Tim Bainton is the President of Blue Chip Sports Management based in Washington D.C. Tim is a published author and frequent industry contributor.
This month: Part 4
Alex Planes is the CEO of FoundEdge, a content marketing agency. He has worked with some of the world's largest brands and has published or syndicated thousands of articles in The Motley Fool, Business Insider, USA Today, the BBC, Fox Business, and elsewhere.
Alex leads all content strategy and development for Blue Chip Sports Management and has been integral in developing BCSM's market authority through content creation.
Club Management Mastery
A Full-Spectrum Guide to Building Better Fitness Facilities
Any serious investor will want to know what their potential returns might be, and the key to convincing many investors can be found in well-developed and plausible financial projections.
Financial projections are forward-looking estimates of your health club’s potential revenues, costs, and profitability.
Every business develops financial projections in its own way based on its own data. However, all health clubs have certain expected sources of revenue, and certain expected costs, around which you should be able to develop some reasonably plausible projections.
You can start with revenue. How many people are in your addressable market (geographic area)? How many do you expect to attract with your branding and messaging? How much will you charge them in monthly membership dues?
The size of your total addressable market, multiplied by the percentage of that market you reasonably believe can be convinced to join your club, multiplied by your monthly membership price (times 12, to calculate revenues on an annualized basis), can give you a decent start on a long-term revenue projection.
Lower percentages can be used to develop nearer-term projections. You won’t get everyone in your potential member base to sign up on day one.
Other sources of revenue might include coaching or training sessions, the sale of snacks and drinks and workout gear, group classes, and special events.
Do the best you can to anticipate all revenue based on what you know. You can always update your projections when you have better data.
You’ll also need to identify as many anticipated costs as possible.
These can be startup costs, required simply to open the doors, ongoing costs to keep the lights on from day to day, and other costs of revenue (like marketing expenses or the costs of promotional discounts) that you think you’ll need in order to achieve growth.
At a minimum, you’ll need to know the costs of your facility space, and the costs of any utilities (electricity, water, gas, etc.) needed to keep the place running.
If you’re already established, you should have a good handle on these numbers. If you haven’t yet opened, you can still accurately estimate your lease and utility costs through honest negotiation and discussion with your landlord. Whoever owns the facility you’ll be using should understand what it costs to keep the lights on, and you can talk to utilities as well to find out what the space might have been billed in the past.
Liability and other forms of insurance aren’t likely to be one of your club’s larger significant expenses, but insurance is necessary, and it’s relatively easy to get a quote if you don’t already have policies in place. Insurance costs should therefore be part of any cost calculations.
You should also have a general understanding of your personnel needs, and how much you may need to pay to retain a capable team.
Facilities in the U.S. can get a general idea of nationwide salary ranges for nearly any possible role through the U.S. Bureau of Labor Statistics’ online Occupational Outlook Handbook.
There are also many employment-focused sites with location-specific pay data, such as:
Since wages and benefits are likely to be one of your largest ongoing costs -- and because an engaged, motivated workforce is vital for building customer loyalty -- it’s critical to know how much to offer employees and prospective hires to get and keep great people.
Many facilities I (Tim) have worked with have tried saving money by offering low salaries to underqualified or outright unqualified people, only to discover that these poorly-paid and poorly-trained employees aren’t very good at maintaining customer satisfaction.
What’s worse, dealing with turnover and replacing departed employees can cost anywhere from 10% to 200% of a departed employee’s salary, depending on their experience and seniority. You might think you’re saving money by skimping on payroll, but the long-term costs of poor pay often outweigh any perceived benefits.
In addition to employee pay, you should also consider the costs of retaining skilled and credentialed professionals. Taxes, legal compliance, and debt collections generally don’t require a full-time salaried employee, but you’ll nonetheless need them handled capably on an ongoing basis.
Lawyers, accountants, and other white-collar professionals provide a valuable service to customer-focused businesses like health clubs, and when it comes to taxes and legal compliance, they’re often worth much more than they’ll bill you.
