# DC Survival Meter



## puffpuff (Jun 12, 2007)

Perhaps it is easier to take a poll.  Based on what you know today, what is your best guess is the risk of the following club  going bankrupt and filing for chapter 11 protection within the next 5 years ? 

Rate from 1-100% for each club. If you rate 100, it means you think there is a 100% chance that that club will file for chapter 11 within five years. If you do not have an opinion on any particular club, leave blank for that club.   If I have left out a club you like to rate, please add . 

This is a non-scientific poll designed to inject some fun into this forum. Don't take it too seriously. No justification needed. If you like, a comment or two after your ranking can be enlightening. 

Quintess - 300+ members 
Exclusive Resorts - 2500+ members
Utimate REsorts - 800+ members in two clubs
Private Escapes - 300+ members in three clubs
High Country Club - 240+ members
Bellehaven - 100 members
Cresendo - app. 60 members.


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## PerryM (Jun 13, 2007)

*90% belly up?*

I understand what you are getting at but this is one engineer that can’t even guess success or failure for the industry at large or specific DCs.

I guess one could use a lot of 50/50 guesses which mean nothing.  If asked to backup a percentage I doubt anyone could withstand a mathematician’s demand for proof.

There is a vague percentage thrown around that 90% of ALL new business are out of business in 10 years – I guess I could do a Google search and come up with some references that might be credible.

So that would be my guess, 90% will be out of business after 10 years of business.  I really don’t believe that number but I have no other statistic to throw around.  I’ve had to defend that statistic in my due diligence process with DCs and hence I am not a DC member yet.


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## hipslo (Jun 13, 2007)

Impossible to do without detailed projections, underlying assumptions, and business plans.  As a general matter, though, number of members, alone, is not that meaningful a metric.  If a DC is losing a certain amount per year, per member, then size could be a negative, unless and until the profit margins turn around, which again is a function of projections, assumptions, and business plan.

One industry with which I am familiar is the legal industry.  While it is generally the case that the larger law firms tend to be more profitable than the smaller firms, a number of the very largest firms have filed for bankrputcy protection over the years.  In some cases this was due to small firms trying to become large firms too quickly and taking on unmanageable financial risk to do so.  In addition, some of the most profitable firms are relatively small.  The same would hold in most any industry, I would think.  Especially in the early years of a company's growth, size is likely not the most meaningful predictive factor of success vs. failure.  Rather, a sound business plan, solid financial projections, and sound/ conservative underlying assumptions would be key.  Those DCs that have these will most likely succeed.  For those that don't, we are back to finger crossing.


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## hipslo (Jun 13, 2007)

It looks like Crescendo is the smallest of the DCs, based on the original post.  I took a quick look at the helium report for some of their "vital stats".  They are as follows:

Number of members - 68
Number of homes -  8
Average value of home - 2.8m
Annual MF - 23,500
Deposit Required - 350k


Based on the above, I am able to derive the following data -

Total deposits from members - 23.8m

Total cost of homes - 22.4m

Total member deposits as a percentage of cost of homes - 106%

Total MF per home - 200k

Total MF per home as a percentage of cost of home - 7.14%

Total leverage needed to acquire each home - 0 (there may or may not be leverage, but based on the numbers, none would be needed)

Total debt service needed per home  - zero (at least none needed - there may in fact be some debt, but it seems likely that debt load would be low, given the above metrics).



These strike me as the underpinnings of a very conservative, and therefore reasoanbly safe, business plan, even if not a single additional membership is sold (in fact, the total number of members is capped at 266, according to the Helium Report - very large size thus seems to have no bearing on their business model).  I'd be curious how these numbers compare to similar metrics for some of the other clubs.  My guess (and its just a guess) is that you may not like what you see for some of the DCs with relatively low price points.

