Thursday, January 20, 2011

Part 2 of Buying a Course - Who Will Invest?

In my last post I bought a hypothetical golf course for $5 million and made the following projections:

Annual Revenues = $5.7 million
Annual Operating Profit = $252,000
Purchase Price = 20x annual revenue

See the full post here.

The question now arises – who, if anyone, would move forward on this deal based on these projections?  It really comes down to investment criteria.

If I’m a venture capitalist (i.e. early-stage equity investor)…

My investment decision is “no” because it’s not a high growth business that can yield 10x returns.

If I’m a private equity guy (i.e. later-stage equity investor)…

I wouldn’t consider investing in the company until it was more mature.  Let’s assume that three years from now, the course hits our projected $250k earnings.  As a private equity investor, this falls well short of my $2-$3 million earnings floor and thus it’s a “no” on this unilateral example. 

However, it could be worthwhile if I bought 10+ courses, implemented the community growth strategy, pooled resources and shared costs to increase the operating margins.  This could reach my earnings requirements and be a reasonable investment, especially if the land was owned and I was interested in the real estate.

If I’m a banker (i.e. debt investor)…

My lending decision and the corresponding interest rate would depend on the course’s existing cash flow and collateral.  Since more courses have closed than opened in recent years, I’d be hesitant to make an investment and would charge a higher rate to compensate for the risk.  On the plus side, the course serves as collateral and has projected annual cash flow in excess of the principle loan amount.  Thus, the decision for both parties would come down to the interest rate.  This is not too different from a typical real estate deal.

Thus, in conclusion, a bank loan is by far the best source of capital for my golf course investment.

Finally, if I’m me

I would not make this investment.  The costs are less subjective than the earnings, and we were optimistic in the earnings.  Thus, I think this is likely a “best case” scenario and I’m not satisfied with a 20 year payback horizon.  But that’s just me.  There are many wealthy golf course owners so obviously this investment works for some.


This exemplifies the beauty of being an entrepreneur and/or investor – we all see things differently.  People have different perceptions, beliefs, risk tolerances and expectations.  Thus, while some folks may shrug their shoulders at the returns for this investment, others may get really excited.

Until next time, happy entrepreneuring…

1 comment:

  1. If I were a pension fund, I might make this investment. My investment horizon is 20+ years.

    I could live with a smaller cash yield if I thought I the land served as an inflation hedge, and depending on the zoning.

    Maybe work an understanding with the local community that the land can flip to zoned residential if the course does not meet a certain financial profile; i.e. have to have complete control of the asset and sell as lots in 20 years if there is not enough return to justify a sale as a golf course.