Valuation

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.  We are happy to provide you with a Free Opinion of Value of your sports & fitness facility, or give us a call at (866) 270-0028.

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 Us today or request a Free Opinion of Value.