Thinking of Franchising a Health Club?

If you’re a newcomer to the industry, or a fitness professional who’s been working in a club for a while, have you ever toyed with the notion of owning a business of your own—maybe purchasing a franchise? Have you sketched the outline of your dream on a cocktail napkin?

If you have, well, you’re certainly not alone.

Between 2013 and 2018, fitness has been among the fastest-growing franchise categories, expanding at 5.2% annually, according to the IBISWorld 2018 Gym & Fitness Franchises Report.

In the U.S., these franchises generate an estimated $4 billion of the industry’s $34 billion in annual revenues, account for more than 7,200 operations, and employ 60,000-plus people.

Between 2000 and 2017, the segment’s revenue and membership numbers nearly doubled, with the latter shooting from 32 million to more than 60 million.

The sector is expected to maintain its 5.2% growth trajectory through 2023.

Franchise Direct’s Fitness Franchise Industry Report 2018 suggests that fitness may well be the fastest-growing franchise class. It notes that the top four of the 10 fastest-growing franchises on Inc. magazine’s 2017 list of the 5,000 fastest-growing U.S. companies are held by fitness or fitness-related brands.

The four: Club Pilates, Fyzical Therapy & Balance Centers, iLoveKickboxing, and Fitness Holdings Northeast (Crunch Fitness).

There are a number of reasons for the category’s vitality and impressive growth. Among them: more health-conscious consumers, attractive price points, fresh new business models, conveniently located facilities, trainers’ growing professionalism, the industry’s increasing sophistication, the impact of new technologies, the power of social media. ... You get the idea—the list goes on and on.

From a prospective franchisee’s perspective, the most compelling factor may be the combination of a tested business model and a relatively low barrier to entry.

“Fitness franchises offer individuals, who often have no formal fitness education or background, a purposeful platform to make a difference,” says Brent Darden, a principal in Brent Darden Consulting, based in Dallas, and former chair of IHRSA’s board of directors. “In addition, many fitness franchises have a proven track record of success, and can generate significant profit margins with relatively low startup costs.”

Embarking on any new business venture raises a host of issues, poses a plethora of questions that need to be answered, but principal among them are: How much will it cost? What fundamental risks do I face?

To Start, Consider These Financial Facts

The “relatively low startup costs” that Darden refers to typically start with the franchise fee, which might run anywhere from $25,000 to $60,000 or more. Certainly, that appears to be a low barrier. But that’s just the beginning.

You need to consider all of the capitalization needs as you research different franchise opportunities.

“Those costs depend largely on the type of model someone chooses, since each involves a different level of capitalization for the franchisee,” says Ben Midgley, the CEO of Crunch Franchising, LLC, based in Portsmouth, NH. “It’s safer to be overly qualified financially than ‘just’ qualified. That’s an important piece of advice for any prospective franchisee.

“A commercial space lease requires good financials, as do the equipment and soft-cost financing,” he adds. “You’ll need sufficient operating capital to rely on as your cash flow builds, and you’ll want general reserves as, while you hope for the best, you plan for the worst.”

Guy Cammilleri, the CEO of World Gym International, LLC, headquartered in Santa Monica, CA, offers some concrete numbers that, while they might be sobering, describe startup funding in realistic terms.

“The capital investment required to build out and run a gym until it turns cash-flow-positive can run anywhere from $500,000 to $3 million, depending on the size of the facility,” he says.

“World Gym’s real estate department analyzes the market the franchisee is interested in and then recommends either a studio or a full-service gym. The suggested size is based on such variables as population, average household income, existing competition in the market, etc.

“With these factors in mind, we generally look for a franchisee to have a net worth of $1 million, and approximately $150,000 to $250,000 in cash to launch the project.”

The guidelines employed by Blink Fitness, a New York–based franchise brand owned by Equinox Fitness, stipulate that a prospective franchisee should be prepared to pay for 20% to 25% of the total investment with their own capital. The company’s minimum requirement for available liquid assets is $300,000 per gym, which ensures enough capital to be successful in obtaining financing.

“As a franchisor, we place a lot of emphasis on this, and complete a thorough due diligence process to ensure that our franchisees are well capitalized,” says Patricia Perry, the vice president of franchise development for Blink. “Lack of capital is one of the main reasons franchisees fail over time.”

Clearly, there are less, and more, expensive franchises. But understanding that you need to take all of the costs into account—including startup fees, equipment purchasse, real estate, staffing, ongoing fees, reserves, and more—gives you an accurate feel for what you need to have in place before you begin to assemble your financing package.

Learn to Tap into Financial Resources

Only when you have your numbers together can you address your financing needs.

Most franchisors offer financing advice, access to preferred financing vendors, and other support, but not direct financing.

