The value of your family-owned sports and fitness center may be one of the largest assets in your marital estate. As a result, it is essential for both spouses to know and understand the exact value of their business when contemplating divorce. Simply guessing at the value or using rules of thumb, or having someone who is not an expert in the sports and fitness industry could result in a valuation that is either way too high or way too low.
That’s where Sports Club Advisors can help. As experts in the sports, fitness and leisure industry, we offer a wide range of business valuation services to spouses contemplating divorce, including a Calculation of Value, a Broker’s Opinion of Value, a Section 59-60 Valuation, and Expert Witness Testimony.
Calculation of Valuation
A Calculation of Value is a detailed financial model that estimates the fair market value of a sports or fitness center based on its historical performance, future prospects, and market conditions. The purpose of this valuation is to provide an estimate of value that the parties can use in divorce settlement negotiations. This is the most cost-effective option, but the results from this approach are the same as in the other valuation approaches we use. We use the same financial model and the same valuation practices and principals as in the Broker’s Opinion of Value and the Section 59-60 Valuation, the only difference is we don’t write up a formal report with the results.
Broker’s Opinion of Value
A Broker’s Opinion of Value starts with a Calculation of Value and then adds a cover letter that explains the information we reviewed to prepare the valuation, the methodology we used, and our conclusions. This is often helpful if you need to present the valuation to a third party and you don’t want them to have to interpret a financial model.
Section 59-60 Valuation
A Section 59-60 Valuation is the highest standard of valuation. It gets its name from the section of the Internal Revenue Code that spells out what the IRS requires in a valuation. This standard has been adopted by most courts and is used whenever litigation is required. A Section 59-60 Valuations requires a trained, experienced appraiser to gather, analyze, and report on the financial performance and future potential of the business. This unbiased process removes subjectivity and supports a company’s true value. This is the most expensive option, so we recommend starting with a Calculation of Value or a Broker’s Opinion of Value. We can always update a Calculation of Value to a Section 59-60 Valuation if a settlement can not be reached and litigation is ultimately required.
Expert Witness Testimony
Rich Jackim and Jim Bates, the founders of Sports Club Advisors have a lot of experience serving as expert witnesses in divorce matters involving sports, fitness, and leisure-related companies. We are prepared to present our findings to a court and to explain our process and methodology in an objective, neutral manner.
Why Work With Sports Club Advisors to Value a Sports & Fitness Center?
The valuation professionals at Sports Club Advisors are committed to ensuring you receive the most accurate, efficient, and easy to understand business valuation of your sports or fitness center.
Our valuations are prepared by Rich Jackim (author of the $10 Trillion Opportunity, Designing Successful Exit Strategies for Middle Market Business Owners) and by Jim Bates (Business Valuation for Dummies) who are experts in all areas of business valuations. We are committed to provide you with an intelligent, informed analysis of your business and assure you of 100% confidentiality from start to finish.
Hidden Factors that Affect the Value of a Sports or Fitness Center
Personal Goodwill – Personal goodwill is the value of your business that is the direct result of your personal involvement in the business. The best example of this in a sport and fitness center is when the owner teaches classes or provides private personal training services and had built up a client list of personal clients. If that spouse were to leave and go to work at another fitness studio or training center, it is very likely that many or all of these clients might go with that spouse. The value of the personal “book of business” is that spouse’s personal goodwill. Since personal goodwill is not a part of the marital estate so it is important that both spouses understand whether personal goodwill is present in their business and how much of the company’s value is attributable to personal goodwill.
Term Remaining on Lease – The term remaining on a fitness center lease has a big impact on the business value. It there is not at least 3 years left on the lease a potential buyer will not have enough time to realize a return on their investment, so the value of the business goes down. The same is true if the lease can be renewed but at a much higher rent. The higher rent means lower EBITDA, which translates to a lower value.
Adjusted EBITDA vs Seller’s Discretionary Earnings – Most business brokers value sports clubs and fitness studios based on seller’s discretionary earnings or SDE. SDE is equal to all of the cash flow a company generates. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It reflects all of the cash flow a company generates, less a market-based salary for the owner who works at the club. This is very important if one or both of the spouses work in the fitness center. If you value your fitness center based on SDE you will overvalue it because you are not taking into account the salary a new owner would need to pay to replace you.
Value of Intellectual Property – Some health clubs and sports-related businesses have built up a valuable portfolio of intellectual property that is not reflected on the balance sheet or income statement. For example, we sold an organizer of professional kickball tournaments about a year ago. They hosted 10 professional kickball tournaments around the country each year and they videotaped each game as well as the national championship. Kickball enthusiasts from around the world would then sign up and pay a monthly fee to have access to watch these games. About 50% of the value of this business came from the EBITDA it generated, but the other 50% came from the revenue potential represented by this video library and licensing platform. If your fitness center has developed a proprietary app or training program, it may represent significant value that is often overlooked.
