GolfCorp Canada Limited

(GolfCorp Canada Limited (GCL) was incorporated six years ago by five wealthy golfing friendswho decided to turn their passion into a business. They pooled their resources and began buying aseries of historically unsuccessful golf courses. Their approach was originally to invest in upgrading thecourse and clubhouse and then to convert the course to a private, member-only facility.As the business grew, GCL began acquiring strategically located land and building new courses fromscratch. This approach allowed the company to expand its inventory of courses and acquireadjoining land for luxury residential development.Up until last year, the business was financed by the personal investments of the owners and the cashgenerated from initiation fees and annual dues, clubhouse and pro shop sales, and daily green feescharged for members? guests. However, as GCL continued its aggressive expansion strategy, the ownersfound it impossible to fund acquisitions independently. Early in 2015, GCL secured a $20 millionoperating line of credit and a $175 million term loan. The owners are contemplating a public offeringin the near future to finance additional acquisitions and developments.Although all five owners are active members of the board of directors, the president and CEO, JamesDuggan, is the driving force behind GCL?s aggressive growth strategy. James is a visionary and a risktaker who has a reputation for turning his dreams into reality.GCL recently held a strategic planning retreat for its management and ownership group. Three primaryobjectives were identified for the business: achieve 30% annual growth in revenues in each of the nextfive years; maintain a minimum 15% return on capital invested; and be perceived as the provider of thehighest quality golf facilities in Canada.You are a management consultant with Michaels and Andrews, Management Consultants (M&A), andyour firm has been consulting GCL since its inception. At a board meeting on March 31, 2016, theengagement leader was told that, although the board endorses the strategic plan for the business, theboard members are concerned that they do not have a deep enough understanding of the significantrisks facing the business.Jimmy, a senior consultant and engagement leader is currently preparing a presentation for the nextGCL board meeting.You gathered the information contained in Exhibits I and II relating to this engagement.

COMM 414 GolfCorp Canada Limited (80 minutes) GolfCorp Canada Limited (GCL) was incorporated six years ago by five wealthy golfing friends who decided to turn their passion into a business. They pooled their resources and began buying a series of historically unsuccessful golf courses. Their approach was originally to invest in upgrading the course and clubhouse and then to convert the course to a private, member-only facility. As the business grew, GCL began acquiring strategically located land and building new courses from scratch. This approach allowed the company to expand its inventory of courses and acquire adjoining land for luxury residential development. Up until last year, the business was financed by the personal investments of the owners and the cash generated from initiation fees and annual dues, clubhouse and pro shop sales, and daily green fees charged for members' guests. However, as GCL continued its aggressive expansion strategy, the owners found it impossible to fund acquisitions independently. Early in 2015, GCL secured a $20 million operating line of credit and a $175 million term loan. The owners are contemplating a public offering in the near future to finance additional acquisitions and developments. Although all five owners are active members of the board of directors, the president and CEO, James Duggan, is the driving force behind GCL's aggressive growth strategy. James is a visionary and a risk taker who has a reputation for turning his dreams into reality. GCL recently held a strategic planning retreat for its management and ownership group. Three primary objectives were identified for the business: achieve 30% annual growth in revenues in each of the next five years; maintain a minimum 15% return on capital invested; and be perceived as the provider of the highest quality golf facilities in Canada. You are a management consultant with Michaels and Andrews, Management Consultants (M&A), and your firm has been consulting GCL since its inception. At a board meeting on March 31, 2016, the engagement leader was told that, although the board endorses the strategic plan for the business, the board members are concerned that they do not have a deep enough understanding of the significant risks facing the business. Jimmy, a senior consultant and engagement leader is currently preparing a presentation for the next GCL board meeting. You gathered the information contained in Exhibits I and II relating to this engagement. Required: See back page. COMM 414 GolfCorp Canada Limited (80 minutes) EXHIBIT I INFORMATION GATHERED FROM THE CLIENT 1. GCL currently owns and operates 25 private golf courses, primarily in the Vancouver, Calgary and Edmonton areas. It is actively working on expansion into the Toronto market, but is finding that it will have to buy or develop new courses a minimum of 50 km from the downtown core due to the high number of quality courses in the Greater Toronto Area. 2. GCL aims to attract members who are business professionals between 30 and 60 years of age, with annual incomes exceeding $100,000, and whose employers will pay for the memberships. Such people are looking for top quality courses that are immaculately maintained, high quality clubhouse facilities for entertainment, and low membership numbers (keeping on-course delays to a minimum). 