LAUREL GROVE TENNIS CENTRE

THE IDEA EMERGES 1973

The weather in Laurel Grove, Tennessee limited the outdoor tennis season to eight months of the year because there were no indoor courts within a 75 mile radius of the city. Despite a growing interest in year-round tennis facilities, the countys Recreation Commission had not seriously considered the building of indoor courts to serve its population of 48,000 residents (30,000 permanent residents and 18,000 university students). The commission felt that such construction would receive more financial and popular support if it were undertaken by the university.

But when Brian Traylor, the Universitys 62 year old physics professor and part-time tennis coach, requested that indoor courts be added to the Universitys recently completed $12 million athletic complex, he received no encouragement. Since authorization of the complex, the Board of Regents had shifted its priorities to non-athletic campus construction. Furthermore, informal discussions with members of the Board convinced Traylor that indoor facilities would be viewed as an extravagance because the University presently maintained twenty outdoor courts for students, staff and faculty.

After several months of investigation, Traylor decided that the best way to provide indoor courts would be to construct a privately owned tennis complex.

Since Traylor was due to retire from the university in a few months, he decided to undertake the project himself as an alternative activity which could supplement his retirement income of $15,300 a year.

Before committing himself to the building of the courts, Traylor attempted to assess the citys need for such a facility. He based his estimates, in part, upon the survey of tennis facilities published in Tennis magazine, an industry guidebook. The magazine had estimated that at least 170 regular players were needed to support one court and that a population of 25,000 generally included about that many regular players.

Traylor believed, however, that Laurel Grove could adequately support at least three courts, even though its population was far less than the 75,000 recommended in the article. He thought that Laurel Grove had more than its share of players because of the large number of residents he knew personally who had taken tennis lessons at the University, the local country clubs, and the Country Recreation Commission Programs. He further reasoned that the number of regular players per court could be reduced from 170 to 155 because of the large number of women who would use the courts during the normally slack daytime hours.

Traylor already owned outright two acres of undeveloped land at the edge of town which would be suitable for the courts. As his own house was located on the property, placing the building there would make it convenient for him to supervise the operation of the facilities at all times. However Traylor faced several delays before he could begin building the tennis center. A petition to eliminate a city right of way for the construction of a street through the property postponed issuance of the building permit for six weeks. Another six weeks was required for out-of-state office approval for utilities hook-up.

While waiting for the permits, Traylor sought the necessary financing. The survey in Tennis magazine had estimated that the average cost of an indoor tennis court would be $100,000, but Traylors initial cash outlay would be less because he already owned the land. He was also able to reduce his required financing by deciding to purchase a prefabricated building and to contract only for its actual construction. (The more costly alternative would have been to authorize a contractor to purchase the necessary materials and to construct the building from a standard architectural design).

After several visits to local banks and meetings in nearby Middletown with representatives of the Small Business Administration (a US government lending program). Traylor secured a nine percent, ten year SBA loan of $135,000 - the amount required to construct two courts.

1974 - THE OPENING OF LAUREL GROVE TENNIS CENTER

A few months later, in January 1974, Traylor opened the Laurel Grove Tennis Center. It had two excellent indoor courts, though only the barest of additional facilities. On one side of the short hallway leading to the courts were two dressing rooms, each containing a wooden bench, five coat hooks for clothing and a single shower, sink and toilet. On the other side of the hallway was a small room serving as office and lounge. One office wall displayed a meager assortment of tennis clothing and equipment in lieu of an elaborate pro-shop.

Despite the spartan facilities, the tennis courts enjoyed immediate popularity due to the absence of competition and to Traylors acquaintance with a very large number of local players. The rental rates for the courts were $7 per hour during the daytime and $9 per hour for evenings and on weekends. The rates were established based upon the results of a nationwide survey of tennis court rental fees that a friend running a similar business had showed the professor. Traylor charged neither initiation nor annual membership fees, as were common in most private tennis centers. In fact, he offered a five percent discount to players who reserved courts on a regular basis.

Even the pro shop wall, as small as it was, received a lot of attention. Since it was intended only to provide a service to his regular customers, Traylor priced most items only slightly above their wholesale costs. Traylor would buy a tennis racket frame, for instance, for $20 and spend forty minutes stringing it with $1.50 worth of nylon cord. He would then sell the racket, complete for $30. An identical racket would sell for approximately $40 in local stores. Another example would be a pair of shorts that were popular a year ago, but no longer in fashion at the retail level. Traylor would buy inventory of such merchandise from large retailers and distributors. Shorts that would have sold for $40 a year ago would be purchased by Traylor for $20 and sold for $30-$35.

As a result, the pro-shop acquired a favourable reputation throughout eastern Tennessee. Many customers would drive from nearby towns to shop at Laurel Grove, even when they were not able to reserve court time.

After being open for only a few weeks, the use rate neared 100 percent. The courts were open from 7.00 a.m. to midnight throughout the indoor tennis season of October to April and the only unreserved times were the first and last hours of the day. If Traylor was absent, players would pay their fees into a coffee can he set out by the entrance. Often, Traylor would not be present from 7.00 - 9.00 a.m.. and the first players to arrive would open the unlocked facility themselves.

While the owner was often absent early in the morning, his faithful terrier Cylon would greet patrons at the door, barking happily as another day began at Laurel Grove Tennis Center.

