The ultimate guide to buying a gym business
Figuring out whether to buy a gym business that is for sale is a complicated decision based on numerous factors, both subjective and objective. Over the years, we’ve learned a tremendous amount about the buying process and helped many potential entrepreneurs evaluate fitness club purchases and determine expected return on investment.
When embarking on purchasing an established business, it is vital to do your due diligence, weigh the risks and opportunities, and ultimately arrive at a final decision you are confident in.
Successfully operating a gym is a huge investment of time and money, so you’ll want to put on the hat of a forensic investigator, ask questions, dig deep, analyze information, and read between the lines to give yourself every advantage possible.
Here is an overview of the main factors to consider when evaluating gym business purchases:
- Their rationale for selling
- Your rationale for buying
- Location and demographics
- Financial metrics
- Legal considerations
- Membership base
- Marketing strategy
- Sales systems
- Facilities and equipment
- Programs and services
- Club software and technology
The rest of the article will delve into the details of each component.
The first factor to consider is the seller’s mindset. Why are they looking to sell their gym business?
Many people assume that the seller is looking to get out of a venture that isn’t doing well, but this isn’t always the case. The owner may want to retire, the business may no longer fit their lifestyle, or they simply want to move onto something new.
Their reasons for selling will also help you gauge how quickly they will want to move through the process and how flexible they will be in negotiations.
In addition, try to understand how much time they invest in the business on a weekly basis, and their opinion on the club’s strengths, weaknesses, and opportunities. This information will help you evaluate if the purchase makes sense for you financially and personally.
It is also important to be honest with yourself about why you want to buy a gym.
Many people go into the fitness industry because they are passionate about exercise and want to share that enthusiasm. But you’ll need to consider if owning and operating a service business is for you. Some questions to ask yourself:
- Does running a health club fit my lifestyle and vision for work/life balance?
- What is my risk threshold?
- Can I mitigate any of the risks?
- What will success in this venture look like?
- Am I willing to work long hours and defer income in order to grow the business?
Any business will have risks and opportunities. It is best to realistically evaluate them early on so you aren’t caught by surprise down the road.
For more information, our blog about starting a fitness business will give you an idea of whether it is the right move for you.
Location & Demographics
Buying a business with the right location and demographics is critical to success. Simply because a club or studio is close to home doesn’t necessarily make it a good investment.
You need to understand trade area demographics and the competitive landscape.
If you want a comprehensive analysis of the potential of the business, you should consider investing in a feasibility study.
A well-done feasibility study like the ones our firm undertakes are thorough and analyze product offerings, market size and trends, untapped demand, and overall financial potential.
Make sure the seller supplies you with the current financial statement of the business as well as year-end audited financial statements and taxes for the past five years. If you don’t have financial expertise, find someone who can help you review the gym’s financials.
You’ll want to know if the business is growing, stagnant, or in decline, if the business is valued appropriately, and if the business has any debts or liens against it.
To understand how the business stands up, you will want to compare it to similar fitness clubs. Analyze the club’s current key financial metrics in comparison to industry benchmarks such as revenue per square foot, revenue per member, EBITA, and non-dues revenue as a percent of revenue.
Investigate whether the business has any lawsuits pending in addition to what lawsuits they’ve fought in the past. The last thing you want to do is take on a venture where your time and money is sucked up by a lawsuit you had nothing to do with.
If the business has had lawsuits in the past, knowing what they were and their outcomes will help you gauge how the club was run and what kind of service environment or work culture the current owner created. These factors could make it more difficult to succeed when you take over operations.
Obviously you want to know about the membership. Don’t ask, “How many members does the club currently have?”
Instead you want to ask, “How many members are charged dues on a monthly basis and how many current members have paid in full?”
Why the distinction? Many operators fail to actually cancel members in their club management system when they are no longer paying which can provide a very distorted view of the actual number of members currently paying.
Other membership considerations include understanding the member profile, attrition rate, the percent of members on freeze throughout the year, and the average life of a member (how long members stay).
In addition to knowing the numbers, get a sense of what members and past members think about the club. Read online reviews and ask to see the results of member surveys if the club has utilized them in the past.
Learning what marketing strategies are in use will inform you about opportunities to bring on new members.
First, check out their website. Does it have a modern design and clean layout? Is the site secure and load quickly? Is it optimized to look good on phones and tablets?
If any of the above factors are not implemented well currently, there is room to improve the website and attract more prospects and members.
Next you should research their online search results. Check a variety of relevant keywords (e.g. gym near [location], the business name, group exercise classes near [location], etc) and catalog where the website ranks compared to other fitness clubs, studios, and specific service offerings in the area.
