How do you value a gym business? (4 ways)
Valuing a gym business can be a tricky(ish) task, but it’s essential for both gym buyers and gym sellers to understand the gym business valuation process. It’s important to know the value of your gym before selling or making any major decisions.
So how do you value a gym business? Read this gym valuation guide to understand what you need to know. There are four different methods of valuing a gym business and we will take a quick look at each, as well as provide some tips for gym owners looking to value their own gyms.
#1 Earnings Multiple Valuation
By far the most common method for establishing a gym valuation, the earnings multiple method is a simple way to value a gym business. It involves taking the business’s earnings (usually EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Seller’s Discretionary Earnings)) and multiplying it by a multiple that’s specific to the fitness industry. For gym businesses, the multiple typically ranges from 3 to 5 but can be as low as 1 for very small gyms and can be even higher than 5 for large gyms with many other favorable factors. This method is quick and easy, but it doesn’t take into account the specific characteristics of the gym business.
|0 – $50,000||1.0-1.5 times EBITDA|
|$50,000 – $150,000||1.5-2.0 times EBITDA|
|$150,000 – $250,000||2.0-2.5 times EBITDA|
|$250,000 – $500,000||2.5-3.0 times EBITDA|
|$500,000 – $1,000,000||3.0-3.5 times EBITDA|
|$1,000,000 and up||3.5-5.0 times EBITDA|
How to Calculate Gym EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
To calculate your gym’s earnings before interest, taxes, depreciation, and amortization (EBITDA), start with the profit shown on your Profit & Loss statement, then add back interest, taxes, depreciation, and amortization. EBITDA is the starting point for any business valuation (not just gyms), and is quite common in the private equity world, so it’s a good number to track on an annual basis. Read more about gym average profitability.)
Source: Sports Club Advisors
How to Calculate Gym SDE (Seller’s Discretionary Earnings)
An alternate gym valuation method that is quite similar to the EBITDA valuation method is the SDE Method. This could really be it’s own valuation methodology but is included with the EBITDA valuation methodology because it is essentially the same thing but for smaller gym businesses run by owner operators.
Start with the gym’s pre-tax earnings from the income statement and then:
|Add||Amortization expenses and depreciation|
|Add||One owner’s total salary|
|Adjust||Compensation of other stakeholders to market value|
Source: Two Brain Business
#2 Comparable Sales Valuation
The comparable sales method involves looking at similar gyms that have been sold recently and using those sales as a benchmark for valuing your gym business. This method can provide a more accurate valuation, but it’s important to find comparable businesses that are truly similar to yours. Factors to consider when looking for comparable businesses include location, size, and type of gym. Most of this is self-evident. A CrossFit gym valuation is different from a Yoga Studio valuation is different form a sports performance gym valuation; and a Nashville, TN gym valuation is different from a Miami, FL gym valuation is different from a Houston, TX gym valuation.
#3 Discounted Cash Flow Valuation
The discounted cash flow method involves projecting the future cash flows of the business and discounting them back to present value. This method takes into account the specific characteristics of the business and can provide a more accurate valuation. However, it’s also the most time-consuming and requires the most information about the business.
#4 Asset-Based Valuation
The asset-based method involves valuing the business based on the value of its assets, such as equipment and real estate. This method is typically used for businesses that have a significant amount of tangible assets. It’s important to note that this method doesn’t take into account the business’s earning potential, so it may not provide an accurate valuation for a gym business.
How do you calculate the value of a gym?
So, how do you calculate the value of a gym? To calculate gym value with a quick rule of thumb, be sure to include the following key considerations:
- Gym History
- Predictability of Revenue
- Recurring vs One-Time Revenue
- Online vs In-Person
- Trends (Macro and Industry)
Gym Valuation Tips
- Understand the method you’re using to value your business. Each gym valuation method has its own strengths and weaknesses, and it’s important to choose the one that’s most appropriate for your business. Ultimately, it’s important to keep in mind that a gym is only worth what someone will pay!
- Be honest with yourself about your gym’s strengths and weaknesses. This will help you to make more accurate projections and find comparable businesses.
- Get professional help if you need it. A business broker or a financial advisor can help you to value your business more accurately and provide guidance on the selling process. Some business brokers even specialize in the fitness industry. (Read more here: How to Buy a Gym Business & How to Find Gyms for Sale)
What factors should I consider when valuing a gym business?
When valuing a gym business, consider the following factors:
- Revenue: Analyze your gym’s historical and projected revenue to determine its financial performance.
- Profitability: Assess your gym’s profit margins and overall profitability, taking into account operating costs, overhead, and other expenses.
- Membership base: Consider the size and growth of your gym’s membership base, as well as member retention and churn rates.
- Location: Evaluate the desirability and accessibility of your gym’s location, along with local competition and market saturation.
- Assets: Inventory your gym’s assets, such as equipment, real estate, and intellectual property, and consider their value.
- Brand and reputation: Assess the strength of your gym’s brand and its reputation within the community and industry.
- Growth potential: Consider the potential for future growth and expansion, including market trends and opportunities.
What are the most common methods for valuing a gym business?