This is also the closest thing to a true equity model out there at the moment, meaning there is potential upside (as well as downside) based on the value of the portfolio over a long term horizon.  Assuming the value of the portfolio increases at a reasonable clip, and the club remains solvent, it is conceivable (not assured, but conceivable) that the "cost per night" metric for crescendo could be as low, or lower, than any of the clubs, at the end of the day. 

If a new DC were to come out with a portfolio of 1.4m homes at a price point of 150k or so, based on an equity model, I'd likely be pretty darn interested.


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## hipslo (Jun 13, 2007)

Here is a claculation of the same metrics for HCC, again based on info from the helium report:

Number of members - 240
Average home value - 850k
Membership Deposit - 60k
Number of homes - 28
MF - 8400

Total member deposits - 14.4m
Total cost of homes - 23.8m
Percentage of member deposits of cost of homes - 60%
Average debt per property - 340k
Total Debt - 9.5m
MF per property - 72k
MF per property as a percentage of cost - 8.4%


So, when compared to Crescendo, the MF per property on a percentage basis is 8.4% vs 7.1%.  With that extra 1.3%, HCC needs to service 340k of debt per property (40% of cost).  Unless Crescendo's MFs are just way to high, it seems like HCCs may be on the low side.  Which model seems more likely to be sustainable over the long term? (Recognizing that both could be, or neither could be, but just on a simple head to head comparison).

Assuming that the helium report is correct, and that the average value of Crescendo's properties is 2.8m and the average value of HCCs is 850k, if we multiply out the relevant Crescendo numbers by 0.3, we would get the comparables needed for the HCC model to work in the same way as Crescendo.  That would entail the following:

Member deposit - 105k
MFs -  7050

I would join a club with those numbers that was modeled on Crescendo's model, and that had little or no debt on the properties.  Since HCC's buy in numbers are lower, on a cost adjusted basis, than Crescendo, it stands to reason that it is inherently riskier than Crescendo (not to mention that there is no equity ownership involved). I am not saying it is TOO risky, or unreasonably risky, that is a subjective judgment call, I am just saying that, under the "survive - o -meter", it looks like it ought to be ranked lower than Crescendo, based on these simple to derive metrics.


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## vineyarder (Jun 13, 2007)

> There is a vague percentage thrown around that 90% of ALL new business are out of business in 10 years – I guess I could do a Google search and come up with some references that might be credible.



This 'factiod' has been around a long time, but there doesn't seem to be any evidence to support it.  As a serial entreprenuer and consultant to several VCs, I've been involved in lots of discussions on this topic.  According to the SBA, new businesses have a 50/50 chance of surviving at least 5 years.  Of those that do not last 5 years, however, only 1 in 7 truly 'fail' in that they leave behind unpaid debts, etc.; many of the businesses close simply because the owner gets bored of the business, or decides it is too much work vs. a 9-5 job, etc.  A study by Dunn & Bradstreet showed that 70% of new businesses started in 1995 were still in business after 8.5 years.  In addition, a new business that does not rely on credit card debt as their sole source of funding is 8 times less likely to fail.  Businesses that have directors and advisors with significant domain knowledge and seasoned management are far less likely to fail.  And lastly, businesses that are backed by VC investments and support fail less than those that are not backed by a VC.  While only 10% - 20% of VC backed new businesses will be hugely successful, only 10% - 20% will truly fail - the remaining 60% - 80% remain in business, but not successful enough to provide the VC with a 10X return.

That being said, I have no idea whatsoever how likely it is that any of the clubs mentioned will fail, as I am only really familiar with the details and management of a couple!


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## PerryM (Jun 13, 2007)

vineyarder said:


> This 'factiod' has been around a long time, but there doesn't seem to be any evidence to support it.
> <snip>



I workout each night at a martial arts school in a strip mall.  I’ve been going to the same place since 1994.  During that time only abut 10% - 15% of the original shops are still there.  The dentist, the vet, the drycleaner, are still there (and my little school) and all the rest have come and gone.

