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January 2006

What's Your Area Worth?

If you're planning on selling or tackling a major upgrade, here's a formula to determine the value of your resort.
Written by Ted Farwell, Winterstar Valuations, Inc. | 0 comment

How do you determine the worth of a ski area? How can you estimate the value, and the wisdom, of installing a new lift or upgrading the snowmaking system? I have developed a relatively simple tool to help answer these questions. The key is to understand the relationship between utilization and operating margin. This relationship may be used to quickly evaluate any proposed expansion, acquisition, re-financing, or purchase decision.

This evaluation tool is based on a formula that flows from the data contained in the annual Economic Analysis (EA) produced by the National Ski Areas Association (NSAA) each year. NSAA has tracked both the skier-visit volume and the financial well-being of the ski industry for over 40 years, and the EA offers a wealth of useful data. In addition, I have conducted over 120 appraisals of ski resorts over the past 25 years and thus have a second source of operational data.

From all this I have created a five-year model. (Five years helps mitigate the effect of the weather.) My model adjusts each season for inflation, thus giving an excellent measure of the various relationships between size, location, market orientation and investment. I have analyzed principally by the five geographic regions, and also by the four size categories. During this process I have discovered a conceptual-financial relationship that can be of great help when developing an operations strategy.

Utilization Is the Key
The chart Utilization vs. Margin plots the relationship between utilization and operating margin. It shows what we all have observed over the years, namely that operating cash flow (Net Operating Income or EBITDA) increases sharply as skier-visits pass the break-even point.

In fact, the data show that you can project this relationship by measuring utilization. This relationship is expressed by the formula y = 1.0285x - 0.0318, where y equals operating margin and x equals utilization. Success in the winter resort business is all about this formula. If you know your utilization rate, or project how different developments will increase or decrease it, you can predict your operating margin or how an investment will impact your bottom line.

The chart shows the five-year national average experience as reported by the 100 or so areas that participate annually in the NSAA Economic Analysis of Ski Areas. For these areas, the average utilization was 34 percent, and the average operating margin was 32.1 percent. Of course, the relationship between utilization and operating margin varies by region and/or size, depending upon the specific regional variables. But the national average creates a useful benchmark.

Ski Resort Value
Now let's estimate the market value of the average resort in the EA. In this analysis we define "utilization" as the proportion of seasonal capacity utilized by the total skier-visits. And how can we determine the "seasonal capacity?" Let's start by using the average vertical transport feet per hour (VTFH) as reported by those areas in the Economic Analysis. In 2002, the average area in the EA had 13,597,000 VTFH. At that time, these areas reported an average of 2,054 VTFH/skier. Do the math (divide VTFH by VTFH/skier), and we see that the average area in the Economic Analysis could comfortably accommodate design capacity crowds of 6,620 skiers/snowboarders-at-one-time.

Seasonal capacity is this skiers-at-one-time capacity times the length of the ski season. The five-year national average was 137 days. Thus the average ski resort in the Economic Analysis could comfortably handle 907,640 skier-visits per season if it was at full capacity every day. That compares to the actual visitation recorded by these resorts of 308,860, which equals 34.0 percent utilization. Although the areas included in the EA do greater volume than the average resort, this utilization percentage is typical of all areas.

After reviewing 20 sales of existing ski resorts since 1990 and analyzing the critical factors, I have concluded that buyers and sellers arrive at mutually satisfactory deals that yield overall rates of return between 12 percent and 19 percent, cash on cash. (Another way of saying this: an area is worth somewhere between six and eight times cash flow.) The variation is a direct measure of the perceived risk and judgments concerning the condition of the assets and their ability to continue to produce historic cash flow trends.

I combine this knowledge with the data from the five-year average NSAA Economic Analysis to create a short measure of any ski resort's potential value. The table below summarizes the required input and the resulting output. This defines a "potential" value only; there are many additional analyses required to perform a more precise "market value" appraisal-more on that later. First, let's understand the quick model.

Using the Valuation Model
Boxes in the Valuation Estimate form show the six critical elements. They are:


• number of days open

• skier visits

• top daily ticket price (usually the all-day adult)

• the “price multiplier” (based on revenue per skier-visit)

• total capital invested in the resort (GFA)

1) Line 1 is the VTFH, which is simply the sum of the product of each separate ski lift (vertical feet of the lift times the hourly capacity) at the ski resort.

2) Line 3 is the number of days (or periods if you run day and night operations) that the ski area operates. Use a five-year average to smooth out the inevitable weather-related ups and downs.

