You've got that feeling. The daily grind of payroll, bills and other financial matters is getting you down. You realize that you know your managers and personal trainers better than your own children. Your club needs to be renovated. To make matters worse, competition is moving in down the road, perhaps a big chain club or maybe a multipurpose Y. You start to feel that it's time to get out.
The reasons for selling a club are as varied as the club owners out there, but chances are, at some point in your life, you will sell your club. How you manage your club now will determine what you get for your club in the future. That's why every club owner should plan an exit strategy now that can be used next year or 20 years from now.
The first step toward a strategy is to realize that eventually you will sell the club — whether due to retirement or health, business, family or other issues. When buying a club, many club owners go into the purchase with a time frame in mind for the length of their club ownership, says Bruce Carter, owner of Optimal Fitness Systems International, a consulting company that works with buyers and sellers. The moves those owners make revolve around quickly building up the business to make it attractive to an eventual buyer. However, other club owners have longer-term plans in mind. Those club owners may be less likely to have a strategy in place for the eventual sale of their club. Even if you didn't open your club with an exit strategy in place, it's not too late to implement one now.
WHO WILL BE THE BUYER?
Consider one of the most important issues first: when it comes time to sell, to whom do you want to hand your business? Because many of today's buyers are chain clubs, you should consider whether you would want to sell to a chain or to an individual club owner. If you open or renovate a club knowing that eventually you will sell it to a chain, then Carter suggests that you look at what type of clubs the chains are buying and open a similar club or renovate your current club to fit that style.
One of the first things that any buyer, particularly a chain club, looks for is location. You want to locate the club in an attractive area with a storefront that's visible. When looking at location, a buyer tries to determine whether he or she will be able to sell memberships there and how the club compares to competitors.
A larger club is more marketable to chains than a small club. Small clubs, though, can attract individual buyers. However, if you really want a chain as your purchaser and you own a small club, then make sure your club is a niche club, such as a personal training studio that will bring in the revenue that buyers want.
Regardless of whom you want to buy your club, you must ensure that you have a good lease on your building with a reasonable, steady rate. No buyer wants to take over a lease with unreasonable rent increases built into the contract.
Because buyers will take a long, hard look at the physical plant to determine how much deferred maintenance has occurred, the club and its equipment need to be well maintained and updated. Most club renovations have about a five-year effective life, says Steve Schwartz, president of Chicago-based TCA Clubs. Unfortunately, he says, most clubs haven't been renovated in 10 years or more.
“Often, sellers prepare for sale by milking the business for the highest possible cash flow,” says Schwartz. “Buyers almost always detect that and will adjust the price down.”
Buyers want a club without a lot of baggage, which means maintaining a good reputation in the community is imperative. Avoid lawsuits, treat members and visitors fairly and get involved in community activities to promote your club as caring for the community it serves.
Buyers also look at how members pay — electronic funds transfer or billed statement. A club should look to increase the number of members paying via electronic funds transfer to three out of four memberships, Carter says, because EFT guarantees some regular, recurring income for the buyer. The 20 times EFT formula states that a club with $100,000 in EFT is worth $2 million, he says.
A buyer will look to see whether members are paying monthly, annually or quarterly; and whether they pay by cash or check. That all plays into the service liability of the club, Carter says. A club with 1,000 members that are paid in full for a year means the seller received revenue from those 1,000 members and the buyer didn't, but the buyer still must service them for a year before they'll pay again — that is if they renew their membership. The buyer then has to find out at what price the seller sold the memberships so that the buyer knows what price he or she will need to ask for to get the person to renew. So, the buyer will also want to know how well thought through the pricing plans are and how appropriate those are to the market.
Membership fees are important to buyers. It's better to have 1,000 people paying $50 per month rather than 2,000 paying $20 month, Carter says.
“The lower amount people pay, the less they value the membership,” he says. “You want to charge a healthy amount. If it is being given away, it devalues the value of the club. You are devaluing the value of the membership.”
The most frustrating part of a buyer's evaluation often is the quality of the bookkeeping, Schwartz says.
“One thing I advise, particularly for owner/operators, is to spend more money on their bookkeeping,” Schwartz says. He suggests that a club owner spend the extra money to hire an accountant to formally close the books at the end of the year. Disorganized and confusing bookkeeping can lead a buyer to believe that the bookkeeping is not accurate, and if the numbers are not valid or well organized, the buyer may wonder what else he or she is missing. Disorganized bookkeeping also makes it difficult to understand how a club operates and how the numbers compare to other numbers the buyer has. The buyer often wants to take the seller's numbers and compare them to a setup familiar to the buyer. If they can't compare the numbers, then it makes it more difficult.
Schwartz suggests that club owners use the uniform system of accounting that IHRSA developed because “that's the right way to do it. It will show that you are a quality operator,” Schwartz says.
Most important, the bigger clubs want to buy clubs with cash flow now, Carter says.
“They aren't looking for the wounded animal that they can nurse back to health slowly,” he says. “They want the cash flow right away. It helps their bottom line.”
A club's asking price is based on its cash flow.
“So, the seller should be cutting the fat in certain areas,” says Frank Margarella, president of Premier Club Consultants Inc. of Tampa, FL. The club owner should downsize some of the long-term debt and bring building maintenance and cleaning inside if it is performed outside.
“If it's the beginning of the year and at the end of the year you want to sell, then start to look where to become more efficient and drive revenue,” says Margarella.
The information a buyer gathers will tell the buyer whether the business will get better, worse or remain flat. In general, the hard deals are those that look like they are getting worse or are staying the same, says Schwartz
“Most of the deals I've seen, sellers have waited too long and are asking an unrealistically high price,” Schwartz says. In fact, unrealistic sales prices — sometimes twice the value of the club — are the things that most often kill a deal, he says.