The small bar has changed hands at least 5 times, the Smoothie Store lasted 4 months, the Nail place 6 months, on and on.

So that’s my real life exposure to the 90% failure rule – works for me.


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## Elsway (Jun 13, 2007)

puffpuff said:


> Perhaps it is easier to take a poll.  Based on what you know today, what is your best guess is the risk of the following club  going bankrupt and filing for chapter 11 protection within the next 5 years ?
> 
> Rate from 1-100% for each club. If you rate 100, it means you think there is a 100% chance that that club will file for chapter 11 within five years. If you do not have an opinion on any particular club, leave blank for that club.   If I have left out a club you like to rate, please add .
> 
> ...



Bellehavens is the only club which has a strict policy of having zero debt.  In my opinion, the prospect of losing "all" of your deposit at BelleHavens is extremely low.  In fact, I am hard pressed to come up with a scenario in which you could lose more than half of your deposit.

Worst case scenario:  Members become dissatisfied and rush to put their name on the resignation list.  The club cannot sell new memberships (no demand).  The club  members vote to liquidate the club (winddown).  The real estate is auctioned and the proceeds are distributed among the members.

The members (at BelleHavens) are first in line to receive distributions under a liquidation scenario.  Other clubs employ some degree of leverage - so in a winddown (liquidation) scenario members could be severely impaired (possibly wiped out).

High Country Club is the riskiest club, I believe, because they are not charging a high enough deposit.  I posted this elsewhere:



> Assuming a target occupancy rate of 70%, HCC properties would be utilized 255 days per year. This amounts to 10 affiliate members (25 days useage) and gross membership deposits of $400,000. They are buying $1 million properties, so they are suffering a large cash flow deficit net of property acquisitions.
> 
> I am concerned that HCC is over promising by charging so little for so much. They will succeed to the extent that they can raise membership dues rapidly/significantly in the future.



Exclusive Resorts is a survivor, I think, because they have critical mass and they charge a high price for their product/service.  Companies will fail because they charge too little rather than too much, IMO.

Safest:  BelleHavens and Exclusive Resorts
Riskiest:  High Country Club
The others rank somewhere in between.


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## vineyarder (Jun 13, 2007)

> I workout each night at a martial arts school in a strip mall. I’ve been going to the same place since 1994. During that time only abut 10% - 15% of the original shops are still there. The dentist, the vet, the drycleaner, are still there (and my little school) and all the rest have come and gone.
> 
> The small bar has changed hands at least 5 times, the Smoothie Store lasted 4 months, the Nail place 6 months, on and on.
> 
> So that’s my real life exposure to the 90% failure rule – works for me.



My daughter's class in school has 13 girls and 6 boys, and 15 have blonde hair.  There are 17 caucasian children, 1 hispanic child and 1 asian child.  So based on my daughter's real life exposure, the world is 68% female, 79% blonde, 89% caucasian, 5% asian, etc.  Is your experience with one strip mall any more valid as an indicator of the entire business climate in the US?  I think not...


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## PerryM (Jun 13, 2007)

vineyarder said:


> My daughter's class in school has 13 girls and 6 boys, and 15 have blonde hair.  There are 17 caucasian children, 1 hispanic child and 1 asian child.  So based on my daughter's real life exposure, the world is 68% female, 79% blonde, 89% caucasian, 5% asian, etc.  Is your experience with one strip mall any more valid as an indicator of the entire business climate in the US?  I think not...



As I said, I would have to spend a lot of time researching that 90% rule - I have found one real life case where it works perfectly.  I frequent another strip mall and I see change over all the time.  The sports memorabilia place going belly up, the cigar place, even the pizza places going belly up.  If I had to guess, it too has 90% of the business change in 10 years.

It's a great rule of thumb and probably why it keeps having some life to it.  Certainly any business lasting 10 years has made it thru a bunch of hurtles and same with an entire industry.

