There are numerous statistics that are thrown out there about the growth of the fitness industry. The IHRSA has said that the number of gym members in the US was 62.5 million in 2018, up 2% from 2017. Another, by IBISWorld, reports that the number of gym, health, and fitness businesses in the US currently stands at just over 100,000 with projections for a 2% increase by the end of 2019.
It’s not out of line to say that the fitness and wellness space is experiencing a moment right now. Fitness is fast becoming a big part of everyone’s daily lives. Because of this, entering the fitness industry is becoming an increasingly appealing and lucrative venture.
And, if you are a fitness business owner already, you may be in a position to sell your business to a new entrant into the market. You could also be looking to expand into a mutlti-location business or franchise. If you are doing either of these things you need to know how to value your gym business. In this article, we will look at how you can do just that.
Skip ahead to:
- What Influences a Gym’s Value?
- How Can You Increase the Value of Your Gym?
- Calculating the Value of Your Gym Business
What Influences a Gym’s Value?
Every business has elements that can drive its value up or down. Usually, the same element which can cause an uptick in your gym’s value is the one which will also affect it negatively if not handled correctly. Here are some of the drivers of value to which you should be paying very close attention.
The condition of equipment and of the facility, in general, will affect value. This includes whether the equipment is modern, dated and it’s cleanliness.
Members are the lifeblood of your gym. They are the main source of recurring revenue. When valuing your gym business, how many members you have signed up and retained is an important factor in determining profitability
Other Revenue Streams
As we detailed in the article 8 Practical Product and Service Ideas to Boost Gym Revenue, it’s important to develop other revenue streams for your business. Diversifying into other areas like apparel, supplements, and events is a great way of increasing profitability and adding real value to your fitness business.
State of the Economy
You have no control over this but it can greatly impact gym value. A poor economic environment leads to consumer uncertainty and can decimate membership figures.
Trends in the Industry
Fitness industry trends, such as the type of fitness club which is currently the rage as opposed to the type you have, will affect how gym buyers value your business.
The numbers don’t lie. Close attention is paid to how your business has performed in the past when assessing its current value.
While size will likely depend on the type of gym you are running, location is one factor sure to be heavily scrutinized when determining its value. This could range from one premise to a franchise over several different locations.
How Can You Increase the Value of Your Gym?
Now that you have an idea of what the value drivers of your gym are, you can set to work ensuring that their net effect on your business is a positive one. Below are ten surefire ways to increase any fitness center’s value.
Invest in equipment
The state of your gym equipment has a huge impact on the overall value of the gym. Well-maintained equipment will definitely increase the figure but outdated equipment and equipment in bad shape will cut it by frightening amounts. That’s not surprising really since the equipment is a direct contributor to your income. So, investing in the upkeep and upgrading of equipment is a really good idea.
Cater to a Particular Niche or Niches
Being assured of a solid customer base can set a potential buyer’s mind at ease. You can attract customers and achieve high retention rates by offering classes or sessions focused on a particular fitness program, such as yoga, strength training or calisthenics. You could also choose to have special programs for a particular demographic, such as children, bodybuilders, seniors, or women.
Choose Dues over Paid-In-Full Membership
Many businesses tend to think that this should be the other way around. In fact, members who pay dues month-after-month, year-after-year generally have a higher lifetime value than members who make one-off payments upfront. They also tend to exhibit higher retention rates. You just have to keep them coming back for more with the quality of the service you provide.
Engage with Corporate Partners
Many companies are now taking an interest in the physical and mental wellness of their employees. Insurance companies, too, have begun tying benefits to proof of gym membership. Gym owners can take advantage of these trends by offering special programs and discounts to corporate groups. It can boost membership numbers and add to visibility.
Offer Some Extras
Consider hiring at least one personal trainer (more depending on the size of your gym). You could also form special exercise groups that members can opt to be a part of. Nutrition and fitness go hand-in-hand. So why not add a juice bar, meal plans, or a nutritionist to the mix of extras you offer to bring in greater revenue.
Build Your Brand
An easily recognizable brand carries much more value than one no one has ever heard about. You can build your brand awareness through a number of initiatives, such as community involvement, a strong social media presence, and giving your present clientele such good service that they will definitely want to spread the word about you.
