Caro on Buyers' Expectations

Rick Caro knows what buyers want in a club. After all, he is a buyer. As the chairman of the Spectrum Club, he has witnessed numerous acquisitions since his young company began consolidating club clusters last year.

First, buyers will look for predictability in a club, according to Caro. They want to know if it has demonstrated a consistent history of success. They'll examine the ebb and flow of membership, changes in the club's pricing, and the club's revenue and expenses. They'll also take a close look at market conditions, checking on existing competition and competition that could come into the area.

After predictability, the buyers will look at future growth, Caro continues. These are the questions buyers want answered: Can the club expand or has it reached capacity in terms of space? Has membership hit its max? Are non-dues revenues available? The answers to these questions will have a bearing on how much buyers are willing to pay.

What buyers are willing to pay may disappoint a club owner with an inflated view of the business's worth. Your best bet: Hire an independent firm to come in and value the club so you have realistic expectations during negotiations. And if the buyers obviously aren't going to match your price, call off the deal. You may want $5 million, but buyers who are clearly only going to spend $2 to $3 million will resent being strung along if you have no intention of selling at their price.

If the buyers are interested in your club and the selling price isn't an issue, expect to go through proper due diligence. At this point, any questionable practices will turn up. For example, if you sold several multi-year memberships, the buyers will find out. They may not want ownership of a club full of members who don't have to pay dues, yet are still entitled to services. "A potential buyer will dig deep," Caro warns.

If you are thinking of selling your club down the road, take a look at what you are doing to minimize taxes. Say you own a $7 million club with a net income of $2 million, and you've made adjustments so that you paid taxes on $500,000. When buyers come along, they are going to judge you as a $500,000 club, not as a $2 million club. Yes, you can pull out your adjustments and try to explain, but buyers may not want to look through hundreds of line items.

If they do, that will lengthen an already time-consuming process. Caro points out that an acquisition doesn't happen quickly, and a club owner must prepare for a long journey. The owner must provide information on finances, memberships, the physical plant and equipment. He must be ready to go through a negotiation, a long and detailed due diligence, legal work, and, finally, a closing that will satisfy everyone.

An owner who is inadequately prepared for all of these steps will slow things down. And if he frantically spends all of his time with accountants and architects, gathering financial information and building plans, the club will begin to suffer. After all, as the owner collects all of the data, he may not be available to take part in staff meetings, maintain a leadership role, and so on.

One way an owner can relieve some of this pressure is to find a lawyer, accountant or other business advisor comfortable with the acquisition process to act as a third-party intermediary. This intermediary can also help find an interested buyer. However, this should be done secretly. Leak of a possible buyout could cause unnecessary panic among members and staff.

One way to maintain discretion is through a mail campaign started by your intermediary. For example, your lawyer can write to club operators in the area, stating that he has a client who is interested in selling a club. He can describe the club and give a rough idea where it's located-but he should not mention the club by name. The people who are interested in buying can then contact the lawyer to get more information.

Instead of a mail campaign, you can place an advertisement in trade periodicals, local newspapers or regional editions of The Wall Street Journal. Again, you want to describe your club without giving the name. Your intermediary can field the calls from interested buyers, keeping you anonymous. One caveat: Don't place ads near holidays; papers are thin and people don't read them.

If you prefer a more proactive approach, you can read the news sections of trade magazines (like this one) to learn which buyers are out there. You can also check with regional IHRSA associations to see who is buying whom and where. Pinpoint buyers who may be interested in your type of club and give them a call. You can also get the names of potential buyers by networking with consultants and talking with club operators at conventions. Just be careful with this direct approach. Stay as discreet as possible.

Not only should you maintain discretion when seeking a buyer, you should maintain discretion once you've found one. Ask the buyer to sign a confidentiality agreement so people won't find out you are selling the club. "The sheer rumor can scare people because they assume change will occur," Caro notes.

Members who learn you are selling may assume that it isn't in their best interest to stay with the club. They may not renew, may not encourage friends to join. That's bad for business-and your negotiations. A sudden decline in membership won't impress buyers.


Key Materials Needed for Potential Sale of a Club

OK, you're ready to sell your club and you've found an interested buyer. He's going to want more than your word and a handshake before proceeding. According to Rick Caro, a buyer will expect the following:

* Seller's "bottom line" and terms

* Seller's asking price and terms

* Copies of complete club financials over last three years prepared by independent CPA firm ("review"-level financial statements)

* Copies of club tax returns for last three years

* Name of ownership vs. operating entities and list of principal owners

* Five-year pro forma with and without proposed physical plant changes

* Street map detailing area within 10-mile radius from club site and showing all competitors

* List of all competitive facilities within 10-mile radius (multi-sport, single-sport, YMCA, aerobic studios, amenity clubs within office or residential buildings, etc.) with name, address and telephone number, and any brochure materials

* Any residential and commercial population studies by local planning boards, utility companies, chambers of commerce, etc.

* Photographs of each "element" of the club

* Copy of membership agreement(s)

* List of all local and regional newspapers with telephone number, address and advertising rates and deadlines

* List of any recent clubs sales (within last three years) in local area

* Attrition rates for last three years

* List of potential upsides for club purchaser

* History of club (year built/bought, expansion phases, membership growth, key owners)

* Description of location/neighborhood

* Copy of any club appraisal conducted by MAI appraiser

* Current floor plan of each floor (reduced to 8 1/2x11-inch size)

* Proposed revised layout after purchase of club (if changes planned)

* List of equipment by type

* Site plan (reduced to 8 1/2x11-inch size)

* Copy of club brochures, flyers, newsletters and membership kit

* Relevant zoning information, including variances, easements and other restrictive covenants

* Profile of current membership (age, marital status, children, etc.)

* Membership broken down by type of membership

* Membership broken down by ZIP code

* Pricing structure (initiation fees, monthly dues) during last two years

* Current organizational chart of club staff by position title and number of full-time/part-time staff by department

* Potential capital improvements for future club (with estimated costs) with floor plans (reduced to 8 1/2x11-inch size)

* List of any lawsuits or claims pending with relevant backup information