Buying a Caravan Park?
As specialist Caravan Park Accountants, Rogerson Kenny Business Accountants have a wealth of industry knowledge and experience in buying and assisting Caravan Park owners in operating or selling a Caravan Park. We have created a comprehensive guild explaining everything you need to know about ‘Buying a Caravan Park’ FREE for you to download here!
WHAT TO CONSIDER WHEN BUYING A CARAVAN PARK
When buying a Caravan Park, what are you actually buying?
One of the first considerations when buying a caravan park, is to consider what it is you are intending to buy.
Are you looking to buy the Leasehold Business or the Freehold Going Concern?
Briefly, a Leasehold Business is buying the plant and equipment, the goodwill and right (via a lease) to occupy land and the use of buildings for a term specified in the lease.
A Freehold Going Concern is where you buy the above listed in a Leasehold Business, along with the freehold land and fixed buildings. Please view this article for more information on the difference between a Leasehold Business and Freehold Going Concern.
What Type of Caravan Park are your considering buying?
This is important to understand the different types or uses a caravan park may have. Often, a caravan park can have multiple uses.
A “Tourist Park” is fairly self-evident. The Caravan Park relies upon tourists staying at the Caravan Park, usually in a tent, caravan or cabin for a set holiday period. These types of Caravan Parks are usually found near the beach, a river / lake, bush setting or other type of attraction. Tourist Caravan Parks have busy periods (think school holidays, Christmas, Easter, long weekends) and will have quieter times also. Typically a Tourist Caravan Park can grow at a quicker rate than other types of Caravan Parks and this is usually achieved if that caravan park can increase the number of cabins and thus revenue within the caravan park.
“Annuals” in a caravan park means people will have a permanent caravan or cabin at the park, pay an annual fee to the caravan park and have the right to attend the caravan park for a certain number of days per year. Annuals are usually a good, steady source of revenue and often a fairly low maintenance. Annuals in your caravan park can usually compliment a tourist park and this is the most common “mixed” type of caravan park we see. It provides a good mix of steady, guaranteed income and the “boost” of having tourists stay in the caravan park.
A Caravan Park with “Permanents” refers to people living in the Caravan Park on a permanent basis. These people rent their cabin accommodation and the Caravan Park provides appropriate amenities, keeps the grounds, the supply of water and power, etc. This type of park usually does not mix with an Tourist or Annuals Caravan Park and are usually not located in tourist type areas, but closer to cities and towns. This type of Caravan Park is usually easier to operate, but with less chance of revenue growth.
A “Residential” Caravan Park is a relatively new concept. We have seen this type of Caravan Park mixed with Tourist and Annuals, but also stand alone. Residents, often retirees, will buy their block of land, with cabin (often 3 rooms and generous) and also pay a fee to the Caravan Park for amenities, grounds upkeep, security and supply of services, etc. Planning and experience is usually required for this type of Caravan Park, with approval required from the council and then the expertise of developing the blocks and building the dwellings for sale.
How much will a bank lend you to buy a caravan park?
Banks will typically lend 50% to a Leasehold Caravan Park Business and up to 70% for a Caravan Park Freehold Going Concern.
Banks will want to understand the performance of the business and future outlook, cash flows, your experience, future plans for the business, the length of lease (if a Leasehold) and any conditions of the lease.
There may be working capital requirements when you first start to operate and keep in mind, you may also have stamp duty and professional fees to fund.
A bank will require a finance application, which may include:
- Contract of sale (even if only draft)
- Historical financial performance
- Projected financial performance
- Information on the Caravan Park (usually as found within an information memorandum)
- Copy of the lease (if applicable)
- Personal assets and liabilities statement
- Information regarding your plans for the Caravan Park
- Information regarding your experience to operate a Caravan Park
Any bank will usually consider the below four elements when considering lending.
- Security. The bank will want appropriate security to protect its investment, in the case of failure.
- Equity. The bank will require equity, in line with the LVR mentioned above (50% equity for a Leasehold Business, 30% equity for a Freehold Going Concern)
- Cash Flow. Also known as serviceability. The bank will want to ensure the business can generate appropriate cash to service the debt.
