A Closer Look at 3 Major Factors to Consider When You Buy a Business
The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make. Buying a business can lead to great financial success or great financial failure. This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.
In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business. The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability.
Appeal Vs. Viability
Not surprising, the most important variable for most prospective owners is that the business is indeed viable. Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster.
As Carins points out, “Do you want to make money or do you want to fulfill a dream?” Sometimes those two variables can intersect, but not always and not often. In the end, it is vital to know whether a given business is, in fact, potentially lucrative.
However, as Carins points out, it is also important that you choose a business that you will enjoy. Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative. Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.
Considering Hidden Costs
The second factor that Carins looks at is the issue of “hidden costs.” One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook. Due diligence is amazingly important. For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.
Second Opinions
The third factor examined in Carins article is “Getting a second opinion.” For Carins, getting a second opinion is actually linked to due diligence. He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well. Additional opinions can help one see angles that might otherwise be missed.
Again, buying a business is complicated and will take up a good deal of one’s time and mental energy. Your friends and relatives, understand your personality and your wants and desires. Their input can be particularly beneficial.
Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.” Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.
Business Buyers Can Leverage SBA Lending
Finding the money to start your own small business can be a challenge. Over the decades, countless people have turned to the Small Business Administration (SBA) for help. A recent Inc. Magazine article, “Kickstart Your Business Dreams with SBA Lending,” by BizBuySell President, Bob House, explored how SBA lending can be used to the buyer’s advantage.
The article covers the basics of an SBA loan and who should try to get one. House notes that the SBA doesn’t provide loans itself, but instead facilitates lending and even micro-lending with a range of partners. The loans are backed by the government, which means that lenders are more willing to offer a loan to an entrepreneur who might not typically qualify for one. The fact is that the SBA will cover 75% of a lender’s loss if the loan goes into default.
Entrepreneurs can benefit tremendously from this program. In some cases, an SBA loan even means skipping the need for collateral. SBA loans can be used for those looking to open a business, expand their existing business or open a franchise.
House points out that getting an SBA loan has much in common with receiving other types of loans. For example, it is necessary to be “bank ready.” By “bank ready,” House means that all of your financial documentation should be organized, clear to understand and ready to go.
Next, a buyer would need to check that he or she qualifies, find a lender and fill out the necessary SBA forms. In order to be eligible for an SBA loan, it is necessary that the business is a for-profit venture and that it will do business in the United States. Once the necessary forms have been submitted, it can take between 2 to 3 months for an application to be processed and potentially approved.
The simple fact is that the SBA helps thousands of people every year. If you are looking to buy a business or expand your current business, then working with the SBA could be exactly what you need. Of course, business brokers are experts on what it takes to buy. Working with a broker stands as one of the single best ways to turn the dream of owning a business into a reality.
Equity Recapitalization for Private, Member-Owned Golf Clubs
Private golf clubs have felt the pinch from on-going economic turmoil and uncertainty. Over the last 15 years membership rosters have shrunk considerably. The majority of private clubs has fewer members today than a decade ago. Changing demographics, combined with fierce competition and changing lifestyles have made attracting and retaining members increasingly difficult.
Of the 14,000 golf facilities in the US, our research suggests that approximately 4,500 are private clubs. Of these, approximately 60% or 2,700 are “equity” clubs that are owned and operated by the club’s members themselves. For a variety of reasons, the number of private member-owned clubs has declined by over 20% since 1990.
For certain clubs serving the very affluent, i.e., those with initiation fees of $100,000+ and annual dues of $15,000 or more, being a member owned club will always be the preferred structure. This ownership structure allows them to be highly selective when admitting new members and they will always have enough highly affluent members who can afford to pay for this type of exclusivity.
However, for the majority of clubs, i.e., those with initiation fees of less than $100,000 and annual dues below $15,000, the member-owned business model may not be a good fit. Members at these clubs often report that it is difficult to actually sell their membership so for these members their “equity” in the club has little real value.
Why is this the case? These clubs are usually competing with several similar clubs in the same geographic market that all have comparable features and amenities. This means families interested in joining a club have several options to choose from. For these clubs to succeed they need to actively compete for new members based on service, amenities, and price. In short, they need to be run like any other premier fitness or hospitality business – they need to be run like a five star hotels or restaurant. This typically means the best ownership structure is for the club to be owned and operated by a professional manager who has their own capital at risk. This makes them focused on delivering an outstanding membership experience.