“I'm shocked, frankly, by what some people think their businesses are worth,” Schwartz says. “These are very smart, rational people who would be smart buyers of equipment, and they expect people to take what they are offering.”
How much a club should go for depends on with whom you speak. Carter says the general rule of thumb is that a business is bought at three to five times net profits. Margarella says a seller usually lists the club for about 10 times the net cash flow of the club while the buyer generally wants to pay about seven to eight times the net cash flow. If the club owner owns rather than leases the building and the club owner wants to sell the property along with the club, then the value of the property increases the asking price.
The higher asking price from the seller often occurs because the seller is trying to recoup the cost of improvements in the club, but that kind of thinking doesn't work, Margarella says.
“It's like putting a pool in your house,” he says. “You never really get your pool money back out of it.”
To get a realistic asking price for a club, he suggests hiring a consultant or appraiser that can offer a good, hard look at the club in an unemotional and unattached way.
“If you are not realistic in what you should sell it for and what you can expect on a return, then don't even attempt it,” says Margarella. “The club owner that is planning the exit strategy has to take his ego out of it. The club owner thinks that his property is worth more than the property next door and you ask him why and he says, ‘because it's my property.’”
However, Schwartz doesn't see a need for a third-party evaluation of a club's value. Instead, club owners should pay attention to reports in the media that state that depending on whether a person owns the space or leases it, the value of a club is worth three to five-and-a-half times the free cash flow a club generates after salaries and maintenance.
WHAT TIME IS IT?
Regarless of how much you ask for your club, one of the most important aspects of getting out of the club is knowing when it's time to sell.
“The time to sell is when money is available,” says Carter. “We just went through a year where the banks stopped lending money. It was difficult for buyers to get the money to buy.”
Good economic times mean that money is flowing. There's more business — more people buying and selling clubs. The equipment companies are happier to lease. During down economic times, it's great to have the money to buy if you can find it because you can find clubs cheap, particularly if the club is already doing poorly.
Besides looking at the economy as a guide for selling your club, you should also look at your club's revenue and potential for growth. Unfortunately, many club owners sell at the wrong time as far as their revenue is concerned. They sell when they see they've milked the market and will have to dig into their pockets for capital needs, such as renovations. They may sell when their revenues begin dropping, perhaps because competition moved in down the street. However, buyers look at the financial records and will question if profits dropped for two consecutive years or more.
Schwartz suggests selling on the way up rather than selling at the top even if it means leaving some value on the table for the buyer.
“If it's going up, the buyer is willing to pay more,” says Schwartz. “If it's flat or going down, you are going to get less.” Trying to time the market to buy at the bottom and sell at the top is dangerous, he says. “You're better off buying after the bottom and selling before the top. The price for being wrong can be pretty stiff,” says Schwartz.
Making the decision to sell at the wrong time or for the wrong reason can be a stiff price, too. That's why before you sell you should make sure selling is the right thing to do.
“Before you sell, make sure that you take another look at the potential,” Carter suggests.
Some owners no longer see the potential in their clubs because they are too close to it and they are looking at too many small details. Instead, bring in a consultant that can show you whether the club still has potential, and if so, where. The consultant can tell you whether selling is the right avenue for you at the time or whether you just need to renovate, change your demographics or your programming. If the consultant agrees that you should sell, he or she can then advise you about whether you should renovate the building to get more at the time of the sale or just sell the club as is.
However, do keep in mind, that odds are someday you will sell your club. If you work now to make your club more attractive to buyers and to protect yourself, you can exit your club with a strategy that sets you up to be successful in the next phase of your business career and your life.
SOMETIMES LOOKS DON'T COUNT
So, your club is more than a bit tattered and worn. You haven't renovated or redecorated in so long that you still have photos of Jane Fonda in leg warmers and leotards hanging on your walls. The paint is peeling; the carpet needs replacing. Is there no hope of selling your club without first renovating or redecorating? Well, not necessarily, although the average buyer generally wants to purchase a club that doesn't need a lot of work or renovations.
“People buy out of emotion,” says Bruce Carter, owner of Optimal Fitness Systems International. “If it's a rundown, beat up club, they aren't as eager to buy it.”
However, as a consultant, Carter likes ugly clubs because he can buy low, renovate it and turn it around. Carter has a client that is looking to buy a club that is in bad shape physically and financially.
“Everything about it is terrible and we like that,” says Carter. “It means the price should be very low. It means we can make lots of changes and make it look great without having to pay a lot of money for the club.”
However, if your club is in bad shape, remember the operative words in Carter's statement: “It means the price should be very low.” So, an ugly, outdated club isn't going to be hopeless to sell, just don't expect to get much for it.
If you are exiting the club and selling your shares to a partner or partners, then you better hope you protected yourself when you entered into the partnership, says Bruce Carter, owner of Optimal Fitness Systems International.
“So much of this is done not when you go to sell but when you put it together,” he says. “It's almost similar to a prenuptial agreement. What is the best way to get in and out of this?”
Plan ahead setting conditions on how and when you can get out and predetermining how you will determine market value for the shares.
The buying partner often has the upper hand because he or she doesn't necessarily need your part of the business, but by purchasing it, he or she takes on your part of the liability. If you are getting out of the partnership because things went sour between you and your partner, then the negotiations are even more difficult.
“So, if you want out, it's going to cost you less than you think it's worth,” warns Frank Margarella, president of Premier Club Consultants Inc., Tampa, FL. Don't expect to make a ton of money unless the property is on the upswing and your partner would love to own the whole thing, he says.