, right? And for our investors, we want them to participate in the upside of the ops and the real estate valuation creation, and I think that may make us unique as we keep that very that's very focused part of what we're trying to

33:50  
do. So and gentlemen, just to, just to re summarize here, both and this would constitute the entirety of Madison capitals Car Wash related ventures, both funds, the Opportunity Fund and the DST fund, both, no matter what, have full real estate exposure. One just has the OPT co added on, all right.

34:12  
Well, the DST has the real estate real estate exposure, but it is master lease back to links car wash,

34:21  
but under none of the offerings are you only isolating and exposing people to the Opco without that real estate backstop, both of them happen, correct? That's right. Okay, that makes sense to me. And gentlemen, I actually cannot thank you enough for putting up with my sort of stupidity, with this kind of stuff, and naive as it comes to all these structures. I can't believe that you guys are the only ones doing this. It makes a tremendous amount of sense to me. Where can investors potential targets that maybe want to sell? Where can everybody

34:53  
find you? Yeah, we I mean, definitely just call me directly or Anthony. That's fine. Yeah. And.

35:00  
And but, yeah, we actually are in the process, and hopefully it'll launch the next week or so. We're doing a website for links that will list all the offerings we have outstanding that would probably be the best place to get an introduction to what we have, and glad to share that with you. Yep, and they can follow us on links, Car Wash investing on social So, Facebook, social media, etc. And then they will get in touch with our capital markets folks. They can provide, you know, 10 times more detail, as much detail as they would like.

35:35  
Last question, right? How many people does Madison capital employ? You guys are quite an operation

35:40  
of Madison capital, the larger holding company, has about 650 employees, outside of links and fresh stop. And I think links, I think we're at 90 employees. Anthony, is that right? Yeah, that sounds correct. Yep. Fresh Stop has about the same as about 90 so all in

36:03  
850

36:04  
Wow.

36:06  
That's guys. This is tremendously impressive. I can't thank you enough. Again, both of you for joining us. This has been one that I've been looking forward to for a long time. What I will be sure to do, and we'll be sure to do, is we'll link all the information in the description, or whatever it is, however you're listening to this, and we look forward to people tuning in next week, Anthony and Joe, thank you so much for being on the show. Harry. Appreciate it. Thank you so much, Harry. Thank you. Thank you, gentlemen. You.