- Management. The bank will want to understand your experience and will essentially need to satisfy themselves that you can operate a Caravan Park (in basic terms, pay back their loan and interest).
How is a Caravan Park Valued
There are different methodologies for a Leasehold Business Caravan Park and a Freehold Going Concern Caravan Park.
Typically, with a Leasehold Caravan Park, the methodology used in the industry is a multiple of adjusted net profit. This multiple will depend on the location, condition of the facilities, prospects for growth, length and conditions of the lease (to name a few). A multiple will usually be between 3 and 4 times adjusted net profit. Ie. If adjusted net profit if $200,000 at 4 times, $800,000 value.
A Freehold Going Concern Caravan Park is usually valued on a return on investment method. The adjusted net profit of the Freehold Going Concern, once again as per above, depending on the location, business performance, condition of facilities, prospects for growth, local conditions, etc will find a return of investment, usually between 10% and 16%. 10% being for an outstanding Caravan Park. If the adjusted net profit is $200,000 and return on investment is 12%, then $1,666,666.
We suggest you always check for comparative sales to understand the market in that location or similar Caravan Parks in other locations.
Drivers behind the value of a Caravan Park are typically:
If a leasehold, the length of the lease and the rental amount to accommodation turnover
a) The location of the Caravan Park (tourist area or not)
b) The adjusted net profit. The higher this is, the greater the base to apply a multiple or return on investment percentage
c) If a Leasehold, the length of lease, the rental amount and any conditions attached to the lease
d) The condition of buildings, plant and equipment, fixtures and fittings and facilities
f) Local attractions driving business
g) Potential for growth (this usually includes development of the Caravan Park (more sites, upgrade powered sites to cabins, etc)
h) Staff, systems and processes
i) Type of Caravan Park (tourist, annual, residential or permanent)
KEY QUESTIONS TO ASK (OF YOURSELF, THE BROKER AND VENDOR) WHEN BUYING A CARAVAN PARK
- Why is the vendor selling?
- How long has the Caravan park been on the market?
- Who is the competition? Is anyone new coming into the area? Have you undertaken a SWOT analysis?
- Is anything changing, such as local laws, zoning, major local attraction leaving?
- Understand the type of park (difference between tourist, annual, permanent, residential) and the pros and cons that the particular Caravan Park encounters as a result of their “Type”” of customer.
- The make-up of the Caravan Park (ie. number of powered, unpowered sites and cabins) – check occupancy, tariffs and assess these figures. You should really understand this in detail, which should help drive your forward projections.
- Status with compliance requirements, such as:
a) State fire authority regulations
b) Outstanding schedule of capital works (if a leasehold)
c) Title and boundary issues and
d) Local government requirements (for permits, registrations, licenses, etc)
9. Are you going to operate the business or have managers? Usually the turnover will dictate this, $1m+ can afford managers, less then usually cannot.
10. Assessment of Business Performance:
a) Three years financial accounts from an accountant
b) Adjusted net profit figures for the above years
c) These need to be tested, typically by an accountant
11. Plant and equipment list, and assessment if this list is sufficient to operate the business. All plant and equipment, fixtures and fittings required to operate the business, should be coming with the business sale, unless specified
12. Check forward bookings and understand the adjustment that will occur at settlement for amounts held in deposit / forward booking income held by the vendor. This is usually a purchase price adjustment.
13. Assess the split between goodwill and plant and equipment if buying a Leasehold Business and the same plus the freehold land if buying a Freehold Going Concern.
14. Consider stamp duty. You will pay stamp duty on the freehold component and may also pay stamp duty in some states on the plant and equipment.
15. You will need to consider your business structuring and the best way to hold the Leasehold Business or Freehold Going Concern
16. Is the transaction deemed a “Going Concern” for GST purposes. Check with your solicitor and accountant
From the outset, we urge you to use our expertise when looking to buy a Holiday or Caravan Park. We are happy to be your first call and answer any queries you may have about the industry
Rob Deayton or Mark Rogerson
03 9802 2533
Or fill in your details below and we’ll get back to you.