The process of transitioning a member-owned equity club to a professionally owned and managed club is called an recapitalization. It’s not complicated, has been done hundreds of times, and it usually provides significant benefits to the club’s members.
What makes a club a good candidate for a recapitalization?
Consider the following questions about the member-owned club:
· Is membership below its cap with no wait list to join the club?
· Does the club have a lot of debt with little to no long-term capital reserves on hand?
· Are capital improvements being deferred because of lack of capital?
· Are members getting regular assessments to fund capital improvements or operating losses?
· Are members complaining because the club isn’t offering modern, well maintained facilities, or amenities?
· Do members have difficulty selling their memberships at their original cost?
· Does the club have gross revenue of at least $4 million?
If a club responded “yes” to most of these questions, the club’s board should consider whether an equity recapitalization could be an effective solution to the challenges facing the club. In most cases it can be.
The Benefits of Recapitalization.
Some of the benefits of recapitalization include:
· The club becomes debt-free with fully funded capital improvements.
· The club is professional managed, with input from a member advisory board.
· Member dues and privileges remain the same.
· Members are guaranteed there will be no more assessments—ever.
· Members are not burdened with management or oversight, they can simply enjoy being members of their club
· Members often receive reciprocal memberships at other clubs owned and operated by the management company.
While an equity recapitalization is not the only solution to a club’s problems, it is a viable, well-tested solution that can lead to sustainability with tremendous benefits to a club’s members.
How does a recapitalization work?
The basic elements of an equity recapitalization are as follows:
· The new owner (typically the management company) forms a new corporate entity.
· The existing club (often a 501(c)3 non-profit entity) transfers the real estate assets to the new corporate entity.
· Any debt the club owes is paid off by the management company so the club is debt-free and unburdened by debt service payments.
· The club’s members sign new membership documents with the same privileges, dues and virtually identical by-laws. Membership dues are typically frozen for a period of time, usually several years.
· Covenants are put in place to ensure that the club remains private and there will be no assessments—ever.
· All needed capital improvements are funded up front by the management company. This is in lieu of paying the members for their equity—in effect, all of the member’s equity is reinvested into the club allowing the club to upgrade its amenities and significantly improving the member experience.
· A member advisory board is elected by the members. This board advises and guides the management company on capital improvements, service issues and long-term planning.
· Members receive reciprocal club privileges at other clubs owned and operated by the management company.
Once the club’s board decides to move forward, the management company prepares documents and completes due diligence; then, the membership votes to approve the equity recapitalization. The whole process can be completed in two to three months with little to no disruption to the members or the operations of the club. To learn more download our white paper on the value of member-equity recaps for private country clubs.
If you would like to explore whether an equity recapitalization is right for your club Contact Us or give us a call at (888) 270-0028
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Leading Clubs report 5.3% revenue growth and 2.8% membership growth
According to the 2018 IHRSA Profiles of Success report, the health & fitness club segment posted revenue growth of 5.8% and membership growth of 2.8%.
A total of 115 firms, representing 12,289 clubs, participated in the IDS. As this report will show, club performance results varied by segment. Clubs part of a chain reported greater revenue growth (+7%) than independent clubs (+2.8%). On the other hand, independent facilities posted a retention rate of 72.4%, while clubs part of a chain indicated a retention rate of 66.7%. The smallest segment of clubs generated significantly less revenue per individual member ($479.70) in comparison with larger clubs ($975.30).
Based on data gathered in the annual Industry Data Survey (IDS), the 2018 IHRSA Profiles of Success provides benchmarks and other operational and financial data for select leading clubs. Included are key metrics such as revenue, membership growth and retention, traffic, payroll, non-dues revenue, and EBITDA. Club reinvestment and profit center analysis as well as income statement and balance sheet data are also provided.
For a copy of the complete report visit the IHRSA Store.
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Study Shows Retirement is No. 1 Reason Owners Sell
Joint research conducted by Jackim Woods & Co. and Sports Club Advisors indicates that retirement is the number one reason why business owners sell their companies. The study also found that the size of the business has a big impact on who the most likely buyers are and the strategy that must be used to ensure a successful transaction.
