Raleigh, Nc — Poor business practices ultimately led the North Carolina attorney general's office to begin its investigation of Charlotte, NC-based Peak Fitness three years ago, leading to two lawsuits and subsequent settlements. And poor business practices, some club operators say, has led Peak Fitness to its current status.

Last month, Peak Fitness closed three clubs in the Raleigh, NC, area, with four more clubs expected to be sold or closed within 90 days, leaving the company with a few scattered clubs in the Carolinas, most of which are in Charlotte.

Peak Fitness has arranged for members of its closed clubs to go to St. Petersburg, FL-based Lifestyle Family Fitness, which has four clubs in the area. McLean, VA-based Titan Fitness, which operates five Gold's Gyms in the area, arranged for members of a Peak Fitness club that closed in April to go to one of its locations.

“We've been watching for a while as Peak has been pulling out of the Raleigh market,” says Aaron Lieberman, chief development officer for Titan Fitness, which honors existing rates of all displaced Peak Fitness members.

The low price points of its prepaid annual memberships led to Peak Fitness' downfall, say Geoff Dyer, founder of Lifestyle, and Kevin Hedley, COO of O2 Fitness, which has five clubs in the Triangle (Raleigh, Chapel Hill, Durham). Peak Fitness sold two-year memberships between $149 and $199, three-year memberships for a little more than $500 and had a buy one year, get one year free option at $199. Peak Fitness, which also has monthly options, reached a settlement with the attorney general's office in May that forbids the company from selling prepaid memberships until it secures the bonds required by state law.

“Simply put, the cost of operating facilities the size of Peak cannot be sustained by this low cost of membership,” Hedley says. “The amount of cash collected in this model barely covers the bills and does not allow for any capital improvements, cleaning or quality staff to service the customers.”

Dyer says successful clubs manage their revenue and collect it on a monthly basis.

“Clubs that sell prepaid annual or multi-year memberships usually don't have a sophisticated accounting system,” Dyer says. “They spend [money] as it comes in. When clubs aggressively sell prepaid memberships, it catches up to them. Clubs that underprice their product are going to have challenges in the future when their prepaid memberships slow down.”

Hedley says a club with a negative reputation can negatively affect other operators. “It is difficult to convince members to re-enroll at a facility with higher rates, even though these rates are fair and necessary to sustain a clean, supportive and healthy environment,” he says.