People always ask, “What is my club worth?” when they list it for sale. Here, in simple terms, is the analytical basis of the value calculation.
THE CLASSIC DEFINITION
Your club is worth what a buyer will pay for it, given adequate time to expose the listing to all potential buyers, and without undue influence on the seller or special terms given to the buyer.
While the analysis below is helpful in setting the asking price, and can help make your case, the final answer is what you find out when you actually go through the exercise of selling your club.
THE USUAL “QUICK AND DIRTY” CALCULATION
You’ll generally hear a shorthand formula like “three to five times EBITDA”. EBITDA stands for “Earnings Before Interest, Taxes, Depreciation and Amortization”.
Simply, EBITDA is the cash flow generated by the business before the impact of capital structure, tax strategy and reinvestment.
The calculation varies slightly depending on whether your club is a corporation or a partnership. Ask your CPA. Once you have it, there are several adjustments you may need to make:
ADJUSTMENTS TO EBITDA
Owner compensation. Estimate what it would cost to hire someone to do the job functions you do. Adjust EBITDA up or down by the difference between that and what you actually paid yourself. Non-club expenses. Add back any expenses you can document that are unrelated to the business, such as cell phones, meals, car payments, etc.
Unreported income. Cash which does not make it to your bank account, and thereby to your tax return, is generally ignored. Make sure you report all income if you want it to be used in calculating your EBITDA. It’s worth more to you in sale value if you’re planning to sell.
MULTIPLE OF EBITDA
The multiple is short-hand for the present value of the future cash flows and terminal value. A stream of 15 annual payments of $1 and zero terminal value, discounted to the present at 24%, equals $4 today. That’s a multiple of four. Clubs in leased premises may have an assumed terminal value of zero, because shutting them down yields little or no salvage value, and to move them would probably consume the entire terminal value. Clubs with owned real estate can go for higher multiples, depending on the probable value of the real estate at the end of the analysis timeframe. The impact is impossible to quantify here. An appraiser would need to take local market conditions and trends into account.
OTHER FACTORS
Sustainability refers to whether the cash flows can be continued for enough years that the present value of the outlying years and the terminal value are inconsequential. If your lease cannot be renewed for at least 15 years, the value may need to adjust down.
Deferred maintenance refers to the fact that a buyer might have to spend more than a normal annual capital reinvestment amount to be able to sustain that cash flow for the foreseeable future. The cost of such work (over and above what would be funded out of normal annual capital reinvestment) must be deducted from the four times EBITDA. Sometimes this results in a value like three times EBITDA, but it’s really four times EBITDA less the catch-up improvements.
Excessive prepaid membership liability. If you’ve cashed out more than 30% percent of your core members, a buyer will knock the excess prepaid membership liability off the purchase price.
Competition. When a new competitor is coming into a market, existing clubs often take an immediate financial hit, then stabilize and slowly recover. Most buyers, however, don’t like the uncertainty and discount the value (i.e. require a higher discount rate).
Cyclicality. Even though the club industry has been growing steadily for many years, buyers tend to lose sight of long term trend and want to pay unrealistically little in down years. Conversely they tend to overpay toward the tail end of an expansion.
USEFUL CHECKS
Once you’ve come up with your basic estimate of value, you need to cross check it against two other valuation methods:
Replacement Cost. Generally, if the club has been in business for three years or longer, replacement cost is irrelevant. Once the club’s cash flows have had a chance to mature, the value is a function of its cash generating ability.
Comparables. In the club world, there are few transactions and the details are generally not reported. A good appraiser or listing service, however, may have comps that a club owner can’t get.
THE CLASSIC DEFINITION – IN PRACTICE
Once you’ve come up with your theory of value, the challenge is to get someone to pay it. If you list your club in a place where most or all of the likely potential buyers can see it and have the necessary access to debt markets; that’s your best chance to get the price you deserve.
Peter Kroon is the Owner of Fitness Alliance. He can be contacted at 860.305.2203, or by email atpbkroon@fitnessalliance.com, or visit www.fitnessalliance.com.