For small companies (businesses valued at under $1 million) local entrepreneurs and first-time buyers accounted for the largest buyer segment at approximately 50%. More than half of buyers in the small company segment were motivated by a desire to buy a job. That is, the buyer has left corporate America and is interested in owning and running a business and being his or her own boss. It is important to determine if these buyers understand what it takes to run the business, how much working capital is required, and the current owner’s lifestyle. Being an entrepreneur is very different than being a manager in a large corporation.
On the other hand, buyers in the lower middle market (companies valued at between $1 million and $100 million) are more often expanding an existing business through a horizontal or vertical add-on or acquisition. In the largest deal category (businesses valued between $5 million to $50 million), private equity firms comprised the largest buyer group representing 43% of buyers. Larger businesses are typically purchased by educated and professional buyers who are interested in acquiring the company’s current labor force, property, and customer base.
“As the economy improves and more people come to market to sell their businesses, it’s critical that sellers have the right strategy,” said Rich Jackim, Managing Partner at Jackim Woods & Co. and co-founder of Sports Club Advisors. “Smaller businesses should always come to market with a purchase price whereas larger businesses should not. Instead they should focus on ensuring that all of their records and financials clearly show their profit and margins.”
In a Market Pulse Survey – comparing the conditions for businesses being sold in Main Street (values $0-$2 million) versus the Lower Middle Market (values $2 million-$50 million) – was completed by 370 business brokers and M&A advisors representing 40 states.
The quarterly survey also found that as the deal size increases, buyers are sourced from a wider geographic area. For example, 62% of buyers of companies valued between $5-50 million were located more than 100 miles away. Among smaller businesses, 68% were highly localized buyers meaning they were located within 20 miles of the company they bought.
“Across the board, the biggest reason deals fail is because sellers have unrealistic expectations about valuation and the M&A process,” said Jackim. “Sellers that have had their businesses appraised by an M&A advisor and that have learned about the M&A process are more likely to successfully sell their company and realize their goals. Implementing the right strategy based on the size and type of company will have a big impact on the success of the sales effort.”
Other key findings:
- The average time it takes to sell a company has stayed relatively flat, averaging 6.5 months in the Main Street market and 9 months in the lower middle market. Of that timetable, roughly 60 to 90 days is spent in due diligence, after the seller accepts a purchase offer or letter of intent.
- After retirement the leading reasons for selling a business include owner burnout and family issues.
- In the Main Street sector, restaurants represented 22% of all reported deals followed by personal services (includes health and fitness clubs and sports related businesses) at 18%, and consumer goods at 13%. In the lower middle market, manufacturing led the number of transactions, representing 37% of all reported deals in that sector.
Contact Us for a free consultation about your business or get a Free Opinion of Value
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Key Performance Indicators Essential to Fitness Club Success
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.
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The 3 Pillars of Value for a Fitness Club or Business
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.
Risk Profile
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?
Growth Prospects
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.
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6 Tips on How to Buy a Sports/Fitness Club or Business
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.
Conclusion
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.
If you are interested in Our Services or would just like to network, please feel free to Contact Us.
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Sports Club Advisors Develops Fitness Industry Public Company Index
Sports Club Advisors has developed an index of publicly traded health & fitness companies to establish financial benchmarks and valuation metrics for the health, sports & fitness industry. We have organized the companies in the index based on the sub-industries within this category.
Fitness Clubs: Many of the well known fitness clubs such as Golds Gym are privately owned, however Planet Fitness completed an IPO in August 2015.
Planet Fitness, Inc. (PLNT)
Town Sports International Holdings, Inc. (CLUB) (owns and operates fitness clubs in the Northeast and Mid-Atlantic regions, including the Boston Sports Clubs, New York Sports Clubs, Philadelphia Sports Clubs and Washington Sports Clubs)
Fitness Equipment Manufacturers: Included in this section are companies that manufacture and sell fitness equipment.
Brunswick Corporation (BC)
Nautilus Inc. (The) (NLS)
Gaiam Inc. (GAIA) (manufactures and sells Yoga products (mats, bags, etc.), fitness products, balance balls; workout, yoga & wellness videos)
Wearable Technology: Wearable technology is the rage right now and promises to transform the way consumers and fitness clubs think about fitness. As a result, there are an increasing number of companies producing health and fitness trackers and health monitors including Fitbit (FIT) that completed IPOs in 2015.
