How to Value a Recreation Business
With more people wanting to travel and spend time outdoors, now is an excellent time to tap into the recreation industry. Recreation businesses sell boats, ATVs, RVs, and more. With the right approach, owning a recreation business can be very lucrative. The first step is to receive a business valuation. During a recreation business valuation, you will learn how to value a recreation business. This will also equip you with the insights you need to find success whether you are buying, growing, or selling a recreation business.
Obtaining a business valuation is the best way to learn how to value a recreation business. During a business valuation, a valuation expert identifies the risks, strengths, and growth opportunities of your recreation business. In addition, you will discover how to maximize the value of a recreation business.
Peak Business Valuation is a professional business appraiser. At Peak, we work with recreation businesses across the country. We are happy to provide a recreation business valuation and answer any questions about valuing a recreation business. Schedule a free consultation with Peak Business Valuation below to get started!
How to Value a Recreation Business
There are several common business valuation approaches to consider when valuing a recreation business. At Peak, our valuation analysts often use the market and income approaches. Both approaches are effective, but each uses a different basis of valuation. The business appraiser will determine the most suitable approach for a recreation business as part of the valuation process. This often includes a combination of approaches.
Valuing a Recreation Business Using the Market Approach
The market approach is a common method for valuing a recreation business. To understand this method, think about the real estate appraisal process. Real estate appraisers look at similar properties that recently sold to determine a fair market value for a home. Similarly, when using the market approach, a valuation expert compares similar recently sold recreation businesses. The expert refers to private transaction databases for private companies.
Multiples for a Recreation Business
Valuation multiples are essential when using the market approach to value a recreation business. These are financial ratios that measure a recreation business’s financial performance. To determine suitable multiples for a recreation business, a business appraiser uses the appropriate NAICS or SIC code. Below, we discuss common multiples for valuing a recreation business.
SDE (Seller’s Discretionary Earnings) Multiple for a Recreation Business
The SDE multiple measures the value of a recreation business by assessing its seller’s discretionary earnings. This is a common valuation multiple in recreation business valuations.
EBITDA Multiple for a Recreation Business
The EBITDA multiple is another common multiple for valuing a recreation business. This multiple helps appraisers determine the expected return on investment (ROI) from a recreation business.
REV Multiple for a Recreation Business
The revenue multiple measures the total amount of revenue generated by a recreation business. Business appraisers apply a multiple to the company’s revenue to calculate the fair market value of the recreation business.
During a recreation business valuation, the business appraiser determines the appropriate recreation valuation multiples to use. To learn more about how to value a recreation business using the market approach, see What is a Valuation Multiple?
Valuing a Recreation Business Using the Income Approach
Moreover, the income approach is another common method for valuing a recreation business. This valuation method calculates the value of the recreation business by considering its cash flow potential. In addition, the income approach considers the risks of meeting expected earnings. Below, we discuss a few common risks in the recreation industry.
- Seasonality: Many recreation businesses experience fluctuating demand based on the season. This can hurt profit margins without proper preparation.
- Competition: The recreation industry is highly competitive. To succeed, it is important to differentiate from competitors and stay up-to-date with consumer preferences.
- Consumer Trends: The success of a recreation business often depends on trends in other industries. As such, recreation business owners need a strong understanding of the market.
Methods to Value a Recreation Business Using the Income Approach
There are a few variations of the income approach for valuing a recreation business. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a recreation business using these methods.
Capitalization of Cash Flow Method
Peak Business Valuation often uses the capitalization of cash flow method when valuing recreation businesses with stable histories. When using this approach, the valuation expert determines an appropriate amount of economic income for one period. This period is then divided by a capitalization rate, which represents a rate of return that an investor can expect. In addition, the capitalization of cash flow method considers any risks a buyer may encounter.
Discounted Cash Flow Method
The discounted cash flow method uses 3–5 years of projections to estimate the future earnings of a recreation business. The business appraiser then discounts the estimated future earnings using a discount rate. This method is best for recreation businesses with reliable financial forecasts and strong growth potential. However, this method is less common since it is based on future cash flow estimates which can be inaccurate.
Summary
If you are buying, expanding, or selling a recreation business, it is important to learn how to value a recreation business. Doing so can help you understand the strengths, weaknesses, and fair market value of a recreation business. With this information, you can take the next steps to maximize the value of a recreation business. To learn more about valuing a recreation business, obtain a recreation business valuation.
Peak Business Valuation, business appraiser, is here to help! We value recreation businesses throughout the country. Peak Business Valuation can provide a business valuation for a recreation business. We can also answer any questions about how to value a recreation business. Start now by scheduling a free consultation with Peak below!