Membership Trends – To accurately value a sports or fitness center it is essential that the valuation expert look at membership trends to understand membership attrition rates, membership dues trends, changes in membership types, and other key membership data. Clubs with high member retention rates and increasing dues trends are much more valuable than a fitness center that has 50% membership attrition and is having to lower dues to try to attract new members.
Competitive Analysis – The value of any business, including a sports and fitness center, is based on the expected future performance of that business. As a result, a valuation expert should look at who the center’s competitors currently are, and what competitors are opening up, to understand what impact, if any, the changes in the competitive environment may have on the future performance of the business.
Market Area Analysis – The value of a fitness center or sports club is directly related to the demographics of its local market area. As a result, to get an accurate valuation of your fitness club, the valuation analysis must determine what changes if any are likely to occur in your market area. Is a large new employer moving into the area? Is a developer building a large new apartment complex in the area? Any material changes to the demographics in your market area can have a big impact on the value of your fitness center.
If you own a fitness center or sports club and are contemplating a divorce, you owe it to yourself to seek competent, qualified advice from professionals who understand the sport, fitness and leisure industry.
Contact us today to learn more about the valuation process.
Selecting the right damages expert witness can make or break your case. Knowing how to pick the right expert is key to obtaining a successful outcome.
Choosing the right expert for a litigation matter goes beyond just checking that the person has the right credentials to act as an expert on financial damages. It is equally important that the expert can connect with the judge or jury, and educate them about how the available data and other information supports your client’s position.
Know What Skills Your Expert Witness Must Have
Expert witnesses are often referred from one attorney to another, however, when you need an expert with a very specific skill set, like expertise in business valuation and mergers and acquisitions issues related to the sports, fitness and leisure industry, clients and law firms do research to identify potential experts.
When picking an expert witness it is critical that you and your attorney know exactly what skills you want your expert witness to have. Richard Jackim, the Managing Partner at Sports Club Advisors, is a former mergers & acquisitions attorney and an experienced investment banker who has been involved in over 25 mergers and acquisitions in the sports, fitness and leisure industry, has performed over 90 valuations of sports & health clubs, fitness centers, and boutique fitness studios, and is familiar with franchise agreements and the world of franchising. Jackim earned his law degree with honors from Cornell University Law School and his Master of Business Administration with honors from the Kellogg Graduate School of Management at Northwestern University. Rich also developed and taught the Certified Exit Planning Advisor program offered through the Booth School of Business at the University of Chicago. A copy of his expert witness curriculum vitae is available here.
In addition to the right credentials, an effective expert witness must be able to communicate in a clear, concise, and articulate manner. He must come across as knowledgeable, accessible and self-assured, but not condescending. The ability to build rapport with the judge and jury is essential; and when both sides present a strong, technically sound case, a jury often favors the side whose expert was able to communicate the issues more clearly or convincingly. To that end, we offer clients and their attorney’s a free, one-hour initial assessment of their claims so they can determine if our approach and communication style meets their needs.
Richard Jackim is a personable and knowledgeable expert and has a unique ability to present complicated issues in a clear and concise manner that connects with judges and juries.
Credibility is Key
An expert must also be polished and unflappable in the face of tough, sometimes seemingly stupid questions from opposing counsel. An expert witness must be able to answer questions about his background and experience to withstand a Daubert challenge. It’s critical for the attorney to have an upfront conversation with the expert to ensure they are of good character; have worked for both plaintiff and defendant; learned of any positions they may have taken that are adverse to the position taken in this case, whether through testimony or through publications of an article; and whether they have been Dauberted.
Richard Jackim’s top-tier academic credentials, plus his 30 years of business experience including practicing mergers & acquisitions law, and leadership positions at several leading investment banking firms, provides him with unique qualifications as an expert witness. His opinions are based on market realities and actual transactions, not just financial theories. As a result, he can speak to industry best practices and what is “market”.
An Expert’s Experience = Your Advantage
It’s also important that you select an expert witness who has experience testifying in a courtroom or providing deposition testimony. This experience enables them to have a clear understanding of the moving parts of a case, gives them an advantage by being able to understand how litigation and depositions work, allows them to anticipate the kinds of questions opposing counsel might ask, and helps you and your attorney understand the key weaknesses in the opposing expert’s presentation.
Richard Jackim has consulted on over thirty-two different litigation matters, testified in six depositions, and provided expert witness testimony in two trials. His experience as an industry expert and as an expert witness helped the parties settle thirty matters without the need to go to trial. On the two matters that did go to trial, Jackim’s clients won both matters on the merits, with the judge stating in one case that Jackim’s testimony was clear and convincing and could not be refuted by the opposing expert witness.
