"I wrote this article around 2000. You'll see I did an edit in 2004. The business has changed a lot since 2004, but the premise I outline does not change - even if prices have come way down (2017).
Along with my associate, Bill McIntosh, Golf Specialists, Inc., we acquired web site: www.golfcoursesforsale.com (GCFS) where you can look for golf courses to buy without having to enter a broker's web site. You may find golf courses available on GCFS listed directly by sellers with no brokerage fees.
The problem since around 2006-7 has been lack of institutional interest in financing golf courses. Sure there are ways to obtain financing, some very expensive, but maybe some worth pursuing. We have been approached by private funding sources (in 2017) that want to fund golf courses. It's expensive money, no more than 3-years, but quick and quite easy to achieve. Leverage could be very high too!" Mike
Call anytime: 941-739-3990
FREQUENTLY ASKED QUESTIONS?
- How do I go about buying a golf course?
- What kind of financing can I get for a golf course?
- How do I determine a fair purchase price for a golf course?
- Should I hire a management company?
- How do I select a golf course management company?
- What kind of management deal should I make?
- Where is the best source of information about the golf course industry?
- What can a consultant do to help me?
- What costs can I expect if I buy a $5 million dollar golf course borrowing $3 million?
How do I go about buying a golf course?
The first thing is determining exactly how much cash you have available to buy a golf course. Keep in mind that you'll need money for closing costs, legal fees, lender's points, inventory adjustments, license renewals, utility deposits and a dozen other expenses you will encounter after the closing.
As a starting point, I suggest you have the equivalent of 33% to 40% of the purchase price of a golf course available in cash. I said cash! This will allow you to purchase a golf course worth up to three times the total cash you have on hand. If you've got $1million handy, you can probably buy up to a $3 million dollar golf course. Of course, the golf course would have to show a minimum of $300,000 in net earnings to be worth $3 million.
The second thing is to be open to acquiring a golf course in almost any location. If you geographically limit yourself too tightly, you may find it difficult to make the best deal for yourself. Too many potential golf course buyers are looking within a few miles of their home. The fact is, the best value for you may be 1,000 miles away. Are you prepared to move to another place buy the right golf course for you?
Click here for more details about buying a golf course.
What amount of financing can I get for a golf course?
Finance sources value a golf course primarily on cash flow history, "Showing a clear ability of the business to repay the loan." A golf course showing no earnings will not have good luck getting financed unless the borrower offers other sources of collateral to the lender - usually a banker. The lender will base its comfort level on a debt service ratio (DSR), which is the cash flow available after all operating expenses divided by the annual debt service (excludes depreciation, amortization, but includes 2 contingincies based on a percentage of gross revenues, for instance: 4% to 5% contingency for management fee, and 2% to 3% for capital reserves (it means up to 8% of gross receipts are added to the cost of operations for lending purposes). The lender will consider the quality and condition of the property, and things like location, strength of income history, appraisal, etc. The experience, skill and risk of the buyer will also be a highly important factor to a lender. A comfortable DSR established by the lender, usually no lower than 1.25 to 1 (2004 - I'm raising the DSR threshhold to 1.35. The golf course business is too risky for a 1.25 DSR threshold in my opinion). Therefore, at a 1.25 DSR a $3 million golf course earning $300,000 a year could qualify for an annual mortgage payment as high as $240,000 (300,000 / 1.25 = 240,000). Keep in mind, the banker may base the loan on the most recent 3-years averages - not just the previous single year.
Therefore, an experienced golf course buyer could have borrowed, conventionally, up to $2.6 million at 8% over 25 years on a $3 million dollar golf course. However, in 2017 there aren't many money-making golf courses out there, so the tradition lending formulas may not often apply.
NOTE: In 2017 there are far too many golf courses for the number of golf players in the marketplace. Many golf courses are doomed to completely fail no matter what or how hard the next owner works. Before you dive into golf course ownership for the first time you can do yourself a favor to consult Michael Kahn's 60-years in golf. Give Mike a call: 941-739-3990 for a completely complimentary consultation. Mike promises no sales pitch and no BS.
How do I determine a fair purchase price for a golf course?
2017: My experience says a golf course is only worth a multiple of its earning ability. Unless the land under the fairways has development potential (a higher and better use), what the golf course earns is what it's worth - and nothing else.
Recently (April 9, 2017), due to the fact that golf courses available for sale are not earning profits, or losing money, they have been trading on multiples of gross sales. An article published on Linkedin by a golf real estate expert, Chris Charnas, Links Capital Advisors, indicated that the multiples of gross sales has run from .75 to 1.5 - usually based on factors such as deferred issues, amount of losses, age of the property, and general business trends.
