So your closest competitor is going belly up. How do you (ethically) feast on his failure?

Health clubs do not mysteriously disappear in the middle of the night (well, not anymore at least). Long before the “out of business” signs appear in window fronts, more subtle signs hint at the club's impending downslide.

Club owners who can predict a competitor's financial failure can create many an opportunity for their own businesses. From luring over the ailing club's staff and members to buying up its equipment at cut-rate deals, the surviving club has a wealth to gain and little to lose.

That being said, there's no foolproof crystal ball that can tell you all about your competitor's financial secrets. But if you look in the right places, you're sure to dig up some dirt — without getting your own hands dirty in the process.

“What's interesting is that in the small-business world, often we don't really know much about what the other guy is doing,” says Rick Caro, president of Management Vision, a consulting firm in New York, as well as chairman for Spectrum Clubs. “But we could.”

If you'd like to know what the “other guy” is doing, look at his pricing, advises Ed Tock, a partner with the New York-based consulting firm Sales Makers. A sure-fire sign of a club's impending financial failure is deeply discounted prices for multiple-year, paid-in-full memberships.

“The problem with [these memberships] is it's a quick fix for the club operator,” Tock explains. “Most good club operators realize sales are just like exercise. If you do it once a month, it won't help much. And if you do it once a year, it definitely won't help much. You have to do it on an ongoing basis.”

Indeed, clubs that collect dues on a monthly basis are the least likely candidates for a financial downfall, according to Michael Scott Scudder, the owner/founder of Fitness Focus, a consulting company in New Mexico. “Most of the clubs that base [their] income on monthly dues don't go out of operation,” he says. “The likelihood of a club going out of business is directly proportional to [its] monthly dues.

“The lower the dues and the higher the prepaid memberships, that's where we've seen the most bankruptcies,” Scudder says.

Financial Desperation

In addition, deeply discounted short-term memberships, no-money-down joining fees, two-for-one sales, and more months for prepaid memberships can sometimes indicate a financially desperate owner, Scudder explains. (Club chains are an exception. They have the financial backing and volume necessary to offer deeper discounts than an individually owned, mom-and-pop-type club.)

Other signs that point to a slumping club include dirty facilities, broken-down equipment that isn't repaired, dwindling memberships, loss of key staff, lack of capital investment in the facility, and a shortage of innovative thinking, says Club One's Jill Kinney. After all, “a healthy club is a very creative environment,” she explains.

Looking at a club's pricing practices, equipment and upkeep isn't the only way to gather clues about its financial condition. You can also gather clues by listening to those who know the club best, according to Kirk Galiani, president and CEO of Gold's Gym International (GGI). Open your ears to the club's employees (are you hearing complaints from them about their boss's business practices?), vendors (is the competitor not paying his bills on time?) and customers (are more and more converts showing up at your club's doorstep?).

What you hear from people who work at — or with — the club may tell you everything you need to know about the business's future. In some cases, you may even hear from the club owner herself.

“Any club owner that's been having trouble, before they declare bankruptcy or shut the doors, they would attempt to sell [the business],” explains Kinney. “So my guess is that as a competing club, you would hear about it.

“Instead of shutting down their doors like they did 10 years ago, now they tend to sell [the business],” she adds.

Rumor vs. Reality

If the owner isn't fessing up and all you have are rumors to go on, consider the source (and magnitude) of the rumors before drawing any conclusions. “To some extent, discount a rumor because it's a rumor,” says Caro. “But if it comes from five different sources, then you should probably pay it some heed. And especially if it's from five different kinds of sources [e.g., former staff, vendors, people in the community, etc.].”

If the rumors do seem to stem from fact, you may want to take an incognito tour of the club — or send one of your employees to look around. Get a guest pass, or pretend you're a prospective client. While the condition of the facilities may not always tell you the true story of the club's financial status, it can be a pretty strong indicator, says Caro.

Once you know that the club is struggling, you must move forward gingerly. Galiani recommends that you “be very proactive, and even if your relationship is not very strong [with that club], you need to contact that owner.” If you're not comfortable speaking with the owner directly, someone in the community who knows the owner well can act as intermediary.

When approaching the owner about his position, be diplomatic and tactful, Galiani advises. Usually, a club owner facing financial problems would rather sell out than go completely bankrupt. As the competitor, you can offer to buy his membership list, his equipment or his accounts receivable, says Galiani. But be fast.

“If you wait until the facility closes, then the accounts receivable is not valid [since the contract is null and void],” Galiani cautions.

Equipment Bargains

Also, if you wait until after the owner cleans out the facility, you may lose your chance to buy the club's equipment. Move quickly and get a refurbishing company involved in the process, experts recommend.

“They'll come and look at it and give you an idea about what needs to be done with that equipment,” Tock says.

Club owners also need to consider whether the equipment is under warranty (which may transfer to the new owner) or under a lease agreement (which may not). Furthermore, since the value can deteriorate very quickly, many clubs can pick up used equipment anywhere from 10 cents to 30 cents on the dollar, says Tock.

Picking up the club's equipment can help round out your own services. Likewise, hiring members of the club's staff can bring expertise that your own business may lack.

Still, don't automatically assume that the competitor's employees will run over to your club and apply for a job. Only the most outgoing, confident people would feel at ease marching into their competitor's office to ask for a job, Caro points out. Therefore, make things easier for the club's employees. If you have a working relationship with their boss, use it.

“Most owners, even when they fail, are not so obnoxious that they want to hurt anyone along the way, especially their key staff,” Caro says. “Very often they'll feel guilty.”

