What’s My Center Worth

There is a simple answer to the question “What’s my center worth” and that is “it depends”.  The correct answer is based on the need.  Some of these needs may be:

Insurance: insurable value.

This reflects the cost of replacing the building and contents after a fire or natural disaster. It is generally replacement cost less the items which are unlikely to be damaged such as the land, parking lot, and system development fees for traffic impact and water/sewer hookups.

Accounting: book value.

Your accountant keeps books based on Generally Accepted Accounting Principles (GAAP) and the IRS Code. The book value reflects what the assets cost less depreciation but excludes items which were expensed when purchased and sweat equity. Accelerated depreciation methods normally force the book value of assets below their actual value since few bowling assets depreciate as quickly as the IRS Code assumes. Also, book value does not recognize the impact of inflation on real estate values and may depreciate equipment to zero even if they have some value on the used market.

Property taxes: assessed value.

The county determines property values based on the purchase price as reported at the time ownership transferred plus an inflation or deflation factor with rare adjustments for physical inspection. The assessed values often reflect assumptions more than reality. Excess deterioration in the physical condition of the assets or major repairs/upgrades that did not require a building permit are excluded. Many jurisdictions cap the increase in assessed value which understates the value of real estate held by the same owner over many years.

Loan collateral: appraised value.

Bankers can look at a bowling center’s value as collateral for a loan in several ways. First, many will only use the real estate as collateral and ignore the value of the equipment and goodwill. Other lenders may look at both real and personal property as collateral but will discount the equipment to its liquidation value or what the bank could receive from selling the collateral. Liquidation value can be defined as what a dealer would pay less the cost of removing the item or what an auction might bring. Neither method reflect the impact that bowling equipment has on the business. Other banks will look at the “going concern” value which is what the business would sell for including land, building, equipment, and goodwill. In some cases, the real estate can be worth more than the business while in others there is significant value to the business in excess of the value of the hard assets. Banking rules require that the bank order the appraisal with no input from the loan officer or from the borrower. This may result in the selection of an appraiser who has little or no knowledge of the bowling industry and no source of data on sales of comparable centers to determine an accurate value. An uninformed appraiser is unlikely to understand the true value of the business.

Estate planning or retirement: going concern value.

Going concern or fair market value is defined as a price that a buyer and seller would agree upon if both were equally motived and both have the same information regarding the centers revenue, expenses, physical condition, competitors, and market conditions. However, even if the buyer and seller have the same information on the center and market it is unlikely that either will have detailed knowledge of what other bowling centers have sold for. Well run bowling centers, like most businesses, are worth more than the sum of its assets. Therefore, goodwill – the difference between the value of the business and the value of its assets – becomes the key factor in coming up with an accurate price.

The remainder of this article will focus on determining the going concern value for use in negotiating a sale of the business.  A bowling center buyer, like a buyer of any business, will focus on the revenue and cash flow of the business to be acquired.  This information is easily obtained from the center’s tax return and financial statements.  Although the data is available there are several adjustments that need to be considered before determining a true net cash flow.  Net cash flow is defined as the discretionary cash available in a period from normal and sustainable business operations before debt service.

Many business owners make use of perks authorized by the IRS Code such as a company car, owners’ salaries which are more than what an outsider would be paid for the same services, owners’ medical insurance, or travel associated with events such as bowing conventions or tournaments which are taken for both business and personal reasons.  A center going through an upgrade may expense many of the items which are considered “minor” under the tax laws rather than capitalizing them.  Attorney or accountant’s fee for personal planning may be deducted as a business expense even most of the work is personal.  These all distort the center’s reported cash flow from the true net operating cash flow.  Before showing the financial statements and tax returns to a banker or buyer, a proprietor should carefully document these expenses so that the appraiser or buyer can see an accurate reflection of the business’ value.

Trends are important in determining value.  A center whose revenue is goes up each year will typically bring a higher price than one whose revenue has been declining or is flat.  An explanation of what has caused the revenue increase is important.  A buyer may find a center who attracts more bowlers each year more attractive and worth more than one who keeps the same bowlers but can raise prices each year.  Other buyers may feel the opposite.  A center whose cash flow increases while revenue falls may scare off a potential buyer unless there is a clear explanation of what is happening.  For example, increasing food prices or discontinuing some menu items to improve the cost of goods sold margin could cause revenue to fall while improving the bottom line.  A clear explanation can turn a negative into a positive.

Developing projections can also help to tell the story.  Basing the projections for league revenue on the number of league bowlers and the average lineage can build a line item that tells a very compelling story.  Raw revenue figures without detail can give the wrong impression to an inexperienced buyer or banker and can even confuse an experienced buyer.  A similar calculation for open play, food, and bar revenue can help a buyer better understand your center.  Expenses can be estimated based on prior costs and expected changes in use or pricing.

Although getting information on comparable sales is hard, it is not impossible.  The sale price of real estate is pubic information in most states.  A visit to the county assessor’s office or a request through a real estate professional should get the sale price and square footage of a bowling center.  The challenge comes with understanding what the information means.  Many bowling center sales record the entire purchase price which the county records as real estate.  Other sales have the sale price allocated between real property and personal.  That makes it nearly impossible to identify the true sale price from county real estate records.

County records do not record the financial strength of the center.  A center that generates $900,000 in annual revenue will generally sell for less than a center that generates $1,500,000 but the county assessor’s office will not be able to show why the prices are different if they are both in a similar sized building.  A small rural center will probably sell for less per square foot and less per lane than a larger suburban center because most rural centers generate lower revenue per lane than suburban centers.  Therefore, it is generally better to use a similar sized center in a similar market in another state as a comparable rather than a smaller or larger center in the same state.  Most commercial appraisals are taught to use nearby sales in similar industries and do not understand the differences between bowling centers.

The best source of revenue and cash flow data is from the selling proprietor.  They will understand their center better than anyone else.  After the sale they will often consider the information no longer to be confidential.  Their information can give you a better feel for how that center compares to yours than information from most other sources.  The broker that represented the seller may be another source of revenue and cash flow data along with information on how the buyer evaluated the strengths and weaknesses of the center that sold.  The key is to be realistic on how your center’s performance compares to a comparable sale.  If the revenue, cash flow, market, or condition of the assets are distinctly different than your center, it is hard to use the data to value yours.  You should keep looking for another comparable.

Bowling center prices don’t seem to change very quickly.  Sales from as long as two or three years ago may still be relevant.  During the recession prices fell as much as 25% to 35% but appear to have recovered in the past few years.  Therefore, sales before 2010 to 2012 are probably not as relevant as sales since then.  My database of sales of in 2014 through 2016 for centers with 24 lanes or larger show an average price of 7x cash flow and 1.2x revenue.  This covers ten centers with prices ranging from 4.3x to 10.5x cash flow and from less than 1x to over 2.1x revenue.  While it is tempting to assume your center is “average” and use an average figure, a better procedure is to put the effort into getting accurate data.  There are few truly “average” bowling centers.

In summary, whether you are looking to challenge your tax assessment, review your estate plan, talk to your bank about a loan, or design an exit strategy for retirement; taking time to understand the value the market places on your center is worth the effort.  Proprietors who have a lot of experience with number crunching will find the exercise to be doable.  For those who aren’t as comfortable with a lot of numbers, bringing in your accountant or an outside consultant may be worth the cost.  Either way, knowing the value should help with whatever decision you are facing.