Chantal: Rick, thank you so much for joining us on the Fitness Business Podcast.
Rick: Well, thank you. I’m pleased to be here, and I met you briefly, and so I’ve been told that this is just a wonderful way of trying to reach some people efficiently, and hopefully the people who listen are going to benefit today, and I’ll be hopefully helpful to them in the future.
Chantal: I am confident they are going to get so much out of our chat today, so we are absolutely so grateful for your time, Rick, and I thought we would start off the interview today maybe discussing selling a club, a studio, or any type of fitness facility. Can you give us your thoughts around that?
Rick: Sure. I have several thoughts, but what comes to me right away is it’s not easy. It’s hard to find a buyer, especially hard to find two interested parties at the same time to create an auction opportunity. It’s just hard to sell a club and run a business at the same time, because what you don’t want to do is take your eye off the ball and let your business somehow atrophy while you’re trying to sell it.
The other thing to note is that most club owners have never sold a business before, so this is a new activity, a new learning curve for everyone, and then the other final point is I think it’s hard to get an owner of a club or a studio to really fully commit to the sales process. It takes a while. It’s really a process, and for many people, they aren’t really fully committed, so they kind of put their famous toe in the water. “Well, if I get an interesting offer, maybe I’ll consider it,” or, “Maybe if someone finds me at the right time, maybe I’ll be responsive,” but to do sales well, of a club, really requires a full out process and a commitment to do that, and that’s a real challenge.
Chantal: So Rick, do you want to tell us or can you explain to us, why is it that so few deals are actually getting done in our industry?
Rick: One of the things I find interesting when I talk to people in other industries, or talk to professionals like lawyers, accountants, etc., is they often talk about how few deals get done, and there’s some reasons for that. The first is that there are not many buyers amongst the largest club companies, at least in the United States. They now have determined they’d rather build new clubs than buy others. Second is that sellers just don’t know how to find potential buyers. They don’t necessarily know how to approach them, but they don’t know how to even start the conversation to know if someone should be screened in as a potential buyer or not.
The other thing that’s … Several other things come to mind. Sellers, in many ways, have unrealistic views of the real value of their business to a third party, and some of the businesses in the industry got shaken up by the most recent recession back in 2008 to about 2011, depending on what part of the world you’re in, but that really, in some cases, meant that some of the inherent values we thought in 2007, because someone told us what our club might have been worth then, are not the same values we can get today, so part of the problem is we’re living in the past, not realistic about what today’s buyers are willing to pay.
In addition, sellers, in many cases, make for terrible negotiators themselves. They’re too emotional. They react badly. You really need a third party, and we’ll talk about that today if I can, later on, but one of the things that often is a reason why clubs don’t sell is because the worst person to sell it is the owner himself directly, and then finally, I think sellers are not really ready and don’t have a readiness factor, as I call it, to commit to a difficult and perhaps lengthy sales process. It’s not clear that there’s an easy way of selling, and so many people just aren’t willing to go the full route, and therefore, a deal doesn’t get done.
Chantal: Now, I believe that there are five phases of selling a club. Can you talk us through those?
Rick: Sure. And by the way, if it’s helpful to any of your listeners, I’m happy to send a copy of that to you and you can certainly feel free to distribute it to anyone who feels interested to want a copy.
Chantal: We would appreciate that. Thank you, Rick. Yeah.
Rick: But the five steps, as I see it, are the following. First is to have an independent, very important, independent valuation by an expert of real club worth, because in many cases, I said earlier, people are really and truly not current as to how people would perceive their club, and they could be off by a great margin, which means they’re not going to have a satisfactory result, even if they were to engage in the process.
A second phase, after you’ve hired the outside expert who’s given you a proper grounding and specific definitions of how to look at the value, the second step is to determine the price and the terms for a potential sale of the club or studio, and this would mean, what is your asking price? What would be desirable? But secondly and most importantly, what’s your bottom line? Because I love when someone says to me, “Well, my bottom line is $1 million.” I said, “So if I’m a third party trying to help make the sale for you, and someone offers me $990,000, what I’m really empowered to do is say, ‘No, thank you. That won’t be satisfactory to the owner.’ But if you came back and said, ‘Wait a minute, Rick. If they offer 990,000, we can certainly find a way to do something to urge them to come and get over $1 million, so yes, you should engage them, etc.'”
So then when I say, “So then your bottom line is not $1 million. It’s 990,” or some number less than that, and what they find is that they’re not disciplined. They kind of want it all. “I’d like a million, but if it’s 990, maybe I’ll take that because it’s close enough that I’m willing to deal with the fact that it’s not exactly perfect,” so what we need to do is discipline people to end up having an asking price and a bottom line.
