Buying a gym that’s already operating well can be a quicker path to reaching your business goals and personal aspirations. Imagine owning a profitable gym with a fun community atmosphere and satisfied members. If you buy an existing gym, you may get a head start to realizing this goal.
Years in business are a significant factor in the success of a gym business. According to Statista research, 52% of gyms and fitness centers with less than three years in business were profitable in 2020, whereas 68% of those with eight years were profitable.
However, the most essential part of buying an existing gym is to make the best-informed decision when choosing the gym best suited for your business goals. We will help you with this part by discussing these topics:
- What are the benefits of buying an existing gym?
- Things to consider before you start shopping for a gym
- How to find gyms for sale
- Conducting a gym valuation
- How to finance your gym purchase
- Preparing for negotiating the terms of the sale
What are the Benefits of Buying an Existing Gym?
Although it is typically more expensive than building a gym from scratch, buying an existing gym has some prominent advantages. These are the most impactful.
Established Assets
An existing gym likely has a recognized brand and reputation in the community. This quality can attract customers more quickly than starting a brand-new gym. As a result, you can spend most of your time and money building on this trust and awareness.
An established gym also already has a solid customer base using the facilities and services. The steady cash flow gives you more flexibility with your budget and saves you the hard work of attracting initial members.
Fully Installed Equipment and Amenities
Purchasing a fully operational gym gives you the advantage of having all the infrastructure in place. Along with bypassing the substantial expense of equipment, facilities, and amenities, you save time and effort on layout planning, delivery schedules, and installation. The established infrastructure also allows you to avoid downtime due to construction.
Trained Staff
Since recruiting and training staff members is crucial to building a successful gym, inheriting a trained and experienced staff gives you a significant head start. They already know the operations, systems, and core members. For this reason, they play a vital role in streamlining the transition and ensuring continuity in service quality.
Financial History
Knowing how your business will perform in a specific setting is a huge advantage. An existing gym provides this vantage point with a financial history. This information is also valuable for:
- Analyzing each aspect of the business
- Assessing the gym’s value
- Identifying areas for improvement
- Making informed decisions about pricing, marketing, and operations
This advantage is even more potent if the owners use gym management software to collect, record, and integrate financial data.
Growth Potential
You can use all the time and money you would’ve spent on starting a business from scratch to immediately promote the gym’s growth and improvement. You can implement changes to enhance services, start a full-scale marketing campaign, expand facilities, or immediately introduce new programs.
Easier Financing
Financing for an established gym is usually more accessible than for a startup. Banks and investors typically view providing financing for the purchase of an existing business with a proven track record as less risky than a new venture with no history. In addition, this advantage can help you borrow a larger sum.
Things to Consider Before Buying a Gym
Deciding to purchase a gym is a monumental decision. The success of this business venture requires a substantial investment of time, money, and effort. So, before you begin your search, there are critical factors to consider before making a potential gym purchase.
The Location
A gym’s value depends heavily on its location. For example, a gym located in a popular area with heavy street activity and easy parking offers more value than a gym in an economically depressed area. Depending on your target market, a gym near a school or daycare may be more suitable than one near a major shopping area.
Competition
Another vital factor for choosing an existing gym investment is the level of competition in the immediate area. Typically, a gym operating in an intensely competitive market may hinder your ability to attract and retain members. For this reason, a highly competitive market can reduce the value of a gym.
Revenue Streams
A thriving gym usually has several sources of revenue. When evaluating a gym, be sure to examine each of its sources of revenue and rate their contributions. The most popular resources for gyms are the following:
- Membership fees: The primary source of revenue for most gyms is gym memberships. Although the average membership fee ranges from $40 to $70 per month, gyms in high-cost-living markets usually have higher membership fees.
- Group classes and personal training: These services not only increase revenues but also help improve membership retention rates and gym marketing campaigns.
- Nutrition counseling: This revenue-generating service is an excellent complement to personal training classes. It also helps improve membership retention.
