Inevitably, there will come a time when even the most enthusiastic gym owner must consider selling their fitness center or health club. Perhaps business has slowed to the point where you’re no longer making a profit. Perhaps the landlord has notified you that the lease will not be renewed, and there are no other suitable locations available. Perhaps you’ve just decided that it’s time to move on and try something different. Whatever the case may be, you’ve decided to put the total gym package on the market and get out of the industry.
Questions To Consider:
When considering a health club sale there are a few questions that must first be answered:
1) Do you own a gym franchise or an independent fitness center?
2) How is your health club organized legally?
3) Do you own or lease the building you’re in?
First and foremost, if you own a health club franchise such as Gold’s Gym or World Gym, it is critical that you contact the franchise headquarters before you make any move to sell. There may be contractual obligations that you need to meet prior to selling your business. In some cases the franchisor may be able to help you sell the gym, or at least put you in touch with a potential buyer. The bottom line is that when you own a fitness center franchise, you are contractually bound with the franchisor. Failure to communicate with the main office at this point could land you in some very hot water!
The second question to consider before your gym sale is how your entity is legally organized. If your fitness center is organized as an S-Corporation, then you will have shares of stock to transfer to the buyer. If your health club is organized as a Limited Liability Company (LLC), then you will need to transfer ownership of that entity. If your gym is set up as a simple sole proprietorship, then you will need to communicate that to the buyer so they can create their own legal entity. (Note: It is an incredibly BAD idea to operate a fitness center as a sole proprietorship! For more information on this topic, you’ll want to get a copy of our Start-Up Manual for health clubs, available at cuecd.com).
Finally, you need to consider whether or not you own the building from which you’re operating your gym. If you own the building, then it is probably your most significant business asset. Will you sell it with the fitness center as part of a ‘buyer take all’ package? Will you keep the building to operate a new business, or even lease it out? Alternatively, will you sell both the building and the business separately and let the new owners negotiate a lease?
It is important to note that, before you put your business up for sale, you should consult with both your attorney and your accountant. The sale (or closure) of a business may have tremendous tax consequences, and the only way to make sure you’re not making a procedural mistake is to seek the advice of an expert.
The Little Gym Sale:
Most of the health clubs that will be sold this year are little gyms, whether they be small co-ed fitness centers or women’s only establishments similar to a Curves gym. The majority of these health clubs are renting their location, so that will be the focus of this article.
How Do I Set My Gym’s Sale Price?
“What is my club worth” is the first question sellers ask themselves. Outlined below in simple terms are two common ways to calculate the value of a health club business.
A club is worth what a buyer is willing to pay, adequately advertised on the open market at a price the seller finds acceptable.
The following analysis below is only meant to be helpful in setting the asking price. Sellers should consult with a business appraiser and/or a CPA before setting the listing price.
1. The Most Common Calculation: Use A Multiple Of The Adjusted EBITDA
What Is EBITDA?
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation and Amortization”. Recent sales suggest a 3 to 5 times multiple for a gym that is leasing space. A multiplier of 5 to 7 times may be used if the fitness center owns the real estate and plans to sell the real estate along with the business as part of the asking price.
How To Calculate EBITDA:
It is highly recommended that you consult with a business appraiser and/or a CPA to assist you in making the adjustments and formulating the EBITDA.
Seller’s compensation. Estimate what it would cost to hire someone to do the job functions you do. Adjust EBITDA up or down by the difference between that and what you actually paid yourself.
Non-Recurring Cost. Perhaps you’ve purchased new equipment or installed a new air-conditioning unit, and expensed those items through the maintenance category in your P+L. The air-conditioning unit is not going to be a normal recurring cost for the buyer each year. This figure needs to be adjusted accordingly.
Seller’s Discretionary Expenses. Add back any expenses you can document that are unrelated to the business, such as travel, cell phones, meals, car payments, personal insurance, etc.
Unreported Cash. If you do not claim all of your income and deposit it into your business account, you cannot expect it to be calculated into the value of the business. It is a double-edged sword. Because cash was ‘hidden’ during operations, you will not receive the full value at sale.