The third phase is the marketing of the club. You need a plan. You need tools, and you really need to talk to two audiences. Industry insiders, people who are currently involved in the industry, and outsiders, people who aren’t, who might be local residents, who know the marketplace, know the club, maybe are members of the club, but could be people who are not currently in the business, and therefore could be a potential buyer.
A fourth phase is to assemble a long list of key materials, not just your most recent financials, but membership information including how many people joined by month and recent years, and how many people cancelled, and how many people downgraded or changed categories, but pricing and your lease terms, if you currently lease the property. Your physical plant and equipment in detail. Your marketplace and obviously some understanding of what the demographics look like and who the competitors are, and your programmes and services, and what makes you unique and differentiated, and what your future upsides are. It’s a long list, but you want to do it all in advance of starting the process because the last thing you want is a very interested party who asks a basic question, and then you spend a week or 10 days gathering the information, and now all of a sudden they’re not as excited and they’re not following through as quickly because you gave them basically a message that you’re not fanatical about this because otherwise you would’ve had it ready or you would’ve turned around the information in 24 hours.
Now, you’re letting time lapse and also the process starts to become unwieldy, so assembling materials in advance becomes critical, and you have to think about what outsiders might want, so maybe we need some industry data to be included so that they have an understanding of what are the key elements of this industry, and then the final step, obviously, is the process of screening out potential inquiries, negotiating with them, dealing with the whole process of letting them get access to information, finally getting contracts signed, having legal agreements, closing, and then handing off and doing the takeover of the club systematically by communicating properly to make sure you hand off your members or users, your staff to the extent that they want to retain a lot of your staff, to vendors, to the community.
You want all that to go smoothly because some will pay more money if they think they can build on what you’ve created. They will pay less if they think that, in effect, they’re not going to be able to take advantage of some of the positives you have because they’re going to have to start over, or you can’t hand them over to them the way they’d like.
Chantal: Rick, can you explain something to me? Why don’t clubs simply use a club business broker?
Rick: Well, unfortunately, we’d like to, but there is no one qualified broker who can work in each of the local markets for potential buyers both inside the industry and outside, and so as a result, one doesn’t have the ability, as opposed to other industries, where someone is savvy, proven, knows how to be a broker for this particular industry, and is rich in experience that they can trade on for you to use. In addition, if we think about it for a second, we don’t have that many deals going on, not many deals in one location, so there’s not a lot of profitability to create a business, to be a broker for a club-focused person, and so it’s hard for them to, in effect, dedicate themselves to being experts in the club industry and serving as a broker in your local market.
So it’s not surprising that there aren’t people that you can easily go to, but what we do need is a local third party instead. This is a person who takes the owners out of the equation for the basic negotiation, and I’m going to elaborate on that later if we have a chance, but I think you need to have someone who’s going to do the screening, who’s going to, in effect, identify the key prospects, who’s going to, in effect, manage the sales process, be a communicator between the potential buyer and the seller, and function, in effect, as a broker, but not be a broker.
Chantal: We’ll definitely come back and talk about that third party in just a minute, but first I wanted to ask you, let’s flip to the buying side. I mean, who are potential buyers?
Rick: Well, let’s talk about fitness buyers. Years ago, I sold eight clubs to eight different buyers, and this was a long time ago before I began my consulting career, and just to give you a flavour of whom I sold to, one was the president of my mortgage bank, personally, where he and his family wanted to own a club, so the mortgage bank didn’t buy it. He bought it personally for his family and put his family and the next generation into it. We sold another club to our landlord. A third one to the village where the club was located, so it became a municipal facility. A fourth to a nonprofit, the Jewish Community Centre, where the particular Jewish population didn’t have a recreation facility that they thought was needed.
We sold another one to our nearest club competitor, who was very difficult to deal with because it wasn’t clear that he was going to just take advantage of information and use it against us, so that was a very difficult negotiation. We also sold one to a combination of people. Our own club manager, who became a partner with our local contractor, [inaudible 00:13:02] identified independent investor, so it was three people coming together, and we sold it to them.
So this was a variety of obviously different ways you can think about who some of the buyers are, but going further, it’s not just other large clubs or a local club. In fact, in some cases, selfishly, we might not want to sell to a local club because they may not be as trustworthy as we’d like, and maybe kind of fishing for information and not be a serious buyer, so we may actually not want to share the information, even if they sign a nondisclosure agreement and say they’re not going to use the information, it could be a problem, but it could be, as I said earlier, it could be a local resident who may be a member of a club or maybe a member of another club, or could be a case where their kids are in your club programme, or it could be a university, could be a local corporation who wants to use it as a place for their employees to exercise, could be a nonprofit.
It could be one of your employees who can access substantial financial dollars. It could be a lot of different alternatives, so the key is to not just assume that it’s a nearby well-financed club as your only alternative, and in many cases, that may not be your best target anyway.
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