Valuation question
Can anyone tell me if twice the free cash flow is a fair/appropriate way to value a bowling alley?  Are there other ways to assign a value?  Real estate would be separate and added to the business value for a final price. Thanks and feel free to offer anything and everything that may be of use. Im finding that brokers arent in any hurry to answer this for free, and I don't blame them.
[{"id": "ctzow97", "text": "That would be a 2 year payback period, no? Seems like it would be undervalued to me. But there are a lot more variables worth considering.", "replies": [{"id": "ctzpxm0", "text": "If it was listed for $500k total it would be. This is just the multiplier being pitched at me for valuing only the business, not the real estate and property ", "replies": [{"id": "ctzrhtk", "text": "What does the $500k have anything to do with it? A multiplier is a multiplier, if you can repay the business portion of the investment in 2 years, that seems like  more than a fair value. Caveat being what was pointed out below: scrutinize the numbers, make sure that really is the \"free\" cashflow. Maybe look at 5+ years to get a good idea the true costs.", "replies": [{"id": "ctzst80", "text": "That's interesting. It does seem low. I wonder how rhe multiplier is chosen to begin with...\n\nFree cash flow is being defined as profit plus officer salaries. If that's appropriate then the business would run around 25-30% profit margin to a cash buyer \n\n", "replies": [{"id": "ctztcs9", "text": "Are the officer's salaries the same as the managers salaries? Do they have a dedicated manager and a salary for them?", "replies": [{"id": "ctzyjo1", "text": "Management is in place and the officers are the owners and we'll above management pay", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ctzpadq", "text": "Disclaimer: Avid bowler but have never valued a bowling alley before.\n\nI've seen rules of thumb like 2-3x net income or free cash flow but I'm not sure I'd buy based on a rule of thumb.  However, if you do choose to go down this path, I'd probably have an annual reserve for capital improvements so you can replace the machinery (e.g. pinsetters, scoring mechanisms, etc.) as they age.", "replies": [{"id": "ctzpvll", "text": "I'm also wondering if improvements or renovations really don't add to the property value. I'm being told the property is generally what the county appraises it for, regardless if the owner just sunk half a million into it in upgrades. ", "replies": [{"id": "ctzqf1l", "text": "Improvements/renovations do matter, to an extent.  For example, would you pay the same for a building that has a new roof on it versus one that needs to have its roof replaced next year at your cost?  I can see certain cosmetic upgrades not having a significant impact on property value but a lot of them do.\n\nMy comment basically meant that you should deduct some amount off free cash flow per year/period as a reserve for when you need to replace certain machinery later on.  Bowling alleys are heavily capital intensive so you should be prepared in the event certain equipment break down.  Unfortunately I do not know what that amount is.\n\nAs for the county assessments, they will assess as a basis for levying property taxes but it's by no means an ironclad valuation.  Generally, a property is worth what someone is willing to pay for it knowing what they know about it.  (Sorry if that's not helpful...)", "replies": [{"id": "ctzyzz0", "text": "In your roof example, would you think a new roof added value and a higher asking price   or would  merely hold current value without prompting a lower valuation", "replies": [{"id": "cu0i3o0", "text": "It's less about \"adding value\" and more about \"reducing cost.\"  A new roof would be a check the box item and I'd pay what I want to pay.  However, if the roof was on its last legs, I'd take what I would pay and subtract out the cost it would take to replace that roof (assuming it's an immediate/near term replacement).\n\nOn the business side of things, my original point was that you should have reserves for the business because it's not on the landlord to replace your bowling equipment.  I have no idea the costs of these things, but say your pinsetters have a remaining useful life of about 10 years and they cost $200,000.  I would set aside $20,000 per year to ensure that when they're up you have the funds to cover it.  My free cash flow calculation would deduct that $20K.", "replies": [{"id": "cu0smvi", "text": "Excellent. Thank you", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "cu0fgp6", "text": "county appraisals are awful for valuing CRE.  A lot of business brokers and sellers just flat out use them if they think they are reasonable/high to avoid a complicated valuation.  \n\nIf the owner sunk half a million into upgrades, it may or may not add half a million in value, but it sure adds something.  \n\nIt pretty much all comes down to rent (even if owner occupied).  How much you can make on that location &amp; the equipment, determines how much you can pay for it (or to lease it) which determines what it is worth.  So yeah if you dump 500k in equipment in, and it allows you to make another 100k a year, the property value definitely increased.  I'd not expect the tax guys to know that you upgraded the scoring screens or redid the lanes etc really either and to accurately appraise based on that.  ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ctzvrj3", "text": "1x FCF is appropriate for a non-scalable business like that. Structure also has to be discounted due to limited use/demo costs for most like any other use. So you are buying a plot of land, and an unscalable but potentially profitable family business.", "replies": [{"id": "ctzyl8h", "text": "So 2x might even be a generous valuation ", "replies": [], "depth": 2}], "depth": 1}, {"id": "cu0f7zz", "text": "There was a very similar thread about a put put place not long ago where a lot of business valuation was discussed, you may want to look that up.  \n\nTo answer your question though, maybe, maybe not, its like asking is $100k per bedroom a good deal for a house?  \n\nYou are dealing with a pretty specialized asset (its unlikely it will ever be anything else, unless turn down).  I'd conjecture unless this is a well known place, or a place that for some reason is performing very very well most of the value is in the real estate &amp; equipment.  \n\nAs /u/lucky_deer says make sure the financials you are looking at are adjusted, meaning if someone isn't taking a market salary, change it so they are.  If the owner has 5 cars leased to it, take those out, etc.  You should be looking at this as what the financials look like if you never step foot in that business after you own it.  Of course you probably will, but this is how you make sure expenses are appropriate.  When you adjust figure out what it costs to upgrade/maintain equipment too.  If a new pin system costs 100k and you will need one in 10 years then you need to be expensing 10k a year for reserves.  Just an example, I have no idea what that stuff costs but you get the idea.\n\nPer the multiplier, I'd expect it to be low but I'm not going to pretend to be a bowling ally broker, so I can't really say for sure.  It seems like the type of business pretty much anyone can buy the building and open up at though.  What you are paying for is basically the good will (again if this place is well known etc) and ongoing business.  So think about if you bought a bowling ally across the street that was closed.  How much would it cost you to get to the numbers of this one?  That is about what its worth.\n\nMost special use building type business tend to have very low multipliers, or even non existent ones (basically all the value is in the RE, not the business).  I don't know how bowling compares exactly, but I'd pretty much expect that, or maybe to go around the neighborhood bar type returns (which are like 1-2).  \n\nA CRE broker isn't typically the best person to value a business btw.  You should be looking at a CPA or business broker for help on that.  Let the CRE broker handle the real estate.\n\n", "replies": [{"id": "cu0sqn5", "text": "Fantastic advice. Thank you ", "replies": [], "depth": 2}], "depth": 1}]