Landing an Investment
Whether you want to open a new location, expand your current location or open your first gym, investments are a crucial part of your business. Unless you can provide the money required, it will be necessary to find investors to fund the project. However, landing an investment is not a simple task. You must decide what type of investment you want or would be able to get. Who do you want to work with? Do you have a solid business plan? And of course, is this the right choice?
To help you answer all of these questions, Jeff Skeen, the CEO of Results Redefined and an active investor in Fitness Connection, shared his advice about managing investments. Fitness Connection has 37 locations operating in North Carolina, Texas and Nevada.
How do you make your club attractive to investors?
JS: A strong management team is critical. Over the last 20 years, Fitness Connection has raised capital to acquire and partner with health clubs, and has consistently found that a strong management team with a proven track record is crucial. It is also important that the business plan outlines how the investor will earn the return on their capital. As the saying goes, “The devil is in the details.” Therefore, the business plan should provide detailed information about how the management team will execute their plan over a five-year period.
How do you make a proposal for investment?
JS: As part of creating a business plan to entice investors, you must determine what type of relationship you would like to have with your partner. The smaller the amount of capital you are trying to raise, as well as the amount you are willing to invest of your own capital, the more control you can keep of the business. However, if you are looking for a larger investment, such as $20 million or more, you will find that your control over your business may diminish.
Also, investors have different types of return profiles. Some investors are fine with a 10 percent IRR (internal rate of return), whereas other investors are looking for a 25 percent IRR. With that said, the higher the return profile from your business, coupled with a solid track record, the larger the number of prospective investors you will attract.
What types of investments are there?
JS: Most investors fall into the following categories:
Friends and Family: These investors are the closest to you and many times will invest because of your relationship with them. You need to think long and hard before requesting money from your friends and family. If you lose their money, holiday gatherings can be very uncomfortable, as well as negatively impact your relationships. However, if you are just starting out, chances are this will be the only option available to you. Make sure to document your arrangement — is it a loan with interest and a repayment schedule, or are you taking on partners who expect to share in the upside of the investment?
Private Equity: These investors are looking for businesses with stable cash flows and a good growth story. They come in all shapes and sizes. Usually, you will need to have an annualized EBITDA (earnings before investment, taxes and depreciation and amortization) of at least $1 million (most require $5 million or more) and have a proven track record of providing returns to investors.
Public Markets: This is when you take your company public and receive investors in the stock market. Very few fitness companies qualify for this and it can be a challenge due to regulations and a large number of investor “voices” you have to manage. Typically, your business should be generating over $50 million in EBITDA before considering this option.
What are the pros and cons of earning investments?
JS: The pros: One, if you partner with a group that has access to a lot of capital, it allows you to weather most economic storms, as well as allows you to grow with one group instead of having to look for capital down the road. Two, not all of your assets are tied up, which minimizes your family’s potential losses. Three, you can have a group of people that can provide additional brain power. When my partners and I raise capital, we look for “smart” money. Our current investors are the who’s who in business and have experience in working with global companies, as well as in the fitness industry. The cons: One, once you move beyond yourself as an investor, whether or not you have control, you now have to consider the other voices. Also, you are now responsible for someone else’s money, which can impact their family’s future. Two, if you give up control, you have to always be prepared to lose your job no matter how much you have invested. Three, life can be difficult if you don’t enjoy the partners you have.
What other advice do you have about earning an investment?
JS: Remember, you need to interview the investors just as much as they interview you. Don’t be quick to take the first offer you receive and make sure your values align with your new partners. I have found that taking on a partner is very much like taking on a spouse, so be careful with your selection.
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