“Some do have dedicated pools for that,” Midgley says. “At Crunch, we have a $50-million pool for our franchisees that lends up to $1.3 million per site, pending qualification. Many franchisees will make use of the franchisors’ third-party relationships, franchise leasing companies, etc. Some, depending on the relationship they have with their bank, will turn to them since many banks offer aggressive financing against deposits to keep the money within their institution.”

U.S. Small Business Administration (SBA) loans are good options since they offer low rates, finance many companies, and have long amortization periods, often seven to 10 years.

However, they’re highly collateralized, often requiring personal property.

In terms of available financing types, Paul Bosley, a managing member at Health Club Experts, based in Mount Dora, FL, a firm that specializes in franchise financing, breaks lenders down into two categories: ones that require less than $350,000 in funding, and ones that require more.

In both cases, he says, the most common source is SBA loans.

“For those under $350,000, the SBA Express Loan offers working capital for the business and equipment,” he explains. “This loan is capped at $150,000, and doesn’t require real estate collateral. You couple that with a capital lease loan, which requires 20% down. So, you’re getting a working capital loan of around $150,000 and, say, an equipment lease of $100,000, some $80,000 of which will be financed. So, you’re getting $230,000 worth of financing, without needing collateral or having to tap your retirement fund.”

SBA Express Loans carry a 10-year term. For most lease-to-own capital leases, the down payment is typically 20%, terms are anywhere from 12 to 60 months, and the payments are tax deductible.

“When you exceed $350,000, realistically, you’re likely to choose an SBA 7(a) loan,” Bosley continues. “In that case, you’ve got to come up with no more than 30% down, and you’ll need to collateralize it with your personal real estate. So, if you’re financing a $500,000 project, you’re providing $150,000 up front, and financing $350,000 over 10 years. You’ll be putting up your house to collateralize that $350,000 loan. The business itself also is considered collateral.”

As one might expect, both loan programs require good personal credit. In addition, the SBA 7(a) loan demands that borrowers provide resumes that demonstrate industry experience, transferable management skills, and/or related education.

Still, Bosley points out, having this funding in place might not cover all of your capital needs.

There’s an old CPA’s maxim that says you should have three months’ worth of personal savings put away for emergencies. The same holds true for your business.

“You should have at least three months’ worth of cash reserves based on your expected expenses. That’s my minimum recommendation,” he says. “So, if you think you’re going to need $30,000 a month to break even, you probably should have around $90,000 to $100,000 in working capital available. You never know what might happen. Memberships may sell more slowly than you think, construction may not be completed as soon as you expect. ... It pays to have something in reserve.”

Preparing for Potential Pitfalls

Having the money to purchase and operate a fitness franchise is a big part of the battle, but risks and pitfalls also lie ahead.

Among the hazards first-time franchisees face is not taking the time to ascertain the best person/brand fit.

“That’s the key problem I see—prospective franchisees simply not doing enough research. And that’s despite the fact that there’s a wealth of information available on how to do good opportunity research,” says Joel Libava, the author of Become a Franchise Owner! The Start-Up Guide to Lowering Risk, Making Money, and Owning What You Do.

“The thing that almost always surprises first-timers is the length of time it takes to turn a profit,” he says. “I tell my clients that franchise ownership isn’t for people who need to replace their current income quickly. It’s a process. But you have to let it work, and you have to do the work.”

While franchises are typically proven models, investing in a recognized brand doesn’t necessarily guarantee success.

“One of the greatest risks is simply the misperception that securing a well-known franchise will make running the business easy,” Darden says. “High-performing franchisees maximize the brand’s strengths, follow the corporate playbook, and passionately work on building ‘their’ business.”

Another common error is treating the business as a passive entity—one that will grow itself.

“Unlike a 401(k), stock market play, or other investment, your business won’t just grow organically,”says Dave Mortensen, the CEO of Anytime Fitness, the global franchise based in Woodbury, MN. “You need to constantly reinvest in your own business—you need to capitalize it.”

The one pitfall cited by virtually every franchising expert? Undercapitalization.

“Many first-time franchisees underestimate the initial investment and ongoing operating costs,” Perry says. “It’s so important for franchisees to read the franchise disclosure document (FDD) carefully, ask thoughtful questions, consult a franchise attorney, and speak with existing franchisees.”

“First-timers often aren’t conservative enough when it comes to their financial forecasting,” Cammilleri says. “Their excitement to build and operate their first gym leads to overly optimistic financial assumptions. We counsel conservative forecasting, and the budgeting of an appropriate amount of working capital to support the business until it becomes cash-flow-positive.”

Almost any mistake can be avoided by learning as much as you can about what you’re getting into.

“The best advice I can give first-time franchisees is this: When you find an opportunity that makes sense for you—and is affordable—take the time required to research everything you can about the company,” Libava says. “This includes visiting headquarters and calling and visiting franchisees. That way, you’ll be able to make a fact-based, yes-or-no decision.”

If, after doing all of the due diligence research required, it still seems that buying a franchise is the right move—you’ll know it.