If the owner feels guilty enough and there's enough time, he may even allow his staff to talk to you before the club closes. For a club shutting its doors in a hurry, though, you won't get this same kind of opportunity. It's up to you to hunt down the employees afterwards.

Member Hunt

You may also need to hunt down the club members. Having just lost a club, they may not be in a hurry to join another. “The real concern…is how to help the customers that have been burned,” Tock says.

Then again, you may not want to help the customers at all. Specifically, they may not be an asset, warns Scudder. “A club going out of business doesn't automatically create an opportunity for the surviving club,” he says.

How can you tell if an opportunity exists? First, you need to factor in how many prepaid memberships there are at the bankrupt club, Scudder says. He points out that “a prepaid membership is a liability.”

“You might not want those members because you would have to assume the liability on that time,” he explains.

In other words, if you bought a member's contract which had an additional six months left, at a much lower price than your own club's dues, you would essentially be letting that member work out in your own club at no cost for that amount of time. Not only are you losing money, but your own members may feel resentful for paying higher dues for the same services.

Naturally, you could try bringing in the members at your normal rate, but they may not want to have anything to do with you. “This person doesn't want to pay any more than what [he's] already paid,” explains Caro. “Very often this person will just go away because [he'll] never be able to replicate that sweetheart deal that [he] got [through the closed club's dues].”

On the other hand, if the members are coming from a high-end club, the transition could be easier. After all, these club members are used to paying top dollar for health club services; they would probably make the switch without worrying about your fees.

Strangers in Your Club

Still, you could be taking a risk by allowing members to switch. “If you're already operating successfully, do you really want those members?” Scudder asks. “[You're] assuming members that [you] don't know anything about. In some cases it's better to let them go out of business.”

Why? Because the clients could be unreliable, according to Scudder. You don't know their history at the club. They may be infrequent exercisers who don't pay their bills on time. Furthermore, the members from the out-of-business club didn't choose you when they signed up; they chose their old club. At least a new member who joins your club has agreed to your rates — and she picked your club.

Not everybody sees a danger in signing up members from closed clubs, however. Kinney relates this story: When a club in California shut its doors unexpectedly, nearby competitors sent employees over to the front entrance of the closed club to sign up the surprised members who no longer had a place to work out.

“I don't know that I'd stand outside the front door and offer memberships the day the club is closing,” Kinney says. “If you've got a good club in the area, chances are those people will come to you.”

First Contact

While you may not want to camp out in front of a closed club, you should actively seek out the club-less members, according to Tock.

“You have to move fast [to contact] the people who belonged to another club,” he says. “The regular people who worked out at the other club are going to find alternatives — whether it be going to another club or buying a home gym. But the casual exercisers you have to get to fast. Most people look for an excuse not to exercise, and we don't want people to have that excuse. It's up to us to make it easy for people to exercise.”

There are a variety of options for reaching the closed club's members — from ads in the paper addressing those customers to flyers posted on the old club's windows. Whatever you do, try to work with the members. After all, the old club's clients may be understandably wary of signing with another club.

Scudder suggests that if the closed club's dues were a lot lower than yours are, offer to honor a portion of the time left on the membership up to a certain dollar value. For instance, if the member paid $300 dollars for a yearly membership, and used six months of her contract, you could give her the corresponding time for your club for the leftover $150. “Or in some cases you might waive the initiation fee to your club,” he adds.

At Ease

If the members really feel slighted by their previous club, you may have to take additional steps to put them at ease. You can offer short-term or monthly memberships, giving them time to gain confidence in your club.

“Try to be flexible without hurting existing members,” Tock advises. “Give everybody 30 days free or give them some free time before they make their decision.”

Once your offer draws the members in, tell them that they can expect a better experience in your club. Listen to their complaints and convince them that your club won't treat them the same way that their former club did. In other words, assure them that you won't go out of business, leaving their memberships (and workout regimen) in limbo.

“It's important that we get the public to understand that not all health clubs are the same,” Tock says.


Guidelines for the Go-Getter

So you've set your sights on the members at a failing competitor. This step-by-step guide, compiled with the help of Rick Caro (of Management Vision and the Spectrum Clubs), will help you get these exercisers into your fitness facility.

  • After you've verified rumors that your competitor is going under, negotiate a meeting between yourself and the other owner. You can contact the owner yourself or set things up through an intermediary. An intermediary can work well as the other owner may act defensive if you were to call her up out of the blue and inquire about her club's financial status.

  • Obtain a membership list, as well as a guest list (if available), as soon as possible. Since the list depreciates in value after the club's closing date, you need to act fast before those members move on to other fitness facilities. You may want to offer the owner a fee for the list, with an additional fee for any members who join within a specified period of time. That way, “the owner may be more willing to work with you if [he] know [he's] sure to get additional money out of it,” Caro says.

  • Get the mailing addresses, phone numbers and/or e-mail addresses for everyone on the list. Contact those people as soon as you are allowed to do so. (Obviously, if an owner hasn't told his employees or members that his club is closing yet, you can't be the one to blow the whistle.)

  • When you pitch your offer to these members, give them a specified free period of time to get to know your club.

  • Know your offer to these members ahead of time. Are you going to waive their initiation fee? Are you honoring their former contract?•

  • If certain members don't take you up on your offer right away, continue using your contact software to communicate with them. Phone, e-mail or mail them additional offers, if need be.

  • Don't harass the former club's members. If after a certain period of time (a month or two) they don't come to your club, indicate to them that you can't go any further with your negotiations. If they still don't join, leave them alone. Since these people have already had a negative experience with a health club, you don't want to give them the impression that the industry is sleazy.