LA Fitness International’s recent acquisition of 171 Bally Total Fitness clubs and the corresponding announcement by LA Fitness that it would close 31 of the properties as part of its operating strategy has generated considerable buzz in the industry, as well as among the members of the former Bally clubs involved in the acquisition. While mergers and acquisitions are natural and desirable in a maturing industry, they nonetheless generate considerable anxiety among employees and members of the targeted company, especially when it involves the prospect of clubs either changing ownership or closing.
Club closures and asset sales that result in a change of ownership are not restricted to large-scale acquisitions. They can take place in smaller organizations and independent clubs. Either way, the sale or closure of a club can be attributed to business conditions, ranging from bankruptcies to lease cancellations to financial losses to changing market conditions to strategic business decisions. Despite the reasons for club closures, these closures often have been a leading contributor to consumer complaints about the industry, negative press and increased government regulations over the industry.
In part one of this two-part series, I highlight the good and the bad that results from how organizations deal with the sale or closure of a property. The second part of the series (to be posted next month) will provide a template on how to close or sell a club so that it addresses the needs of shareholders, members and employees.
Most independent clubs close as the result of deteriorating business conditions, most often the result of factors such as a lease cancellation, a market downturn, or new competition moving into the marketplace and the resultant loss of members and revenue. When it comes to multiple club operations, most closures are strategically driven (e.g., existing clubs may not meet necessary financial metrics, acquired clubs may be in the same market as a more profitable existing club, and the closing of a club may allow for consolidation of memberships to create greater operating efficiencies and profit margins).
The sale of a club is usually driven by several factors. Sellers often desire to reap a return on their investment or to recapture a portion of the original investment if the club is performing poorly. For buyers, the decision is usually (if not always) strategic, as the buyer may see an opportunity to use its expertise to leverage the new assets to grow the business. In the Bally club acquisitions, for example, LA Fitness has identified opportunities to create growth, operating efficiencies and improved productivity through the acquisition of 171 properties and through the closing of 31 of those properties.
The sale of a club benefits both the seller and buyer. For the seller’s shareholders, a sale provides capital that can be used to cash out, pay down debt or invest back into the business. For the seller’s employees, it might offer professional growth opportunities. For the seller’s members, it might provide additional membership benefits. For the buyer, the sale brings new strategic assets that can help grow the business, while for its employees it could provide greater opportunity for professional growth. In club closings, the only partner group that benefits is the shareholders, since closures are intended to reduce financial losses, liabilities and obligations.
A sale may create negative consequences for the buyer and the seller. The buyer can experience challenges in integrating the employees and members of the acquired club into its existing business culture. According to many merger and acquisition experts, the biggest reason acquisitions fail to generate the synergies and cost efficiencies forecasted is because of the inability to integrate distinctly different cultures and the destructive impact this inability can have on employee morale and customer service. Sometimes, these negative consequences can overwhelm any benefit from the transaction. Negative consequences for sellers can occur when the seller does not properly communicate the sale to employees and members. When that happens, the rumor mill takes over, generating negative dialogue among employees, members and the community. In some instances, this negative dialogue can result in employees and members sabotaging the business transaction, suits being filed by disgruntled employees and members, and at the very least, damage to the seller’s professional reputation.
Closing a club may help the sellers avoid a bankruptcy filing, avoid future business losses and eliminate certain business liabilities. In the case of a large club company, closing a group of clubs can generate greater operating efficiencies and profitability in addition to the benefits described for a single club owner.
Closing a club can have consequences. When a club closes, employees lose their jobs, an experience that can be akin to losing family for some. For the members of a club, closure often can generate emotions similar to those experienced by employees, resulting in shock, disbelief and anger. The failure to deal effectively with the emotions of employees and members can generate a firestorm of negative publicity, an avalanche of legal actions and perhaps threatening activities by certain employee and member groups.
One large club company has had both a good and a bad experience with club closures. In the 1990s, the company was faced with a club closure in the South. The club had operated profitability for 10 years, was well respected in the community and was loved by its members. Unfortunately, a series of business circumstances came to a head at once. Faced with a 300 percent rent increase and the need for further capital investment in the facility, the company’s board decided to close the club.
Once the decision was made, the company assigned a regional manager to work with the club manager to put together a plan to close the club. Once they created the plan, the two shared it with the company directors and the club’s member advisory board. Once the plan was accepted, the leadership team met with the employees, both collectively and individually, to share the news.
The plan involved a series of steps designed to lessen the emotional turmoil that the employees and members might experience due to the closing. The plan’s goal was to insure that before the club closed, each member had received privileges at another club and each employee had received a good separation package and a position with another organization either inside or outside the company’s network. Over a 90-day period, the management team actively arranged for severance packages and new jobs for the employees. The team worked with neighboring clubs to provide club members with options for extending their membership privileges at the new clubs.
As part of the closing plan, club management arranged for a closing party on the final day of operations to give employees and members emotional closure. Since the club always had been a good member of the community, the management team made the closing party a charity event. On the night of the closing party, more than 2,000 of the club’s 2,800 members, along with their guests, came to the party, each contributing $20 toward the chosen charity (a local children’s hospital). The party was even covered by the local media, which announced the event as the closing of a city landmark. When the management team locked the doors for the final time after the band escorted out the last party goers, the club had garnered such favorable support that most members indicated that the company would always be welcomed back.
During the same decade, the same company had to close a New York club that had operated since the 1970s and that in the mid-1980s had been rated one of the best fitness clubs in New York. By the mid-1990s, the club had fallen on hard times. Unfortunately, the closing was handled by one of the company’s senior officers, as the company’s senior leadership felt that the regional team was ill prepared to deal with such a high-visibility closing. Rather than organize a closing plan like the one put together for the club in the South, management closed the club at night without warning, hanging a sign on the door for employees and members to find the next day when they arrived. As you can imagine, the closing was a public relations disaster in the community, among members and among employees. Although the company did save money by closing the club quickly, it created a firestorm of negative publicity that resulted in the company never being able to open another club in New York.
These two stories show that when a club is closed, it can be done in a manner that creates goodwill among all stakeholders or it can be done in a manner that has dire consequences for stakeholders. Unfortunately, club operators often choose the path of least resistance, and as a result, find themselves having dug an even deeper hole than before they closed. If operators instead create a well-thought-out closing plan, they can achieve the desired financial results for shareholders, while creating an outcome that brings proper closure to all parties and opens the door to future goodwill and business.
Stephen Tharrett is president of Club Industry Consulting. He is the author of four books and is a former board member and president of IHRSA. Tharrett is involved in public speaking, having served as an international keynote speaker at conventions in Argentina, Australia, Brazil, China, England, Ireland, Japan, Russia, Singapore, Spain and Turkey, as well as domestic conventions such as Athletic Business, CMAA, IHRSA and SIBEC. He can be reached at Steve@clubindustryconsulting.com.