If someone has a better rule, backed up with lots of university studies I'm all ears.  I have no real stake in the rule of thumb I use now.


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## Elsway (Jun 13, 2007)

Most (the vast majority) of small business failures do not result in bankruptcy.  In many cases, the owner merely decided that the business was not profitable enough to justify continuance.

Consolidation in the retailing (and restaurant) industry has put many "mom and pop" retailers out of business.  Very few of them actually experience bankruptcy - the simply cannot compete with the large chains.


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## Sir Newf (Jun 13, 2007)

Rather than a Country Club analogy, I see a couple of these lower entry DC's more like that of a Health Club...Initial entry fee, an annual fee, with no Bonds like Country Clubs and no equity like the higher end DC's....pure risk when acquisition occurs, members are left with new terms of the new club....the folks that gain are the fonders.....just my guess....


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## PerryM (Jun 13, 2007)

Sir Newf said:


> Rather than a Country Club analogy, I see a couple of these lower entry DC's more like that of a Health Club...Initial entry fee, an annual fee, with no Bonds like Country Clubs and no equity like the higher end DC's....pure risk when acquisition occurs, members are left with new terms of the new club....the folks that gain are the fonders.....just my guess....



This gets back to my co-op idea - there is so much profit going to a few guys who take very little risk that a company should just start up with the lawyers and paperwork to create your own DC over a weekend.

Kind of like Assist-to-sell in the real estate world.  A company in business to charge a fee to start a DC and guide it and heck even subcontract management functions.


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## puffpuff (Jun 13, 2007)

The start up is a lot harder than most people think. the first 10-30 members may be friends and family. AT that point, say you have 30 members and 5 house, how are you going to attract new members with only 5 house , minimal track record when they can go to HCC club that has 30 homes and 240 members? This is the same problem BH has now vs a vs ER. How are you going to position the houses? US is a big country, not to mention international which is where the growth really is. 

 The marketing expense is running around 10% of membership fee  by industry average, and the office overhead , brochures,  computer system , management fee is on top etc  A lot of the expenditure goes out the window the first 12 months of operation to set things up. 

As far as purhcase is concern, you need someone who travels around, buy the rifht property at the right price, a design person, a handyman, just to get the place up and running. The initial 100 members is the toughest, then the next inflicion point is about 300 members where you break even operationally but still investing heavily ahead to buy preconstruction properties and lock in future prices, then the next point is about 800 members where the snow ball rolls itself. 

This is a cash intesive industry requireing in my view about 5 million to get started to have a showing and sustainabiliyt for the first 3 years of operation. Let say you can do it shoe string, so 2.5 million. So you need 25 people , each come up with 100,000.


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## hipslo (Jun 13, 2007)

puffpuff said:


> The initial 100 members is the toughest, then the next inflicion point is about 300 members where you break even operationally but still investing heavily ahead to buy preconstruction properties and lock in future prices, then the next point is about 800 members where the snow ball rolls itself.



Crescendo, according to the Helium Report, is capping the number of memberships at 266.  With a ratio of 8 members per property, that would be 33 homes.  (Heck, I'd be happy with 10 to 15 homes if they were sufficently geographically distributed - 4 or 5 ski properties, 4 or 5 beach properties, and a handful of urban properties thrown in).  Assuming the member to home ratio is roughly the same for all of the clubs, a larger number of homes wouldnt translate into any greater availability.  

Do you think there is something inherently flawed with a business plan that caps the number of members at 266?  Based on what you say, above, that would be prior to operational break even.

As far as how to attract members where there are other alternatives, the answer ought to be simple - offer a better product - one that provides full equity participation in the portfolio.  While that may not be meaningful to lots of people, it would be VERY meaningful to me, and I would be willing to bet that I'm not alone in that, notwithstanding what appears to be the prevailing attitude on this forum (again, I dont think its something that needs to be debated - its something that is likely to be important to some, and not to others - why shouldnt there be offerings serving both market segments?)