3) Line 5 is the actual recorded skier visits. This, too, should be a five-year average.

4) Line 7 is the top-priced daily ticket, generally the adult, weekend day price.

5) Line 8 is the price multiplier that equates this top ticket price to the average revenue per skier-visit from all winter sources (Line 9). The multiplier should be approximately 1.0, as the discounts from the top-priced ticket roughly equal the balance of gross revenues from all non-ticket sources (food and beverage, ski school, etc.)

6) Line 19 is the total original capital invested in the ski area assets that are now in use, sometimes called the Gross Fixed Assets or GFA.

The model operates as follows:

Ski area capacity (line 2) is calculated by dividing the VTFH by 2,054, which represents the average hourly demand per skier as estimated by the respondents to the NSAA Economic Study. This estimate varies by region; it’s possible to use different figures for different regions.

Capacity skier-visits (line 4) are the product of ski area capacity (line 2) and days/nights of operation (line 3).

Utilization (line 6) is calculated by dividing the actual skier-visits (line 5) by the capacity skier-visits (line 4).

Revenue per skier-visit (line 9) is the product of the ticket price (line 7) and the price multiplier (line 8). Gross Revenue (line 10) is Skier-visits (line 5) multiplied by revenue per skier-visit (line 9).

Operating margin (line 11) is related to the utilization (line 6) using the linear formula y = 1.0285x – 0.0318 where y equals operating margin and x equals utilization. This is the key to your ski resort’s balance. If your actual operating margin numbers do not approximate this finding, you are out of balance (that is, you may have too few or too many lifts for the terrain, too little support services or inadequate lodging, for example) and you need to review your business plan.

Net operating income (line 12) is now the product of the gross revenue (line 10) and the operating margin (line 11).

Maintenance investment. My research indicates that 6 percent of the original invested capital is required annually for replacement of worn and/or obsolete assets, thus line 13 is 6 percent of GFA (line 19). This creates a reasonable budget for “maintaining the earning power” of the assets.

Annual cash flow (line 14) is the key figure. This line is the major financial measure of business success.

Cash Flow and Value
Value is determined by capitalizing this cash flow at a “market” rate of return. Lines 15 through 18 represent the reasonable range of returns (between 5.76 and 7.92 times cash flow) required by buyers of ski resorts. The range of rates represents buyers’ evaluation of the risk.

Note that the average ski resort will at best be valued at only 63.5 percent of its original capital cost (line 17 divided by line 19). This has been true for as long as I have been tracking these numbers, and explains why very few new ski resorts have entered the market.

Why Valuations Vary
In my judgment, the single most critical variable in this analysis is the role of snow. Skiers and riders have found ways to participate during recessions, wars, gasoline shortages and price increases so long as snow cover was exceptional. This phenomenon grows when there is snow in the customers’ backyards. The supremacy of snow has made snowmaking a requirement at most ski resorts, even in many high-snowfall regions. Even so, historic statistical snowfall patterns allow for some measure of this risk. Even the Arizona Snowbowl, currently without snowmaking, illustrates a predicable weather pattern that supports a cash flow projection and a market value.

The second variable is the scope and attractiveness of the ski/snowboard terrain. Much can be accomplished in rebuilding old ski slopes and trails if an evaluation reveals a poorly developed mountain. I focus on “balance.” The available terrain sets the scope, and the lifts, supporting facilities village and parking must create a balanced resort to maximize the value.

A third area of interest is the availability of outside resources and utilities to support the resort. Is there adequate water, both for potable consumption and machine snowmaking? How is wastewater handled, solid waste? Is there adequate and reasonably priced power?

A major part of any ski resort valuation is the condition of the assets and their ability to maintain the area’s historic earning power. (Enhancement is a separate issue, which should trigger a similar analysis to justify the expansion investment.) First is an analysis of the rolling stock and the rental inventories. Are they new, worn or obsolete? Second are the ski lifts. How old are they, what parts require replacement, are they still functional and attractive in their marketplace? Finally, are the buildings functional and pleasant, or is a refurbishing or even replacement required? Close scrutiny of the snowmaking system is essential.

All of these judgments yield a potential cash requirement to keep the ski resort competitive in its marketplace. Such requirements deplete the annual cash flow (EBITDA) available to support the valuation.

Even with these variables, though, any manager can quickly establish a range of value for any ski resort, expansion, or retrofitting plan once the six critical facts are known. And that can help managers feel confident enough in their operations and plans so that they can sleep well at night. And the value of that? Priceless.