Areas of Expertise for Sports Businesses & Health and Fitness Centers
- Business Valuations
- Financial Damages (lost revenues & profits)
- Valuation of Membership Lists
- Valuation of Personal Goodwill
- Earnout Disputes
- Lender or Creditor Disputes
- Shareholder Disputes
- Buyer & Seller Disputes
Engage An Expert Witness as Early as Possible
For these reasons, we encourage clients and their attorneys to contact us as early as possible. Early collaboration provides us with an opportunity to help you and your attorney to discuss strategy. Ideally, we would be engaged early enough to assist in formulating requests for discovery. As a well-versed damages expert, Jackim knows what information is needed to ensure a thorough and supportable analysis. In addition, engaging us early in the process allows time to think through the issues and help you and your attorney develop the most cost-effective strategy to present your case.
In the event we find we cannot support your position based on the information provided, knowing this early on can give you time to either revise your strategy or find a different expert. Remember, unlike attorneys who are advocates for their clients, your expert witness should be a neutral, third party whose opinion is objective and unbiased. Jackim has built an impeccable reputation by providing clients with honest, objective, advice based on the available facts and his years of industry experience.
As an experienced damages expert, Jackim is familiar with recent case law in the subject area, as well as the best health club and fitness center business practices and mergers and acquisitions norms. He understands his role and can be the deciding factor in your case if you choose to use his knowledge, experience, and credentials. For a free initial consultation, please contact Richard Jackim at email@example.com or at 224-513-5142.Read More
Key Performance Indicators Essential for Fitness Club Success
At IHRSA 2016, Daniel Gonzalez, chief financial officer for Universal Athletic Club, shared his thoughts on how to use key performance indicators (KPI’s) to drive success for fitness clubs.
Gonzalez gave several reasons to define and monitor KPI’s as a club owner or operator:
- Define a clear path for your organization
- Clarify performance expectations
- Manage more objectively
- Focus your staff’s attention on what is really important
- Run more effective meetings
- Hold staff accountable
As a club owner, it’s important to keep two specific key traits in mind when understanding KPI’s. KPIs need to be actionable and results-focused
In order to develop the most effective KPI, Gonzalez stressed the need to identify the primary business goal or result you want your club to achieve. Every staff member should have an ongoing quantitative KPI or two and be able to answer the question, “Did I have a productive day or week that helped the club achieve this goal?”
Gonzalez offered five characteristics of key performance indicators.
Simple: Need to be both comprehended and measurable. KPI needs to prompt decision.
Aligned: KPIs need to be developed from overall strategic goals of the organization and translated into actionable daily operational tasks.
Relevant: Applicable to respective decision makers within various levels of the organization or department.
Measurable: To analyze positive and negative variations from a goal.
Achievable: The goal of each KPI should be reasonable and attainable or else it may negatively impact team morale.
Timely: Should be monitored and reported on a regular basis via a dashboard or other method.
Visible: Goals are achieved more readily if staff members are aware of KPI’s and progress towards goals.
Gonzalez suggests that a fitness club’s KPIs, should revolve around three goals:
Attract: Gain new prospects
Sign: Acquire a new member
Retain: Create loyal members
Sports Club Advisors knows that key performance inducators are an essential component of building the value of every fitness club. Contact us if you are interested in developing a value enhancement strategy for your sports and fitness facility.Read More
How do you maximize the value of your fitness club or business? What’s the difference between a club worth $150,000 and $1,500,000? Health, fitness and sports clubs and related fitness businesses typically sell for between 3 times and 6 times their cash flow. That’s a big range, but where you fall in that range is up to you.
In order to maximize the value of your club or business, remember that there are three basic categories of factors affect the value of a fitness club or business: return on investment, risk profile, and growth prospects.
Return on Investment
Buyers look to the cash flow of your business or your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to see what kind of pay back they will get on their investment. As a result, if a buyer offers you 4 times EBITDA for your club, they are basically saying that it will take them 4 years before they will recouped the purchase price and begin seeing a return on that investment. As a result, doing whatever you can to improve your cash flow or profitability will have a multiplier effect when you sell your club or business.
The risk profile of your club club or business is largely subjective and based on the buyer’s impressions. Their impression of risk directly affects how long they are willing to wait before they see a return on their investment. So, if your club has a higher than average risk profile, buyers may only be willing to pay you 3 times EBITDA, because they are concerned about the long-term prospects of your business.
Here is a list of some of the factors that buyers look at to determine the risk of a particular business:
- Are the long-term and short-term trends in revenues and earnings positive or negative?
- Is total membership stable?
- Are financial statements complete and accurate ?
- Is operating data presented in a clear and concise way?
- Does the business have an experienced management team willing to stay on after the sale?
- Are margins at least equal to industry averages?
Buyers are basically buying the future performance of your fitness club or business. As a result, to maximize their return on investment they want it to be bigger and more valuable when they decide to sell it years in the future. As a result, buyers will try to project how they could grow your business once they own it. Help them see the growth possibilities by understanding the following:
- What are the prospects for increasing overall membership?
- How successful would we be in introducing new programs?
- What other sources of revenue could this club or business generate?
- Could we grow by acquiring other clubs in the area?