- Online classes: An existing gym offering online classes can set a new owner up for increased earning potential. Online subscription plans help extend the gym’s reach and brand appeal.
- Merchandising: Many gyms generate extra revenue by selling fitness apparel and accessories in the gym or online. They typically target existing members and extend their reach online.
Gym Equipment and Amenities
The condition of a gym’s equipment, accessories, and infrastructure is critical to any gym investment. This is why you should determine whether the owner owns, leases, or finances the equipment. Many gym owners use gym management software to keep thorough inventory records of their assets. If so, you can calculate each item’s remaining useful life(RUL).
The simplest way to calculate RUL is to subtract the number of years of ownership from the average life of the fitness equipment, assuming it’s purchased new. The average years of useful life for different types of fitness equipment are as follows:
- Cardio equipment: 7 to 10 years
- Weight equipment: 10 years
- Plate load machines: 10 years
The Gym Membership Base
Verifying the revenue generated from gym members is essential in buying an existing gym. You can do this by analyzing churn, average revenue per member, average length of engagement, expansion revenue, and other metric history. If you hire an accounting firm to do a Quality of Earnings Report (Q of E), you should let them know that this membership data should be a priority. Before moving forward, the predictability and soundness of the gym membership base should be evident.
The Gym Ownership and Staff
Your interview with the gym owner(s) and staff can significantly influence your gym buying decision. When you talk to each person, try to get as many candid answers as possible. Some good questions you can ask are:
- What are the best qualities of the gym?
- How do you think the gym will perform after the sale?
- How do most members feel about a change in ownership?
- What challenges do you think you face?
- What do members think about the gym location, facilities, and programs?
How to Find Gyms for Sale
Since gym members typically prefer to travel within a 5-mile radius of the facility, gyms tend to be in areas with a large population to sustain them. This is why you will likely find more gyms for sale in large cities.
There are three primary ways to find gyms for sale.
1. Industry Networks
Tapping into the local gym market can be an effective way to find gyms for sale. You can start by asking local gym owners if they know any gyms for sale in the area or if they are interested in selling. Another way to network with owners is to attend industry events, trade shows, and fitness conferences. It certainly helps if you have friends or acquaintances in the gym industry.
2. Online Marketplace
Online business-for-sale platforms make it easy to shop for gyms for sale by price, size, location, and several other search options. Here is a list of some of the most popular online business-for-sale platforms.
3. Business Broker
Business brokers can help you find a gym to buy in the same way real estate agents assist their clients in finding and purchasing a home. They allow you to identify suitable opportunities, handle the negotiation process, and provide expert insights into market trends and pricing. For this reason, using a business broker is a good option if you don’t have much experience in buying and selling businesses or properties.
Conducting a Gym Valuation
Successfully purchasing a gym business requires an accurate estimate of the gym’s value. Many gym owners have poured years of work, devotion, money, and emotion into their gyms. For this reason, it’s understandable that they may value their business more than its tangible worth. This possibility is one of the reasons you do a gym valuation with each potential investment. It also gives you more leverage in negotiating the final sales price.
Although you have a choice of several methods, there are two standard methods of assessing the value of a gym: DCF and EBITDA.
Discounted Cash Flow (DCF) Method
This method is popular because it estimates the value of your purchase based on the projected cash flows anticipated over time, typically 5 to 10 years. You can calculate the expected cash flows for each year by adding up the total annual revenue and subtracting the total yearly expense from that sum.
