How much your fitness center is worth depends on more than just a simple mathematical formula.
I recently received an email from a reader who thought my column was consistently negative. She wondered if I needed a career change because I seemed down on our industry. I appreciate that she was worried about me, but I hope readers realize that my posture toward our industry, and the opportunity available to independent club owners, is quite positive.
What may appear negative is that I am consistently frustrated by the low expectations we have for ourselves. As someone who sees a bright future for my own business, I believe we'd all benefit if we held ourselves to a higher standard.
Facility valuations
I have written about our need for higher standards in hiring, pricing, customer service and professional development. I also think we need higher standards when it comes to club valuation. Facility valuations are considered a simple mathematical formula. You take your adjusted earnings before interest, taxes, depreciation and amortization - EBITDA, which is a fancy term for cash flow - and you multiply it by a number called the "multiplier." If you rent your facility, the multiplier is 2.5 to 3.5. If you own your real estate, the multiplier will increase to 5, or maybe 7.The creation of this formula was, at the time, a vital advancement for the industry. All industries need metrics for standardization and investment purposes. So, it's good to know that a starting point for a fitness center's value is "cash flow times a multiplier." Hotels, restaurants, construction firms, software companies - they all have formulas that help potential investors determine what they are worth, and business owners often need to quantify their business' value for many purposes (partnership agreements, wills, divorces, etc.).
My worry is what happens when such formulas become so ingrained that a facility owner is undermined when trying to maximize valuation for a sale. After all, I'm a club owner, and someday I'd like to have the opportunity to sell my business for as much as possible. And, I know how much my club is worth, and your club, too: They are worth much more than someone is willing to pay! The valuation formula is a great starting point, but we do ourselves a huge disservice as club owners if we allow that formula to become our end point.
Is worth debatable?
I once worked with a doctor who owned a medically based fitness facility. It was a losing operation for him, but he didn't mind. His practice could more than subsidize the fitness operation, and it was a valuable service to his patients. When a suitor approached him to buy the fitness operation, he made a compelling case to the potential buyer that his facility should be valued based on 1) the desirable nature if his demographic, 2) the untapped potential that a new owner could exploit and 3) revenue growth the buyer would achieve by reaching markets unique to medically based fitness.However, the response from the potential buyer was that the targeted operation would be valued at three times cash flow. Period. The parties were so far apart that a deal was not possible.
I believe the seller was right. A business's value is not just a function of its past performance; its value is in its potential. Its value is also reflected in the opportunity cost to the potential buyer (how much would it cost them to break into your market if they don't buy your facility?) and how much they could improve operations.
Maximize investments
As independent facility owners, we owe it to ourselves to maximize our investments. When it's time to sell, we should not simply accept the industry formula. Rather, we need to hold ourselves to a higher standard, and demonstrate a higher valuation. A buyer may be able to exploit opportunities you have identified but haven't yet pursued. A buyer may be able to reduce expenses and squeeze out more cash flow than you ever could. A buyer may need your fitness center as a beach-head to future expansion in your community.We should not diminish our business' worth by using history as the guide for value. A business represents opportunity, and the dialogue around facility valuations should move toward quantifying those opportunities. Buyers will always be welcome to use any tool they'd like to negotiate prices down, but we need to look to the future.
