Is buying a resort stupid?

[polaroid22]

Hi guys,

I am looking into buying a resort (have no experience buying businesses). So they send over their financials. They are asking for 2500.000, but they are only made 116K net last year.
(Average Sellers Discretionary funds SDF 130K from 2017-2019), not sure how they can go from 130K untaxed to 116K taxed.

Why they are sending me that old data over instead of 2020-2021-2022 I am not sure either. (covid prolly, but still that is the most relevant info).

Combined EBITDA for 2017-2019 was $462,507, with an average EBITDA of $154,169. Multiply that amount x 5 for a business value of $770,845.

When you total the elements of business value ($770,845), real estate and associated value ($1,524,490), and goodwill ($204,665), you see the basis for the asking price of US$2,500,000.
(Real estate looks like a real stretch, as they lease the land for 2K a year.)


I don't know anything about EBITDA yet, or how to read these financials properly. Any tips on how to learn this kind of stuff the fastest? Any book/video/games recommendations?

First thoughts are that this resort is a dud, but tbh I don't have the financial understanding yet to be sure. (as it looks I need to work 25 years just to break even, prolly some more as there will be renovations/boat repairs etc).

Thanks!

 

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[Robdavis]

If you bought this resort who would your customers be?
What do they want from a resort like this?
What might they want from a resort like this that this resort doesn't have?
What is the competition offering that this resort also offers?
What does the competition offer that this resort doesn't?
Are your competitors successful?
Is the resort in an area where tourists go and there is a lot to do outside the resort for excursions or days out?

You've seen some financials, (It's worth noting that sometimes business owners will produce another set of accounts to share with a prospective buyer that aren't the accounts that were submitted to the government officially - they might not be true) but what is more important really, is the future cashflows of the business in comparison to what you intend to pay.

What experience do you have of working in or running a resort like this? The more experience you already have, the easier it will be to grow or improve this resort if you buy it.

If this would be your first business, then you are putting $2.5m on the line and would lose much of it if the business failed. For your first business it would likely be better for you to have startup capital of a few thousand dollars or less, maybe just a few hundred. Many businesses have been founded with $100 or less. A low initial investment would limit your losses in the event of a business failure, which does sometimes happen.

Perhaps you should think of other things that you could do, in order to give yourself a number of options as alternatives to buying this resort?

Have you owned a business previously?

 

[parabolic]

Sounds terrible. You have no experience, you've never bought a business before, their financials sound very weak and you would need to have killer marketing to keep customers coming. My first thought is to avoid this resort purchase. My second thought is that if you're interested in something similar, consider a small apartment building, motel, storage unit facility, or something else less sexy but more dependable and profitable than this resort.

 

[farmer79]

Terrible. You could easily get $125,000 just putting in the bank.

 

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[LateStarter]

Hi guys,

I am looking into buying a resort (have no experience buying businesses). So they send over their financials. They are asking for 2500.000, but they are only made 116K net last year.
(Average Sellers Discretionary funds SDF 130K from 2017-2019), not sure how they can go from 130K untaxed to 116K taxed.

Why they are sending me that old data over instead of 2020-2021-2022 I am not sure either. (covid prolly, but still that is the most relevant info).

Combined EBITDA for 2017-2019 was $462,507, with an average EBITDA of $154,169. Multiply that amount x 5 for a business value of $770,845.

When you total the elements of business value ($770,845), real estate and associated value ($1,524,490), and goodwill ($204,665), you see the basis for the asking price of US$2,500,000.
(Real estate looks like a real stretch, as they lease the land for 2K a year.)


I don't know anything about EBITDA yet, or how to read these financials properly. Any tips on how to learn this kind of stuff the fastest? Any book/video/games recommendations?

First thoughts are that this resort is a dud, but tbh I don't have the financial understanding yet to be sure. (as it looks I need to work 25 years just to break even, prolly some more as there will be renovations/boat repairs etc).

Thanks!

If you want to go over some of this in private, hit me up on a DM and we can set up a call.

You have to evaluate it 2 ways. 1) What would you pay for the current business (regardless of their asking price) and 2) What do you think this business 'could' be worth if you improve it? Pitch an offer at the first and, if accepted, work to grow it to the second.

The pre-covid numbers don't look great but there's not enough detail here to make a determination on what it's really worth IMO. What's the top line revenue trend both pre and post covid? Any social feedback/reviews/sentiment? Any opportunities to expand capacity, upsell, or increase revenue other than vacancies and nightly rates? Reason for selling? Any major debts on the books? What are the staffing requirements and who do they usually hire for them? If you're inexperienced you'll need competent staff and will need the owner to stay on and train you.

If it's a resort, depending on where it is, likely it's seasonal and have kids working there. Can you realistically offer something in the off-season to increase revenue? You may incur higher staffing costs as a result.

As others have said, there may be 2 sets of books they can provide: those for taxes and those that outline how the seller spent the SDE (usually personal expenses written off against the business so the business will show less profit and avoids taxes).

The real estate figure does seem out of whack depending on what structures exist and how long the land lease is for. Generally I try to avoid and leases. The real value is the dirt and if you don't own that, then you're relying on cash flow to generate wealth.

You can likely scratch off the goodwill also since covid likely killed most of that. If they want to stick by a number for goodwill ask them how they calculated it an get the current books for 2022 even if they haven't been audited yet and see if they've recovered any.

A 5x multiple for a seasonal business is ridiculous IMO and even if it was a decent business I'd offer closer to 3x or lower. It would be good to also know how long it has been on the market.

 

[ZCP]

how many of those posting advice in here have bought or sold a business?
lot of good advice and a lot of things to think about
wondering which is from those that have actually bought or sold a business.

one thing to take into account is 'YOUR desired outcome' @polaroid22
what is your desired outcome? your desired ROIC? your exit plan?
do the math, run it through CENTS, do a risk analysis
get two or three seasoned business owners / buyers / sellers to look into it

there is always a deal.
right @Greg R ?

 

[Spenny]

Not sure about this one. P/E ratio is about 21, some may say its expensive, others may see it as cheap if they can add value. But, you haven't got experience in the area, maybe difficult to do that.

Ok so, lets say you just buy it and let someone else run it for you. P/E 21 is pretty high for a business with a ~20% margin that doesn't have the greatest of moats. To give a comparable, Microsoft, a computer & software giant is P/E 24. That's only a little bit more expensive and you get one of the best businesses in the world.

Is there something that you see that the sellers are not seeing? Is there anything you could do to add value? I'm just echoing LateStarter, I'm sure he knows more!

 

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[polaroid22]

thanks for all the feedback! yeah not going to pursue this one.
Robert T. Kiyosaki always says but 4 houses then a hotel (like in monopoly). But there doesnt seem to be any great books about hotel/resorts. (small demand I guess).

 

[The Sandman]

1st, it always takes a discussion to begin to paint a picture of the business. There's too much information missing to really know what's going on.

That said, the numbers presented don't justify the asking price. For starters, goodwill is part of the business value, not a separate add-on.
And you don't value real estate that isn't owned by the business! Are the buildings work $1.5m?

Put your questions together and talk to the agent. Let them know that the numbers you see don't add up the the asking price and see if they can explain. Sometimes they can. Many times the business is simply overpriced.