For example, suppose your total revenue is $500,000, and your total expenses are $300,000. Your first-year expected cashflows equal $200,000. So, assuming the revenue will increase 10% each year and your yearly expenses remain constant, the five-year cashflow formula is as follows:
- 1st year: $200,000 ($500,000 – $300,000)
- 2nd year: $250,000($500,000 x 10%) + ($500,000 – $300,000)
- 3rd year: $305,000 ($550,000 x 10%) + ($550,000 – $300,000)
- 4th year: $365,500 ($605,000 x 10%) +($605,000 -$300,000)
- 5th year: $432,050 ($665,500 x 10%) + (665,500 – $300,00)
At this point, we need to apply the discount rate to determine the present value of these cash flows. The discount rate represents the rate of return an investor would receive on an investment. The method includes accounting for the time value of money and risk related to the investment. Let’s use 8% as the discount rate to arrive at the present value of these cash flows:
- Year 1: $185,185 ($200,000 / (1 + 0.08)^1)
- Year 2: $214,464 ($250,000 / (1 + 0.08)^2)
- Year 3: $242,077 ($305,000 / (1 + 0.08)^3)
- Year 4: $268,602 ($365,500 / (1 + 0.08)^4)
- Year 5: $294,240 ($432,050 / (1 + 0.08)^5)
To determine the total present value of the gym business, add the present values of each year’s cash flow. The total discount cash flow in this example is $1,204,568, indicating the estimated value of the gym.
💡 The DCF method is a valuable valuation tool but relies primarily on projections and assumptions.
EBITDA Method
If you prefer to calculate a gym based on its financial performance, the EBITDA method may suit your needs. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This method primarily focuses on the gym’s earnings potential instead of the gym’s assets.
To do a gym valuation with the EBITDA method, take these three steps:
- Calculate EBITDA: Take the total gym revenue and subtract its expenses, but don’t subtract the taxes, depreciation, interest, and amortization. This sum indicates the gym’s earnings potential, making it a primary factor in assessing its overall value.
- Get the multiple: The multiple is needed to calculate the gym’s value with this method. In the gym industry, the average EBITDA multiple ranges from 3.33 to 4.34.
- Calculate the gym’s value: To determine a gym’s value, simply multiply its EBITDA by the specified multiple. This method will provide you with an estimated gym value based on the gym’s financial performance. For example, suppose your EBITDA is $200,000, and your multiple is 3.5, the estimate worth of the gym would be $700,000.
Financing Your Investment
Since most full-service gyms can cost between $500,000 to over $1,000,000, most gym purchases require financing. So, unless you’re buying a fixer-upper, you will need a loan to complete your gym purchase. Some of the financing options for gym business purchases include:
- Small Business Administration (SBA) Loan: These government-backed loans offer low interest rates and other favorable terms, such as easier qualifying standards than other loans. However, you must personally guarantee an SBA loan with the equity in your home or other collateral.
- Seller financing: If you deal with a gym owner eager to sell, this financing could be your best option. Many regard the seller note as the best form of gym financing because motivated sellers typically offer exceptional terms. On the other hand, remember that the seller could eventually repossess the gym if you can’t make the payments.
- Traditional bank loans: A loan from a conventional bank or credit union can be a good option if you have excellent credit, high personal net worth, a sound relationship with your bank, a successful record as a gym owner, or a connection in the institution.
- Investors: Bringing family and friends in on the gym investment is another option. If you have a novel approach to gym investment, you may be able to raise money through a crowdfunding or investor online platform like GoFundMe. However, you may have to combine it with other forms of financing.
Negotiating the Best Deal
As stated earlier, your gym valuation is a powerful tool in the negotiation process. It helps you establish your initial offer and your negotiating goals. Your offer should reflect your thorough research, and your terms should be defensible. It also helps to have a mental list of non-essential things you are willing to compromise on in the negotiations.
You may feel uncomfortable negotiating this deal alone, managing the closing processes, or facilitating the transfer of ownership and assets. In this case, you may be better off hiring a broker or attorney to oversee the final stages of the sale.
Taking Over the Gym
Navigating the process of buying an existing gym is critical to ultimately reaching your goals for the newly bought gym. However, it’s only the beginning of the significant challenge of managing all aspects of your business to enhance your return on investment. This is why gym management software can be a powerful asset in streamlining and optimizing gym operations, marketing, member relations, staff management, performance tracking, scheduling, etc. To find out more about Kilo gym management software, watch our demo.
