Rick Beusman has been busy. In the last three years, he's gone from owning two clubs to owning five. Considering the time and effort it takes to start a new club, that's quite a feat.
However, Beusman, whose clubs are in New York and Connecticut, isn't alone in his expansion efforts. The number of health clubs in the United States grew by more than 2 percent (up to 18,203 clubs) during the first six months of 2002. That number was down from a 5.1 percent increase in health club numbers in 2001 (from 16,983 clubs in January 2001 to 17,807 clubs in January 2002).
While the economy may be to blame for a slowing in the number of new clubs, it hasn't stopped all club owners from forging ahead with expansion. Some are motivated by the desire for additional revenue and profits, others by the need to defend against competitors and still others by the desire to give employees and the company the opportunity to grow.
Regardless of the reasons for expansion, club owners must look first at internal and external strategic issues prior to going forward, says Beusman, whose clubs include Saw Mill Club, Mt. Kisco Athletic Club and three Sports Plex clubs.
“There's strategic issues that if you don't get them right, you'll be dead,” Beusman says.
Before expanding, a club owner must ensure that he or she is capable of expanding internally. Is the club's culture one that supports growth and expansion? Is the staff on board with the idea? Is the culture one where growth and acquisition is seen with pride and ownership?
Administratively, the club also must be designed for growth. It must have information technology, payroll and accounting systems that are expandable and that will allow the club to expand. The business office must be centralized. The human resource system must be expandable and must provide training for employees.
Club owners also must look at two external issues: would growth help defend against competitors and do prime markets exist that aren't being reached? For Beusman's clubs, he wanted to secure the market and become the dominant player as well as give his employees an opportunity to grow. That led to the question of how to align the business, what types of clubs to add and whether to acquire existing businesses or build new ones.
For Beusman, the answer was to acquire existing businesses. The reason has to do with one of the first nuts and bolts issues that a club owner must deal with: financing.
The rocky economy has tightened bankers' grips on their wallets making it more difficult to obtain financing for a new club. For banks, it's all about the operator. Banks care about the history, past successes, equity positions, personal guarantees, personal assets and resources of the operator. A club owner starting up a second club must show good numbers from the first club or the going will be tough, says Bruce Carter, the founder of Optimal Fitness Systems International, a consulting firm specializing in startups, and Optimal Design Systems International, a design firm. In essence, a first club has to show profitability and sustainability over a long period.
“Banks will lend you money when you show you don't need it,” says Dan Horan, owner of Hatfield Athletic Club in Hatfield, PA. That makes it tough to get financing for a fitness person who doesn't “come from money.”
Horan opened his club five years ago, but it took him a good year or two to get the financing that he needed. He was turned down by bankers at least once, but finally landed a backer whose collateral made him more attractive to the banking community.
“I had the experience but not the collateral,” Horan says. “My partner had other experience and major capital and collateral behind him.” If a club owner must take on a partner, Horan suggests finding one with different strengths so each person brings something different to the partnership.
Years of experience in the club business give a club owner the successful history to make future loans easier to obtain.
“In the last three years, we were able to get a lot of financing with little personal guarantees,” Beusman says. His past successes have shown his banker that his clubs are cash flow generators. “They know us personally and see our financial strength,” he says.
Beusman isn't interested in investors for his club. Carter agrees that most club owners prefer to stay away from investor relationships because investors cut into the profits. However, sometimes club owners have no way around an investor arrangement. In that case, Beusman recommends a majority shareholder arrangement instead of a conglomeration of minority holders, which Beusman calls “a hard beast to manage because everyone has a say.”
“You can get investors, but investors are a lot of work,” Beusman says. “A good banking relationship is a lot less work. They just want you to pay the mortgage and meet the covenants.”
GOTTA HAVE A PLAN
Financing requires a compelling business plan that helps the club owner get equity, find debt and create a roadmap for senior management. The business plan is created for bankers, investors and senior management — each of which wants different types of information in the plan. A banker is interested in the concept and the total cost, but most importantly the club owner's ability to pay back the debt. Investors want to know what the risk is to them. They are concerned about cost overrun and they want to know about working capital, tax benefits and their returns. Senior management wants to see the operational numbers and plans. A business plan needs all of this information (perhaps in chart format) to satisfy each of these audiences.
A club owner should take just as much care in putting together the business plan for the second club as he or she did for the first. Too many club owners who have been successful with the first club get caught up with the excitement of their success and hurry the process along, becoming lax in the details for the second club, Carter says. While taking the time to create detailed and thoroughly researched plans for the second club may initially slow the growth process, in the long-term it increases the probability of success, he says.
In addition to a business plan, a club owner should develop a marketing plan. If the demographics of all the clubs are the same, a club owner can use the same marketing plan for each. By doing so, a club owner can cut marketing costs drastically by developing just one campaign and direct mail pieces or radio and TV commercials for all his or her clubs at one time.
However, if the demographics of the clubs are different, a different marketing plan will be needed for each, says Michael Scott Scudder, managing partner, Southwest Club Services, Taos, NM.
“You can't market in our rural locations like we do in our urban areas,” Scudder says. “They wouldn't get what our message is. It wouldn't translate to them because they are not used to it.”