As far as the start up costs, those ought to be funded by the founders and their investors out of their own equity.  That, plus their management function, is what ought to entitle them to their share of the value of the portfolio, and their management fees. (I tend to agree that Perry's co-op structure is flawed, in that there is still going to be a need for some deep pocket investors to fund the start up costs, including purchasing the first few homes, marketing, and g&a - but their are venture capitalists out there willing to fund all sorts of start ups, so that ought to be doable, if they get a large enough share of residual value so that their IRRs are attractive).


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## Elsway (Jun 13, 2007)

puffpuff said:


> The start up is a lot harder than most people think. the first 10-30 members may be friends and family. AT that point, say you have 30 members and 5 house, how are you going to attract new members with only 5 house , minimal track record when they can go to HCC club that has 30 homes and 240 members? This is the same problem BH has now vs a vs ER. How are you going to position the houses? US is a big country, not to mention international which is where the growth really is.
> 
> The marketing expense is running around 10% of membership fee  by industry average, and the office overhead , brochures,  computer system , management fee is on top etc  A lot of the expenditure goes out the window the first 12 months of operation to set things up.
> 
> ...



The early adopters (charter members) of a new DC need to be lulled with a discounted membership deposit in order to compensate them for the lack of diversity in the property portfolio.  It seems that a number of clubs have reached a point where they have adequate diversity to begin to raise prices in a fairly aggressive manner.  The price increases are always announced to the public in advance, thus providing motivation to prospective members to join quickly.

If breakeven is at 300 members, a new club will need to average 1 new member per week in order to turn profitable after 6 years.  It helps to have patient and deep pocketed investors.


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## puffpuff (Jun 13, 2007)

hipslo said:


> Crescendo, according to the Helium Report, is capping the number of memberships at 266.  With a ratio of 8 members per property, that would be 33 homes.  (Heck, I'd be happy with 10 to 15 homes if they were sufficently geographically distributed - 4 or 5 ski properties, 4 or 5 beach properties, and a handful of urban properties thrown in).  Assuming the member to home ratio is roughly the same for all of the clubs, a larger number of homes wouldnt translate into any greater availability.
> 
> Do you think there is something inherently flawed with a business plan that caps the number of members at 266?  Based on what you say, above, that would be prior to operational break even.
> 
> ...


Small boutique clubs like Cresendo, Lusso, and to a certain extend Quintess is going after the home-like enviroment wide wider choices of location and not very deep seleciton per location. Exclusive, by nature of its size, has no choice but to become a "multiple home withihn a resort" type environment, like a super upscale Ritz. 

In order to be a boutique, they have to cap the membership, and in order  to cap the membership to a number under 300, the margin and the sales income per member has to be sufficiently high to pay for the operating expense. Thus this type of club will  necessarily have to be in the very high end , and that is exaclty where they are positioned. 

In terms of availability , all clubs  sell out 300+ days a year, so reservation is very similar - you line up , and you work the system. The larger the club, the more problem in general with reservation because more people are crowding into the same popular places ( ie hawaii) regardless. Ski properties are occupied 90% for 3 months, then it drops to 30% average the rest of the year.  The average 60-70% occupancy really does not make a lot of sense beause you would not want to be in Arizona in August anyway, even if they pay you to go. 

ER members will tell you their frustrations ,and that is why high volume clubs like ER or UR has to make the window open up to 2 years out in order to allow members to reserve farther out and plan. I tmay be up to three years in not to distance future. 

Its simply very hard to offer full equity because there is a lot of infrastrucure and start up cost with this business and someone has to front it and take the chance. If you are an investor and founder, would you allow members coming in later to be full euqity partners with you when you are the one that come up with cash to get it going and take the risk ?? At most , you will reward them with part of the appreciation in return for their loyalty to stick around. That is fair. 

