Owning your own fitness centre or gym can be a lucrative and rewarding experience. But being the boss and owning your own gym can, if not handled carefully, turn into a nightmare.
There are many legal and financial considerations to take into account when deciding to purchase a gym business.
Some of the issues you will need to carefully consider are:
1. Due Diligence
Not everything is as it seems and that is especially true when buying a gym. The owner can produce financial statements that show a gym is thriving but that may not necessarily be the case. You, with your solicitor and accountant, will need to undertake a range of due diligence investigations to ensure the information presented to you is valid and accurately reflects the true financial position of the gym.
You will need to ensure that the membership information is accurate and moreover that the members they purport to have actually exist.
The gym’s equipment is another integral part of your purchase and you will need to determine what equipment is leased and what is owned by the business. If the equipment is owned by the business, you will need to ascertain whether it is unencumbered or subject to finance, as this responsibility will fall to you following purchase.
It is essential you and your accountant determine what is owed to the gym and what the gym owes to others. Failing to do so could result in purchasing a gym only to discover a huge pile of bills are due and the income you were expecting does not materialise.
Undertaking a comprehensive due diligence investigation will help you avoid buying the wrong gym or paying too much.
2. Having Sufficient Cash Reserves
Operating a gym requires capital. Successful gyms will generate enough revenue to cover the cost of their expenses as well as make a considerable profit. However, there will be times, particularly in the beginning, when the expenses of the gym will exceed its returns and you will need cash reserves to cover the shortfall.
During a transition of the ownership you, through no fault of your own, the gym will loose a number of existing members. Changes in membership levels are unavoidable and can have a tremendous impact on the cash flow of your gym.
If you purchase a gym assuming the current cash flow will cover the payment of your debts, you may find yourself in financial difficulties sooner rather than later. Speak to your accountant and make sure your business plan allows for these shortfalls in the beginning, so you can start making profits in the future.
3. Paying for Potential
The seller may try to set the purchase price based on the projected value of the gym. However, it is your time, effort and energy that creates this future potential. You should be rewarded for your efforts, not the seller so don’t make the mistake of overpaying for the gym.
The value of the gym should be based on its condition at the time you purchase it. Your accountant will assist you in ensuring you don’t pay “over the odds” for the gym.
4. Entity Structure
Probably the most important decision to make when considering purchasing a gym (or any business for that matter) is which entity you buy it in. The worst mistake that you can make is to buy a gym using the wrong entity structure.
First time gym owners will usually make the purchase and sign the contracts, in their own name. This is a major mistake as it makes you personally liable for any loss the gym incurs and creditors can take your home, car, and savings in the process.
Purchasing a gym (or any business) using a company can minimize risk to your personal assets and have some tax advantages as well. Ask your solicitor and accountant for assistance in determining which entity best suits your needs. Do not make the mistake of putting everything you own at risk when buying a gym or fitness center.
About Jim Burke
Jim Burke is a Consultant in the Business and Property teams at Plastiras Lawyers. Jim helps health professionals with the sale and purchase of gym and fitness center businesses. Jim also assists clients with commercial property sales, acquisitions and leasing.