Why I Think Now is a Great Time to Buy a Fitness Business
By Mitch McGinley
This information contained herein does not constitute financial, legal, or other professional advice and is meant to be used solely for informational purposes. It does not take into account your specific circumstances and should not be acted on without full understanding of your current situation, future, and/or objectives by a qualified professional. Mindbody assumes no liability for actions taken in reliance upon the information contained herein.
You've heard it a million times: the key to smart investing is to “buy low and sell high.” Buying a business, and investing in yourself, can be one of the greatest and most rewarding decisions you ever make. But how do you go about this? And are you crazy for thinking about buying a fitness or wellness business right now?
Perhaps you find yourself in a huge transition—shifting your priorities and contemplating your next move. Maybe owning your own business is something you’ve always wanted to do, and now you have the freedom, opportunity, or motivation to do it.
Maybe you simply need to hear this: I’m a former fitness studio owner, Mindbody Certified Business Consultant, and CA Licensed Business Broker, and I think now is a great time to consider buying a fitness business.
The key to buying low is to buy when most people wouldn’t buy, or when things look bleak, believing your investment will increase in value over time. The key to selling high is to sell when most people wouldn’t, or when things are going great.
You can probably guess which category we’re in right now.
Times are tough—especially in the fitness industry. Most businesses are either closed or operating under reduced capacity due to government restrictions. There's been a dramatic shift into the virtual world. And before all of this happened, there were changes in the works such as reclassifying independent contractors as employees that had a significant impact on owners’ bottom lines.
For all these reasons, many fitness businesses are struggling. Some have been forced to shut their doors completely. Others are being sold for a fraction of what their value was six months ago. Businesses that were selling for $300k are now selling for $100k. Many that were selling for $100k are desperately trying to make whatever they can, just to get out. Business owners that were wildly profitable before (making more than $100k a year in profit) have chosen to shut their doors and walk away. This means there are some very successful, well-established businesses out there available for pennies on the dollar—and many of them are still profitable.
Getting a fresh start
I talk to gym and studio owners all the time who don’t have the willpower to start this new chapter. Maybe they were thinking about selling before, and this was just the icing on the cake. Maybe they can’t stand technology and marketing and aren’t interested in competing in a virtual world.
Let’s use an example of a gym that was about to sell for $300k+, that ended up selling for about a third of that. This gym had around $450k in gross revenue in 2019. The owner paid themself a salary of $50k a year and made about $100k in profit on top of that. The rule of thumb for valuation in this industry at that price point is 2x net earnings. So, 2 x $150k = $300k valuation. That’s a bit oversimplified but sufficient for this exercise.
This gym was in escrow in early March for just over $300k. But when COVID-19 hit, everything changed. The buyers walked away, and the owner was left to create a whole new virtual business, when they were just days away from being completely done with the business. That is a difficult mental shift to make—starting a whole new business model just days away from being done. Just imagine if two days before high school graduation everyone looked at you and said, “Sorry! You have to keep going with no end in sight." Can you imagine getting up and going to school the next day?
Luckily, we found another interested party, who several months later, offered $100k, and the seller gratefully accepted and walked away.
Who do you think got the better end of that deal? The seller got paid, and that’s been tough to do. And who knows how much they would’ve made over the next year anyway. If they waited a year and tried to sell again there’s no promise that it would've been for more. And in the meantime, they would’ve had to put in a lot of work.
For the new owner, sure, they're taking some risk buying a business that’s partially shut down. But given they saved $200k on the purchase price, they have a large cushion to get things back to where they were. For example, if rent is $5k a month, that’s 40 months of rent. Do you think things will be back to a new normal in 3.5 years? I sure do.
Heading back to the gym
While I believe virtual fitness will never replace in-person classes and services, it’s helpful—and will undoubtedly be a piece of the market forever into the future. However, nothing can replace our human need for social contact. And while consumers plan to continue virtual workouts, 78% said they usually or almost always prefer in-person options.
That means this industry is coming back, and when it does, there will be less competition in the marketplace. If you can get in for a discount, use the downtime to work on marketing, establish your new brand, or make some changes to the physical space. Now's the perfect time to do it. Landlords are being abnormally accommodating right now—maybe you can work out a deal for some rent forgiveness or deferral to help mitigate that risk while you make some improvements and bide your time.
Let’s jump back to that example of the gym. If in two years the buyer has survived, they've made it to a market where there are fewer local competitors, and therefore have more market share than the business ever had before. It’s reasonable to think they’ll be able to sell for at least that original $300k price. At which point, they will have made $200k in two years, on a $100k investment. That’s not a bad return!
Sure, it will take work, and there’s certainly some risk, but what good things in life come without work and risk? Personally, I believe investing in yourself and this industry is the best investment you can make, and I think now is an excellent time to do it.