Keys to Feasibility and Financing a new club

Typically, when opening a new club, the greatest start-up cost is the buildout of the space. This can run from $25 to $75 per square foot or higher. For a 10,000 square foot space you would be looking at $250,000 – $750,000 in start-up construction costs. With former clubs sitting vacant, and already built out as a fitness facility, the opportunity to get into the fitness business can cost much less due to the highly reduced construction costs.

In many cases, there may still be equipment left in the space that the landlord inherited when the club operator shut their doors. A new operator may be able to negotiate with the landlord to get the equipment at a fraction of the cost it would cost new. Also, pre-owned equipment dealers that we know report a large inventory of almost new equipment.

Even if you find such a fantastic opportunity, you’ll still need to do your feasibility homework in order to determine the potential success of the new club, as well as put together a package that can help get the financing for the project. The steps to getting a new club open remain the same. However, there are challenges that come with these fantastic opportunities.

Add inflation and supply chain issues to the start up scenario, the importance of a strong business plan and cash flow analysis becomes paramount to assure that enough working capital is on hand.

In any case, you will need to do your homework. Here are some keys to feasibility and financing of a new club:

Defining the market in which you wish to open your club mostly has to do with travel time. In most instances the primary market is a 12 minute travel time. Travel time is the amount of time it takes to drive, or in urban areas, walk to get to the facility.

Convenience is still the number one reason why people join a club, but now, because of a plethora of low-priced clubs, the cost vs. perceived value has become a very important factor.

What will your Unique Sales Proposition (USP) be? What features, programs, or services can you offer that a competitor doesn’t have? That being said, it is highly unlikely that your market will consist of a certain radius (i.e. 5 miles). Likely, it will be a polygon based on issues such related to traffic patterns and density.

Once the market has been determined, you conduct a general demographic analysis to provide information on total population, income, education and growth patterns for the area. Prior to the pandemic roughly 20% of the population belonged to a health club. That number has dropped by 30% in many markets. It remains to be seen how much that will bounce back now that most of the mask mandates have been lifted. When making assumptions on that number it should be prudent to use a conservative number to assess feasibility.

The next step is to analyze your competition. While there may be obvious direct competitors you need to include ALL fitness offerings in your market. Use an objective point of view when conducting your research. Don’t assume that your new facility will be so much better than a particular competitor that you will put them out of business. You will need to estimate the number of members each competitor has, compare that to the population from your demographic analysis and then determine how many potential members are left in the market.

It is not necessary to find a location before putting together financial projections. You should look at putting together a 36 – 60 month proforma to analyze income and expenses on a monthly basis. This will help to determine when you would foresee hitting your break-even point and start to turn a profit.

For the months leading up to that point you will project operating at a deficit. Therefore, you will need to have contingency/operating capital included in your start-up costs to cover those months of losses. Be sure to include an escrow for repairs and capital improvements as they will be necessary to add equipment and make renovations as time goes on. Finally, run multiple scenarios to see what your success will look like in a best case and worst case. If profitability looks good for your conservative model you have a good chance for success.

This is the difficult part. Your need to raise the money necessary to get your new club off the ground. This will require a business plan outlining who you are, why you will be successful, meaningful analysisof the aspects affecting the business, your financial projections and start-up costs.

At a minimum, the Business Plan should include:

• An executive summary
• Market analysis
• Site analysis (if one has been selected)
• Competitive analysis
• Sales & marketing strategies
• Management/owners/investors
• Financial projections
• Start-up costs

Additional information that may be included would be leases, construction bids, personal financial statements/tax returns and collateral listings. You want to answer as many questions as possible with this information to show the lender you have done your homework.

Finding the financing for a new club may is usually the most difficult challenge in this whole endeavor. The fitness industry has taken a significant blow from the pandemic and this has been noticed by financial institutions, as well as private investors. Today’s lenders view a loan for a fitness business as a risky proposition.

After speaking with several commercial lenders, there is not an appetite for fitness/hospitality/hotel type businesses. They also noted that if such a loan were even to be considered, they would run the loan through the SBA to limit exposure on their end. While this will require more regulations and paperwork, it may be the only option for a commercial loan. In addition, the collateral needed is likely to be a minimum of 100% of the loan up to 120% in some cases.

We recently spoke with an individual who has previously invested in fitness clubs. He commented that there is more risk now due to the possibility of future government shutdowns. The uncertainty of the fitness industry, as well as many similar industries, has driven some private investors to seek more stabilized investments with less potential return but also less risk.

A personal relationship with a private investor who believes in you, and your vision, could be the way to go. Some individuals are sitting on a lot of cash right now. They seek to diversify their investments away from the stock market. If a friend or relative has the means, they could be the perfect partner to get your business off the ground.

Without that personal relationship, private investors will likely be too risk averse to venture into the fitness industry. We recently helped a client open a club by using funds that his wealthy brother provided. A young woman opened her dream studio with funds from her parents.

Another client is working with a real estate investor to pick up a club that is situated in a very up and coming neighborhood. The club will provide the income to pay off the loan as the property values increase. These opportunities exist.

So, there are great opportunities out there right now, but they will require persistence and patience on behalf of the owners and investors. Those with means, as well as access to expertise in the industry, could make some very fruitful long-term investments. Provided we are past the worst of the pandemic, the industry will grow back with better capitalized and well-run businesses.