There are several common methods for valuing a gym business, including:
- Asset-based valuation: Calculates the value of the gym based on the total value of its tangible and intangible assets, minus any liabilities.
- Income-based valuation: Estimates the gym’s value based on its ability to generate future income, typically using discounted cash flow or capitalization of earnings methods.
- Market-based valuation: Compares the gym to similar businesses that have recently been sold in the market to determine its relative value.
How can I determine the value of my gym’s assets?
To determine the value of your gym’s assets, you can:
- Create an inventory of all tangible assets, such as gym equipment, furniture, and real estate. You may need to obtain appraisals or valuations for high-value items.
- Calculate the value of intangible assets, such as intellectual property (trademarks, copyrights), client lists, and goodwill. This may require the assistance of a professional valuator.
- Deduct any outstanding liabilities, such as gym loans or gym lease obligations, from the total asset value to determine the net asset value of your gym.
How can I increase the value of my gym business before selling it?
To increase the value of your gym business before selling it, consider the following strategies:
- Improve profitability: Reduce expenses and increase revenue to boost your gym’s profit margins and overall profitability.
- Enhance membership retention: Implement member retention strategies, such as personalized services and loyalty programs, to reduce churn rates and maintain a stable membership base.
- Upgrade equipment and facilities: Invest in modern, high-quality equipment and maintain a clean, attractive facility to increase the perceived value of your gym.
- Strengthen your brand: Develop a strong brand identity and reputation through effective marketing and excellent customer service.
- Optimize operations: Streamline your gym’s operations and implement efficient management practices to demonstrate its potential for growth and success.
How can I use industry benchmarks and ratios to value my gym business?
Using industry benchmarks and ratios can help you compare your gym’s performance to that of similar businesses within the fitness industry. Common benchmarks and ratios include:
- Revenue per member: Divide your gym’s total revenue by the number of members to calculate revenue per member.
- Membership churn rate: Calculate the percentage of members who cancel their memberships over a given period.
- Operating profit margin: Divide your gym’s operating profit by its total revenue to determine its operating profit margin.
By comparing your gym’s performance to industry averages, you can identify areas of strength and weakness and assess its overall value relative to other businesses.
Should I hire a professional valuator to appraise my gym business?
Hiring a professional valuator can provide several benefits when appraising your gym
- Expertise: Professional valuators have the knowledge and experience to accurately assess the value of your gym’s tangible and intangible assets.
- Objectivity: An unbiased third-party valuation can lend credibility to your gym’s value, particularly during negotiations with potential buyers.
- Comprehensive analysis: A professional valuator can provide a thorough analysis of your gym’s financial performance, market position, and growth potential.
- Customized approach: A professional valuator can tailor their valuation methodology to your specific gym and the fitness industry, ensuring a more accurate valuation.
While hiring a professional valuator can be an additional expense, the benefits may outweigh the costs, particularly when selling your gym business or seeking financing.
How does the local market and competition impact the value of my gym business?
The local market and competition can significantly impact the value of your gym business in several ways:
- Market saturation: If your gym is located in an area with a high concentration of fitness centers, it may face increased competition, which could negatively impact its value.
- Market demand: The overall demand for fitness services in your area can influence your gym’s revenue potential and growth opportunities. High demand may increase your gym’s value, while low demand may decrease it.
- Local demographics: The demographics of your gym’s target market, such as age, income, and fitness preferences, can impact its ability to attract and retain members.
- Economic conditions: Local economic factors, such as employment rates and disposable income, can affect consumers’ willingness and ability to spend on fitness services, which may influence your gym’s value.
By assessing the local market and competition, you can better understand the factors that may impact your gym’s value and develop strategies to mitigate potential risks or capitalize on opportunities.
What role do industry trends and market conditions play in valuing a gym business?
Industry trends and market conditions can have a significant impact on the valuation of a gym business by affecting its growth potential and future profitability. Some factors to consider include:
- Consumer preferences: Changes in consumer preferences, such as the popularity of boutique fitness studios or virtual workouts, may influence the demand for traditional gym services.
- Technological advancements: Emerging technologies, such as fitness tracking devices and virtual reality workouts, may create new opportunities or challenges for your gym business.
- Regulatory changes: Changes in regulations or licensing requirements may impact your gym’s operations and compliance costs.
- Economic conditions: Broader economic factors, such as recessions or periods of economic growth, can influence consumer spending on fitness services and memberships.
By staying informed of industry trends and market conditions, you can adapt your gym’s business model and strategies to remain competitive and maintain or increase its value.
Read More: Gym Statistics
Increasing Your Gym’s Valuation
If you want to buy a gym or sell a gym, it’s essential that you understand how gym valuation works. The Earnings Multiple Method, Comparable Sales Method, Discounted Cash Flow Method, and Asset-Based Method are all methods that can be used to value a gym business.
It’s important to understand the method you’re using and be honest with yourself about your gym’s strengths and weaknesses. If you need help buying or selling a gym, don’t hesitate to seek professional assistance from a business broker or a financial advisor.
And if you need help managing and growing your gym business, get a demo today.