- How much would it cost to expand or enhance the club’s current facilities?
Small changes you make today can have a huge impact when you decide to sell. Contact Us if you would like to learn more about how you can maximize the value of your sports club or business.Read More
Finding a great sports and fitness club or business to buy is a lot hard work. Most buyers review dozens of deals each month, and many buyers will evaluate hundreds of deals before they find a club worth acquiring.
Part of the challenge is that there are far more buyers than sellers of quality clubs. Consider this: Sports Club Advisors has over 2,000 registered buyers who want to receive notices when we have a new opportunities for sale, but in most years we only bring 6-10 new clients to market each year.
The problem is not just limited to a lack of sports and fitness club businesses for sale. Buyers routinely complain about how hard it is to find a transaction that is worth pursuing. Common complaints we hear from buyers include:
- Unrealistic expectations of value on the part of sellers
- Inaccurate or incomplete financials or operating data
- Hidden liabilities like unresolved member complaints or improper payment of independent contractors
Given these challenges, how can you increase your chances of finding a great sports or fitness club to buy? Here are six tips to help you with your search.
Tip 1: Develop Clear Criteria
The best buyers act quickly. With so many buyers looking, and so few quality deals coming to market, you need to make decisions quickly. To speed up your ability to evaluate the deals, put together a clear list of your acquisition criteria. This list will act as your guide to help you determine which deals are worth pursuing and which deserve a quick pass.
Putting together a clear, well-thought out list of acquisition criteria will take some time and effort.
Your acquisition criteria should be your objective guide to evaluate opportunities, but you should always apply a subjective element to your evaluation as well. This should be your basic “gut check” about a business. If the business meets your objective criteria, do you like and trust the owners? Do you like and trust the staff? Do the members and clientele seem reasonable? If you decide you do not like a business for some reason, offer the seller or broker quick feedback and move on.
Tip 2: Register with Online Marketplaces and Brokers
There are many ways to find fitness clubs or businesses for sale, and club brokers represent only a portion of the fitness club or businesses that are for sale. Finding a good fitness club or business for sale is a numbers game. You need to look at as many deals as possible in order to find the perfect acquisition target. Registering with online marketplaces and brokers will provide alerts on any new listings. This will make your daily inspections relatively easy. To register with Sports Club Advisors, simply fill out our Buyer Registration form, and don’t forget to bookmark our Active Engagements page on our website.
Tip 3: Approach Fitness Club or Business Owners Directly
Many buyers limit their search for a sports club or gym to two places: marketplaces and brokerage firms.
However, why not write directly to fitness club or business owners to see if they would be willing to sell their fitness club or business? There are pros and cons to this approach. The pros are:
- You Get Better Deals. Writing directly to club or business owners allows you to reach club or business owners who never considered selling. It’s a numbers game so if you write enough people, you may find a club or business owner who is an absentee owner and no longer actively involved in their club or business. For these owners, selling their club has probably been on the back of their mind and your letter might just incent them to start a discussion with you.
- It Simplifies Things. When you approach an owner directly to buy their fitness club or business, it makes it simpler for the owner. He doesn’t have to hire a broker or try to sell it himself. He doesn’t have to worry about the club being “on the market” and having his employee find out. In addition, a direct transaction is often more relaxed and focused on creating a win/win transaction.
- Less competition. Sports Club Advisors has over 2,000 buyers actively looking for a fitness club or businesses to buy, but we only bring 6-10 clients to market each year. So when you do look at a good listing, from a broker you are likely competing with dozens of buyers. When you approach someone directly, you usually have the luxury of less competition.
However, contacting club or business owners to see if they would be interested in selling has it downsides too. Here are some of the cons:
- It is a numbers game. Many of the buyers we’ve worked with report several challenges, beginning with getting a good list. Buyer often say that it takes them weeks to put together a list of targets that they think will fit their acquisition criteria. Since a good response rate is between 1-3% depending on whether you call or write, that means you will need to call or write email 100 people just to get 1-3 responses. Then they need to find the time to call or send letters to 200-300 potential targets and then find the time to follow-up with each of them a month later.
- Rejection is Part of the Game. Because the response rate is between 1-3% that means that 97-99% of the owners you contact will simply ignore you. The polite ones might respond by telling you they are not interested. The less polite ones will yell at you and tell you not to bother them.
- Opportunistic Sellers are Poorly Prepared. When you find an opportunistic seller he or she will typically not be prepared. They may not have financial statements and operating data prepared, reviewed and ready to be shared. This can drag out the process and you may find yourself investing a lot of time and energy to collect the information to review only to discover months later that the opportunity does not meet your acquisition criteria.
- Sellers may be unrealistic. When you approach a seller unsolicited, it naturally puts them in the “driver’s seat”. As a result, a seller may have no idea what their club or gym is worth and as a result may pull a number out of the sky, or figure the club must be worth enough to allow them to retire. Either way, even if the club meets all of your other criteria the seller may have unrealistic expectations of value that you cannot change.
