By Peter J. Nanula
In speaking each year with hundreds of Board members at equity clubs around the country, we encounter a common misconception: Board members often lump their funding challenges together with their club management challenges. Board members will tell us, "We've experienced serial turnover at the GM position. We are thinking of hiring Kopplin & Kuebler, Troon Management or Concert Golf Partners."
Huh? These are three very well-respected golf industry firms, but Kopplin & Kuebler are executive search specialists (they will find you a new General Manager), Troon is a Golf Management Company that operates clubs for a fee, while Concert Golf is an owner/operator of private clubs specializing in golf course financing. As such, these three entities offer three different solutions to three entirely different problems.
If a Board has struggled to find the right General Manager and is committed to self-managing the club, in the tradition of private equity clubs, then hiring an executive search firm such as Kopplin & Kuebler, GSI or Search America is a logical step. These firms are very experienced at canvassing the country for the GM who best fits a particular club's needs.
If a Board is grappling with governance questions - for example, whether to continue trying to hire and supervise the GM position, or perhaps outsource that managerial function and others to a third-party fee manager - then interviewing Troon Golf, Kemper Sports and other "3rd party golf management companies" is a logical step. These firms, because they buy club/course supplies for multiple client clubs, can often save private clubs money in the purchasing realm. These savings can offset some or all of their monthly management fees and help to professionalize the entire club operation. The Board can then manage a contractual relationship with a professional management firm that is accustomed to dealing with club boards.
Too often, however, we encounter a mash-up of the above issues with the fact that a particular Board is grappling with capital-project and debt issues - classic balance-sheet funding matters. In detailing the clubhouse renovation and membership issues that put the club in a precarious financial position, they begin to discuss their ongoing interviews with executive search firms and third-party fee managers.
Make no mistake: These debt issues are not uncommon in the private club industry today. Industry observers agree that fully half of America's private equity clubs already carry dangerous levels of debt (hint: if your debt is more than 50% of your annual revenues, you need equity capital). Equity club Boards increasingly face a stark choice: fund capital projects, or fall behind competitor clubs. This choice is not new - clubs have always competed within a regional marketplace - but it has been underlined in the 21st century thanks to a recession (2008-11) and an oversupply of private golf clubs (the golf development spree ran roughly from 1990-2005). These events have changed the private club market.
For clubs carrying significant debt, further borrowing would exacerbate this state of affairs, though securing this type of financing is hardly a slam-dunk. Banks and other lenders have essentially vacated the golf sector in the wake of the recent recession. So, golf course financing options for private equity clubs are few. Back to our conversations with Boards. When Board members describe this type of debt burden, only to circle back to executive search firms and golf management companies, we immediately stop the conversation and back up a bit. General Managers are hugely influential employees, but a new GM will not solve these capital issues. Third-party fee managers such as Troon Golf and Kemper Sports are skilled operators, but they have no capital to invest in private equity clubs.
For answers on the capital front, these Boards are often looking in the wrong places. Perhaps Board members have heard for years about "golf management companies" and conflated or misunderstood what they actually do: run clubs, own clubs, hire staff, fund capital projects, etc. Here's the truth: There are literally hundreds of 3rd party, fee-based golf management companies out there: 95% of them have no capital. Most have never owned a country club, nor have they ever made a capital investment in a client club. They are hired operators, paid by the month with annual bonuses to oversee your on-site club staff. That's it. It can be a useful service - if you want to outsource operation of your club and not deal directly with your club staff. But that service, if deployed, has zero to do with your club's balance sheet. What do I mean by the club's balance sheet issues? Most often, a club has a bank loan that provided the funds for a clubhouse expansion or greens renovation a few years ago. Now, the club has developed a "master plan" for further golf course work such as bunkers, tee complexes, an irrigation system. Or perhaps its small fitness room is not competitive with the modern fitness centers that nearby clubs are now offering. Or the Board knows that it needs to add some outdoor dining or casual dining to attract younger, affluent members in the community. These are golf course financing issues, and if a club is already dealing with debt issues, the Board has essentially three choices when attempting to secure those funds:
The added benefit of an outside partner like Club Corp or Concert Golf is that these companies also operate the club on behalf of the members. This is likely where the confusion lies: Owner-operators, as the name implies, typically handle both the funding and management of a club, though there are only a handful of firms who do this nationally - and even fewer have the capital on hand to retire club debt and reinvest in the club via these vital capital projects. If bank-funded capital is, in fact, secured, dues increases and/or assessments are required to chip away at the debt load. If bank-funded capital is not secured, dues increases and/or assessments also result. There are several ways to slice this issue, but one thing is constant: Member-led club governance requires that members themselves pay for these capital improvements.
Let's be honest: Top-of-the-market private equity clubs do not fret over these capital-funding dilemmas. They have waiting lists, which moot the issue of member attrition - the perfunctory byproduct of any assessment or dues hike. Indeed, their members generally don't balk at higher dues and assessments, so retiring debt takes time but rarely proves an existential problem.
But the remaining half - perhaps up to two-thirds of America's private equity clubs - do face this dilemma today. In our dealings with these clubs nationwide, maintenance of the traditional, member-led club governance model represents a very important priority. Many are making it work via the bank loan or assessment route, but many are not. For the latter grouping, the dilemma boils down to this: To what extent should Boards continue to value self-governance over the ability to effectively self-fund these capital projects?
For these clubs, the matter at hand is unrelated to management issues. It's more serious than an ineffective GM because funding capital projects is not optional; it's something private clubs must do today in order to compete and survive.