Step 1: The Research Phase
By Mike McPhee, Club TeamWorks
We all know what to do when we want to sell our home; but if you own a fitness club and want to sell it, the process (and the unique challenges it presents), couldn’t be more different. In this 3-part series, we’ll highlight a detailed “best practices” process that we encourage club owners follow to achieve their desired outcomes – that being to get the best price for their club while expending the least amount of time and resources doing so. All brokers follow different plans, but after twenty-five years of experience selling clubs, we’ve perfected a system of protocols that has been proven to be both comprehensive and effective.
Here’s our Three-Step Process:
- Step I: The Research Phase
- Step II: Potential Buyer(s) Advertising and Recruitment Phase
- Step III: The Deal Development and Closing Phase
Step I: The Research Phase
One of our first considerations is the need to clearly understand the club owner’s desired outcome – that being your (hopefully realistic!) asking price. To do that, we need to get to know your club; as well as you do. We need to research your facility – as thoroughly and discreetly as possible – in the shortest amount of time.
Our Observations
- Conduct an exhaustive (preferably after-hours) guided tour of your facility: Assess your physical plant, parking and assets – including condition, design and location – to determine their most and least favorable features. Thoroughly review your lease.
- Acquire as much historical data and background information as is available. This includes access to a minimum of five fiscal years of financial statements and membership data reports.
- Study and assess of the advantages and challenges unique to your target market – price-points, competition, demographics, location and marketing initiatives (past and present – successful or otherwise).
- Carry out a thorough “nuts and bolts” review of your club’s operations, policies, programs and services – including their quality, popularity and relevance.
Our Conclusions = Your Valuation
In order to determine an appropriate and realistic asking price, your broker will need to conduct a thorough valuation, utilizing any number of methodologies to do so. Our approach is a two-step process:
Step One:
Although valuations begin with an analysis based on your club’s average EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) over the last five years, many club owners confuse that with profitability and/or cash flow.
Keep in mind that just because you only break-even or seldom seem to enjoy positive cash flows, your club value will not necessarily be assessed as ‘negligible’. While EBITDA calculations start with your Net Earnings, they usually end up quite a bit higher once items such as interest, taxes, depreciation and amortization are added back to the formula. Of course, you can only add these values back if you track them – and that requires keeping an accurate set of books. No books = zero EBITDA = minimal club value, and valuation.
In the absence of EBITDA, brokers must resort to a simple Asset Valuation –and the depreciated sale value of your used fitness and office equipment is often, depressingly little.
Step Two:
Assuming you’ve managed well enough to have acquired a minimal (if not respectable), EBITDA valuation, the 2nd step is to determine how many years you can multiply that figure by your five-year EBITDA average.
In other words, with an EBITDA of five being the highest a club can attain, and a $100,000 annual EBITDA average, your club could technically achieve a valuation of $500,000. Note that clubs seldom (if ever) earn 5x EBITDA ratings – in fact usually it’s much closer to a 3x factor – and during the current post-Covid era, more often than not, even less.
To determine your ‘x’-times EBITDA rating, we provide your club with a scorecard based on our historical assessment of your club’s performance and attributes, using five different criteria:
- Location
- Physical plant (including lease)
- Financial performance (in comparison on accepted industry averages and standards),
- Goodwill
- Membership dues, data and stability/retention
After this assessment, if you are rated for example at an overall score of 70%, your ‘x’-times EBITDA factor would be X 3.5 years. Therefore, if your five-year averaged EBITDA was $70,000 your valuation would be calculated at $245,000; in which case, we would advise that your “sale price” be strategically set at $250,000.
Lastly, based on our research, we prepare a one-page Club-at-a-Glance key-stats sheet that highlights a plethora of industry-recognized benchmarks alongside your historical financial performance, membership data and growth, physical plant and lease rates and terms. All this is presented without disclosing your club identity or address, as it is most often shared with prospective buyers whose only commitment was an expressed desire to acquire more information than your initial generic email blast provided.
Stay tuned to FitBizWeekly next week for Step II: Advertising and Prospect Recruitment protocols and challenges.
Mike McPhee is a 48-year veteran of the commercial club business, who spent the first 20 years of his career in senior management positions and/or partnership roles, operating several large and profitable sports and fitness clubs in southern Ontario – before starting his own independent commercial club design, marketing and management consulting company, Club TeamWorks. Over the last 25 years, he has advised and consulted for hundreds of clients operating a diverse range of fitness facilities, with a specialization in club broker services.
Contact Mike at 647-828-3207 or email clubteamworks@hotmail.com
