Can switching directions help a struggling business get back on its feet? Maybe—but turning things around means making some tough decisions.
Over the last three issues, this column has followed the story of “Mark,” a former club trainer turned entrepreneur who opened his own facility in Smithville, USA, using $100,000 of his own money and $400,000 in investment capital from his brother-in-law, his parents and a personal training client. After struggling for two years to make ends meet and suffering a substantial loss in personal income, Mark entered the third year of his business with a corps of disgruntled investors, a facility operating just under breakeven and a landlord who was owed three months’ back rent.
At the end of a troubled second year, Mark and his investment partners paid for a professional valuation of the business. The shocking finding that the operation was worth only slightly more than $300,000 prompted some hard decisions on the part of the investors:
- They asked Mark to give up the day-to-day management of the club within 60 days and evaluate the options he had left. They made no promises to buy out his shares.
- They discontinued the group exercise program, which had struggled from the start. Members were given 30 days’ notice, and members who regularly participated in group exercise were offered a pro rata return of their prepaid dues, or additional time on their memberships.
- They placed an ad for a qualified small-club manager in regional newspapers and national trade journals, hoping to attract an experienced person who could combine sales skills with a general knowledge of the fitness business.
- They decided to eliminate the high-commission sales position as soon as a manager could be hired.
- They hired me, on retainer, to do an on-site evaluation of the local marketplace, conduct a strategic planning day and be available for follow-up conference calls.
The marketplace study I conducted revealed that, as Mark had initially suspected, a high-end demographic set was moving into Smithville that was not being satisfied by any of the competition’s offerings. Other encouraging news about the competition also emerged: The owners of the local racquet club, which had been a money-losing venture for several years, were considering selling the property to a real estate developer. In addition, although the YMCA was planning to build a new facility within three years, it was to be in a location that did not threaten Smithville Quality Fitness. Another of the study’s key findings, which would affect the club’s marketing plan, was that the local chain gym had pretty much captured the under-40, low-price segment of the market.
About the time the marketplace study was completed, a couple in their early 50s from a neighboring town bought into the business. The woman, who had been a successful cosmetics salesperson, wanted to run a fitness club, and the man had marketing experience from years with a large firm in a big city. With the money the couple infused into the business, the investors arranged to buy out half of Mark’s interest. He was to be kept on as a salaried fitness program director for at least a year and was given the opportunity to create a personal training business in the former group exercise room. Mark’s parents’ shares were purchased outright, and a plan was formulated for eventually buying out his brother-in-law (who, for the time being, stayed on as a partner). Finally, $50,000 of additional capital was spent outfitting a new training room.
At the strategic planning session, a new picture began to take shape: Smithville Quality Fitness had to become an “exclusive-clientele” business. This determination about the target market called for revisions to the membership marketing plan and pricing structure. The shareholders made a crucial decision to “cap” the membership at 1,000, with an eventual target of $49 minimum dues per month. Existing members would be “grandfathered”—their current dues would be honored for a time and then increase gradually.
Following payment of back rent plus appropriate interest, and after lengthy negotiations, the landlord agreed to make some minor changes to the club and freeze the rent for two more years. Since the clientele the club brought into his mall had improved business for his other tenants, he wanted to keep the club in his center.
The partners agreed to get paid help (rather than volunteer work from Mark’s relatives) to be at the reception desk at all times. Although hiring new employees would increase the operating expenses, the payoff in member satisfaction and sales was expected to make up for the cost. Mark got busy reinvigorating the training program and planning the training center operations and pricing, and the new owners infused enthusiasm back into the business. A plan was formulated for a “Grand Re-Opening.”
So what happened?
The business is entering the early stages of its fourth year. The neighboring racquet club sold out within three months of the major changes at Smithville Quality Fitness. The club’s tennis players moved to a larger center 20 minutes north and the fitness members split up—with the younger members gravitating to the local chain gym and the more mature clients going to Smithville Quality Fitness.
The revised marketing and pricing plan proved to be right on target. Some lower-paying members did leave, but the club now has a little over 900 steady members (less than 10 percent away from “cap”), with all new members paying the full initiation fee of $100 and $49 monthly dues. In fact, by the middle of the third year, monthly dues averaged nearly $40. Operating income is now exceeding operating expenses every month—the business is finally profitable!
Mark has found his niche. He is comfortable in his former role of trainer, and no longer suffers the anxieties of owning a failing business. He has already created a great personal training business and is beginning to see the possibilities of an equally successful group training program. He will soon be making more income than he ever has in his entire career! The shareholders have allowed Mark to “lease back” the training center, and his rent garners over $1,000 per month net profit for the company.
The woman who is the new manager/shareholder is proving to be an accomplished salesperson and is providing the leadership the business desperately needed.
The shareholders were able to get a small distribution by the end of the third year, which has given them hope that the major problems are finally past. The business is on solid footing for the first time.
Finally, the members feel comfortable that the club is going to last, and the town has responded positively to the facility’s new image as the upscale club in the area.
This club’s problems eventually got solved, but things could easily have gone the other way. If the shareholders had let the issues slide for another year rather than taking action when they did, the club would probably have gone under. This sobering saga can provide some valuable lessons for anyone thinking about starting a health club.