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Friday
Apr152016

Best Practices: Health Club Financing Options

The following post was written by John McCarthy for our Best Practices series

Question: I’m planning to open a health club. What are my options with respect to financing? 

John McCarthy: The main sources are debt financing from conventional lenders, private investors, landlords and equipment suppliers, and private equity funds. 

For debt financing, lending institutions are currently financing at rates ranging from 5% to 8%, for periods of three to 15 years—depending on your history, the quality of the collateral, the projected debt coverage ratio, the predictability of cash flows, the business experience of the ownership group, the expertise of the operating team, and the general economic environment. Personal guarantees are usually required. 

Private investors expect—within five to seven years, at most—annual cash-on-cash returns of 7% to 14%, depending on the current rates of return. Often, they require an option to be cashed-out of their entire investment within a specified number of years. A seven-year return on investment (ROI) is common. 

Where vacancy rates are high, landlords are often willing to help with build-out costs, although this may lead to much higher rental rates. Nearly every fitness equipment company offers attractive equipment leasing arrangements. 

Finally, private equity funds may finance leading regional players. Generally, they expect to cash out of their investment within five to seven years, and to average a compound ROI of at least 20%. 

John McCarthy
Executive Director Emeritus
IHRSA
Weston, MA

Reader Comments (1)

John McCarthy is right as usual. Our experience from funding over a thousand start up small clubs is that experience, financial strength and personal credit, in that order are the three critical areas in obtaining funding for the project.
April 20, 2016 | Unregistered CommenterJoe Schmitz

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