OPERATION OF THE CENTER

One reason Traylor said he was able to operate profitably was that the center had no paid employees. Despite keeping the center open 360 days a year for 17 hours a day, Traylor was adamant in his opposition to the expense of any employees. One of his friends, a chartered accountant, often told him to keep better records and attend to the details of his business more conscientiously. Traylor's wife had been involved as a recordkeeper for the Centre in the start up years of the business, but had moved out of that role as the venture expanded.

Although a tennis instructor was available on a regular basis, with the lessons arranged by the office, Traylor did not collect any portion of the instruction fees. Feeling justly compensated because the courts were rented, Traylor forfeited his percentage in order to avoid any possible complication of his tax calculations.

Laurel Grove Tennis Center was profitable in each of its first three years of operation. As the business was operated as a proprietorship, net income was reported on Traylors personal income tax form as approximately $11,000 per year, for the first three years of the Centre's existence. Traylor took this approach because he neither paid himself a salary nor deducted his implicit wages as a business expense in the business income statement. Instead, the income was retained and reinvested in the business.

In July 1974 just six months after the first two courts were opened, Traylor began making plans to add a third court. At first, he wanted to enlarge the original building to include the new court and thus save on heating cost. However, construction cost for the addition would have been very high because the land on either side of the building was very steeply sloped. Instead, Traylor decided to construct a second building to house the third court, attached to the first building by a covered walkway. He added a small lounge area at the end of the walkway with a soft drink machine, a coffee maker and a few lounge chairs.

In order to pay for the new building, Traylor re-negotiated the existing SBA bank loan to increase the amount from $135,000 to $183,000. As part of its mandate to support small business, the local SBA office offered free consulting advice, including advice regarding insurance, recordkeeping and accounting basics, to Traylor along with the expanded loan. Traylor politely declined the offer of assistance, feeling his business was too small and too limited to benefit from this type of help. The third court opened in December 1974.

By reinvesting the profits of the next years operation, Traylor was able to make a second major improvement. He had a door cut in the office wall that formerly constituted the pro shop and added a 15 x 30 room adjacent to the office in order to expand the merchandise display area. Pro shop sales were $50,000 in the first year of operation, $55,000 in the second and $70,000 in the third. In each of the first two years, Traylor spent an amount nearly equal to pro shop gross sales to replace and increase the merchandise inventory. By the end of 1976, what was left of the original wall, the new room and a large part of Traylors basement were filled with tennis rackets, clothing and other assorted equipment. In that year, gross pro shop sales had exceeded inventory cost by about 30%.

Most of this merchandise consisted of factory discontinued items which Traylor had been able to purchase at a very substantial discount. However in order to take advantage of the savings, he was often forced to buy certain items in large lots, which resulted in slow turnover of selected items.

In addition to increasing his inventory, Traylor felt forced to selectively increase his selling prices. Rather than using a predetermined mark up percentage, Traylor set prices for each item based upon its apparent demand and the prices charged in local stores.

However, the average item was tagged approximately 15-25 percent below the suggested retail price. Nevertheless, Traylor said he regretted having to make the increases, because he retained his original philosophy of viewing the pro shop primarily as a service for his paying customers.

THE SUMMER SEASON

The center functioned very much the same in the summer as it did during the busier winter months, despite the fact that the occupancy rate dropped to 30 to 50 percent of full capacity. Since outdoor tennis courts were readily available at a variety of locations throughout Laurel Grove, few residents appeared willing to pay the relatively high cost of playing indoors during warm weather.

As a result of decreased demand for his courts, Traylor found it much easier to operate a one man business during the off season. For example, he was often able to shorten his operating hours either by opening the center in the late morning or by closing during the earlier evening hours when courts had not been reserved in advance. Also , because he did not choose to engage in advertising or promotional efforts, Traylor was relatively free to enjoy the summer months relaxing with his family or playing outdoors with friends.

While Traylor did not elect to promote his courts through media advertising, he did make two adjustments in light of the seasonal slump. The first was a reduction of all court rental rates to $6 per hour. The second was an informal contract which he developed with the County Recreation Commission for six court rentals daily for a 10 week period. The Commission offered tennis lessons to county residents for a very nominal fee and used part of the revenues to pay Traylor $1,500 per summer for the use of his courts.

THE FUTURE

Traylor intended to continue the present operating strategy indefinitely. His decision stemmed from his belief that a minimum of six courts would be necessary in order to pay outside help and still preserve a reasonable return on his investment. The decision reflected the fact that he felt comfortable with his present level of financial investment and absence of organizational complexity.

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make a cashflow spreadsheet

instructions

Laurel Grove Tennis Centre

Individual Assignment Due Before the Start of the Week 5 Lab Session

1. on an Excel spreadsheet, create a monthly cash flow projection model for Laurel Grove Tennis Centre, using the information presented in the case. The model is for the year 1977. See the reading on Cash Flow Projection Models in the Business Plan Guide posted on the course website for information on how to assemble and present this type of model.

2. assume

-no changes in the way the Centre operates between 1976 and 1977

-the base markets for indoor tennis court rental and tennis equipment were stable between 1976 and 1986 (i.e. don't worry about "macro" market factors like a collapse in the overall market for tennis )

3 from the model, make a one paragraph assessment of whether this business is financially attractive to a potential buyer and why. Include this as part of your hand in

4. make reasonable assumptions regarding any costs you feel are not mentioned in the case, but do not conduct any primary research on any aspect of the assignment

5. don't forget

-to include notes that explain your major numbers as part of your hand in

to explore the possible currency and time differences that could affect the content of your model if it was to be presented to a reader as of todays date.

6. do not calculate the working capital requirement of the operation

7. do not include opening or closing cash balances in your cash flow projection