Tip 4: Network, Network, Network
Wouldn’t it be nice if deals just came to you? Well, they can if people know are seriously interested in buying a fitness club or businesses and you have the money to do so. The best way to get known as a serious buyer is to network within the industry.
Conferences and networking events are a good way to meet many people and get the word out, but it can be expensive, especially if you are traveling around the country. Instead, we recommend that you network by telephone and email with a targeted list of industry leaders. Send them your acquisition criteria. Tell them how much money you have to invest and the source of your capital. Then stay in touch with them on a monthly or quarterly basis to update them on your search.
Tip 5: Hire a Merger & Acquisitions Advisor to Help You Source and Evaluate Deals
As previously mentioned, finding the right deal is a volume game. You could easily spend most of your time reading through email notices, browsing online marketplaces, and networking. Rather than spend your time doing this, you might find it simpler to hire a club broker or mergers and acquisitions advisor to conduct a buy-side search for you. Follow the tip above and develop a criteria checklist. Then hand this list over to the club broker and have them find deals for you. They can either run a “passive” search or a “pro-active” search for you. In a passive search, they will screen their prospects and active clients, sort through notices and online marketplaces and contact you when they have something that they think might interest you. In a pro-active search, they will do the above, but also pro-actively reach out to club owners on your behalf using a combination of letters, emails and cold calls to find opportunities for you that meet your acquisition criteria.
Tip 6: Always Explain Why You Are “Passing”
Because buying a club or business requires evaluating lots and lots of deals, you’ll likely make a few mistakes along the way. One mistake many buyers make is to dismiss a deal based on a misunderstanding of the business. If you mistakenly pass on a good opportunity it could take months to find another good club or business. The best way to avoid this mistake is to always tell the broker or seller why you are passing or not pursuing a particular business. Not only will the seller or broker appreciate the feedback (brokers will often give preference to buyers who give regular feedback), but if you are mistaken, you’ve given them the ability to help correct any misconception and could save you a lot of time and aggravation.
Finding a great club or business to buy is a numbers game, but it is also about being smart and designing an intelligent search and using the right resources to help you identify and evaluate deals properly. Most importantly, be patient. It can take 6-24 months to find a quality club or fitness facility for sale, but when you do, you’ll be glad you did.Read More
According to a recent study released by Dr. Lisa Neirotti, a professor at George Washington University, travel sports or “sports tourism” is an $8-billion industry that accounts for 14% of all tourism. As a parent with two children who competed at the national level in high school, a good share of our time and household income was spent on traveling to tournaments around the country. But sports tourism doesn’t stop with youth sports. The adult travel sports segment is growing too as seen by record numbers at regional marathons and tennis tournaments around the country with many adults traveling long distances to compete.
Sports Club Advisors believes there are 10 trends that will affect the future of the travel sports industry in 2017 and beyond:
#1 – Facility Development. Designing and building a “premium” facility is becoming increasingly important to make the experience memorable and enjoyable for all participants, from athletes to spectators. The recent development of premier indoor and outdoor soccer facilities around the country is evidence of this.
#2 – Ownership Structures. In the past local communities, sports commissions, or counties have financed, owned and operated facilities. However, increasingly, we are seeing that well-run privately operated sports facilities create better overall experiences and are more successful. We expect more public-private partnerships to develop over time.
#3 – Social Media. Social media is not just for marketing events. It has become a tool to provide real time updates and highlights during events, changes in schedules and VIP sightings. Due to flexibility, convenience and cost, apps have replaced the printed flier or guide.
#4 – Volunteers. Many events are run by a combination of paid employees and volunteers. A pending lawsuit filed by a volunteer alleges she should have been paid for her work at a sporting event. The outcome of this case could have massive implications on the way events are organized and staffed, not to mention the economics of sporting events.
#5 – Partnerships. We are increasing seeing groups partner to create a world class sporting venue. Public private partnerships have been around for a long time, but we are now seeing partnerships between owners and concessionaires, service providers, sponsors, sports equipment manufacturers, etc. We expect this trend to continue.
#6 – Sponsors. In the long-term, sponsor involvement is more important than a sponsor’s money. It is arguably more valuable to have the Chicago Cub’s name associated with a baseball tournament or camp than to have their financial support. Through well planned involvement, the sponsor will get more out of the experience and so will you. Get to know your sponsors and let them get to know you before you ask for money.
#7 – Bid Fees. Host cities are less willing to pay bid fees, and are instead looking for a financial partnership with event organizers. This shared risk-reward model is becoming more common every day. In addition to diversifying risk, many host cities want a share in the financial results (just the upside) of the events they host.
#8 – Housing. Securing adequate hotel space for events and negotiating rebates and commissions with hotel operators is likely to become more of a challenge. At least one major hotel brand is exploring capping commission and rebate programs. The challenge of protecting rate integrity and of tracking room blocks and rebates (especially in smaller communities) may force the industry to revisit how housing is secured for travel sports events.