Other Factors That Affect Value:
Deferred Maintenance. If you have not adequately maintained the furniture, fixtures, equipment and done basic house cleaning of the business, it can reduce the value of the business. From a buyers point of view, they will have to outlay the capital to bring the club back up to par to successfully operate the business. Most health clubs keep a capital reserve of 3-5% of revenue on an annual basis to maintain all aspects of the business.
Prepaid memberships are a liability. If you’ve cashed out more than 20% of your membership accounts, a buyer could ask to knock the excess prepaid membership liability off the purchase price.
Competition. It’s understood by gym operators that, when a new competitor enters the market, the existing clubs often take a financial hit. Many later stabilize and slowly recover. However, buyers don’t like the uncertainty and instability that is perceived and may ask you to discount the purchase price.
Once you’ve come up with your basic estimate of value, you need to cross-check it against two other valuation methods:
Replacement Cost. Generally, if the fitness center has been in business for three years or longer, replacement cost is irrelevant. Once the club’s cash flows have had a chance to mature, the value is a function of its cash-generating ability.
Comparables. In the health club world, there are few transactions and the details are generally not reported. A good appraiser or listing service, however, may have comps that a gym owner can’t get.
2. Use Contract + Equipment Value
An easier (but not necessarily better) method to determine a selling price is to take the amount of money owed to the gym and add to that total the current value of the health club property.
By and large, the days of the “pay as you go” health club membership are over. Most fitness centers enroll members using a Membership Agreement, or contract, whereby the member agrees to join the gym and pay for a set number of months. For example, many circuit training health clubs enroll members on a 12-month contract, where the member agrees to pay $29 per month for the next 12 months. These membership dues are typically automatically deducted from the member’s checking account or credit card.
The money owed to the fitness center by members as required by their contracts is an important indicator of selling price. This total, which may be referred to as “Total Receivable” on the P+L, reflects the amount of money that the gym will have coming in during the next year (or two, depending on the length of Membership Agreements offered) even if they don’t sell another membership.
The total value of all property owned by the health club, when added to the total contract value, may provide a number that will help you determine selling price.
Determining gym equipment value may be best accomplished by using the IRS depreciation tables. In other words, by taking the original value (purchase price) of all equipment and applying the depreciation percentages outlined by the Internal Revenue Service, a reasonable value may be found. Another method may be to use the official assessed value of all business property as determined by the county (for the purposes of calculating Business Personal Property Tax).
Be sure to include all property owned by the health club, including scales, body fat analyzers, etc. The more you include, the higher the total business value, but keep in mind that everything you include in business value calculations must be given to the new owners at closing.
(Portions of the preceding section have been adapted from information found at healthclubforsale.com.)
Who Should Sell My Fitness Center?
It will be extremely difficult for you personally to sell your health club, simply because you probably don’t have the contact information for potential buyers. You may choose to browse the internet, find a few ‘business for sale’ sites, and list it on your own. However, since you’re probably not an expert in this area you may end up spending thousands on trial-and-error methods and never actually sell the health club.
Another option is to contact a business broker and have them sell the gym for you. Be aware that business brokers typically charge fees in one of two ways:
1) a flat dollar fee (whether or not the fitness center is sold)
2) a percentage of the sale (they are only paid if and when the gym is actually sold)
Obviously, the option #2 will be preferred by most health club owners. Another fact to consider before contracting with a business broker is that the sale contract will probably last twelve months. In other words, the broker will most likely reserve the right to sell your gym for the next twelve months. If you end up selling on your own during that time, the broker is still due their commission. If you close the fitness center during that contract period, then you may be in violation of the agreement with that business broker (and they may ask for their commission anyway, even though the sale was never made).
As with all things in business, this contract term is negotiable and you should not hesitate to ask for a shorter contract term if needed. For example, if your lease term ends in four months, then you know that you’ll need to be closed and out of the building in four months. Therefore, you only have four months to sell the business before you close it down. There’s absolutely nothing wrong with asking the business broker for a four-month contract term! They may refuse, but there’s no harm is asking.
Example: Sally Needs To Sell Her Gym:
Let’s pretend that Sally has decided to sell her health club. Maybe she’s no longer making a profit. Maybe she’s decided to move to Florida. Maybe she’s just decided to go back to college. We don’t know, because Sally never told us. At any rate, she wants to (needs to?) sell her gym.
Her lease term ends in seven months. At that time (in seven months), Sally knows that she needs to be out of the business.
