Just like with any other deal, one of the most important parts of a golf course investment comes down to the acquisition. If you pay too much or buy something without proper due diligence, your back is against the wall, and you'll struggle to generate cash flow.
What does it really mean to own a golf course?
Investing in a golf course attracts all kinds of people: accomplished golf pros, 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 why you'll see such diverse backgrounds in ownership is because of the many hats a golf course owner has to wear.
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'll be owning a restaurant, an entertainment venue, and the equivalent of a farm."
To learn more about assessing potential deals and better understand what it takes to be a successful golf course investor, I spoke with John Brown, CEO of Brown Golf, an owner and third-party manager of golf courses across eight states. Brown himself started as a banker before going to work for the largest golf course operator in the world, Troon Golf. Brown Golf launched in 2011 and currently has 28 golf courses in its portfolio.
What to look for when assessing a potential acquisition
Brown has some pretty hard-and-fast rules when looking at deals: If a course with 18 holes isn't already at $1.5 million in top-line revenue, he generally won't even dig into it. Same goes for a 36-hole golf course with less than $2 million in top-line sales.
Just 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 might need help running more efficiently. And, he adds, "I'm not paying [a golf course] for revenue potential. That's my upside."
Profitable golf courses are generally selling for six to eight times EBITDA, while courses that aren't profitable tend to sell at 0.8 to 1.4 times revenue.
Value creation: how to identify opportunities
Once a potential acquisition passes the revenue test, Brown and his team will dig deeper into the numbers. When looking at the revenue side, he compares "the revenue mix between golf, food and beverage, and retail." In Brown's experience, profit margins run very slim, with little margin for error on the nongolf parts of the business.
If a course has a restaurant and a pro shop, he wants to see where most of that revenue is coming from. If the restaurant and the pro shop are being run pretty efficiently but the tee sheet management is poor or there's more money to be made in golf, he knows that's a place his team can put the work in to generate more revenue and create value.
Another way to add value to a golf course operation is to layer on new revenue streams. Jay Karen, CEO of NGCOA, recently told me: "The most creative development in our business is the addition of 'golf entertainment.' Course owners are adding simulators and technology like TopTracer Range to create whole new experiences. These additions can be an antidote to things that can hamper the business, such as bad weather and when the sun goes down."
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 departmental overhead should run 32% of a course's sales. And seeing numbers higher than these when assessing a deal generally means that there is value to be created.
On the food and beverage front, he wants to see food costs as a percentage of sales to be around 36%, 32% for beer and wine, and 26% for liquor.
As for the pro shop, he wants to see the cost of goods for merchandise to run at about 60% to 65% of pro shop sales, while he'd like to see inventory turn over three times each year. What that means is that at any given time, the total inventory in the pro shop on his balance sheet should be equal to roughly one-third of the cost of inventory of a year's worth of sales.
Golf course exits
Although Brown has flipped courses before, his team's strategy is generally to buy and hold a golf course investment after turning it into a strong cash flow-generating asset. In many cases, when Brown Golf invests in a golf course, it's bringing in a partner to actually purchase the course, with Brown engaging in a long-term lease.
Karen says that the most important thing someone should consider before investing in a golf course is the exit strategy: "What is the end game? The end game will drive how you run the business. If it's to one day sell it to another party that wants to continue the golf operations, then maximizing net income is paramount. The value of the course, real estate value notwithstanding, will be based on your ongoing financial health. If the end game or objectives are different than that, then your strategy and goals as an operator may alter."
Types of exits
There are traditionally six types of exits for a golf course:
- Hold long term like Brown does
- Sell the property after you do the work to increase the value and do a 1031 exchange
- Gift the property to future generations
- Do a cash-out refinance loan and use the cash to further invest in the course or make another investment
- Sell the course, but lease it back through a sale-leaseback (similar to how Brown does it, but done later on)
- Reposition the land for uses other than a golf course
Can I get investment exposure to a golf course without buying one?
There's no way around it: Owning a golf course is a huge undertaking, and you need the financing to do it. That said, it is possible to get exposure to golf courses in other ways. For example, while not a direct investment in a golf course, you could also invest in a rental property in a golf community. You could also look at some hospitality real estate investment trusts (REITs) with exposure to golf courses.
What to consider when investing
Value creation, just like any other real estate deal, is the name of the game when you invest in a golf course. It's a tough business; 1% to 2% of golf courses close each year, while 25% of them don't turn a profit. There's great money to be made for a smart investor and operator, but be sure you know what you're getting into and what metrics to focus on.