3. James believes that the targeted market is prepared to pay \"top dollar\" for premium memberships. He has acted on this belief: non-refundable initiation fees (now averaging $25,000) and annual dues (now averaging $3,000) were increased by 25% last year, and further increases are budgeted. 4. A key long-term component of GCL's strategy is the development of residential and resort properties on lands adjacent to its golf courses. In most cases, the land is commercial or agricultural and therefore must be re-zoned before development can commence. James claims that GCL has a lot of experience in dealing with the government on such issues, and he does not see the re-zoning as a major concern. 5. In order to maintain the desired level of growth, in December 2015 GCL entered into a commitment to purchase two well-established ski resorts in British Columbia and property for development into a third ski resort outside Calgary. James is very excited about this new venture and plans to use the same strategies as for GCL's golf investments. 6. GCL finances all operating equipment through capital leases, the majority of which have five- year terms. COMM 414 GolfCorp Canada Limited (80 minutes) EXHIBIT I continued INFORMATION GATHERED FROM THE CLIENT 7. James has stated that, although acquisitions to date have been very successful, two or three properties are not performing to expectations: One is about 60 km outside Calgary and is experiencing low membership numbers due to its location. The other two are recent acquisitions in the Edmonton area. They are also experiencing low membership, but the cause appears to be the poor quality of the courses and facilities. GCL plans to upgrade both properties, but making this investment would mean using financing capacity that is earmarked for the acquisition of two premium courses in the Greater Toronto Area. 8. GCL spends significant amounts on advertising and promotional programs to market its facilities to potential members. GCL sees its competitive advantage as its size, expertise and reputation. James says, \"When new members join the GCL family, they know they will enjoy the service and prestige associated with belonging to the very best.\" COMM 414 GolfCorp Canada Limited (80 minutes) EXHIBIT II INDUSTRY OVERVIEW 1. Golf has experienced tremendous growth over the past few years. According to industry analysts, the golfing population in Canada has increased significantly since 2000. This growth has been fuelled largely by the increase in the participation of women, as well as growth in the number of younger golfers. Continued growth is expected during the next 10-15 years but the demographic mix will become skewed, as the number of retired baby boomers will increase significantly. 2. One of the trends in the golfing industry has been towards the development of high quality, private courses with fewer members. There are concerns that the average player is being priced out of the private club market. Public courses are attempting to compete through creative semi-private arrangements, partnering with other courses to provide reciprocal golfing privileges, etc. 3. The golfing industry faces constant challenges from environmentalists regarding the use of pesticides, and the environmental impact of golf course development on the local vegetation. These lobbying groups are becoming increasingly powerful and are gaining the attention of local, provincial, and federal governments which are beginning to look more closely at regulating the industry. 4. The golfing industry is going through a period of consolidation, with Canadian and US companies developing significant property holdings over the past several years. The market is very competitive, and premium prices have been paid for many of these purchases. Prices have far exceeded those that would have been paid under normal methods of valuation due to the scarcity of golf course land available on the market today. 5. The industry practice of acquiring golf courses within a certain geographic region (known as \"clustering\") is driven by the cost-reducing synergies that can be obtained in management, purchasing and labour. Further, clustering allows the group of courses to act as a market leader on green fee pricing. Characteristically, the cluster organization can drive fees up and the competition is likely to follow. On average, green fees have risen 10 to 15% over the last year. Moreover, competitors are beginning to offer equity involvement to members with the initiation fees charged. 6. Tastes in golf are changing and will continue to do so as baby boomers continue to mature. Private club members are less attracted by extravagant clubhouses and dining facilities than in the past. New golfers are more concerned with the condition of the course and the availability of tee times. COMM 414 GolfCorp Canada Limited (30 Marks) Required: For each of the following areas: Identify and discuss the various business risks, as well as the impact of each of these business risks on Golf Corp. Additionally, discuss overall how the risks of this area will affect the achievement of the company's objectives: (5 marks each / 30 total) 1. 2. 3. 4. 5. 6. Industry trends and the changing golf population Expansion of golf courses into new markets Acquisition of poorly performing golf courses Development of ski resort facilities Development of residential and resort properties Environmental Lobbyists Adapted from CA School of Business 2007, with permission Chartered Professional Accountants of Canada, Toronto, Canada. Any changes to the original material are the sole responsibility of the author (and/or publisher) and have not been reviewed or endorsed by the Chartered Professional Accountants of Canada