#9 – Helping Others. The most successful events have a charitable side to them that make participants feel good about competing. From charity runs to playground clean-ups these events do well by helping others. The question is, “How can we engage our target market and create a positive impact on our community.”
#10 – Creating Experiences. The NCAA Women’s Final Four slogan, “It’s More Than Three Games” says it all. Athletes, young or adult, and spectators at events want their trips to be an experience for the entire family. That means event organizers need to plan supplemental activities for family members to do (apart from the sporting event or competition) that will create memories. This is equally true for world-class running events to youth travel gymnastics tournaments. The more you invest in creating a memorable experience for all participants, the more successful your event and facility will be.
About the Author: Rich Jackim is a licensed attorney, an experienced investment banker, a sports industry entrepreneur and the managing partner of Sports Club Advisors, Inc. Sports Club Advisors is a boutique mergers and acquisitions firm that provides financial advisory services to clients in the sports, fitness and leisure industry. Rich may be reached at firstname.lastname@example.org.Read More
When it’s time to grow your fitness business, how you grow is important. There are two ways to grow your business: organic growth and growth through acquisitions.
Organic growth basically means doing what you currently do, just doing more of it or doing it better. That means increasing the amount of the products or services you sell. You can do this by fine tuning your marketing and operations, or entering new marketing by introducing new products and services or opening new locations. This is how most businesses grow. It takes time and effort, but it is tried and true. The only risks are those that are inherent in operating your business.
Growth through acquisitions, on the other hand, is buying companies and consolidating them into your own. It can be a good way to rapidly expand your business. It sounds easy, but a famous study at Harvard Business School showed that almost 50% of acquisitions do not live up to the buyer’s original expectations. So what determines a good acquisition from a bad one? How to you decide if it makes more sense to buy another club or business, or just start one from scratch? Should you adopt an acquisition strategy just to get bigger, or are there other strategic objectives to consider?
These questions lie at the very heart of every CEO’s decision on how to grow his or her business in a way that creates value for the company’s stakeholders – its owners, its employees, and its customers or members. While buying companies may sound simple, ensuring that you buy the right company is still as much art as it is science. When you acquire and merge two companies together, the result must be greater than the sum of the parts or the acquisition does not make sense.
A study published in the Harvard Business Review years ago concluded that successful acquisitions must do at least one, but preferably two things.
Eliminate Redundant Expenses
The first factor is an elimination of redundant expenses. What this usually means is that the acquisition or merger allowed the combined company to reduce costs. The largest of these cost savings are usually in the form of reduced payroll or reduced headcount. When two companies are combined, they typically don’t need as many people doing the same jobs. The second biggest expense reduction comes from the fact that the combined companies don’t need the same number of offices, warehouses, factories or retail locations. So rule number one is be sure the proposed acquisition will reduce your overall cost structure and enhance your margins.
Gain New Know-How
The second factor is a transfer of knowledge. Each company has its own proprietary knowledge base or skill set. Some companies have a competitive advantage over other businesses in their industry because they have developed proprietary products, a unique service models, an excellent training program, superior marketing or purchasing program, or some other skill or knowledge. When a company acquires another company, this knowledge or skill is an “off balance sheet asset” that is a big part of the value of the acquisition. The transfer and integration of these skills, requires a lot of work and careful thought, but is a major factor in whether or not the acquisition is successful. So rule number two is to be sure the acquisition you are considering brings some unique knowledge or competitive advantage to your business.
In the world of mergers and acquisitions, these factors are referred to as “synergies.” In our experience, growing for growth’s sake alone does not make sense. Growing to capture synergies is the key to growing through acquisitions. That said, one of the biggest mistakes buyers make is to underestimate how long it will take to see the benefits of these synergies.
Consider Impact of Culture
The largest obstacle in the realization of these benefits comes from cultural differences between the two companies. The stronger a company’s culture, the harder it is to assimilate a new one. In our experience, when culture and strategy clash, culture always wins, so buyers need to invest a lot of time and effort to understand their culture and the culture of the company they are thinking of acquiring to see if the cultures are compatible. Understanding and quantifying the synergies of a possible acquisition and helping to determine if the cultures are a fit are the keys to making a successful acquisition.
So, in short, when deciding whether to pursue an acquisition growth strategy, be cautious and get good advice from knowledgeable experts. Acquiring another company can be a transformative event for your company when done well and with proper thought. However, without a careful and objective process in place, it can be a disaster.
Rich Jackim is a partner at Sports Club Advisors, Inc., a leading mergers and acquisitions firm that serves the sports, fitness and leisure industry.Read More
2) Proximity or Travel Time. In suburban markets, where people drive to get around, clubs draw approximately 70% to 80% of their members from an area within an eight minute drive of the club. This is the club’s primary market. The club’s secondary market, from which it can draw approximately 20% of it members is an area within a 12 minutes drive from the club. The remaining 10% of a club’s members may come from outside of the club’s primary and secondary markets.
