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Entries in expansion (11)


Expanding Your Club vs. Building a New Location: Which Has a Higher ROI?

Photo: vividBreezeDag Lee and Bryan O'Rourke discuss the return on investment (ROI) you can expect when expanding your facility and building a new facility in this week's Best Practices.

Q: "How can we compare the return on investment between adding on additional space to our current facility and opening a new facility?"

A: Consider the local market, growth prospects, macroeconomic factors, competition and so on. This can have an impact on your decision, as well as your own financial situation, the borrowing cost and weighted average cost of capital. 

Calculate the returns and payback times on the two options, perhaps using a 10-year horizon for the budgeting, and then compare them.

Adding additional space to your current facility.

Here you should make two scenarios that include all investments, top line development, as well as costs and expenses for both scenarios. Then do a return analysis on the cash flow differential between the two scenarios; 1 and 2.

  1. Running the club as is without the additional space, but with the capital expenditures required to upkeep the club as needed, and with the expected P&L development.
  2. Similar to 1, but with the added costs and investment of the enlargement project (you may need to renovate the old part of the club as well), including additional rent and other variable costs that increase with additional space, but also factoring in how you might be able to grow your membership base with additional space. Will you need more staff? Consider all costs and revenue changes from the project. You also need to factor in any club downtime, or partial closing of the club. Try not to close, as this is like asking members to go elsewhere. You may also be able to charge a higher price after the refit and enlargement, at least from new members, slowly but surely increasing your average dues, PT and miscellaneous revenue. Projects like these, although positive for the members when finished, can create frustration from partial closings or limitations in the service offer while the projects lasts. Noise, dirt and dust may also impact the experience. Therefore good and complete information in good time through all channels is key: in the club, posters, staff, website, social media, email and newsletters.

Building a new club – effectively a club move.

Here I have assumed that you close your old club and move it to the new site. You’ll need to make budgets for investments and the P&L (and a balance sheet) for the new club project, as well as factoring in the costs of the move, as well as all costs associated with exiting the old site. This may include any rent obligations, repairs to the structure, etc. As you’ll build the new site while still operating the old one, you need to factor in duplicated costs during the project, if any. You also need to have a strong plan for ensuring that as many members as possible make the move with you, as well as a great presale plan to capture many new members to justify the large undertaking building a new club is. Calculate the returns on the 10-year cash flow.

Now you can compare the returns between the two options: adding space or building a new club. Building a brand new club may require significantly more cash, and construction projects have certain risks you need to understand, as well as negotiating favorable contracts with the landlord. In addition to the financial analysis, it is crucial to understand the market, your position, and in the end, have a good gut feeling for the route you choose.

Have you considered enlarging and upgrading your existing club, AND building a new one? Effectively making a little 2-club cluster with the advantages that can bring.

Dag W. Lee, Taipan Invest, chairman
ACTIC Fitness, board member

A: First calculate the cost of each alternate investment. Be as accurate as possible. Don’t leave anything out. Miscalculating costs could result in a poor decision.

Now that you have an idea of what each alternative costs you want to know what they’ll generate in cash flow. Prepare estimated revenues and operating costs for each option and be meticulous. When expanding an existing club, make sure you have a clear understanding of what the additional space will be used for to create a reliable basis for estimating net cash flows. A new club facility will require even more thoughtful analysis. If you have a geographic area identified engage a professional to conduct a market analysis estimating both demand and supply in the trade area. For each alternative, create a best case, worse case and an average cash flow forecast.

The final step is to use a net present value calculation to determine which option is best. You can use an NPV calculator online. When doing so it might be wise to use a higher discount rate for a completely new facility as opposed to adding on space, given the added risks. 

Finally, have you considered what your strategic end game is for your business ? Managing multiple clubs can be far more challenging than a single location. Take time to really consider the options and what you are committing to and good luck.

Bryan O'Rourke, CSO & Principal

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