What are your own fitness centers actually worth and how does such a sale work? Nico Scheller, who together with his partner Michael Schetter recently sold 13 In Shape fitness clubs to the LifeFit Group, and Christophe Collinet, Chief Commercial Officer of the LifeFit Group, describe the process.
The gist in a nutshell:
- Selling a gym can make a lot of sense
- As both buyer and seller, you should always communicate clearly and openly
- Both parties should be sensitive to each other's various needs
- A good attorney is essential to keep track of sales contracts
Corona has left deep wounds for many companies. Even before the crisis, some studio operators were struggling to survive and had difficulty withstanding the fierce competition. The increasing formation of chains and the accompanying professionalization make it difficult for individual operators.
Many a marketing budget of a regional chain exceeds the turnover of the individual company, chains have a specialist in every discipline, while the operator of an individual studio or a small chain has to do everything alone as a generalist. This costs energy and many a person who has already been on the front line for decades now has no more energy and is thinking about selling.
However, since a company sale is not an everyday occurrence and very few people do it several times in their lives, the following is a rough outline of the process.
Active buyer search versus reactive sales process
There are two options. One is the active buyer search, possibly with the help of an M&A consultant (M&A stands for mergers and acquisitions), who approaches several bidders and organizes a process. The other is the reactive process. Here, offers are received from potential buyers without managing an active process.
The probability that a single company or a small chain will be actively approached is rather low. Many things would have to fit, such as the fact that the club for sale is located exactly in the expansion area of another chain, has a good position there, a very good property, or similar.
So, if one is determined to sell, one should actively seek the sale oneself. There are numerous consultants who can help the seller find a buyer. In addition, they often have a lot of experience and this can be put to good use in the sales process.
Selling a gym on fitnessmarkt.de
How do you determine the value of fitness studios?
Past experience shows that club operators often have utopian price expectations for their business. These were justified, for example, with high acquisition costs for equipment as well as expensive renovations. However, no matter how much money has been invested, buildings, membership base and employees are not directly relevant for the purchase price calculation. The benchmark here is usually EBIT or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Translated, EBITDA describes "earnings before interest, taxes, depreciation on property, plant and equipment and amortization of intangible assets". If you want to know this, look at your BWA (Betriebswirtschaftliche Auswertung), take the "operating gross profit" and add to this the depreciation and operating taxes from the previous items. If the entrepreneur takes a very high salary, this can also be deducted and an appropriate managing director's salary can be applied instead.
The enterprise value is calculated from a multiple, i.e. a factor, of the EBITDA. The value of this multiple depends on the buyer and attractiveness of the fitness company for sale. If the company has a stable EBITDA margin greater than 20% and annual growth greater than 15%, the chances of a successful sale are very good.
As an example: A fitness company has a turnover of 1 million euros, and achieves an EBITDA of 200,000 euros. Multiplied by an exemplary factor of 3x, this would result in a company value of 600,000 euros. All of the company's liabilities are deducted here. These include, for example, leasing contracts. Investments in the company that are overdue or due in the near future are also deducted.
Corona has brought with it a new challenge: How do you deal with contributions that were collected during Corona and posted to liabilities? How to deal with Corona aid received? Since the situation here is uncertain for all sides, a final decision on these amounts can only be made if, in the case of contributions, they can be booked out as a liability after three years and by then it is also clear who has claimed the compensations and repayments.
In the case of Corona aid, one option is to postpone the final audit of the amounts until the final values are known. In the end, it is a matter of negotiation here whether to rely on a final settlement in the future or to apply lump sum values at the time of sale.
Probably the most common valuation approach in the fitness industry is the multiple approach, where the EBITDA generated is multiplied by an industry standard factor to determine the business value. However, there are other business valuation approaches. Essentially, these can be grouped into three categories: net asset value method, earn-out or DFC value method, and just the multiple method.
The earn-out rule
But what do you do if the company does not generate any positive EBITDA at all or generates significantly lower EBITDA, but was making good profits before Corona? In such a case, an earn-out provision can be used. After all, both seller and buyer should be convinced that the company has the potential to generate good profits again.
A jointly developed business plan then sets out a forecast EBITDA for an agreed period. If this result is achieved, the seller will subsequently receive a further amount, which in total will then reflect the value of the company in the future. The purchase price is thus split on the future performance of the club or the facilities.
When should you sell your gyms?
The question also arises as to when a sale is appropriate. Should one sell when the market situation is most attractive? Or is it not rather the case that our industry has had its best times (for the time being) and one or the other feels compelled to sell?
If you are in the situation that you are heading for insolvency sooner or later, you should rather act quickly and offer yourself on the market. A dead company is worth much less and with a quick sale you can possibly get your head out of the noose and save yourself from personal ruin.