It’s important to note that these markets are defined by travel time, and not miles or distance. In every market, these two factors are distinct. Note, also, that markets can be defined as travel time from either a person’s home or office. Many health club demographic studies show that up to 80-90%% of a club’s members come from within 12 minutes travel time of the facility. When measuring travel time, you should use the most popular routes used by local residents during peak times.
Peak times are the peak club usage times such as between 6 and 8 a.m. or between 4:30 and 7:00 p.m., Monday through Thursday. In most cases these times are also rush hour so travel times are at their longest. In most suburban markets, 8-12 minutes of travel time is equivalent to approximately three or four miles from the club, and it can be as low as two miles in congested areas or during peak commuting times.
In urban markets, where parking is limited and car travel less popular, the club’s primary market is an area within an 8 minute walk or commute of the club’s location and a 12-minute walk/commute for the secondary market.
These markets need to be researched and plotted precisely. These concentric rings on a map should show you the primary, secondary, and total market for a club’s location. Once a club’s total market is calculated, you should use various demographic services to obtain essential information, like the number of people who live or work within the primary and secondary markets, their ages, their median household incomes, home ownership, etc.
3) Household Income. There is a strong correlation between median household income in a market and fitness club membership and dues. While roughly 20% of the general population are members of a health or fitness club, member penetration rates among high-income earners can often exceed 30%. Conversely, when household income falls below $25,000, only 7% of that population are members of a health club.
Household income is also a key determinant of membership dues rates. Generally speaking, in markets where the average household income is $75,000 or more, members are comfortable paying monthly membership dues in the $60 to $125 range. .
In markets where the average household income is between $50,000 to $75,000, the market will support monthly dues in the $45 to $74 range. And where average household income is between $20,000 and $50,000, the market will support monthly dues in the $10 to $44 range. However, you need to be aware of the competitive environment in your primary market. In the last 10 years, the success of the of low-priced clubs has created downward pressure on dues in many markets.
4) Educational and Professional Attainment. Educational or professional attainment levels are two other factors that can predict demand for fitness clubs. In general, the higher the educational attainment in a market, the higher the overall demand for health and fitness clubs serving that market.
It is interesting to note that the overall health & fitness club membership rate among full-time college students is 24%; similarly the health club membership rate among people with advanced degrees (masters degrees, doctorate degrees, etc.) is 25%. However, among high earners (making $75,000 or more) but who did not go to college, the membership rate is less than 12%.
5) Competition. It’s important to remember that all of these factors help predict total market demand in a club’s market. As a result it is also helpful to plot the club’s competitors on this map so you know how many other clubs you are competing with for the total number of potential fitness club members in your club’s market. For example if the feasibility study shows that there is total market demand of 15,000 potential fitness club members in your club’s market and there are six other clubs in your market (or that have markets that overlap yours) then the total projected demand for your club would be 2,500 members.
Because of the importance and complexity of assessing demand in a club’s market, it is essential that a feasibility studies be conducted by an experienced third party who is not a developer, architect, or builder. This feasibility study should then drive a financial model so you as the buyer, investor or lender, can do a sensitivity analysis to understand the impact that different levels of demand and different pricing structures will have on the overall success of the club.
If you would like to schedule a free consultation with Sports Club Advisors, feel free to Contact UsRead More
The goal of any successful transaction should be to benefit both parties. The following legal documents make sure that all of the terms and disclosed and agreed to so that there is no misunderstanding later on.
The goals of these legal documents are to :
- Create a safe and secure environment in which both parties feel comfortable sharing information and conducting due diligence
- Define the terms of the transaction including what is being sold or purchased, the purchase price, terms, and the buyer and seller’s obligations
- Protect both parties against misrepresentations and fraudulent actions
- Provide a process of legal remedy should that the buyer and seller’s agreements be violated.
Below are just a few of the most common documents you can expect to run across in buying or selling your leisure or fitness related business or health, fitness or sports club.
Letter of Intent
A letter of intent provides the general framework of a final transaction. Although it is not a binding contract like the final purchase agreement, it certain sections of the letter of intent like confidentiality, remedies, and non-compete provisions are often binding.
The letter of intent provides a high level outline of the terms that the buyer is proposing, including the total purchase price, what is being purchased, the amount of seller financing requested and the terms, the expected closing date, a period of exclusivity to allow the buyer to do due diligence, and any other elements or terms that are important to the buyer.
Sellers usually respond to the letter of intent with a counter offer. Once everything is accurately documented and agreed to in the letter of intent, the final purchase agreement should mirror the terms in that letter of intent. If during due diligence the buyer discovers some facts that were not disclosed or that we misrepresented, i.e., the financials are different that presented or material facts were not disclosed prior to signing of the letter of intent, the final purchase agreement may account for these differences (assuming the buyer does not walk away from the deal).
