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  • Selling a Fitness Industry Company

    May 26, 2020

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Vishal Punj. Mr. Punj specializes in the sale of fitness industry companies for IBA.

    Selling a Fitness Industry Company

    When Joe Gold opened his first gym in Venice in the mid 60’s, little did he know that he would unleash a love affair with fitness that would eventually spread to the rest of the world and evolve to include hundreds of business models all focused on one thing — improving one’s physical well-being.  During the past 50 years the industry has been able to ride out tough economic times and emerge healthy and strong.  With that being said it’s definitely not immune to what happens in the broader economy.  An economic downturn has a way of shaping customer preferences.  COVID-19 had the added element of forcing health and wellness facilities to close temporarily until the lifting of restrictions by state governments.

    In speaking to health & fitness owners and consultants throughout the Pacific Northwest since the pandemic began, I’ve noticed a couple trends emerge.  The first is that the shutdown of their businesses has sped up the adoption of practices that serve to increase the engagement with their customers.  A good example of this is the addition of streaming workouts and online nutrition services to maintain the ‘stickiness’ factor with customers and insure that the brand remains top of mind as the restrictions ease and people begin to re-visit services that they would frequent pre-COVID-19.  Ultimately, I believe this is good for the industry as more engagement means more people continuing to stay active and increased customer retention.  The second is that the lockdown has many fitness entrepreneurs questioning their priorities and motivations for staying in the business.  Those reasons are many – a desire to pursue other interests, retirement, divorce, health concerns, labor issues, partnership problems, etc.  The pandemic simply sped up the timetable to confront these issues head on.  For these entrepreneurs a sale of the business may be the most viable option.  The following are a few things to consider in prepping the sale of your fitness business:

    Documentation

    Documenting events in the business and the keeping of concise records that can point to the effect of those events on your business is critical.  The financials of a business will form the outline of a story for that business.  The narrative that accompanies those financials will complete the story and fill in the blanks where a potential buyer might otherwise come to their own conclusions.  A good example of this would be documenting the onset of COVID-19 within your specific market and the specific actions that were taken in response.  Was ownership able to negotiate a rent abatement with the landlord?  Fitness businesses are considered non-essential and were thus forced to comply with the state mandate to shut their doors.  Many in the industry closed their doors ahead of the state mandate in the interest of protecting the health of their customers.  On exactly what date did ownership initiate the process of closing the business?  If so, for how long and what are the conditions of the re-opening of the business?

    Because fitness falls squarely in the service industry key employees often play a deciding factor in the retention and viability of the business.  Key trainers, coaches and support staff are often the ones at the front lines of the business that form relationships with customers to keep them coming back.  Was the business able to procure funds from the EIDL and/or Paycheck Protection Act?  Which employees were furloughed and how many of them are still in the process of being re-hired?  Transitions from the existing seller to a buyer in ‘normal’ times are always delicate.  With the pandemic not quite in the rearview mirror those transitions involving key employees will require a paper trail and constant flow of communication to ensure that the new buyer is able to retain key staff members.

    Reality Check

    As this article is being written the details are still emerging surrounding the many factors that have led to Gold’s filing for bankruptcy and the cash flow problems faced by Town Sports International & 24-Hour Fitness.  Those familiar with the industry however, all agree that COVID-19 simply highlighted the volatile economic forces that were already plaguing those business models.  Facing pressure from both the boutique studios (i.e. CrossFit, Orange Theory, FlyWheel) and luxury clubs that offer a high touch, specialized workout experience and high volume, low price clubs (i.e. Planet Fitness) that have an unmatched pricing model, clubs such as Gold’s and 24 are stuck squarely in the middle.  It’s a valuable lesson for fitness entrepreneurs in knowing where you stand in an ever-changing marketplace.

    What is a buyer purchasing when they acquire your fitness business?  It isn’t the equipment in your facility, which is discounted for acquisition financing by the lending community as collateral to a mere fraction of its original value.  A buyer is really purchasing the intangibles of your business.  Most health and fitness businesses employ some version of a recurring revenue model whose intangibles include the goodwill and relationships you’ve created with your customers that keep them returning (and paying).  By using the financials of the business as a starting point the buyer is essentially purchasing the expected future benefits derived from existing goodwill and relationships with those customers.

    A logical question to ask is what happens to the business value if revenues are down from the same time last year?  The business was likely closed during the pandemic and a serious buyer will understand this.  The question you should be prepared to answer is what you’ve done to maintain your relationship with your customers during the time the business was shut down to maintain brand trust.  Going forward a primary concern will be the overall cleanliness of the facility and what safeguards have been put into place to properly sanitize all surfaces.  Communicating what is being done to keep customers safe cannot be understated.

    People join a fitness facility for a number of reasons, but it’s safe to say all of those reasons involve movement and staying active.  Whether you have a boot camp facility, CrossFit, Pilates, MMA, indoor cycling, boxing, multipurpose or big box gym the customer came to your facility expecting a certain experience.  With that experience being absent from their lives for the past several weeks how is the void being filled?  The pandemic has been a boon to online platforms such as Obe Fitness, Neou, and Classpass (just to name a few) who have seen their memberships skyrocket.  In the absence of any direction from you during the pandemic those platforms were competing for your customers’ attention.  Were you able to offer a compelling alternative and stay top of mind while the facility was closed?  A good example of this is Equinox, who accelerated the release of their online Variis platform to engage members and going forward will have both in-club and online membership options. As they re-open clubs in Texas it will be interesting to see how those early investments have paid off.

    The type and duration of the engagement with your clientele will directly impact their decision to return as the pandemic resides.  If you managed to keep those bonds with your clientele through communication and content there is a good chance that over time your members will gradually trickle back.  Assuming that is the case an argument can be made that COVID-19 was a one-time event and thus have little impact on the valuation.

    Honesty

    Here I’m referring to being honest with one’s self about why you really want to sell your business.  By and large the entrepreneurs IBA frequently encounters have owned their businesses for many years and in some cases a number of decades.  Whether you’ve been the owner for five years or twenty, the one common thread we see is that the business has become intertwined in the entrepreneur’s identity.  The business is more than just a source of financial rewards.  For many it’s a source of expression and a decision to sell will directly impact all stakeholders including employees, partners, and vendors.  Not being absolutely clear on why you wish to exit will play out during the negotiation phase, as a serious buyer and all professional parties involved will sooner walk away from a deal than expend valuable time and resources with a seller whose intentions are not crystal clear.  Speaking from personal experience, during the sale of my first fitness facility the deal nearly fell apart several times due to emotions running high.  Had I not been able to channel my reason for wanting to exit in the first place, all of that work and stress would have gone to waste.  Inevitably when things hit their boiling point do people’s true intentions become apparent – make sure those intentions stay constant throughout the process and that you aren’t the cause of your own sale blowing up.

    If you have questions relating to the content of this article, the process associated with preparing a business for sale, or selling a fitness industry business Vishal Punj would welcome the opportunity to talk with you.  Mr. Punj can be reached at (425) 454-3052 or vishal@ibainc.com.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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