FEATURE --by Charles Dupuy
May 19, 2000
Should a Timeshare Company be a publicly held company? A few years ago Wall Street thought so, as several timeshare
companies were successful with initial public offerings. Today, however, with the recent problems of Sunterra,
the answer to that question may be no. Personally I do not believe that a timeshare company should ever be a public
company unless at least a portion of its business is in other related companies. My belief is founded on the fact
that a timeshare company is the only business that loses money every year, but still has capital to pay its bills.
To understand that statement one must look at the nature of the business.
To start a timeshare resort an investor needs a certain amount of equity capital and the ability to arrange possible
development loans and lines of credit for the funding of receivables. In the Orlando market, the amount of equity
capital would have to be large enough to acquire the land and build the first phase of the resort. As for arranging
a line of credit for receivables, an investor would also have to have the ability to prove past marketing and sales
success in the timeshare industry. Once everything is in place sales can begin and cash flow can be tracked.
The sale of a timeshare interval is unlike any other sale. A customer may wake up in the morning and think of purchasing
a car, an appliance, a new suit of clothes, or anything else possible, but no one ever woke up and said "I
want to look at a timeshare." It is the only product that has to offer a free vacation or other gift to get
the customer in the store. Once in, the customer will need to be offered further incentives to purchase. This causes
the cost of the sale with regards to marketing and sales commissions to average forty to fifty percent. The product
cost is typically twenty-two to twenty-seven percent. If it is averaged, the cost of sale with regards to marketing,
sales, and product is seventy percent. If a resort is run very well, the general and administrative expense can
average five to seven percent depending on the yearly sales volume. The total cost of sale is seventy-five percent,
which would lead to a twenty-five percent profit, or so it seems. The truth is, every sale is a loss as far as
net income is concerned. The actual amount of income from the sale, on average, is twenty-five percent. If total
cost of the sale is seventy-five percent and only twenty-five percent of the sale is income how can a business
survive? The answer to this question is the answer to the question: Should a timeshare company be a public company?
In the sale of a timeshare interval the average purchaser does not pay all cash. With the recent good economy,
the percentage of all cash sales has risen from an average of twelve percent to around eighteen percent. The balance
of the sales results in a ten-percent down payment with the balance financed by the developer. These receivables
are typically seven-year notes and a higher-than- normal interest rate. In order to survive the developer will
borrow against these receivables to raise the cash needed to cover the shortfall. Unfortunately borrowed cash is
not income. As a result the company has available cash to cover expenses but not produce a profit. If a profit
is not produced, how can a stockholder receive a dividend? The answer is that the stockholder cannot; for this
reason a timeshare company should not be a public company. How Wall Street overlooked this simple process is a
mystery.
At the beginning of this article I stated that if a timeshare company had a portion of its business in other related
businesses then it could be a public company. Other related businesses would be businesses that produce a profit.
Hotels produce profits and at the same time possible future customers. Is it not curious that Vistana was acquired
by Starwood? Carnival was to have acquired Fairfield, but that unfortunately did not happen. As for Sunterra, there
is a solution; but it would take the cooperation of the stockholders that have filed the class action suits. If
that cooperation is not forthcoming I do not see a happy ending for anyone including the stockholders. The timeshare
business is the greatest product for the vacationing public, but the companies should remain private.
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Mr. Dupuy has been in the timeshare industry for over sixteen years and has worked for many developers in Orlando. At present he is President of Charles Dupuy and Associates. He can be reached at CDupuy1947@aol.com