It is hard to set a price on golf courses, because they are all so different. The variables can be endless. However, the best way to set a fair price on a golf course is based on its trailing 36-month history income and earnings. It is this sometimes slightly gray area where inexperience can cause buying mistakes. Usually the income side of the statements can be clearly verified, but the expenses side needs study by an expert - another reason to consult Mike Kahn.
Too many golf courses try to show high earnings to command a higher price for the property. What cannot be seen by inexperience are hidden maintenance insufficiencies and shortcuts that result in a perception of higher earnings. There are formulas to find the 'real' costs to maintain a golf course and they need to be applied to the subject. If reasonable maintenance costs to make the business competitive are determined to be higher than what is shown in the subject's financial statements, the property is probably not really earning what is says. Therefore, it is likely worth lots less.
Once you've determined the real cash flow of a golf course, you can base a fair offering price on a multiple of its net earnings history - usually from six to ten times earnings. We priced the $3 million dollar golf course mentioned above at ten times earnings: 10 X $300,000 = $3 million. Our value assumption is based on proper a maintence budget and practices, the condition of the infrastructure, revenue (business) trends, local demographics, among other factors.
Should I hire a management company?
Unless you have lots of money, lots of experience, or both, you need to hire a source of experience to help you learn to operate a golf course. I consider daily golf course operations as an endless series of decisions. When I'm in the manager's seat, I make most of these decisions almost without thinking because of my 50+ years of experience. Many decisions cannot wait for consultations with a far-away source, nor can they be put off to another day. That's why you need experience at your fingertips during your first few months as a golf course owner. Whether it's a manager or management company depends on the magnitude of the project. If you are acquiring a country club with tennis, swimming, fitness center and an emphasis on food and beverage, you may want a management company for their experience and available trained personnel. However, I cannot believe a $3 million dollar golf course with an owner-operator on site needs, or can afford a management company. An experienced club manager may do.
How do I select a golf course management company?
Selecting a management company is like hiring any individual. You want to be sure you're getting the right element for the job. I don't recommend hiring management companies who also own their own golf courses, because you'll always become the second fiddle in a crisis. Make sure they have a track record, and be sure to interview their current and former clients. Make sure they have a full scope of golf course operation experience including inside the clubhouse and out on the golf course. Do not hire a management company that charges a large cancellation fee. You have to be in position to dump the company at anytime you feel they are not improving your business - subject to the management company recovering some minimal out-of-pocket expenses during setup.
You would be smart to use a consultant (like Mike Kahn) to help you decide, find, and hire a golf course management company. Here's my rule-of-thumb: A golf course with under $2 million in annual sales cannot afford the expense of a golf course management company.
What kind of management deal should I make?
Do not enter a management contract where the management company's fees are not at least partly based on performance incentives. Don't pay a management company strictly on the base of gross revenue, and never more than 6% of gross revenue. Don't rely on any of a management company's equipment or machinery. Make sure you have everything you need to maintain and operate your own golf course. Never let a management company take any of your equipment off the grounds, because (believe-it-or-not) some will borrow yours for their own courses if they can. Keep all your records and record keeping equipment on your property where you can inspect them at all times. Make sure a contract allows you to remove the management company including all of its personnel and affects from your property at a moments notice without reason, subject to minimal cancellation fees.
Where is the best source of information about the golf course industry?
The National Golf foundation (NGF) is my choice of the best-unbiased information about the golf course industry. Their web site is www.ngf.org.
What can a consultant do to help me?
If your consultant has experience in all areas of golf course operations, you will have help and guidance in every decision process. After all, that's all you really want. Unless your consultant has worked in golf through at least one generation (20-years), I suggest you're not getting enough experience.
I am a consultant with 50-years experience in golf. I have run golf courses, planned golf courses, designed golf courses, sold golf courses, and bought golf courses. I've been a golf teacher and a licensed superintendent. I've financed golf courses. I have conducted feasibility studies, completed diligences, supervised ownership transitions, and prepared dozens of business plans for golf courses. I've operated food and beverage operations, pro shops, practice ranges, and golf retail stores. I have accomplished several successful golf course turn arounds. With full cooperation from my clients, I have never had a failure.
What costs can I expect if I buy a $5 million dollar golf course borrowing $3 million?
The answer to this question can be found at the "FREE! MIKE KAHN'S GOLF COURSE BUYER'S GUIDE" page. Have a paper and pencil handy to do your own calculations.