GO TO THE MARKET
A club owner should have an idea of what type of club he or she would like to open before selecting a site. That concept (desired demographics, service offerings, size of club) could change slightly as the demographics of a potential site become clearer.
Club owners must be careful about being “opportunistically driven,” says Rick Caro, president of Management Vision in New York. Just because a realtor offers a building at a great price and a seemingly great location, club owners shouldn't snap it up if they haven't done their homework properly and if they don't know whether the location and market fit into their concept for a club.
Caro also warns against skipping steps in the plan and just going with a gut feeling. A club owner must do a market analysis each time he or she opens a club because the owner may be too close to the situation to analyze it with a dispassionate point of view.
“If a location isn't adequate in terms of being able to have a sustainable population to serve it, then it doesn't matter how terrific the offerings are inside the building or how experienced the management is or how much they spend on marketing to woo people or how cleverly financed it is,” Caro says. “A business can be flawed from the beginning if the market conditions aren't adequate.”
A market survey offers dispassionate clarity. Part of a market survey involves defining the physical breadth of the market. Generally, club owners and consultants use drive times to define the market area. The drive times should be determined by actually driving in peak time traffic from the potential site to the north, south, east and west. By doing this, the club owner emulates the way people would come from their residential areas. Caro chooses to use eight minutes as his drive time for his primary market. He then drives another 12 minutes from that point to find the secondary market. Caro also looks at the daytime market, particularly in an urban area where the potential members may be workers visiting on their lunch hour. For an urban market, such as New York City, Caro uses a five-minute drive time, considering that the majority of potential members may walk to the gym at lunch or after work.
Once the market areas have been determined, a club owner orders demographics for each area from a demographic company. The demographic information includes age, ethnic background, income, educational attainment and occupation — the last two factors Caro considers more important than the others in ascertaining whether a club's concept fits the market.
Most club owners then take the numbers and extract out those ineligible to join their club for one reason or another — wrong age group, physically unwell, unemployed, indigent, or loyal to another health club in the area — to ascertain the number of potential members in a market for the chosen club concept.
Scudder, however, says that club owners must dig deeper when looking at the market. They must determine the kind of buyers that are in the market, something that can only be gleaned through surveys, interviews, chat groups and cross-referencing. Using a company called Red Hot Marketing, Scudder can see numbers for each group of buyers identified by the company. Each group has distinctive buying patterns and lifestyles as well as response mechanisms to advertising messages. Therefore, information about the buyers in a market not only allows a club owner to determine if the market is appropriate for the club concept, but also how to market to that group.
“That's how I do demographics and it has avoided a lot of mistakes,” Scudder says.
IF YOU BUILD IT
Club owners must work with several other individuals and groups to put together that additional club. Most important among these are the architect, builder and vendors. Word of mouth is vital when choosing the architect, builder and vendors. It's never too early to start asking around at other health clubs to see who they used for their new club or expansion.
It's also never too early to get an architect and a builder involved in the process. If a club owner does a phase one feasibility study, he or she will want an architect on hand to look at the possible site, hear the concept and create a conceptual layout to see if the plan and site are workable, Caro says. An architect can alert an owner to vital information such as whether the proposed site is level enough to fit into the concept for the club. The architect and builder also can give a club owner a better idea of cost, something required for the business plan.
Using a club-experienced architect is important, Caro says. “The more they've done facilities, the more they can organize you,” he says. “They know what questions to ask, and it forces you to think about those things.”
A club owner should get bids from several builders before choosing one, and he or she should ask about the size of past jobs the builder has completed to ensure that the builder can handle the size of the project.
Club owners should make sure to select an architect and a builder that share visions similar to their own and an architect and builder that they get along with. The process of building a new facility or renovating an existing building can be a long one so the three entities must be able to work together in a professional manner.
Once an architect and builder are selected, a club owner must select vendors for everything from exercise equipment to towels and toilet paper.
To find vendors, “be prepared to make half a dozen phone calls to people in the business, people you trust and think have done well,” says Frank Bentkowski, general manager at Exude, a motivational fitness company, and a sales representative for Xercise Systems, a distributor. Both companies are in New York City. For supplies other than equipment, Bentkowski suggests looking outside the club business at building or hotel managers who are willing to share where they get everything from their light bulbs to their towels.
Horan found his vendors by referral and then by trial and error, building relationships as he went.
“It's about relationships,” Horan says about vendors. “The people who have been good to me, who back up what they sell — I have people I deal with in every avenue — I usually end up giving all of them some business.
”Loyalty and trust is earned over time. “The business is very small so everyone knows everyone,” Horan says. “You have to do right by people.
”Vendors should be able to help a club owner accomplish his or her objectives and get the owner the required equipment at an affordable price in the needed timeframe.
“A vendor has to be someone who cares about you and your interests and tells you the truth,” Bentkowski says.
ALL AT ONCE
The selection of site, architect, builder and vendors doesn't happen in isolated moments. The process of starting a second club is made even more difficult because practically everything must happen at the same time. A club owner will simultaneously be working on the business plan, the architect and blueprint selection, the search for capital and zoning permits. The club owner also must create a marketing plan to sign up members — a process that may require leasing office space near the facility as it's built or bringing a trailer to the site. Prior to opening, key staff and hourly staff — including sales, housekeeping and maintenance — must be hired and trained.
