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With markets opening during the past year, private equity firms are becoming more interested in the fitness industry. Industry insiders say that the industry’s recession-resilient reputation, increased mergers and acquisitions in the industry, plus an impending capital gains tax deadline have led to more activity as 2012 heads down the home stretch.
Added to the deadline pressure felt by some companies, venture capitalists may lose their carried interest treatment at the end of 2012, which would result in revenues shifting from capital gains to ordinary income rates, O’Rourke says. Carried interest is the share of profits that a general partner of an investment fund receives from his or her ownership interest in the fund’s assets, according to the Private Equity Growth Capital Council.
“Hence the money on the sidelines wants to get deployed before year-end if a grandfather provision, which is a likely negotiated conclusion around new tax law, would result,” O’Rourke says.
If owners of some club companies do not make a sale by the end of year, they might increase the sale prices on the total worth of their clubs to compensate for the higher capital gains tax, Caro says.
“I know a number of clubs that would like to have a transaction before the end of this year or they’ll raise their prices for the same story starting Jan. 1 of next year because they don’t want Uncle Sam to benefit disproportionally for the value that they think they’ve created,” Caro says. “Especially if it’s a family-owned club and they want to get a favorable tax treatment, then they’re obviously going to be encouraged to try and create a transaction before the end of this year.”
However, some owners who have had their clubs for a long time would be happy to sell after the new year even if a transaction cannot be completed by Dec. 31, Caro says.
“There will be private equity dollars available in 2013,” Caro adds.