In the appraisal world, we’re taught to estimate value using Net Operating Income (NOI), which is often considered akin to “cash flow”. Within the confines of the golf course industry, NOI is still and has been used for years for properties with positive cash flow. Problem is that until the COVID surge in golf participation there were lots of courses experiencing negative cash flow. Accordingly, the market (buyers and sellers) often evaluated golf properties based on gross revenues.
In recent years, many market participants have evaluated golf properties simply by using a gross revenue multiplier, Value = Gross Revenue X Gross Revenue Multiplier (GRM). The problem with this is that properties with varying level of profitability were difficult to adjust to develop reliable market based multipliers. Thus, the evaluation of properties, especially those with varying levels of positive cash flow wasn’t as precise. In more recent years many in the market are evaluating properties based on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiples. The inherent problem with EBITDA is that based on numerous discussions at the various golf industry conferences, there seems to be no standard definition of EBITDA, or what is included or excluded.
Our interpretation of EBITDA is that operating expenses are deducted from gross revenues with no allowance for management or reserves. Thus, in developing a pro forma NOI for a property, one includes as an expense a typical management fee and a percentage of annual gross revenue for reserves and capital expenditures. Of course, there’s no standard level for each of those either, which is why some eliminate them from the equation. The first thing to clarify here is that EBITDA and NOI are NOT equivalent. Additionally, it seems, all EBITDAs are not created equal.
In addition to not allowing for management and reserves, there seems to be inconsistency among market participants as to whether entrance fees at private clubs should be included in operating revenues and whether equipment leases or replacement of owned equipment should be allowed for in the expense budget. As one might expect, what is included or not can significantly impact the multipliers derived from market (comparable) sales and subsequently the application of a multiplier to the property under consideration.
IMHO (for what it’s worth), equipment costs (lease or reserve) should most definitely be included, whether lease or replacement and should be part of the golf course maintenance budget. Membership entrance fees are a bit more difficult since (again IMHO) the status of the club and how full membership is (or isn’t) can dramatically alter the revenue picture. If a club is unlikely to generate much in the way of entrance fees on an annual basis, or if they are refundable, it can skew the analysis. If the club is structured in a way that generates a somewhat consistent amount of membership turnover and replacement, then it may be indicated that entrance fees represent a reliable source of revenue.
Active buyers seem to suggest an appropriate level of EBITDA multiples in the range of 7 – 9 times EBITDA. Actual sales show variations that sometimes exceed these parameters which can be the result of unusual motivations of buyers and sellers or simply an abundance or lack of competition for a specific property. GRM’s have remained pretty steady over a long period of years, even as revenues have increased and perceived risk levels have declined. As we develop more market data on EBITDA multiples from actual sales over time, it will be interesting to track how stable those multiples are as well.
