During a recent meeting, I was asked what type of business do I consult on the most. No need to reflect or hesitate for an answer, my quick response? – “Fitness businesses.”
In the past 18-months, I’ve consulted with owners and potential buyers of six fitness-related businesses in North Alabama. Of these six consultations, only one fitness business was turning a large profit with an absentee owner who owned four separate locations of a franchise gym. The other five fitness businesses were either barely breaking even or making just enough to cover a full-time owner’s draw of somewhere between $30-40k/yr.
Because owning a gym or fitness studio can be considered a fun, lifestyle business, I consider $30-40k/yr a reasonable return for an owner passionate about fitness. If you’re happy and living your dream by working in your own gym, what more could you ask for?
But a problem occurs when these small earning gym owners expect to transact their business for $300k-400k when they’re ready to sell. Their evaluation expectations usually include ideas regarding the value of their equipment to replace with new, the cost they invested to get started along with possible continued debt, how long they’ve been open, and the number of their membership (even though the members are under no contract.)
I’d like to take a little time to explain why a fitness business may sell for less than these owners expect.
Every type of business increases in value when the service or product they supply is unique and difficult to copy. Fitness businesses can be desirable to entrepreneurs because they’re a lifestyle business, but they’re also generally easy to replicate. There are few barriers to entry for a new gym owner beyond the initial capital needed for leased space and equipment purchase. Sometimes an owner has personal training certificates or a related degree, but it’s not required for ownership. This ease of replication makes fitness businesses have a lower value when compared to other industries.
All the equipment included with the sale of a gym is not an additional value added to the price of the business. If a business is going to be sold in its entirety, based on its cash flow, the equipment to make that cash flow is always included in the price. If the resale value of equipment is so high it exceeds the value of the entire business, it may be possible to sell all the equipment as a package to someone who wants to try to keep the gym open, but keep in mind the equipment is not new and cannot be priced for what you bought it for. It depreciates quickly and if the equipment is more than a year old you will likely have to accept 25-cents on the dollar, or less, in a consignment sale.
But what about a gym’s name recognition and loyal members? Unfortunately, fitness consumers are an extremely fickle market! Customers have a tendency to change gyms, routines, and preferences with the seasons. They’re easily lured to the “latest-and-greatest” when a new facility opens nearby with brand new equipment and features. Even when there’s no competition in the area, fitness consumers will wax and wane in their interest and their commitment to exercising. If a fitness business has contracts in place guaranteeing monthly payment, you may see an increase in value despite the lower earnings, but most of the fitness industry has moved away from long-term contracts.
So what might you expect to pay for an existing fitness business where the owner is making $30-40k/yr? Depending on the urgency and motivation of the seller, as well as, the condition of the facility, a fair price could be anywhere between $30,000-$80,000, but this estimation is not meant to be inclusive of all considerations.