You should be using an incognito or private browsing mode when searching to minimize ranking adjustments based on your search history.
In addition, is the Google My Business page set up correctly so that hours, address, website, and phone number appear automatically?
List all the club’s social media channels, followers, and engagement level of their audience.
Is their currently an email list for the gym? How many people are on it and what is their average response rate?
If the club or its services can’t be found through an online search, the club’s social media presence isn’t strong, or they don’t utilize email for marketing, don’t fret. That means there are opportunities to improve communication with prospects and members and build a stronger digital and social media presence, both of which can lead to an increase in revenue.
Next evaluate how well the website turns visitors into leads. Note any sales funnels and opt-in boxes that appear as you visit.
Try to get a sense of the promotions they run for new members. You’ll also want to know what kind of member referral programs they’ve used in the past and which ones have been the most successful.
You’ll want to know what other forms of marketing the club uses to drive prospects in the door. Traditional marketing such as direct mail, print ads, radio, and TV spots is utilized less these days, especially for small businesses. It’s expensive, harder to track results, and does not usually have a strong return on investment.
Finally, ask if they have stats on marketing in general that includes sources and how many prospects each source generates on a monthly and yearly basis.
It’s important to develop prospects and get them in the door, but if the club doesn’t have strong sales practices, you won’t be able to convert leads into members.
What to look for:
- Do they collect contact information when a prospect inquires?
- Do they follow-up with prospects regularly and if so, how often?
- Do they have a needs assessment process that identifies what a prospect is looking for and then use that information to emphasize what is important to the prospect on the tour?
- Do they know how to close the sale and what to do if someone doesn’t join on the first visit?
- Do they have stats on how many prospects and how many memberships they sell each month?
This information will provide a snapshot of the annual sales cycle and will help you know how to utilize your sales and marketing resources on a monthly and yearly basis.
The first step is to get a sense of the physical plant. You can walk around and see if the club is clean and if the physical plant looks like it’s in decent shape.
However, consider what’s behind the facade? How old are the physical plant systems and have they recently been serviced?
You should look at how much the business spends on yearly repairs and maintenance as well as what have been the largest expenditures over the last year or two.
Next, get a sense of the age and condition of the equipment. Find out if there is a preventative maintenance program in place that includes quarterly servicing. The better the preventative maintenance, the longer the equipment will last.
Alongside rent, labor will likely be your largest expense.
Employees play a significant role in driving revenues, creating a strong customer service environment, retaining members, and delivering a strong bottom line. It’s important to know how many people the business employs or contracts with, what positions they hold, and how they are paid.
It’s helpful to know the employee turnover rate and who on the team is strong or weak as well.
You don’t want staff to leave or start looking for jobs when they hear the business is being sold. Develop a plan to keep employees once you have bought the business and until you can evaluate staff yourself. This will be critical to retaining members and ensuring the club operates smoothly while in ownership transition.
Programs and Services
Although membership is the main revenue source, programs and services are as important to stability and long-term business sustainability.
Not only do program and service revenues directly add to the bottom line, but they also play a significant role in member retention.
Here are some questions to ask:
- Which programs and services make money and which lose money?
- How are revenue producing programs and services marketed and sold now? Is there potential to grow these revenues?
- What does the competitive landscape look like? Are the programs and services priced competitively? Is there room to raise rates or are rates too high for the market and your membership base?
Club Software and Technology
Club management software is the customer relationship management (CRM) system that helps operate the business. It manages member records and provides the backbone for billing, payment, reporting, scheduling, and accounting.
No software is perfect, but a well implemented CRM system will help you automate and streamline processes and tasks and help in creating a strong customer service experience.
Although changing the software is not something you should do as soon as you get keys to the door, understanding its strengths and weaknesses prior to purchase will be helpful in the overall operations of the club.
In addition to key software, you’ll want to run a hardware inventory and find out how old the computers, tablets, and other devices are. This information will help to determine if you will need to invest in new hardware in the near future.
Help with Buying a Gym
We hope this guide helps you determine if buying a gym, fitness studio, or large multipurpose fitness club is a good investment.
If you are new to the fitness industry or have never owned or operated a club before, we highly recommend having experts assist you in navigating through the due diligence process.
If you would like assistance in this process, we can help. This is what we do.
We advise clients on what information they need to determine if the gym is a smart purchase in addition to analyzing the information and providing a big picture view of how the business compares to others in the industry.
Ultimately, our goal is to help you fully evaluate the opportunity and if it makes sense from both a personal and business standpoint.
Want to find out more? Schedule a free consultation or call (508) 654-6244.