Selling a Gym or Health Club

What a buyer is paying for

The first number a buyer wants is the count of paying members, and the second is how many of them were there a year ago. Recurring dues are the base of the value, and a buyer will ask for a list of active memberships by type, the monthly rate on each one, and when each one started. They will look at how many people joined each month, how many left, and why. A gym that holds its members for several years is a very different business from one that has to sign up a new crowd every January to stay where it is.

Buyers separate dues from everything else. Personal training, group classes, small group programs, childcare, retail, towel service and juice bars all bring in money, and each has its own margin and its own dependence on particular staff. A strength coach with a loyal following who brings in a large share of the training revenue is worth a lot to the gym and is a risk to the buyer. We look at what holds that revenue in the building if the coach leaves.

Type of facility changes the picture. A large club with pools, courts and childcare carries high fixed costs and needs volume. A boutique studio with a single format, such as cycling, boxing or yoga, depends on a brand and a small group of instructors. A low-cost gym lives on high membership counts and thin pricing. Buyers have preferences, and they price these differently, so the first question we ask is which kind of gym you own.

Retention and the billing system

Almost every question about value comes back to retention. Buyers will ask for the cancellation and freeze rates, the average length of membership, and how many people sign annual agreements versus month to month. They will want to know how the gym handles failed payments, because declined cards are a quiet leak in many clubs. Members who stop showing up usually stop paying within a few months, so some buyers also ask for visit data from the door scanner.

The billing platform holds most of the evidence. It should show every member, every payment, every refund and every adjustment. Buyers will compare it to the bank and to the tax returns. If cash dues, comped memberships for friends and staff, or side deals with certain members are not in the system, the numbers will not tie out. Our post on financial statements for a buyer explains what a clean set looks like.

Another item that often comes up late is prepaid memberships. When members have paid for a year in advance, the buyer is taking on the obligation to serve them without receiving the cash, since the owner already collected it. That gets handled through an adjustment to the price at closing. If you have sold a lot of annual plans, a buyer will want the schedule early, and you should expect the number to reduce what you receive.

The equipment and the space

Buyers will walk the floor with a notepad. They want the age and condition of the cardio machines, the strength equipment, the racks, the turf and the flooring, along with the locker rooms, showers, saunas, HVAC and any pool equipment. Tired equipment is something a buyer prices as a replacement cost. Some equipment is leased, and those leases need to be assumed or paid off.

The lease is the most important document in the deal. Gyms use a lot of space, they spend heavily to build it out, and moving costs far more than it does for most businesses. A buyer will insist on enough remaining term, with renewal options, to justify the purchase. Landlords have a say in assignments, and they sometimes ask for a new guarantee. Read the lease post early, and talk to your landlord before a buyer does.

Hours matter as well. A club that is open around the clock with keycard access needs less staff per hour than a staffed facility, and a buyer will check how the building is monitored.

Staff and trainers

Trainers and instructors are the people members follow. Buyers will ask who is on the schedule, how long they have been there, how they are paid, and whether they are employees or independent contractors. Some gyms pay trainers on a 1099 basis and others on a W-2 basis, and a buyer's attorney will want to look at whether the arrangement fits the way the work is done. Rules vary by state and your attorney confirms what applies.

A written agreement with each trainer that covers client relationships, non-solicitation and what happens when they leave helps the buyer feel comfortable. So does keeping the front desk and the general manager stable through the sale. When the owner is the one who greets members, handles complaints and opens the doors, the buyer sees someone to replace, and our post on owner dependency covers the work of stepping back.

Records a buyer will ask for

Expect requests for tax returns, monthly profit and loss statements, a balance sheet, the member list with rates and start dates, billing reports, failed payment and refund reports, the membership agreement forms and liability waivers, trainer agreements, payroll, equipment lists and leases, the facility lease, insurance policies with loss history, and any health department or safety inspection records. Buyers will also ask for a marketing summary showing where new members came from and what each source cost.

Member information is personal, so the early materials describe the membership in totals. Names and card data stay with the owner until a buyer has signed a nondisclosure agreement and is near an offer, and card data usually stays with the processor and transfers through its own process.

What has to transfer

Membership contracts, the billing processor relationship, the lease, equipment leases, the phone number and website, social accounts, the software for scheduling and door access, and any music licensing and insurance all need attention. Business licenses and permits depend on the city and the services offered, including any pool or spa. Franchise agreements, if you have one, require the franchisor's approval of the buyer and often a transfer fee. Whether members' existing agreements can be assigned depends on the contract wording, and your attorney confirms what applies.

Our post on asset sale versus stock sale is worth reading here. Most gym sales are asset sales, and the buyer takes the equipment, the member list and the name, while leaving behind most old liabilities. In that structure the buyer needs fresh insurance and a new billing setup before opening day.

What tends to sink a sale

A lease with too little time left ends more gym deals than any other single thing. After that come billing records that do not match the books, a member base that has been shrinking, a key trainer who leaves when the sale becomes known, and equipment that needs a large investment right away. A new low-cost competitor opening nearby during the sale can also cause a buyer to reconsider.

How to prepare

Clean up the billing system a year ahead so every member and every dollar is in it. Put trainers on written agreements. Fix the maintenance items you have been avoiding. Ask your landlord about extending the lease. Show retention in plain terms, with the members who joined three years ago and how many are still there.

At Business Advisors of America we start with a valuation based on your own membership and billing records, then assemble the materials a buyer and lender will expect. If you want to see how buyers look at selling a gym or health club, that page is a good place to begin, and a short call with us can come after.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.