BioTelemetry Inc. (BEAT)
DexCom, Inc. (DXCM)
Fitbit Inc. (FIT)
Weight Loss: Anyone who has ever tried to loose weight is likely to recognize the public companies in this sub-sector.
Medifast Inc. (MED)
NutriSystem Inc. (NTRI)
Weight Watchers International Inc. (WTW)
Health Food and Nutrition Stores: These companies operate health oriented retail stores. Two examples include:
GNC Holdings, Inc. (GNC)
Vitamin Shoppe, Inc. (VSI)
Nutritional Supplements: These companies develop and manufacture nutritional supplements. Examples of these companies include:
Herbalife Ltd. (HLF)
Nu Skin Enterprises, Inc. (NUS)
USANA Health Sciences, Inc. (USNA)
Sports Club Advisors provides business valuations for all types of sports, fitness and leisure businesses. Our valuations have been used in strategic planning, divorce settlements, shareholder disputes, and purchase price allocations. The founders of our firm have written two books on business valuation. Contact Us if you would like to learn more about our valuation services for fitness clubs and health and leisure industry.
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Selling Your Fitness Studio or CrossFit Gym: The Hard Truth About Selling
I was recently approached by the owner of a fitness studio/CrossFit affiliate who was interested in selling. When we prepared a Market Assessment for her I could tell she was shocked that our estimate of the fair market value of her gym was so different from what she was expecting.
I won’t speculate as to how she determined the value of her gym, but I thought it would be helpful to summarize how small format fitness studios and CrossFit gyms are valued so you can have realistic expectations before you decided to either buy a gym or sell one.
The hard and simple truth is that 80% or more of the of gyms we evaluate are not set up to be saleable. That means that 80% of the time no buyers will be willing to submit an offer or if they do sell, they will sell for much less that what the owner was expecting.
The number one reason gyms are not saleable is they are founder centric, i.e., the gym owner or founder does all the work. She teaches the classes, runs the books, handles the admin, does the social media, and builds the membership base.
In the simplest terms, gyms like this are basically offering a buyer an opportunity to buy a job.
If you own a fitness studio or CrossFit gym and want to receive anything beyond the book value of your business, you’ll need to make sure it can run smoothly without you. I mean this literally. You need to be able to hang up the phone, turn on your vacation auto-responder, and leave for a 1-2 month vacation without the business missing a beat. If your gym or studio cannot run without you, make sure it can before you think about selling.
Once your gym can run on its own, a buyer is going to be looking at two things: your bottom-line cash-flow and year-over-year earnings growth. This means they want to see the business is profitable, and they want to see those profits are growing.
The more money the gym makes and the faster that number is growing, the more a buyer will pay. This is because buyers are investors who are seeking a return on their investment. Buyers are investing in the future cash flow or profits of your gym or studio. The expected amount of those future profits determines how much they’re going to be willing to pay today.
To determine the value of your gym, buyers will apply what is referred to as a “capitalization of earnings” or an “earnings multiple” approach. You’ll often hear gym owners referring to a “2x” or “3x” or “5x” earnings multiple when they acquire a business. What that means is they are paying two times, three times or five times, the yearly cash flow of the gym to buy the business. Buyers tend to pay a lower multiple for gyms with profits that bounce around from year-to-year and that have a record of low historic growth. On the flip side, they tend to pay higher multiples for gyms with steady profits and above average growth prospects.
To be candid, the growth prospects for most individual yoga or fitness studios or CrossFit gyms are limited. You can only have so many clients before you need to invest more money to expand your physical space or open a new location.
Because the earnings potential of most gyms is limited by the number of people that you can fit in your gym and the number or classes or programs you can offer, the earnings multiple buyers will pay for a gym is also limited. Most likely, you’d receive something in the realm of a 2x or 3x earnings multiple, provided your gym can run without you and generates more than $100k a year in profit.
What does this mean?
Your gym certainly has value, but it is important to realize that your gym is probably not the golden retirement nest egg you were hoping it would be.
If you are still committed to selling, focus on building a solid, self-operating business. Focus on developing a good management team and trainers and being a good boss. Work hard to acquire and develop loyal clients and introduce new initiatives to help make your business unique. Then focus on improving your earnings each year. When you have completed these tasks you will have something to sell, but by then you may just decide that if the business can operate without you, you may want to simply retire and manage your gym as an investment and not exit at all.
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