As an entrepreneur, I have had the good fortune of learning from the smartest people on the planet when it comes to investing. We all make investments, whether it's our 401k, a college education for our kids, a new vehicle or even a home. That being said, there are two different kinds of investors and you probably fall into one of these groups:
1) The investor who goes with their gut and decides based upon feeling, or
2) The investor who looks at the numbers and can extrapolate trends to see what their potential return on investment may be.
But what if I told you that while searching for a private club membership you will need both skills? And, by the way, throw out what you learned in business school because that logic will not apply when reviewing a club’s financial report.
At Golf Life Navigators, approximately 33% of buyers would like to be viewed as an “important member” at their future club by serving on the club's board or helping with the club’s governance. Moreover, women would like to be involved as well. They consider “investment into the club” four times more important than their male counterparts. In short, consumers are concerned about the financial health of their future club and want to ensure their investment is protected or, at the very least, that they made a smart financial decision.
A common issue we hear from club officials is that new members come into the boardroom with a notion that the club should read positively on a financial statement. The mentality is, if a department is “in the red,” you need to shake it up or pivot. Sounds logical, right?
Consider this before answering that question: if the food and beverage operation lost $50,000 last year, does it mean you fire the chef or general manager? Perhaps, but after studying the industry, you find a $50,000 loss in food and beverage is less than 80% of clubs nationwide. As it turns out, the last thing you would want to do is fire the chef or GM. Instead, shake their hand and extend a warm “job well done.”
My point is that private clubs are not necessarily built to maximize revenue or create a dividend for their equity members. Private clubs are on a mission to serve their membership and create financial sustainability by use of member dues to fund the annual operation. In addition, they sustain themselves by member capital contributions to assure the club can reinvest in its physical assets as necessary. Each dollar is earmarked toward a specific budget within the club’s financial operation or master plan. So, when you ask to see the financial statement of a club prior to investing, take a deep breath because it may not fit your preconceived view of how a business functions at peak efficiency…and that’s okay!
In this article, my objective is to teach you how to read a club’s financial statement before investing into a club and share a few tips on flagging negative trends. But before we do that, we have to agree that when you look at a club’s financial statement, you won’t flip to the back page and look for an EBITDA. Agreed? Private clubs are a different animal, so it is imperative that we understand the dynamics of a private club’s finances before jumping into the numbers.
The industry's leading expert in private club financials is a gentleman by the name of Ray Cronin. Ray is a graduate of Harvard’s MBA program and co-founder of Club Benchmarking, a firm that studies private club financials around the world. Ray has also served on the board of directors of his home club just south of Boston.
Below are a series of questions that I asked Ray so that we could establish a foundation of education ahead of your financial due diligence with prospective clubs. But first, keep in mind a few points before hitting a club official with these heavy topics:
1. The membership director is not responsible for this info, so you should speak with the CFO, general manager or the board’s finance chairman.
2. Take a notepad to write down the numbers; it would be difficult to conduct this level of math during conversation.
3. If the numbers are less than desirable, don’t necessarily give up on the club. Ask the relevant official what the club's plan is to get financially healthy in the short and long term.
Now that we’re all on the same page, let’s get to Ray.
Golf Life Navigators: Ray, what are some high-level questions a consumer should ask the finance chairman or general manager to get an overall comfort with the financial health of the club?
RC: Ask for the last fiscal year-end balance sheet, the 2006 balance sheet and ask for the ratio of total operating dues revenue to the total operating revenue for the last fiscal year. If the ratio of operating dues revenue to operating revenue ratio is less than 40 percent, it is a red flag. The industry norm is 50 percent - the higher, the better.
GLN: Why 2006, is there a significance with a 12-year trend?
RC: We chose 2006 because we want to know where the club was financially before the economic downturn. This gives us a good basis to see how the club has evolved since that recession as the economy has grown.
GLN: While reviewing the balance sheet, what are some key indicators a consumer should look for to determine a “good” balance sheet?
RC: How much higher is equity in 2018 than it was in 2006? Ideally the ending equity in 2018 is at least 50% higher than it was in 2006. Acceptable is 30% higher. Net Worth in every business must grow over time – it has to grow at least at the rate of inflation – which is a 30% growth over that time. The industry norm is 30% growth between 2006 and 2018.
Ask what the Net Property, Plant and Equipment divided by the Gross Property, Plant and Equipment ratio is (exclude land, which doesn’t depreciate, from both). Ideally, it is 55% or higher – which means the assets are being repaired and maintained properly. Acceptable is anything over 46%, which is the industry norm.
Ask what the debt-to-equity ratio is. The industry norm is 20% (one-quarter of clubs don’t have debt). Ideally it is 50% or under.
Video: Cronin on assessing the financial performance of a club
GLN: What are some key indicators a consumer should look for to determine a “bad” balance sheet which could lead to financial issues in the future?
RC: If the equity in 2018 is equal to or less than it was in 2006 that is a red flag. I would be concerned with any growth of equity under 20% over that period of time.
If the Net Property, Plant and Equipment to Gross Property, Plant and Equipment ratio is less than 40% it is a red flag. This stems from the fact that assets haven’t been maintained as they should.
If the debt-to-equity ratio is over 100%, it’s another red flag.
One must also consider the three metrics taken together – low equity growth, combined with high debt and underfunded asset investment (an under 40% net to gross PP&E ratio) signals a club heading in the wrong direction and likely making poor decisions.
To avoid misconceptions of what the financial purpose of a private club really is, can you share advice for consumers who wish to be involved in their future club’s governance?
RC: Members of member-owned clubs must think as owners, not customers. Every member involved in governance must embrace that concept and must have the fortitude to realize one of their roles is to constantly remind their fellow owners/members that they are on the hook for the capital requirements of the club. The only way to get the money to keep the assets up to date and fresh is through members' contributions of incoming capital (via initiation fees) and current capital (through dues/assessments). Clubs can’t cut their way to success. ”The data shows that the clubs consistently investing are the ones with a strong membership base.
GLN: Finally, if there is one thing you would like readers to know about investing in a club and basing their decision off of the financials, what would it be?
RC: The equity growth reflects the mentality of the membership. If equity is growing, members think like owners. If it isn’t growing to keep up with inflation, members are thinking like customers and therefore, you will be investing in a club that needs help.
GLN: Thank you, Ray.
Is your head hurting from all that insight into the financial world of a private club?
Remember, our goal was for you to take on this article with a clean slate and have no illusions about how private clubs operate financially. My suggestion: re-read this article multiple times so it resonates, print this article, save it or email to a friend. You won’t find a more valuable piece of education on the internet when conducting financial due diligence before joining a private club.
In summary, don’t stress about all of the math. Ray has detailed the questions perfectly with factors to consider when gathering facts from the club. As with all of my articles, these topics are meant to inform you, not create anxiety. At the end of the day, use both types of investment skills to ensure a confident decision is made: use your gut and your logical mind.
If you have any questions or just need to talk through the decision process, don’t hesitate to reach out. Golf Life Navigators and Golf Advisor will always be here as your trusted resource for private club information.
PS: Remember to enjoy the journey...you’ve earned it!