As with any other transaction, one of the most important parts of a golf course investment comes down to acquisition. If you overpay or buy something without due diligence, your back is against the wall and you’ll struggle to generate cash flow.
What does owning a golf course really mean?
Investing in a golf course attracts all kinds of people: accomplished golf professionals, politically connected insiders, food and beverage specialists, successful entrepreneurs, trained agronomists, local heroes, and more. Many get involved as investors because they have a passion for golf, but another reason you’ll see such diverse backgrounds in ownership is because of the many hats a golf course owner must wear. carry.
In the book So you want to own a golf course, published by the National Golf Course Owners Association (NGCOA), Hilda Allen explains that when you buy a golf course, you’re not just investing in real estate — “you own a restaurant, an entertainment venue and the like of a farm.”
To learn more about evaluating potential deals and better understand what it takes to be a successful golf course investor, I spoke with John Brown, CEO of brown golf, owner and third-party manager of golf courses in eight states. Brown himself started out as a banker before working for the world’s largest golf course operator, Troon Golf. Brown Golf was launched in 2011 and currently has 28 golf courses in its portfolio.
What to look for when evaluating a potential acquisition
Brown has some pretty strict rules when it comes to deals: If an 18-hole course hasn’t already reached $1.5 million in revenue, he usually won’t even dig into it. The same goes for a 36-hole golf course with less than $2 million in sales.
Like any other business, golf courses can become more profitable by increasing sales or decreasing costs. Brown’s experience has taught him that he can be more effective when a golf course already has sales but may need help to operate more efficiently. And, he adds, “I don’t pay [a golf course] for earning potential. It’s my advantage.”
Profitable golf courses typically sell between six and eight times EBITDA, while courses that are not profitable tend to sell between 0.8 and 1.4 times revenue.
Value creation: how to identify opportunities
Once a potential acquisition passes the revenue test, Brown and his team will dig into the numbers. In terms of revenue, it compares “the revenue mix between golf, restaurant and retail.” In Brown’s experience, profit margins are very slim, with little room for error on the non-golfing parts of the business.
If a course has a restaurant and pro shop, they want to see where most of that revenue is coming from. If the restaurant and pro shop are run fairly efficiently but tee management is poor or there’s more money to be made in golf, he knows it’s a place his team can work to generate more revenue and create value.
Another way to add value to a golf course operation is to add new revenue streams. Jay Karen, CEO of NGCOA, recently told me, “Our company’s most creative development is the addition of ‘golf entertainment’. Course owners are adding simulators and technology like the TopTracer line to create brand new experiences. These additions can be an antidote to things that can get in the way of activity, like bad weather and sunsets.”
Golf Course Metrics
When a golf course has been stabilized, Brown has a few key financial metrics he looks at. Total labor cost as a percentage of sales should be around 40%, while service overhead should be 32% of a course’s sales. And seeing numbers higher than these when evaluating a deal usually means there is value to be created.
For food and beverages, he wants food costs as a percentage of sales to be around 36%, 32% for beer and wine, and 26% for spirits.
As for the pro shop, he wants the cost of goods for goods to be around 60% to 65% of the pro shop sales, while he would like to see inventory rotate three times a year. This means that at any given time, the Professional’s total shop inventory on their balance sheet should equal approximately one-third of the cost of a year’s sales inventory.
Although Brown has reversed courses before, his team’s strategy generally involves buying and holding an investment in a golf course after turning it into a strong cash flow-generating asset. In many cases, when Brown Golf invests in a golf course, it uses a partner to purchase the land, with Brown entering into a long-term lease.
Karen says the most important thing someone should consider before investing in a golf course is the exit strategy: “What’s the end game? The end game will determine how you run the business. If it’s a day to sell it to another party who wants to continue golf operations, then maximizing net income is paramount. The value of the course, notwithstanding the value of the real estate, will be based on your current financial health. If the end game or the goals are different from that, then your strategy and your goals an operator can change.”
Types of outputs
There are traditionally six types of outings for a golf course:
- Hold on for the long haul like Brown does
- Sell the property after doing the work to increase the value and do a 1031 exchange
- Offer the property to future generations
- Take out a cash refinance loan and use the money to further invest in the course or make another investment
- Sell the course, but lease it through a sale-leaseback (similar to how Brown does it, but does it later)
- Reposition the land for uses other than a golf course
Can I invest in a golf course without buying one?
There’s no getting around it: Owning a golf course is a huge business, and you need the financing to do it. That said, it is possible to be exposed to golf courses in other ways. For example, although this is not a direct investment in a golf course, you can also invest in a rental property in a golf community. You can also look at some hotel real estate investment trusts (REITs) with exposure to golf courses.
What to consider when investing
Value creation, like any other real estate transaction, is the watchword when investing in a golf course. It is a difficult business; 1-2% of golf courses close every year, while 25% of them do not make a profit. There’s a lot of money to be made for a smart investor and trader, but make sure you know what you’re getting into and what metrics to focus on.