It's clear the process is not a one-person operation. Assistance from partners or a trusted employee can prove beneficial, particularly since a club owner doesn't want to neglect the original club while planning for the new one.
In fact, Caro says that many club owners who are interested in expansion don't understand that when they make this decision, they are involved in two businesses: operation of the current club and expansion. He suggests maintaining two separate staffs.
“If you are trying to grow, you may need an acquisitions or new deal person so that you have a committed force that helps you grow as you want to,” Caro says. “Otherwise, you are haphazard.
”The club owner also must have at his or her current club a well-trained staff that is empowered to make some vital decisions if the club owner can't be reached. For that reason, proper training of current staff is exceedingly important. Otherwise, the club owner will feel he or she must do it all, a feeling that can only lead to burn out and possibly failure of one or both clubs.
In the end, whether to expand or not comes down to how strong a passion the owner has and how long he or she is willing to be in the business, Beusman says.
“If they are doing this with the goal of flipping it in three to five years, they are doing it for the wrong reason,” Beusman says. “You are prone to fail if you just want to build and then sell in three years.”
Instead, a longer-term focus is more likely to end in success and the desired exit strategy. That longer term focus should always keep in mind the reason the club owner wants to be in the business and should help prevent the owner from side trips to “trendy” decisions that could get the owner off track on his or her way to success as a chain, a franchise or just a few good clubs in which the owner can take pride.
PARTS OF A BUSINESS PLAN
The business plan should be detailed, clear and concise, run no more than 12 pages, and include the following information:
- Executive summary
- Mission statement for the club and a plan for enacting it
- Market analysis
- Site and building analysis
- Competitive analysis
- Facilities and programs to be offered
- Rate structure
- Marketing/advertising plan
- Income projections
- Startup costs
- Exit strategy
- Appendix (which may include information such as consultants, whether a franchise or not, pictures of other clubs done in the past)
FACTORS THAT MAY SHOUT ‘GET OUT’
Several factors indicate that a club owner should either pull out of the deal or revise the plan.
- If the market and demographics aren't right in the selected location
- If the return on investment is low
- If the facility isn't unique from other facilities in that market
- If the existing building can't structurally be renovated as required for a club
- If locating in this space may require a zoning change that is too costly or not winnable with the neighbors
- If the right amount of financing can't be obtained
Rick Caro, president of Management Vision, also suggests that a club owner look at issues such as whether there will be adequate parking space, whether getting permission to use any planned outdoor facilities and their lights would be doable or whether there would be any other constraints on the planned club.
THE NEW GUYS
If you want to get into the club business but have little to no experience, your going may be rough. For starters, banks won't be lining up for your business.“If I'm doing a club and I've never done one before, that's a big red light for the bank,” says Bruce Carter, founder of Optimal Fitness Systems International, a consulting firm specializing in startups. The firm has helped newcomers to the industry with their startup plans. However, by just hiring a club-experienced consulting firm, a newcomer often becomes more attractive to banks and investors.
The process of opening a new club is similar to that of opening a second or third club. Homework must be done. The club needs a business plan, market survey, site selection, marketing plan, an architect, builder, contractor and vendors for equipment and day-to-day supplies. Calling upon the expertise of others already in the industry is a must.
Before Dan Horan, owner of Hatfield Athletic Club in Hatfield, PA, started his club, he tapped the experience of other club owners to put together his plan, even getting copies of their business plans to use as guides.“I met with a club owner that was so helpful,” Horan says.
“I met with six different people and picked their brain on this industry.” He also went to trade shows and talked to club owners to get their insights about the industry.
“There's nothing wrong with not knowing,” Horan says. “There's something wrong with not finding out.”
A club owner can find a wealth of knowledge outside the industry as well by talking to hotel owners, bankers and attorneys. But, Horan cautions, be willing to get drilled about your business plans by these people who are looking at the plan from a dispassionate, outside perspective rather than an inside, passionate perspective. Their no-nonsense outsider view can help bring a club owner back down to earth about his or her plans and can put things into perspective.
TIP: Regardless of how many clubs an owner has, he or she shouldn't assume that every new club would be the same. As time progresses, club owners learn what works and what doesn't work. A new facility gives a club owner the opportunity to do things that he or she couldn't do in the old facility.
TIP: If you are leasing the space for your second club and the landlord asks to see your business plan, tell him or her no. The business plan not only will show the landlord how much money you project you'll make and when you project you'll turn a profit, but it will also show your equity. This knowledge could cause the landlord to up the rent.
TIP: The concept for the second club generally should be similar to the first club because it cuts down on the learning curve for a club owner and the staff.
TIP: Just like with most first clubs, it's often best if you put some equity in subsequent clubs rather than borrowing the full amount. Otherwise, your debt to equity ratio could be out of whack and you could become overburdened with debt.
TIP: Once you've developed a business plan for the new facility, put together a master business plan for all your facilities to take advantage of synergies.