Currently on the CrossFit.com Message Boards: an Affiliate for sale in Dearborn, Michigan.
I won’t speculate as to the reasons for the sale; there are a thousand reasons to divest ownership. Still, it would be worthwhile for that seller (and the rest like her) to understand a little bit about business valuation prior to pulling the trigger.
Here’s the harsh truth: 99% of gyms are not set up properly for sale, and as a result, they’ll receive offers far below what might seem reasonable to the unseasoned owner.
The number one reason for the un-saleable gym: the owner does all the work. Very few acquirers are going to pay anything beyond book value for a gym in which they’ll need to teach the classes, run the books, and build the membership base.
Put more simply, people don’t buy jobs.
If you, the seller, want to receive anything beyond the book value of the business, you’ll need to make sure it runs without you. Literally. You could put down the phone, put up a vacation responder, grab a beer, and leave forever. If the business cannot run without you, you need to make sure it does prior to putting up a For Sale sign.
Once the gym runs itself, an acquirer is going to be looking at two things: bottom-line profits and year-over-year earnings growth. This means they want to see the business make money, and they want to see that amount of money growing steadily.
The more money the gym makes and the faster that number is growing, the more an acquirer will pay. This is because investors are seeking a return on investment. For every dollar in profits they “buy” today, they are expecting to receive more than a dollar in the future. The size of those future dollars determines the price they’re willing to pay today.
This valuation method is known as an “earnings multiple”, and it’s the one that will most likely be applied to a gym. You’ll commonly hear investors referring to a “2x” or “3x” or “10x” earnings multiple when acquiring a business. What they mean is that they are paying two times (or three times or ten times) the yearly profit to buy the business. Investors tend to pay a smaller multiple for businesses with steady profits and limited growth prospects, and a higher multiple for businesses with steady profits and large growth prospects.
Bluntly, the growth prospects of the individual gym are limited. You can only have so many clients before you need to spend more money to knock down walls, buy more equipment, add shower stalls, and expand the parking lot.
Because the earnings potential of a gym is limited by the number of people that fit in the building, the earnings multiple that any investor will pay for a gym is also limited. Most likely, you’d receive something in the realm of a 2x or 3x earnings multiple, provided your gym runs without you and generates north of $100k a year in profit. You’d walk away with a few hundred grand at most.
What does this mean?
In the cold, rational world of the investor, your gym isn’t worth much.
As an individual owner, you’re much better off building the business like you were going to put it up for sale, and then never selling it. Make it run without you, focus on earnings growth, and ride that success forever.
If you do, you’ll be acting like an investor yourself. You receive substantial passive income; not from the work you did today, but from the work you did yesterday. You won’t sell (and you won’t want to) because your gym has become a self-sustaining cash machine.
As an added bonus, you’ll get the social and psychological benefits of being a part of something larger than yourself, and you’ll maintain the service to community that motivated you to start in the first place.
If you’re in this to sell, stop wasting your time. The exits simply aren’t there, and if you get lucky enough to find one, it won’t be life changing. Instead, focus on building a solid, self-sustaining business. Focus on being a good boss. Focus on acquiring clients and keeping them. Focus on earnings growth, and focus on making the gym run without you.
In the end, the best exit is probably no exit at all.
Jon Gilson is the Founder of the AF Project. Visit the AF Project on Facebook to keep up with our latest.