Members coming in thinking they are particpating in the equity 100% is not too real and in fact is closer to an illusion, becuase it does not matter whether the club is equity or non equity, the top is already skimmed off by the operator one way or another (extra management fee , inflate the property  price at time of transfer to members etc)  as reward for their risk prior to being shared in the equity portion. 

There is a portion of equity sharing, but the cream is already gone, so to say, and the club is sharing some equity, not zero. But itis quite limited and members should not count on such equity appreciation as a true investment  . At best, the various models of equity particupation translate into about 20% upside for every dollar appreciation the club makes. This upside is then marketed in the form of "equity" in  case of Bellehaven,, " credit" by PE at one time ( which they since disontinued as it cost them too much), " member ship increase " as in UR.  

AT the end of the day, if you can use the club and enjoy it, and can take a 30% haircut in worse case, and particpate 20% of eavery dolllar earned  on the upside via membership fee going up for new people and on exit, you should consider that a home run. 

DC is an expense. it is not an investment. Not going to happen, not now, and not going foward. The only way it is an investment is for the founders and the investors, not the members. 

The cooperative idea is very interesting. But someone has to work it, and mucho $$$ is needed. So we come back to the same senerio as all the clubs in place now. They are not going to give any equity away unless they have no choice. 

As usual, I could be wrong and have been proven wrong manytimes over.


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## vineyarder (Jun 13, 2007)

> Originally Posted by *PerryM*
> 
> As I said, I would have to spend a lot of time researching that 90% rule...  It's a great rule of thumb and probably why it keeps having some life to it... If someone has a better rule, backed up with lots of university studies I'm all ears. I have no real stake in the rule of thumb I use now.



Perry - I already provided the data:

A study by Dunn & Bradstreet of 850,000 businesses showed that 70% of new businesses were still in business after 8.5 years. Also, only 1 in 7 businesses that cease operations truly 'fail' (in that they leave behind unpaid debts, etc.); many businesses close simply because the owner gets bored of the business, or decides it is too much work vs. a 9-5 job, can't handle the uncertainty, etc.

The story about people drying the cat in the microwave, and the emails about Bill Gates paying $245 for every email you forward, etc., also 'keep having some life' but that doesn't make them any truer!


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## Steamboat Bill (Jun 13, 2007)

I don't want to quote the entire post, but I really like how PuffPuff evaluates the DC industry.

I also think the "doom and gloom" of non-DC owners is overblown. Don't get me wrong, I see the risks in being an early adopter, but I think the benefots far outweigh the risks.

When it comes to business failures, I think there should be a difference between a high-school dropout starting and failing in a business vs a ivy league educated MBA with a bunch of advisors. Most of the DC owners I have spoken with are VERY intelligent. These people are the exact opposite of traditional timeshare salesmen.


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## hipslo (Jun 13, 2007)

puffpuff said:


> Its simply very hard to offer full equity because there is a lot of infrastrucure and start up cost with this business and someone has to front it and take the chance. If you are an investor and founder, would you allow members coming in later to be full euqity partners with you when you are the one that come up with cash to get it going and take the risk ?? At most , you will reward them with part of the appreciation in return for their loyalty to stick around. That is fair.



In my practice I am involved in real estate development deals all the time where the developer/ entrepreuner makes an initial investment in time and money, acquires a property, fronts the initial costs for due diligence and predevelopment work, and then goes and finds equity investors who provide needed capital for the development to be completed.  Typically the equity investors put up 80% or so of the capital, and the developer puts up 20%, including the earliest start up costs.  At the end of the day, once the project is completed and sold, and everyone (investors and developer) get their money back, perhaps with a return, the developer then takes 40 or 50% of any additional upside, which we call a "carry".  Prior to that time they take a development and/or a management fee.  If things go well its a win/win - the investors get their money back, plus a return, plus 50 to 60% of the upside, and the developer get the other 40-50% of the upside to reward him for taking on that intitial risk.  Why wouldnt an equity DC model structured in this same way also be a win/win?