At this point Sally has several options:
1) Try to sell the fitness center herself in the next seven months, and if she’s unable to do so then she should simply close it at the end of the lease term and sell the equipment on the open market.
2) Hire a business broker to sell the business for her in the next seven months, and if they’re unable to do so then she should simply close it at the end of the lease term and sell the equipment on the open market.
3) Try to sell the gym either by herself or with a business broker, in the next seven months. Let’s assume that it does NOT sell in this time. Negotiate with the landlord to allow her to remain open (continue renting the building) on a month-to-month basis without an increase in rent. This will allow Sally to continue trying to sell the fitness center without locking in a new long-term lease.
4) Close the health club immediately, sell the equipment on the open market, and attempt to sub-lease the building for the remainder of her lease term. (NOTE: Sally would still be liable to pay the rent for the remainder of the lease term, but a sub-lease would shift the financial burden to another business).
Sally doesn’t have a nice landlord, and when she initially rented her building she didn’t read the Lease Negotiation Tips section of our Start-Up Manual, available at www.cuecd.com. (Had Sally read the Start-Up Manual, she may not be in this situation! Be sure to get your copy today!) Her landlord will not allow her to sublease the building or extend the lease term on a month-to-month basis. In other words, Sally is legally obligated to pay the full rent for the next seven months.
Sally doesn’t want to close her doors prior to the expiration of the lease term, because she is contractually bound to pay the rent until the end of the lease term (for the next seven months). The landlord really doesn’t care if she’s open for business or not…..the landlord will collect their rent either way. Sally also doesn’t want to go beyond seven months, because that would require her to sign a new lease.
Sally decides to contract with a business broker to sell her health club for her. The terms are that the broker will collect a 10% commission on the sale only, with payment due only upon a successful sale. Sally negotiates a seven-month contract term to coincide with the end of the lease term.
It is obviously in Sally’s best interest to keep the gym open and operating for the next seven months, because she still has bills to pay (rent, utilities, payroll, etc.). With this in mind, Sally wisely requires that the business broker conduct a ‘stealth sale’ of her fitness center. In other words, she doesn’t allow the broker to advertise locally or put ‘Business for Sale’ signs up at the health club. Once the general public knows that a gym is closing, new memberships will drop like a rock. Therefore, Sally chooses to keep it a secret.
So the question now is how should Sally conduct business for the next seven months?
Strategies To Use When Selling Your Fitness Center:
Okay, so you’ve found yourself in the situation where you own a health club in a leased location, and you need to close it down in _____ months (at the end of your lease term). For whatever reason you were unable to find a buyer for the gym as an entity, and you’re going to simply cease operations in _____ months. How should you best operate your business between now and then?
First and foremost, it’s important to keep the closure a secret. Nobody is going to join a gym when they know it’s closing soon.
The next point to consider is how to generate income between today and the closing date. There are two ways to do this: New Memberships and Retail Sales.
Most fitness centers offer memberships based upon a 12-month or 24-month contract. In other words, in return for a discounted price members agree to join (pay dues) for either one or two years. Once you’ve decided to close, this becomes an issue because the health club will not be open for twelve or twenty-four months.
Of course, upon closing you’ll stop collecting monthly dues from your members. To do otherwise would be unethical. But what about new members that are signing up between now and ‘closing day’? The answer is to turn a negative into a positive by offering a new membership special!
Let’s say that you’re planning to close the gym doors for good in six months. You normally charge $29 per month and are willing to drop that price a little. For this month, then, your special membership offer should be either “6 Month Special – Only $150” or “6 Month Special – Save 14%”. The member is saving $24 over the regular price of $174 ($29 per month x 6 months).
Essentially what you’re doing is offering only Paid-In-Full (PIF) memberships from this point on, and you’re doing so in such a way that it is perceived as a strength instead of a weakness.
At the three-month point, when you’ll be closing the doors in just ninety days, you’ll want to advertise “Join Our 3-Month Fat-Blaster Plan For Just $99!”. Obviously, you may call the sale anything you want but the goal is to get people to pay you for the next three months so that their payment is up/over the exact same day you close the doors for good.
When you’re down to the final month, you’ll want to advertise something like this: “Exercise All This Month For Just $25”.
