Posted by ray@lcorn on August 27, 2005 at 12:28:25:
I’d say pass, or watch the process with an eye toward snatching it on the courthouse steps.
My thinking goes is this…
First, the going price for bowling centers is around one times gross. Operating margins are slim; it is capital and maintenance intensive; and takes competent, hands-on management to be profitable. I tell you this from firsthand experience. Our family company owned and operated two centers for over forty years. We closed one in 2002 and redeveloped the site. (We still have a 16-lane center we’ll be glad to sell you!)
The present owner has demonstrated his lack of ability to operate profitably, so making him a tenant instead of an owner is just making his problem yours. In my opinion there is no value in the proposed lease, and bowling is not a growth industry that would make it marketable to other operators.
The fact that he has lied to the government about the gross is a major red flag. Think about it this way… if he’ll lie to the IRS, would he lie to you?
There are so many due diligence items that would have to be investigated it would take hours to list them all. The major problems usually are related to outdated and ill-maintained equipment. It costs $1500-$2000 per lane to resurface every five years, and if they are very old wood lanes there may not be enough wood left to get by more than a few more years.
The pinsetters require constant preventive maintenance and ongoing repair. The parts are expensive and few mechanics are actually trained and qualified to work on them. Problems are known in the biz as “stops”. A high number of stops per night will make even the most patient bowler angry. And don’t get me started about trying to keep league bowlers happy…
In cases where a center sells for a higher multiple it’s usually because the underlying real estate has more value than the business. If the property does have potential redevelopment value, the bank is the party to be dealing with, not the current owner. My guess is they have a very good grasp of the value of their collateral. If the short sale number is true, that would indicate they do not believe the real estate is worth more than the business.
It may be fun to talk with the bank and get a feel for their thinking, take a look at the surrounding neighborhood to get a feel for real estate values for development parcels, and perhaps get a title report (the bank may share theirs with you) to see if there are other liens, such as payroll taxes or sales taxes. A failing business is usually guilty on both counts, and those liens are superior to the bank’s mortgage. That means you have to pay them in order to get clear title.
Once you have that info you can make a decision as to whether it is worth your time, effort and risk, and if so at what price. Even if the research put me off the deal, by then I usually have enough morbid curiosity to go to the sale and see what happens. If you’re the only interested party (and you could well be), the bank may pay you to take it off their hands.