The key to ensuring that a letter of intent leads to a final purchase agreement is make sure all material facts are presented and that they are accurate and verifiable.
The purchase agreement is the governing document in the transaction. It is often 30+ pages long and includes all of the terms and provisions of the deal and is the binding agreement that governs the transaction. All other closing agreements (non-compete agreements, employment or consulting agreements, asset allocation agreements, promissory notes) are tied to this agreement.
Drafting the purchase agreement is typically held to the end of due diligence because of its importance. Because it is time consuming and expensive to draft this document, buyers will only instruct their attorneys to prepare the purchase agreement once they have completed their due diligence and are comfortable with everything about a company.
In some highly competitive transactions, a buyer may be willing to provide a conditional asset purchase agreement instead of a letter of intent. The goal here is to demonstrate the buyer’s eagerness and commitment to getting a deal done, but this is pretty rare.
Buyer Promissory Note
If a transaction involves seller financing, and the financing is in the form of a seller loan, one of the key transaction documents will be a buyer’s promissory note. The promissory note is an agreement that spells out the amount of seller financing provided to the buyer, the payment schedule, interest rate, and default remedies related to the seller financing.
A promissory note is typically tied to a purchase agreement so that both parties (and the courts if necessary) understand the context under which the note was issued.
The asset allocation is an agreement between the seller and buyer about how the purchase price should be applied to the different assets the buyer acquired. The asset allocation agreement itself is not a complex document, but its implications can be significant from a tax standpoint to both the buyer and seller. Sports Club Advisors recommends that buyer and seller consult a tax attorney or tax advisor regarding the implications of the asset allocation for their deal before an offer is accepted and then again before signing the Asset Allocation Agreement.
Most purchase agreements include a non-compete clause within that document itself. However, many attorneys like to have the non-compete agreement as a separate document. Doing this allows the terms of the non-compete agreement to be more fully defined and to have different remedies from the Purchase Agreement. Sellers should always expect to sign a non-compete agreement when they are selling fitness center, sports club, or fitness related business. Buyers need to be assured that they will have an adequate time to recoup their investment and will not be immediately competing with the seller.
Bill of Sale
The bill of sale is a receipt that acknowledges the buyers receipt of assets and the seller acknowledging the receipt of purchase price as spelled out in the purchase agreement. It exists to protect against any claims of a lack of delivery. As a result, it should only be signed when the purchase price and assets being sold have been received by each party.
While these documents appear in every transaction, each club or business is unique, and every buyer and seller have unique needs, so it is not uncommon for transactions to require additional documents, like leases, assignments of contracts, consulting agreements, indemnification agreements, or lien waivers.
When selling your health club or fitness related business, you should hire the most qualified M&A attorney you can find to represent you. These legal documents are intended to protect you, and while attorneys fees represent an additional cost, the cost is minimal compared to the expense of a lawsuit.Read More
You may have heard the term “fair value” or “fair market value,” so you might expect that a “fairness opinion” is focused on the same thing. The truth is, a fairness opinion may be based in part on fair market value, but there the similarities end. Let’s look into exactly what a fairness opinion is and when they are used. It’s best to start with an example. Let’s assume you are CEO of a family-owned business and you have several family members who are shareholders, but who are not active in the business. The shareholders have decided to sell the company and have entrusted you as CEO with that responsibility. You engage a business broker like Sports Club Advisors who finds a buyer and helps you negotiate a deal. The deal is ready to close when one of the minority shareholders claims the price is too low, or worse, the deal closes, then the minority stockholder decides to sue you, claiming the selling price was too low. A fairness opinion prepared as of the date you accepted the offer, or as of the closing date, provides an objective, third party opinion that the value paid for the company and the terms of the deal agreed to are reasonable and “fair”. So in essence, a fairness opinion is designed to protect corporate officers from complaints by shareholders that the officer violated their fiduciary duty to the shareholders by accepting a value or terms that were not reasonable.
A fairness opinion is usually in the format of a letter, about two to six pages long, that sets forth the factors or items considered, and a conclusion on the fairness of the selling price along with standard caveats or limitations. These caveats usually state that all the information relied on has been provided by others and not independently verified and that the actual assets of the business have not been valued.
A fairness opinion is usually prepared by an expert in business valuation such as a business appraiser or a business broker. The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert. It does not contain any recommendations on whether the deal should be accepted or rejected.
Fairness opinions are often used in the sale of public companies and when a private company has a large number of shareholders. It helps ensure that the board or the officers of the company are looking out for the best interests of the stockholders, at least as far as the selling price is concerned. A fairness opinion is especially important in the sale of a privately held companies if the company is being sold as part of a divorce settlement or the dissolution of a partnership since it helps ensure that the value arrived and negotiated between the parties is fair and reasonable and in the best interest of the shareholders.
If you are interested in getting a fairness opinion for a transaction you are contemplating, please contact Richard Jackim at 224-513-5142 or at email@example.com.Read More