The basic concept is that you’re no longer pushing annual contracts. Instead, you’re offering Paid-In-Full (PIF) contracts only and every single one of the PIF contracts you offer expires on the exact same day you’re closing down the gym. Following this method, you should minimize the number of members who find their gym closed during their contract term, while at the same time maximizing the number of new members who ‘expire’ at exactly the right time.
When you’re closing your fitness center, don’t forget about retail merchandise! You probably have some health club t-shirts, water bottles, nutritional supplements, etc. still in the gym and you should make every effort to sell these prior to closing.
Without divulging that you’re closing the gym, you should start discounting these goods immediately and lower the retail each month. If you’re closing in four months, for example, you could immediately lower the price on all merchandise by 10%. In another month, lower all prices another 10% to 20% total. In yet another month, you may want to consider going down a total of 30%. Finally, when you’re operating in your final month, announce a ‘Best Prices of the Year’ sale and take everything down 50% or more!
How To Sell Used Gym Equipment:
Assuming that you haven’t found a buyer for your health club and you’re simply closing up shop, you’ll need to find a buyer for your fitness equipment.
Selling your commercial exercise equipment on the open market isn’t like selling a Total Gym or home gym equipment at a yard sale. You’ll never achieve top dollar with that approach. On the contrary, there are quite a few people out there seeking quality fitness equipment for their existing business. All you need to do is find them!
There are two ways to unload your commercial exercise equipment:
1) Do it yourself on sites like eBay,
2) Hire an equipment broker to sell it for you.
It has been said that you can sell just about anything on eBay, and it’s true! Check out the ‘Sporting Goods’ category, the ‘Exercise & Fitness’ subcategory, and go from there. The ‘Strength Training’ subcategory recently offered a 10-piece hydraulic circuit for an $8,000 ‘Buy It Now’ price and a $6,000 minimum bid. The ‘Other’ subcategory recently featured a 16-piece fitness equipment package (8 strength machines + 8 cardio stations) at a starting bid of $4,000.
Other sites like usgyms.net specialize in do-it-yourself fitness equipment sales. You can list your classified ad at no charge! Even better, this site allows you to list by region, which is enticing to a buyer because they can pick up the equipment themselves and avoid shipping charges.
Another company that purchases used commercial exercise equipment is fitnessrush.com. Their website offers little in the way of information about how they do business, and you may find it difficult to get anyone on the phone. However, they’re probably worth checking out.
Yet another company that offers to purchase used fitness equipment is usedgymequipment.com, although they also do not offer much information on their site and the employee we spoke with on the phone didn’t seem to have any idea how their firm purchased or paid for the merchandise.
Perhaps the easiest way to sell your exercise equipment is through a company like GymTech, which you can find at http://gofitness.stores.yahoo.net/. The folks at GymTech state that “We’re looking for full club packages for sale, we will broker out all the contents of your gym to a lucky buyer! We will coordinate payment with you, we’ll make shipping arrangements with the buyer, and we’ll be there to load the trailers with our crew the day of the pickup.” In other words, GymTech will handle all the details for you including shipping!
Other sites worth checking into when you’re selling used fitness equipment include:
Hopefully this article has been helpful as you prepare to leave the health and fitness industry. The bottom line is that there is a LOT to consider when you’re either selling or closing your health club. Although it may be tempting to simply take the fastest and easiest approach to liquidation, the quick-fix isn’t always the best fix. Do your homework. Consider your options. Take your time and carefully consider how you can maximize your income during this transition. Above all else, be sure to consult with your attorney and/or CPA before making any decisions.
(For more free health club marketing ideas please visit: http://www.cuecd.com/ or our blog: http://cuecd.blogspot.com/ or connect with us here: www.linkedin.com/in/circuittraining/.)
The purpose of this document is to give you a basic working knowledge of the subject matter. This document should not be considered the end of your research. The author advises you to check with any and all appropriate governmental agencies for additional information. The author makes no representation or warranties regarding the outcome or the use to which this information is put and is not assuming any liability for any claims, losses, or damages arising out of the use of this document. Additionally, the author strongly recommends that you retain the services of an attorney and accountant before making any decisions.
This document is designed to educate and provide general information regarding the subject matter covered. However, laws and practices often vary from city to city and from state to state and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are encouraged to consult with your own advisor(s) regarding your own specific situation.
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