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## Bourne (Jun 13, 2007)

a couple of good posts in this thread...


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## PerryM (Jun 13, 2007)

*Ok, it's only 80% fail in 10 years...*

Ok, I spent 10 minutes Googling and here is what I came up with. 

This is from the Small Business Administration study section 3.1:


66% of new businesses survive 2 years or more

50% survive 4 years or more

40% survive 6 years or more.



Said the results are similar to another study showing:


75% of new business survive 2 or more year
50% survive 4 years
40% survive 6 years.

They don’t go out 10 years but I can see where 80% fail at 10 years.  I’m extrapolating 4 more years out but that seems like a logical guess.


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## vineyarder (Jun 14, 2007)

*Mixing Apples & Watermelons...*



> Originally Posted by PerryM
> 
> Ok, I spent 10 minutes Googling and here is what I came up with.
> 
> ...



You're mixing apples & watermelon; the SBA data includes all new businesses, 60% of which are sole proprietorships with 2 or less employees, the majority of which are funded by credit card debt, and while only 40% are still in business after 60%, that does not equate to failure, as only 1 in 7 fail (i.e. have debts that exceed assets); 6 of 7 close for other reasons.  Remember - this discussion started wrt DCs; I don't know of any DC that has 2 or less employees, etc.  The Dunn & Bradstreet data is what is applicable in this case, and that large study (850,000 businesses) showed 70% still in business after 8.5 years.


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## PerryM (Jun 14, 2007)

vineyarder said:


> You're mixing apples & watermelon; the SBA data includes all new businesses, 60% of which are sole proprietorships with 2 or less employees, the majority of which are funded by credit card debt, and while only 40% are still in business after 60%, that does not equate to failure, as only 1 in 7 fail (i.e. have debts that exceed assets); 6 of 7 close for other reasons.  Remember - this discussion started wrt DCs; I don't know of any DC that has 2 or less employees, etc.  The Dunn & Bradstreet data is what is applicable in this case, and that large study (850,000 businesses) showed 70% still in business after 8.5 years.



Well with the amount of debt the DCs seem to want to carry I'd lean towards the SBA's data.  I don't know how many folks work at HCC versus a pizza place - about the same?  (Employees, not BOD members, folks who work day to day).

P.S.
Just asked the kid across the street - he drives for Pizza Hut.  During peak hours they have 4 employees and a manager manning their store and have 4 or so drivers in the field.  They have backup drivers that can be called in on special occasion.

Does HCC have that many employees?  (I'm not picking on HCC, this goes for all the DCs out there)  If they have roughly the same number of employees as our local Pizza Hut then I'd use numbers from the SBA.


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## travelguy (Jun 14, 2007)

Elsway said:


> The early adopters (charter members) of a new DC need to be lulled with a discounted membership deposit in order to compensate them for the lack of diversity in the property portfolio.  It seems that a number of clubs have reached a point where they have adequate diversity to begin to raise prices in a fairly aggressive manner.  The price increases are always announced to the public in advance, thus providing motivation to prospective members to join quickly.
> 
> If breakeven is at 300 members, a new club will need to average 1 new member per week in order to turn profitable after 6 years.  It helps to have patient and deep pocketed investors.



You've just described High Country Club except that they are averaging significantly more than 1 new member per week and their biz projections show profitability way before 6 years.  And HCC is running ahead of their projections.


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## travelguy (Jun 14, 2007)

hipslo said:


> In my practice I am involved in real estate development deals all the time where the developer/ entrepreuner makes an initial investment in time and money, acquires a property, fronts the initial costs for due diligence and predevelopment work, and then goes and finds equity investors who provide needed capital for the development to be completed.  Typically the equity investors put up 80% or so of the capital, and the developer puts up 20%, including the earliest start up costs.  At the end of the day, once the project is completed and sold, and everyone (investors and developer) get their money back, perhaps with a return, the developer then takes 40 or 50% of any additional upside, which we call a "carry".  Prior to that time they take a development and/or a management fee.  If things go well its a win/win - the investors get their money back, plus a return, plus 50 to 60% of the upside, and the developer get the other 40-50% of the upside to reward him for taking on that intitial risk.  Why wouldnt an equity DC model structured in this same way also be a win/win?




