Valuation

The Evolving Impact of the Coronavirus on Business Sales in the Health and Fitness Industry

The evolving impact of the coronavirus is being felt everywhere—but especially in the health and fitness industry as social distancing and shelter-in-place become the new norms. This is a time of uncertainty in our personal lives and in our businesses.  The closest thing I can compare it to is the uncertainty everyone felt in October 2008 as the financial crisis was unfolding.

Then, like now, business owners are seeing the values of their business plummet as clubs close indefinitely and members cancel their memberships in droves.  Smaller health clubs and fitness centers are naturally more vulnerable in an economic downturn, but everyone in the health and fitness industry is affected in one way or another.  Strategic buyers, investors, sellers, business owners, and business brokers are all trying to understand how this will impact them, and what they can do to mitigate the consequences.

Reflecting on the financial crisis of 2008-2009, however, helped me identify a few things that are likely as we deal with the impact of coronavirus on the M&A market and business sales.

Like in 2008 and 2009, M&A activity will most likely contract significantly over the next 3-4 months as the volatility in the stock market will likely put the M&A market on hold. For deals in the early stages, there will be a lot of anxiety on the part of sellers and a lot of caution on the part of buyers.  As a result, we expect that many buyers and sellers will press the pause button to wait and see how the situation unfolds over the next few months.

But there are a lot of indicators that when the coronavirus scare is behind us, the M&A market will rebound with gusto.

“I’m bullish on the outlook for M&A activity in the long term once the financial markets adjust to the ‘new normal’. There is an unprecedented amount of capital that needs to be deployed, interest rates are at record lows, and the federal government’s stimulus package should make borrowing even easier.  At the same time, the record high valuations that we’ve seen over the last year or two are likely to decrease, which will make financing acquisitions less risky and fuel a strong increase in M&A activity.”

Richard Jackim, Managing Partner, Sports Club Advisors, Inc., and Jackim Woods & Co.

If you own a fitness boutique or a health club and are thinking about selling, what does all this mean to you?  First and foremost, it’s important to remember that while the next few months may be painful, and it may take you six months to a year to build your business back up to its 2019 levels, but the fundamental value of your business is likely still intact. If you were waiting for the market to peak before you sold you missed the window.  But that doesn’t mean your business is unsaleable or that it has no value.  The value is still there because buyers buy companies for the future cash flow that business will generate.  That means buyers take a long-term perspective.  If your business is fundamentally sound, it is very likely that its value will rebound once the economy and our lives return to the new normal.

Many of the business owners I’ve spoken to in the last few weeks believe that the current market conditions will scare away buyers.  That is true in the short run, but savvy financial and strategic buyers recognize the short-term nature of this crisis and see this as a good opportunity to buy a good business at a lower multiple of EBITDA than last year.

If you’re thinking of selling your health club or fitness center it’s important to work with someone who understands the dynamics and changing motivations of sellers and buyers to advise you during these uncertain times.  Below are our recommendations for business owners to take over the next 2-3 months if you are thinking about selling in the next few years.

• Focus on Exit Planning (talk with us about our formal process that can use this time to help you and your business get prepared for sale)
• Get a valuation of your business (so you understand how much your business is worth)
• Understand what you can do to improve the value of your business and make it more attractive to potential buyers
• Talk to your financial advisor to understand how much you need to retire
• Work with an M&A advisor or business broker to begin putting together a data room and formal marketing materials so you can hit the ground running when the market recovers.

Our team is comprised of experienced investment bankers and M&A professionals who literally wrote the book on exit planning.  We helped over three dozen companies between 2008 and 2010 help get ready for sale and then sold them for top dollar when the market recovered.  We will provide you with a value-focused, hands-on approach to help you develop a strategic exit plan that allows you to exit your business on your terms and for its highest possible value.

If you are interested in selling in the next three years and would like to talk to a licensed business broker and M&A professional about how this crisis affects your options, please feel free to contact Rich Jackim for a FREE, confidential conversation at rjackim@sportsclubadvisors.net or at (224) 513-5142.

Business Valuations of Sports & Fitness Clubs in Divorce Proceedings

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. 

Section 59-60 Valuation

Selecting the Right Expert Witness for Your Case in the Health, Sports & Fitness Industry

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
• Divorce
• 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 rjackim@sportsclubadvisors.net or at 224-513-5142.

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.

How to Value a Health Club or Fitness Center

How to Value a Health Club or Fitness Center

If you are an owner or manager of a health, fitness and sports clubs one of your goals is to slowly and steadily increase the value of your business.  To do that it is important to understand basic valuation concepts and approaches and apply them in your strategic planning process and in your day-to-day decision making.  First, let’s take a look at an overview of the fitness industry.

Key Health, Fitness and Sports Club Statistics.

·         A 2015 study by IBIS World Reports indicates that there are over 46,000 health & fitness centers in the United States alone. The health, fitness and sports club industry generates a whopping $11.2 billion in revenues per year, and employs over 300,000 people.

·         The fitness industry is highly fragmented with the vast majority of health & fitness clubs being small businesses, with approximately 7 employees and $350,000 in annual sales.

Value Drivers for Health, Fitness and Sports Clubs

If you are wondering what factors or value drivers have the most impact on the value of a fitness business, here is a short list:

·         Historical Financial Performance. The most important factor in a business valuation is a club’s historical financial performance.  Has the club been profitable for the last three years?  Are margins above or below industry averages for clubs of its type?  Are revenues and profits stable, trending upward, or trending downward?

·         Projected Financial Performance.  Buyers are essentially buying a business for the stream of future cash flow that it will generate.  As a result, the most important question is what will future revenues and profitability look like?  Buyers often look to the past to provide some indication of what the future will look like, but if you are in a rapidly changing neighborhood or a fast-growing sector of the fitness industry, your future earnings might be significantly higher than in the past.

