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.
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.
Due diligence is the process a buyer goes through to verify the information that has been presented and ensure, as much as possible, that there have not been any significant omissions by the seller. Most of due diligence serves to verify the legal status, the financials, past history of the business, and your general ability to sell the business. In addition, a buyer may verify different aspects of the company to make sure it is in good health. In many ways, due diligence is akin to bringing a used car to a mechanic for a thorough inspection before you buy it.
Strong member retention. The third most important value driver is membership retention. Successful fitness centers have membership retention at or above 70%.
When selling your company, one key factor in its success is the transition of ownership and management that happens immediately afterwards. The buyer needs time with you to understand how and why you operated your business the way you did, and they need your support to smoothly and seamlessly transition your relationships with your customers, vendors and employees.
As you think about negotiating how much time and energy to commit to the transition after a sale, consider your role in the business. Were you the go-to person for all decisions? Were you actively involved on a day-to-day basis in the operations of your business. Or, do you have a strong, empowered management team in place that runs the business on a day-to-day basis and only comes to you for strategic guidance?
The more the business is reliant on you for day-to-day operations, the more important it will be to the buyer that you play an active role in the transition. However, if your primary role was to provide strategic oversight and guidance , then you may be able to transition out more quickly, once the buyer understand your strategic vision, philosophy, culture and business plans.
Consider customer, vendor and employee relationships as well. Many small businesses are almost like a family and the vendors, employees and customers has a strong sense of loyalty to the owner. The last thing a buyer wants is for you to simply announce to these people that you have sold your company and a new owner is taking over.
Buyers will want you to introduce them to these key stakeholders and explain why they chose to sell to them: “Over the last few years I’ve gotten to know John and he and I discovered we share the same values on thing like the importance of culture, customer service, ethics and training, so as it came time for me to begin planning my retirement, I decided to sell my business to John and I am confident he will do great job.” Most buyers want to make sure that you are involved in the transition and that the transition process is long enough to ensure that those relationships will transfer.
The Nine Month Transition Plan
One transition model we have seen that works well, particularly in smaller businesses, is the nine-month phase out. For the first three months, the seller commits to the buyer that they will work full-time in the business handling all of your normal duties, but also teaching the buyer the business and its operations.
During the next three months, you would continue to work a standard workweek, but you step back and play a support role, while the buyer takes on handling your day-to-day responsibilities. During this stage, for example, you might still be going to meetings with the buyer, but the new owner is the one leading the conversations and making the decisions.
During the last three months, you would transition into a part-time, consulting role. During this period you would be available to consult on big strategic decisions, help handle a crisis, or take on some special project that the buyer would like you to tackle before you leave.
And finally, once you are formally retired and no longer involved in the business, most smart buyers will want to make sure you are available for phone calls and consultations on an as-needed basis.
When Is It Time to Go?
During any business transition, there inevitably comes a time when you need to walk away. One business buyer owner shared his transition story with us, praising the seller and describing their relationship as that of a “mentor,” “father-figure,” and “friend.”
But the buyer went on to tell us that after about 6 months, he had learned the ropes and the business was operating smoothly, but because the seller had owned the business for so long and employees had worked for him for years, they had a hard time not coming to the former owner first to run their ideas past him, before coming to the new owner. This began to cause problems to the buyer and seller both agreed that after 6 months it was time to have a clean break and let the new owner over completely.
It was a difficult decision, but with the old owner gone, the new owner was able to introduce some new business strategies, introduce a new technology platform, and redesign the company’s training program to develop a second tier of management.
Transparency and Trust
Discussions about a transition period are typically handled during the negotiation of the Letter of Intent and the Purchase Agreement. These discussions need to be open and honest, because in order to be successful the transition plan needs to address both your goals and the buyers. If you are going to continue working in the business, plan to check in regularly with the buyer to see if the arrangement still makes sense, and recognize that at some point, one or both of you is going to want to end the relationship.
No matter what the Purchase Agreement or Employment Contract says, the success of any transition depends on you and the buyer trusting each other and working together with a common goal in mind. If you do that, the results can be remarkable for you, the buyer, and for your customers, vendors and employees.