You’ll also have to consider the costs of purchasing equipment or installing amenities such as tennis courts or climbing walls, as well as the ongoing costs of maintenance.
This will be much easier to anticipate if you’re already well-established and have experience installing and maintaining equipment or amenities.
If you’re just getting started, you should look for qualified suppliers and/or contractors to provide accurate quotes for whatever you’ll need.
Marketing, advertising, and sales efforts will all be costs you’ll need to anticipate, but they can vary widely in size and frequency, depending on your approach. These costs may be difficult to estimate if you’ve never faced them before plan for, so don’t worry too much if you can’t lock down specific values.
Ultimately, the return on your investment (ROI) in any sales and/or marketing efforts will be more important than the actual costs of those efforts.
No one expects you to put together something that looks like a pitch deck from Bain or McKinsey, and you don’t have to be laser-sharp in your projections. However, research into your competition, your local market, and your own business structure and branding should give you some idea of what’s possible.
You’ve figured out potential revenues and expenses, so what’s next? It’s time to take your completed business plan and start shopping it around to people who can invest in your business or provide loans.
Fitness businesses tend to be capital-intensive.
This is particularly true when you’re getting started, as you’ve got to bring everything together for your future members and clients. You’ll need a well-decorated facility, functional and attractive equipment, other business supplies, a good team, sales and marketing campaigns, and more.
It’s rare to see a decently-sized fitness facility get off the ground with less than six figures of upfront investments in space, stuff, and staff.
Most fitness entrepreneurs don’t have hundreds of thousands of dollars lying around, but there are many ways to fund a fitness facility that don’t involve using every cent you’ve got.
The next few sections will examine some popular and lesser-known ways to finance a new fitness facility. These options can also be used to cover upgrades, expansions, or seasonal lulls in business for existing clubs.
Let’s start with the most popular, and generally easiest-to-obtain, source of funding: capital from your friends and family, which can also include your own personal financial resources.
Years ago, when I (Tim) was still starting out, I trained a client who worked as a banking executive. He often handled loan applications from entrepreneurs seeking small business loans, which we’ll cover in a subsequent section. He was also frequently responsible for generating new applications, which occasionally required him to convince reluctant entrepreneurs to take on significant debts.
He used one bold-face statement to get peoples’ attention and convince them to apply for a loan. I’ve always remembered it, and I’d like you to think about it as well:
“82% of all new business funding comes from the business owner and their friends and family. But 82% of all business failures happen because the company doesn’t have enough money. It’s not just a coincidence that the number is the same for both situations.”
You probably won’t be able to afford everything you’ve dreamed of when you’re first starting out, especially if you only use your own money.
It can be tempting to finance the launch of a new health club with money from your friends and family. You won’t be beholden to anyone -- except your friends and family. You won’t have anyone else telling you how to run your business -- except, possibly, your friends and family. And you won’t need to pay anyone back month after month, or through dividends, share buybacks, or other stock-market-like maneuvers -- unless your friends and family demand it.
However, there are reasons to avoid taking money from friends and family if you can avoid it.
Friends-and-family investments often punch massive holes in the wall between your personal and professional lives. The most well-meaning grandma or fraternity pledge brother can get antsy, and even become confrontational if you don’t appear to be using their money wisely and moving towards fulfilling your repayment obligations.
Many entrepreneurs burn bridges and destroy relationships by overextending themselves with friends-and-family funds. Success may arrive too late to salvage a strained relationship, and no amount of money can make up for the loss of a treasured friend or familial bond.
If, for any reason, your health club doesn’t make it, and you can’t pay back your friends and family, the damage to personal relationships could far outlast the damage to your financial position or professional standing.
You’ve probably heard stories of people ending decades-long friendships over something as trivial as not picking up the tab at lunch. You might believe your friends and family are more forgiving, but until you actually borrow money from them, you can’t know for certain.
In case it wasn’t already clear, we don’t recommend funding your new health club entirely out of personal capital and/or friends-and-family funds, even if you find yourself in the rare situation where you can actually do so.
