Whether you’re looking to acquire a new property gym business, looking for financiers, or are interested in acquiring a small business of your own, paying attention to how you value a gym business is necessary for doing business in the fitness industry.
A Zippia.com research paper reports that over 39% of America own gym memberships, and the US fitness industry is expected to see a growth of 33.10% per year till 2028. There’s never been a better time to be in the fitness industry.
And a good business valuation lets you make informed business decisions without fear of being cheated or losing money.
This Article in a Nutshell
- A gym valuation is a must-have for any buyer or investor in the fitness industry and can determine your future prospects.
- There are multiple types of gym valuations, each with its distinct advantages and disadvantages, and it’s up to you to choose which one makes the most sense for you and strike out a favourable deal
- Factors like location, size, advertisement costs, demographic, earning history, and state of the economy can affect the performance of a gym and its valuation in extension.
How to Perform a Business Valuation
Business valuations are a tricky thing to un-initiated. Many factors go into determining the fair market value of a property. Tangible assets and intangible assets have to be taken into account, as well as cashflows, tax returns, income statements, depreciation, net income, and much more.
There are four popular methods gym owners and business brokers use to calculate business valuation on their gym businesses.
Earning Multiple Valuation
An Earnings Multiple Valuation is one of the quickest ways to calculate the value of any gym business. Imagine that you’re looking to open a strength and conditioning gym and want to quickly hit the ground running; this is the best option for you.
It gives a business broker a great jumping-off point to negotiate pending further investigations.
An earnings multiple valuation is calculated by multiplying the business’s earnings before interest taxes, depreciation and amortization expenses (or EBITDA) by a multiple most appropriate for the business size in the fitness industry.
Most gym businesses, fitness clubs, and fitness businesses fall in the 3.0 range, but some franchises can climb as high as 5 or be as low as 1.
Here’s a helpful chart to help you calculate a gym value.
- 0-$50,000 — 1.0-1.5 times EBITDA
- $50,000-$150,000– 1.5-2.0 times EBITDA
- $150,000-$250,000– 2.0-2.5 times EBITDA
- $250,000-$500,000– 2.5-3.0 times EBITDA
- $500,000-$1,000,00–3.0-3.5 times EBITDA
- $1,000,000 and up — 3.5 times EBITDA
To calculate your gym’s EBITDA, start with your gym’s profit and loss statement or net profit, then add back interest, taxes, depreciation and amortization.
For a small gym business, your EBITDA calculation would work a bit differently. You’ll be using the SDE method, which stands for Seller’s discretionary earnings.
You calculate by starting with your net income statement and then, add adding and subtracting other variables.
You add non-operational expenses, subtract non-operating income, add one-time expenses, subtract non-recurring income, add amortization expenses and depreciation, add interest expenses, subtract interest income, add One owner’s total salary, and adjust for compensation for stakeholders to market value.
The Asset Method
This method of gym valuation takes metrics like cash flow and net income out of the equation, purely focusing on the gym’s total assets as well as intangible assets like brand recognition, intellectual property, market share, and trade secrets to calculate a gym’s worth.
While simple on the surface, this method can be cumbersome to use as intangibles are often difficult to value correctly, usually due to the seller’s ego, personal attachment, and time invested.
The tangible assets acknowledged in this gym valuation method typically include exercise equipment, franchise rights, account details, lease agreement, and property.
Comparable sales valuation or market valuation
The comparable sales valuation method has its roots in the real estate market. It involves using the sales records or fitness businesses around your area to determine the selling price or value of your gym business or fitness club.
The biggest factors to consider when using this method are the location, size, and type of gym or fitness business. A crossfit, Yoga, and weightlifting gym do not pull in the same client numbers or have the same projected growth, revenue streams, monthly revenue, or limitations.
Take those into account while you’re negotiating. However, the biggest advantage of using this method is the negotiating power comparative analysis gives you. You can raise or lower the prices based on the figures businesses around your area have managed to sell for.
Discounted Cash Flows
The discounted cash flow method determines the value of a gym business based on the future projected growth or cash flow and discounting them back to the present value.
Essentially, it helps buyers determine if business owners would be worth it or would their money be better invested.
To do this valuation, you need an estimate of future cash flow from your initial investment, a discount rate, and a total cost of investment.
You can get a somewhat accurate forecast of future earnings by referencing the previous year’s profit and adding a growth percentage, provided the business is on the incline.
The Weighted Average Cost of Capital is a great way to determine the discount rate for a Discount cash flow valuation.
Using an online DCF calculator, you can calculate the discounted cash flow over the next four years. If it’s below the asking price, that means the property is overvalued and might not be worth the exposure risk.
However, the DCF valuation rules are not set in stone. they make lots of assumptions about the business stability and take longer than every other method we’ve discussed. Even then, there’s a lot of room for error. To get the best results for your DCF valuation, you’ll have to go beyond the gym valuation guide, accounting for all foreseeable factors like economic, regional and industrial stability and trends.
Things you should keep an eye on when valuing a gym business
Whether you’re buying or selling and need to value a gym business, here are a few important factors/things you should look out for when determining a gym’s value.
These factors are also criticial if you’re trying to license a gym franchise and need to decide on the most financially savvy option.
- Other revenue streams
- State of the Economy
- Trends in the fitness industry
- Earning’s history
- Location and size
All 7 factors play major roles during valuation and can help project and determine the future growth and future value. However, Memberhsip and Other revenue streams are by far the biggest factors that affect a gym’s worth or a gym’s EBITDA score.
They are the main sources of recurring revenue and determine gross revenue, future cash flows and value, future value, etc.
Increasing your gym business valuation (for Sellers)
It’s impossible to make a failing gym profitable overnight. However, if you’re gearing up to sell your fitness club or business, you can do a few crucial things before you see the business brokers.
If you’ve been paying attention, you know what metrics really matter to potential buyers. Gross revenue, operating cash flow, decent profit margin, past performance, net profit, and projected growth.
You can’t change what your books say, but you can focus on growing your client list, preparing your gym, and cutting back unnecessary expenses to boost the gym’s overall value.
However, if you want the best results, we recommend hiring a business broker or financial advisor experienced in your industry. They can give you an inside scoop on expected cash flows, what gym buyers look for, and tell you which gym valuation method makes the most sense for your business.
How much cash flow or money does an average gym business make?
The average medium to large-sized gym or fitness club makes between $250,000 -$500,000 every year with a 9-11 % profit margin.
Note that these numbers can fluctuate wildly, depending on the location of the gym, its mortgage, staff, alternative revenue streams, personal training staff, and so much more.
A more interesting metric for potential buyers might be revenue growth, member retention rates, customer satisfaction, etc.
Can a Gym valuation help you get a bank loan?
Yes, it can. Banks require collateral when you take out a loan as evidence that you can pay back with interest. And one of the quickest ways to confirm that your gym and its equipment are worth what you say it is through a gym valuation.
The valuation will be carried out by a professional who will determine the current value of your property, taking into account your location, size, comparable sales, as well as other important factors.
It also helps to have a thriving gym, which is why you might enjoy our post on Why you should incorporate these features for small gyms immediately.