If there is no enormous time pressure during the sale, there are perfectly justifiable reasons for the seller to let the deal fall through. Probably the most common reasons why a seller should refrain from selling are:
- Price and valuation
- Improper allocation of risk and liability in the purchase agreement
- Unreliable buyer who repeatedly fails to honor agreements
The first steps of the sales process
When an initial offer is on the table from the potential buyer, the seller should check that the offer is roughly within market valuation standards, and also clarify early on what seller warranties they have to provide.
Once the interested party and the seller have found each other, initial discussions and visits to the club take place, in which the situation of the company should be described as openly and realistically as possible. Flunking or whitewashing does not help and, in case of doubt, costs a lot of money, as everything will be uncovered in the course of the process and urgently needed trust will be gambled away.
Usually, if there is serious interest, an NDA (Non Disclosure Agreement) is signed by both parties, which obligates both seller and buyer to maintain confidentiality and is intended to protect them. Especially in the circle of the staff, one should still keep a low profile, since burgeoning rumors can cause a lot of commotion and unrest.
In the following, things become a bit more concrete: You exchange BWAs and company key figures, dive deeper into the company and develop a common understanding of how the company can be continued after a purchase. Under certain circumstances, it may make sense for the selling management to continue running the company for a defined period of time.
In the next step, both sides agree on the basic points of the sale and set them down in a letter of intent or term sheet. The term sheet then becomes the basis for all further negotiations. A potential purchase price is also determined here.
Therefore, an experienced M&A lawyer should be consulted at the latest when negotiating the term sheet. It is not advisable to save up for this. Nor should one be deterred by the exorbitant hourly rates of several hundred euros. A good lawyer will more than pay for himself.
In addition to transactional lawyers, it also makes sense to involve tax advisors and, if available, lawyers from your own company in the process. Coordinating the cooperation between all of these people is an extremely important component in being able to close the deal.
The due diligence - it gets down to the nitty gritty
Due diligence will keep both sides busy for several weeks or even months. Here, all details, all contracts are checked by the buyer, the sustainability of the deal is examined and risks and irregularities are looked for.
Due diligence usually takes place for the areas of taxes, real estate, IT, finance, marketing, operations, human resources and legal. This phase is very time-consuming, as all documents are viewed and uploaded into the data room, which will then also become part of the contract. Those who have already done the groundwork here and have already archived the majority of their documents electronically will enjoy immense advantages.
Basically, every entrepreneur who is thinking of selling his studio(s) should be aware that the consistent preparation of all data is a central preparation point, which should be completed in any case before the first talks with potential interested parties. Alternatively, good law firms offer support here, but also at high hourly rates.
Those who have a (consolidated) financial statement available at the start of the sales process benefit, as it facilitates and accelerates due diligence on the seller side. In the last third of the due diligence, the final purchase agreement, the SPA (Share Purchase Agreement) is negotiated.
Some times, as a seller, you feel like a mere passenger and, above all, can hardly follow the legal context. At this point, it becomes clear once again how important it is to choose an experienced and trustworthy lawyer, as the SPA is a legally complex and demanding contract. In the event that several shareholders sell their shares, it also saves nerves, time and money if they have coordinated as precisely as possible in advance and there is agreement on the most important points.
The duration of a sales process depends on the preparation of both the buyer and the seller, the financial resources and the timeline set internally. A deal may close after three months, or it may take 12 months. Frequently, disagreements among selling shareholders cause delays in the sales process.
The personal level as a guarantee for success
The personal level is a factor that should not be underestimated for the successful conclusion of the deal. From the buyer's point of view, care should be taken to be open and transparent in the initial discussions with the seller. It is important to understand the philosophy behind the company for sale.
It should also be noted that the sale can be very emotional for operators, as it is often their life's work. It is therefore important to establish a basis of trust between buyer and seller at an early stage.
It is not uncommon for sellers to prefer the best offer on paper at the beginning of negotiations. In the further course, however, it has turned out that the buyer negotiates unfairly elsewhere and does not take time for the concerns of the sellers. Especially if you continue to work with the buyer after the sale, the chemistry between both parties should be right.
When should the sale be communicated?
A key point in the sale is also communication to employees. When and how should intentions to sell be communicated? The sale is not certain until it is signed by the notary. If you communicate too early and the deal falls through, the damage can be immense. It is therefore very important to plan this point carefully in advance as well and to safeguard the interests of the employees throughout the entire sales process and to offer them a perspective beyond the sale.
Conclusion
In summary, a company sale can be an extremely sensible decision for all three parties - buyer, seller and employees. Because sometimes 1 + 1 = 3, but often enough sales end in disaster because the chemistry between buyer and seller is not right or essential red flags are intentionally concealed in order to increase the purchase price.
In the case of In Shape and the LifeFit Group, the sale proved to be very sensible. The economic situation was comfortable and there was no pressure to sell. The chemistry on a personal level was excellent and expectations were extensively aligned in advance, making the sales process and the associated outcome a win-win situation.
Source and image source: BODYMEDIA
Published on: 9 February 2023