Friends-and-family funding can be a viable way to involve your loved ones in a business that’s on its way to success. Many hugely successful entrepreneurs have either started off with some friends-and-family funding or brought friends and family in as investors (or even business partners) relatively early in the growth process, producing massive wealth for their loved ones over the long run.
However, you shouldn’t place the burden of your business’ success on friends-and-family capital.
That’s where the rest of our funding options come in. The next section will cover angel investments and venture capital.
The last section of this guide introduced you to a familiar, but risky, way to fund the start or growth of your health club: friends and family financing.
Today, we’ll examine angel investments and venture capital, forms of funding often available to only a few high-performing businesses.
Angel investors or venture capital firms represent some of the most manageable forms of fundraising, particularly for a young business yet to establish itself profitably in the marketplace.
You’re probably familiar with these types of investments simply because of their growing presence in pop culture. Not only are large rounds of venture capital fundraising heavily reported by the mainstream press -- remember when Uber was supposed to be worth $100 billion? -- Hollywood has also trained its lens on this world with increasing levels of detail and accuracy.
However, pop culture doesn’t often focus on the boring, but essential, aspect of angel investors and venture capitalists: they’re in it for the long haul.
When these investors put their money into a young or ambitious company, they tend not to demand regular repayments or onerous interest rates.
In fact, investments of this sort may not be cashed out for years and may demand no further financial transactions from the business back to the investors at all, unless that business decides to pay dividends (we’ll get to that in a moment).
Angel investors and venture capital firms don’t give millions of dollars to young companies, without demanding any regular repayments, because they’re nice people who want to support the local economy.
These investors provide funds to businesses in exchange for a significant ownership stake in those businesses. As such, they expect the “portfolio companies” they’ve invested in to grow rapidly, increasing the size of their ownership stake by many multiples.
The angel and venture financial model is primarily built to find these rare mega-hits. An angel investor or venture capitalist doesn’t want any business in which they invest to fail, but they accept the likelihood of failure to grab at those moonshot opportunities.
Unfortunately for fitness business owners, these types of investors typically focus on more technology-focused opportunities, due to more visible opportunities for rapid growth.
A health club, or even a chain of health clubs, doesn’t fit the typical profile of an early-stage equity investment. However, if you’ve put together a high-growth business plan with ambitious but achievable goals, you may be able to attract angels or venture investments. You’re more likely to do so with fitness technology than fitness facilities.
For example, Peloton is 20 years younger than Planet Fitness. Because it builds connected exercise bikes instead of merely offering access to connected exercise bikes via gym membership, it’s attracted nearly $900 million in venture capital. It’s now worth about $9 billion after going public in 2019. Planet Fitness, on the other hand, was completely bought out by a private equity firm for $550 million in 2019.
Angels and venture investors also tend to involve themselves with your business to a greater degree than most other types of financing on our list. Because they’re buying a piece of your business, they have every incentive to help it succeed.
Many angel investors and venture capitalists serve as de facto mentors to the founders of businesses in which they’ve invested, helping introduce them to new business opportunities, strategies, and systems.
If your business is appealing enough to attract early-stage investments, it can feel a bit like being the most attractive person in a crowded singles bar.
It’s vital to vet your prospective investors just as they’ll be vetting you, to make sure you can trust them and work well with them for years. A good-fit investor will understand your mission, believe in your abilities, and want to offer support beyond the chunk of change they’re offering. They also won’t low-ball your company’s value or push you to sell too much of your business.
If you’re the rare health and fitness entrepreneur to attract early-stage investor interest, make sure you understand how big a share of your business you’re willing to part with. You should also work to develop an objective understanding of your company’s market value before trying to raise capital this way.
The less of your business you own, the less control you’ll have over it when it comes time to make big, high-level decisions.
Let’s say you haven’t had any angel investors sniffing around your club lately, and you don’t want to ask friends and family for loans.
Luckily, committed entrepreneurs -- who can secure facility leases and are ready with strong business plans -- often have other options. We’ll cover a popular one in the next section.
Next month: Part 5