This is a very good point and is somewhat analogous to the DC biz model except the ratios are different.  I believe that a properly executed DC represents a win/win/win for members/investors/management.  (Just the opposite of the DC doom-and-gloomers).  I've only researched High Country Club to the extent that I could accurately comment on the investment side of their DC.  I love the fact that they break down the DC biz model into members and investors.  

Members win - HCC members can participate in travel to luxury properties for a per-night cost lower than most upscale timeshares and they do not have to worry about ROI, etc.  HCC allows members to enjoy the DC industries lowest membership and annual fees through efficiency of operations and property purchases in addition to the separation of membership and investment.

Investors win - HCC makes investment available to members as well as outside and institutional investors.  The investment is very straight forward and managed like any good commercial RE investment with a good risk/reward ROI.  This allows members to become investors in ala cart fashion and participate in both the property equity AND management income with very limited liability.  I'm not aware of any other DC that allows this level of investment to it's members.

Management wins - The HCC founders/managers have the same incentives as the members and investors to make the HCC biz plan work.  They benefit from the management fees and property appreciation the same as the investors.  HCC has done a good job of placing the interests and payouts of members and investors before management (sign the NDA and call HCC if you want more info on that).  The managers really only make out well if the club reaches critical mass and profitability in due time. 

Unlike timeshare sales where we Tuggers see the relationship as Developer vs. Tugger, DC purchases can be win/win/win where the Members, Investors and Managers are all working toward a successful Club.  This give the members the benefits of membership, the investors the returns they require and management the benefits of a successful business they are working toward.


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## puffpuff (Jun 14, 2007)

agreed totally with Doug. Well Said.!


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## travelguy (Jun 14, 2007)

*Back to Survival ....*

I not sure why the debate on how many biz failures in general or strip malls or whatever..... but I believe the OP (Puff) was asking about the chances of survival of DCs.

In very simple terms, I believe that a successful DC needs that same things that all successful biz needs:


Biz plan - I realize this is a highly opinionated issue that has been debated elsewhere on this board.  But I question if some DCs even have a long-term biz plan.
Management - The bosses who run the DC must be the smartest guys in the room.
Sales - This should be obvious but it seems like Tuggers spend a lot of time debating the business plans of DCs that have no sales!  Even Best Buy will fail if they have no sales!
Capital - It's true that the best ideas usually get the most money, except in politics.
Momentum - In a start-up industry, momentum builds success while stagnation breeds failure

As I've said before, I can only talk in-depth about High Country Club because I've done extensive research on them and became a member.  Here's how I rate them on my above biz criteria:


Biz Plan - HCC is on the second year of a 10 year plan ... and they are running way ahead!  My opinion is that the plan is good, realistic and very doable.  HCC also has good exit strategies.

Management - HCC Management is comprised of a small group of commercial RE Brokers and a corporate account that work tirelessly and have been together from the beginning of the club.  Having met with them in their offices, my personal opinion is that they have a genuine passion for their business.

Sales - I believe that HCC is second only to ER in terms of adding members over the recent past (last year, quarter, month, etc.)  'Nuff said.

Capital - HCC started with modest capital but Management always realized the need for cash reserves.  They are now in their second PPM and have great capitalization.  This has allowed them to purchase properties ahead of membership and secure members refundable deposits.  They also have contingency reserves for the blips in business that the doom-and-gloomers like to discuss so much.

Momentum - Need I remind you which DC has more TUG members and which DC we talk about the most?  Also, see "Sales" above


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