Tuesday, January 11, 2011

Part 1 of Buying a Golf Course - Projected Costs and Returns

I was recently talking to a high-level member of the golf industry and he made a statement that was both obvious and gratifying – “golf needs to do a better job of getting the community involved.” 

Amen.

His next statement was – “We should buy a family-friendly golf course, implement grassroots programs that bring golf into the community, capture kids and parents at schools / soccer games / etc., then filter them to the course and prove that the model works.”

The first part of the comment was more fantasy than anything, but philosophically I believe the concept would work.  Thus, I decided to do some research and create a back-of-the-envelope financial model of what buying a golf course would entail.

Sales Price of a Golf Course:

First, we need to buy the golf course.  Courses for sale online have price tags ranging from $1.0-$15.0 million with most being $1.5-$4.0 million.  Since we’d want to buy a course in a good location with good existing facilities, let’s take the high end of the average ($4.0 million) and add a 25% premium. 

Conclusion – sales price of $5 million for our ideal golf course.

Annual Sales, Expenses and Profits of our Course:

The following data is from the National Golf Foundation’s July, 2010 Report – “Operating & Financial Performance Profiles of 18-hole Golf Facilities in the U.S.”  Data has been statistically weighted on geographic region.
DAILY FEE 18-hole Golf Courses
2009
% of sales
Golf revenue (green fees and golfcars)
$793,500
54.44%
Other golf revenue
$96,500
6.62%
Food & beverage revenue
$325,800
22.35%
Merchandise revenue
$103,900
7.13%
All other revenue
$138,000
9.47%
TOTAL REVENUES
$1,457,700
100%
Maintenance expenses
$565,200
38.77%
All other operating expenses
$709,700
48.69%
TOTAL EXPENSES
$1,274,800
87.45%
Average CAPEX investment
$131,700
9.03%
NET OPERATING PROFIT
$51,200
3.51%

Thus, the average course does approximately $1.5 million of annual revenue and has $50k of profit. 

For our course, we have an ideal location with ideal facilities, plus our grassroots community programs, so it should perform better than average in most categories.  Let’s make some assumptions:

1.   50% premium for location, quality of facilities, etc.  $51,200 x 1.50 = $76,800
2.   50% premium for a high traffic driving range.  $76,800 x 1.50 = $115,200
3.   75% premium for community outreach programs/involvement.  $115,200 x 1.75 = $201,600
4.   25% decrease in expenses due to operational efficiency.  $201,600 x 1.25 = $252,000

Conclusion - in what I believe is a highly optimistic scenario, our course would profit $252,000 per year (5x the norm).  Using the same assumptions, revenue would be $5,739,694 (4x the norm) and our operating margin would be 4.39%.

Return on Investment:  a $5 million purchase price is 0.87x annual revenue and 19.8x annual earnings.  So, we'll get a 5% annual return and earn back our money in 20 years.

Conclusion:

We all have a lot of ideas, and a quick back-of-the-envelope financial model like this is a great way to inject reality into these discussions.  However, it is not an end-all/be-all because a couple of tweaks to my assumptions would change the picture considerably.  Thus, if you have an idea that you believe in strongly, I encourage you to conduct extensive research, create a detailed financial model, have an honest appraisal of your risk tolerance and follow your dreams in an informed manner.

In my next post I’m going to look at this model through the eyes of a variety of investors. 

Until then, happy entrepreneuring...

4 comments:

  1. Two thoughts:

    1. If this course were promoted as a muni, the numbers might make sense, esepcially if the land were reclaimed.

    2. If this course were promoted by a developer, the course would be a loss leader for real esates sales of lots, etc.

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  2. All this sounds great, but what about making a family fun center golf course that is a par three. This is no ordinary par three, but it is in a yupy town and is a diamond in the rough. The old man that owns it does not care about how it looks and his pride consumes everything.

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  3. I like the idea of building a family fun center within a strong community. Sounds like you'll either need to buy the course or convince the owner to give you a management contract ("I'll do all the work and you get a cut of the money") in order to execute the plan. Good luck!

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