·         Strong member retention. The third most important value driver is membership retention.  Successful fitness centers have membership retention at or above 70%.

·         Strong Niche Focus. Given how competitive the fitness industry is, a gym or fitness center that has developed a loyal following by focusing on a specific niche, such as women, young urban professionals, or active senior citizens, is more valuable than a club that tries to appeal to everyone.

·         Location. Being in a market with a large and affluent population is one aspect for a club’s success, but being the largest player in a small market can also be a competitive advantage.

·         Facilities.  Fitness club members have become increasingly discerning and expect their clubs to be well designed, modern and well maintained. Clubs have not been updated or that have deferred maintenance issues we be less valuable than other clubs.

·         Quality Fitness Programs. The most valuable heath, fitness and sports clubs differentiate themselves by offering members a wide range of high quality programming, including niche group exercises, professional personal trainers, tennis instructions and leagues, and swimming instruction and other aquatic activities.

·         Technology.  Fitness clubs that are keeping up with changes in technology, including things like club management software, social apps, and wearable technology will be more valuable than clubs that are still operating the way they were in the 1980’s.

Valuation Multiples for Health Clubs

Rules of Thumb

Fitness centers sell often, so you can get reliable data on the private business selling prices. You can estimate the fair market value of a health club by using one or more of the following valuation rules of thumb:

·         Business value as a percentage of annual gross revenues, plus inventory (not recommended because it doesn’t take into account whether the club is profitable or not.)

·         Business value as a multiple of EBITDA, plus inventory.  (See our recent article on the rules of thumb for valuing a fitness club.)

More Accurate Valuation Techniques for Fitness Clubs and Gyms

As with any other personal service businesses, the best way to determine the value of a health or fitness club by using one of the following income-based business valuation approaches. For smaller fitness centers that are owner-operator managed, consider using the Multiple of Discretionary Earnings method.  Discretionary earnings are the net profit of the club, plus whatever salary the club owner received, plus any personal expenses the club owner ran through the business.  The trick when using the Discretionary Earnings Method is to determine what the right multiple is. This is where a subjective and qualitative analysis of the financial and operational performance factors listed above becomes important.

For larger fitness centers or more complex operations, it is more accurate to use the well-known Discounted Cash Flow approach. This method projects the club’s revenues, profits, and EBITDA or free cash flow for the next five years based on its historical performance and an analysis of the operational value drivers list above.  Then the EBITDA is discounted back to present value, using a risk-adjusted rate of return, to give a buyer a sense of what the stream of future cash flows is worth today.  This approach is especially useful if you are dealing with sophisticated investors or potential buyers since this is the approach they will use.

Last but not least, you can use the old Capitalized Excess Earnings method to determine the value of the club’s assets and its goodwill. While this approach has been discredited in many applications, it is still useful in situations where a fitness club is very asset intensive, including for tennis clubs that own the real estate they occupy.  This approach is also useful if the fitness center is being acquired and the buyer needs to allocate the purchase price between the club’s hard assets and goodwill.

For an accurate market assessment and valuation consult a mergers and acquisitions advisor like Sports Club Advisors.  If you are interested in selling your sports or fitness-related business we are happy to provide you with a Free Opinion of Value of your business.   Contact Rich Jackim at 224-513-5142 or at rjackim@sportsclubadvisors.net.

Rules of Thumb to Value a Fitness Club or Gym

What’s My Fitness Club or Gym Worth? – Simple Rules of Thumb

Thinking of selling your fitness club or gym?  The first question most business owners ask is “how much is my business worth?”

Most businesses, including health clubs, fitness clubs, and gyms, are valued based on a multiple of the cash flow they generate.  This cash flow is often referred to as earnings before interest, taxes, depreciation, and amortization or “EBITDA”.

These rules of thumb are used by business brokers, buyers and lenders to get a ballpark idea of the value of a fitness club or gym.

Updated 7/1/2019

The selling price includes all of the equipment, fixtures, and other assets that are necessary to run your club or gym.  If you own the real estate and want to include that in the transaction as well, then you would add the fair market value of your real estate to the asking price for your club or gym.

How to Calculate the EBITDA of your Fitness Club or Gym

To calculate your club’s earnings before interest, taxes, depreciation, and amortization or EBITDA, start with the profit shown on your P&L statement or tax return, then and add back interest, depreciation, and amortization.  EBITDA is the starting point for any business valuation so it’s a good number to track on an annual basis.

Don’t Leave Money on the Table When Selling Your Fitness Club

Using valuation rules of thumb will give you a rough idea of what your club or gym is worth.  But a word of caution.  Because rules of thumb don’t take into account the unique characteristics of your club, they are usually wrong.  They result in either too high a value or too low a value.  To get an accurate idea of what your club is worth, the valuation needs to take into account things like past performance, future prospects, projected growth, and other things.  In addition, business ownership comes with many perks including the ability to pay yourself an above-market salary and to offer yourself perks and pay expenses that a new owner may not incur.  The value of your fitness club is also highly dependent on things like your historical growth trends, your margins compared to other clubs, the terms of your lease, including the remaining term on the lease, rent escalation clauses, and renewal terms. As a result, it is important to work with an objective third party to evaluate what adjustments can be made to your EBITDA to truly reflect the operating cash flow of your business.

To get an accurate valuation talk with a business broker or M&A advisor who specializes in representing health clubs and gyms.  They will work with you to make the appropriate adjustments to your EBITDA, evaluate your lease, and value your gym properly so you don’t leave any money on the table when you sell.

If you are interested in selling your club or gym,  contact Rich Jackim at 224-513-5142 or at rjackim@sportsclubadvisors.net.