The Gym and Fitness Franchises industry is experiencing robust growth as a result of growing membership levels and a more health-conscious population.
The fitness industry is highly fragmented with the vast majority of health & fitness clubs being small businesses, with few employees.
While every business is slightly different, there are a few key measurements that give insight into the trends and performance of your business. We’ll go through them now and provide equations when needed.
1. Revenue (R): which is the sum of all money taken in. This number is often looked at in a gross monthly revenue capacity because it’s helpful to compare this number month to month to spot trends and make projections.
2. Expenses (E): this is your total outflow per month, including the cost of labor.
3. Revenue streams (Rs): it’s often informative to look at the different places you’re bringing in revenue. Some normal revenue streams include your memberships on autopay, your retail that has been sold and drop-in classes or other private training sessions.
4. Net profit (P): to see what your actual profit is after paying your expenses, you’ll want to calculate your net profit. Net profit = gross revenue - all expenses (including retail inventory costs P= R - E)
5. Gross margin per revenue stream (Ms): your gross margin is going to tell you what percent of your income you retain. By looking at this by revenue stream, you are able to see which stream generates the highest profit margin for you.
Profit margin = (revenue from stream- expenses for stream) / total revenue for stream.
Ms = [(Rs – Es)/Rs] x 100 expressed as a percent (the higher the % the more profit you retain per revenue stream).
Example: your monthly revenue from retail sales is $1000 and your retail expenses total $700. Your margin on retail is: [($1000 – $700)/$1000] x 100 = 30%.
Valued based on a multiple of the cash flow they generate. This cash flow is often referred to as earnings before interest, taxes, depreciation, and amortization or "EBITDA".
These rules of thumb are used by business brokers, buyers and lenders to get an idea of the value of a fitness club or gym.
To calculate your club’s earnings before interest, taxes, depreciation and amortization or EBITDA, start with the profit shown on your P&L statement or tax return, then and add back interest, depreciation, and amortization. EBITDA is the starting point for any business valuation so it’s a good number to track on an annual basis.
For a highly accurate business market value assessment considers using a number of valuation multiples at once. This way, you can determine your business value based on its revenue, profitability, and asset base.
If a club in leased premises had five years left on its lease and two five-year renewal options, and if the club’s cash flows were projected to be stable for the foreseeable future, and if you discounted those cash flows using a 20 percent discount rate, you would come up with a present value of about 4 times the starting EBITDA – or a multiple of 4 times. A higher discount rate would result in a lower multiple and vice versa.
Using valuation rules of will give you a rough idea of what your club or gym is worth. To get a more accurate idea, the valuation needs to take into account things like past performance, future prospects, projected growth, and other things. In addition, business ownership comes with many perks including the ability to pay yourself an above market salary and to offer yourself perks and pay expenses that a new owner may not incur. The value of your fitness club is also highly dependent upon the terms of your lease, including the remaining term on the lease, rent escalation clauses and renewal terms. As a result, it is important to work with an objective third party to evaluate what adjustments can be made to your EBITDA to truly reflecting operating cash flow of your business.
Whichever approach is used, determining an appropriate multiple for a private business is always going to involve a significant degree of opinion and subjectivity as only quoted other Gymnastics have valuations which are readily accessible and which have been established by the market.
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