While there are no truly recession proof small businesses, fitness centers come close. And there are good reasons for this:
- Health club membership continues to grow as more and more people realize the health benefits of regular exercise.
- Excercise is an excellent stress reducer.
- Health club members enjoy the social benefits of participation in regular activities with others.
- Many employers and insurance companies offer membership benefits.
- There is a wide choice of affordable health center facilities available, including privately owned and publicly funded fitness centers such as YMCAs.
Some key industry statistics
There are over 46,000 fitness centers in the US alone. The industry as a whole generates some $11.2B in annual revenues, and employs just under 303,000 staff.
Yet a typical health club is small business – averaging around $300,000 in annual sales with 7 employees.
Factors that affect the value of businesses in the fitness industry
If you are wondering what factors affect the value of a fitness business the most, here is the short list:
- Profitable history. Despite strong competition from full-service health clubs, small fitness centers that generate consistent earnings from a well-established client base continue to thrive.
- Strong client retention. Successful fitness centers have the client retention at or above 69%.
- Focus on a market niche. A gym can develop a loyal following if it focuses on a specific demographic, such as women, children or family oriented.
- Location and facilities. State of the art exercise equipment is essential for client retention. Convenient access and easy parking are also key to keep the members happy.
- Quality of the fitness programs. Many successful clubs establish themselves due to the quality of their personal trainers, tennis school staff, swimming instruction and other acquatic activities.
Valuation multiples for health clubs
Fitness centers sell often, so you can get reliable data on the private business selling prices. You can estimate a health club market value using these valuation multiples:
- Business sale price to annual gross revenues, plus inventory.
- Business sale price to seller’s discretionary earnings, plus inventory.
For larger or multi-location fitness centers, consider these valuation multiples:
- Business sale price to EBITDA.
- Price to EBIT.
For a highly accurate business market value assessment consider using a number of valuation multiples at once. This way, you can determine your business value based on its revenue, profitability, and asset base.
Other business valuation methods for fitness centers
As with other personal service businesses, you can determine the value of a health club using the income-based business valuation methods. For smaller fitness centers that are owner-operator managed, consider using the Multiple of Discretionary Earnings method.
You can determine what the business is worth based on its discretionary earnings and a set of important financial and operational performance factors.
For larger fitness centers you may wish to use the well-known Discounted Cash Flow method. This method is especially useful if you have reliable earnings forecast and need to negotiate with sophisticated investors or potential partners.
A successful health club may have established itself as a true institution in its market. If you are valuing a business like that, the value of business goodwill may be an important factor in your assessment.
You can use the classical Capitalized Excess Earnings method to determine the value of the entire business as well as business goodwill. This may be very important if the fitness center is to be sold and the purchase price needs to be allocated among its hard assets and goodwill.