Invest in Staff Professional Development
Staff who is already properly trained and qualified to do their jobs can add a good deal of value to a gym business. A buyer will be impressed by a gym with a strong management team as they are the ones who will ensure a smooth transition and future growth of the business.
Network to Increase Authority
Networking within the industry improves your reputation and by extension, that of your gym. Attend seminars, join industry-related online forums and go to trade shows so you can make yourself and your gym known throughout the fitness industry. It also gives you the opportunity to share what you know and to learn best practices from others.
Lengthen Your Lease
Gym buyers are likely to give purchasing a second thought when they realize that the gym’s lease is set to expire in a couple of years or less. It will be much easier for buyers to secure funding in the form of loans from financial institutions if a strong and long lease is already in effect.
There is a range of gym management software available to help ensure the smooth running of your fitness club and in so doing, increase its profitability and value. Plus, by automating and streamlining some processes, you will be cutting back on labor costs and improving your profit margin.
Calculating the Value of Your Gym Business
Some really good advice when determining the value of a gym is to go with a business broker, preferably one with some experience in how to value a gym business. That said, even if you hire a professional, it is worthwhile for you to have a working knowledge of the processes involved.
Using the EBITDA Method
One of the metrics commonly used when valuing a fitness business, or any business for that matter is its EBITDA. Those letters stand for Earnings Before Interest, Taxes, Depreciation, and Amortization. Together, they represent the gym’s market value and cash flow with regards to its assets and overall earnings. Multiples of the EBITDA are then used to find the selling price or value of the gym. Here is an idea of how that works.
A gym business whose EBITDA is $50,000 may be valued using a multiplier of between 1.0 and 1.5. The multiplier goes up to between 2.5 and 3.0 for gyms whose EBITDA is calculated to be $250,000 to $500,000. However, if the business has an EBITDA of $1,000,000 and over, a multiplier anywhere between 3.5 and 5.0 could come into play.
To calculate your gym’s EBITDA first grab a copy of your Profit and Loss (P&L) Statement or your tax return. Begin with the profit shown on it, then add on interest, depreciation, and amortization for your business.
EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization
Looks simple, yes. But you may be scratching your head, wondering where the figures come from and how you are going to locate them. The good news is that they are in your gym’s financial statements. Your earnings (or net income), interest (or interest expense), and taxes are all shown on the income statement but you will have to look either at the cash flow statement or in the notes accompanying the operating profit to find the depreciation and amortization figures.
Not too good at math? No worries, you can use an EBITDA calculator to help you get the answer instantly.
Asset-Based Business Valuation Method
This helps to determine the gym’s net asset value. It is calculated by subtracting the total liabilities from the total assets. You can get into some gray areas with this method since some businesses choose to exclude some assets and liabilities as not relevant whereas another business would have included them in the calculation. Furthermore, different valuation methods can lead to conflicting figures for the same asset or liability.
Multiple of Discretionary Earnings Method
This method involves first figuring out your discretionary earnings and projecting what they will be over the next few years. The discretionary earnings are arrived at from your pretax earnings and expenses such as salary, one-time expenses, interest, depreciation, and amortization. Secondly, a multiple is applied which takes into consideration factors such as staff quality, location, state of equipment and facility, and quality of competition.
Discounted Cash Flow Method
The discounted cash flow method seeks to find the future value of your gym today. That may sound a bit confusing, but it is a popular way of calculating the value of large businesses. Fundamentally, it takes into consideration the interest a buyer would have earned on their money had they invested it otherwise instead of spending it now to buy your gym.
There is no doubt about it – fitness clubs are becoming more and more popular as persons begin to realize the many benefits physical activity provides. Knowing the value of your gym helps you to implement strategies to improve it and make the gym more attractive to buyers.
You put plenty of hard work into building your fitness business and so its true value to you could never really be expressed in monetary terms. A business valuation helps by giving you an objective and realistic idea of your gym’s worth. You can use the EBITDA as a good measure of your company’s profitability and it can be easily calculated once you have the gym’s financial statements in hand.