So You Want to Start a New Club?
Many industry professionals dream about opening their own facilities. Here are some cautionary guidelines to consider before taking the plunge.
Each month I receive over a dozen telephone calls from individuals wanting to start new fitness facilities in their communities. Invariably, I hear something like this: “We really don’t have a good health club in our area. None of them take care of people. They cannot hold onto members, especially the 40 and over age group. I want to build a club that appeals to all people. We’ll give superior service and drive our competition out of business in a year.”
I will spare you all the ragged details of their puzzled answers when I ask them about experience, demographic studies, area competition, number of memberships at other clubs, amount of equity they have on hand and so forth. Instead, let’s cut to the chase.
On average, building a new finished fitness facility will cost you around $40 to $65 per square foot, depending on the geographical area and local labor costs. Finished means the entire space built, carpeted, floored, treated, and outfitted with locker areas, amenities, rooms and other considerations. In other words, when everything is ready for occupancy. The square footage cost does not include items such as equipment, furniture, phones, computers, supplies and real estate (if the building is owned). For a better, inclusive estimate, I tell would-be owners that it’s going to cost, on average, $100 per square foot to open the doors to a new club. That does not include the two to three months cash reserve needed for operating expenses, nor does it cover building ownership; the $100 is a leased space estimate.
A 10,000-square-foot facility will cost $850,000 or more to open (two of every three clubs being built today are in this category). A 15,000-square-foot club will cost $1.2 million to $1.5 million. Note: Individuals with no experience as facility owners should not start a club of more than 15,000 square feet.
Once you have decided on the size of a new club, the next question is how to finance it. If you need a business loan, most banks and financial institutions will want you to provide 30 to 35 percent in equity—meaning that you will need about $300,000 up front to build a 10,000-square-foot club. In addition, lenders will want a personal guarantee on the note—meaning that you will need to put virtually everything you own on the line for the duration of the loan. If you do not have that kind of equity and you’re not willing to mortgage away your life to various investors for the next ten years, then maybe it’s better to pass on the idea of opening a facility.
If you’re still committed to the idea, you might consider private investors (other than family members willing to give you their life savings for “the world’s greatest health club”). These investors will want to know some essentials: What kind of guarantees will you give? How much equity can you put in the deal? What’s your piece of the action? How much of the company will they own? What will the return on their investment be? Even in today’s less-than-robust market, investors are looking for 12 to 15 percent or more per year and a full payback in about seven years; they will generally forgo payments for the first year to let you get on your feet.
Here’s a real-life story to drive home the point about adequate financing before you consider opening a new fitness facility. It’s about a guy called Mark (not his real name) who came to me two years ago with a variety of questions about owning a club.
Mark lived on the U.S. east coast in a growing community—let’s call it Smithville—that used to be nothing but farm fields and vacant land. Next to Smithville was a larger city—let’s call it Mainville—which had split at its own seams. Many of the professionals in the area worked in Mainville, but made their homes in Smithville. From 1988 to 1998, Smithville grew from a population of 14,000 to more than 100,000. At the time when Mark was contemplating opening a facility, Smithville had a standard YMCA, an older racquet club with a small fitness center, a “ma and pa” operation that had existed since cows roamed the field next door and a popular national fitness chain franchise.
Mark wanted to build a 10,000-square-foot “upscale, modern, high-personal-service facility with all the best equipment and programs to appeal to the right kinds of markets.” Those were his words. Here is the gist of our conversation (in shortened form for the sake of your eyes, my sensibilities and both our sanities).
Me: “So, Mark, have you figured out what this club is going to cost you?”
Mark: “Oh yeah, I figure I can get in for about a quarter of a million dollars. The rent is only $16 a square foot, and the landlord’s going to give me the first three months free.”
Me: “So you’re going to carry some debt?”
Me: “You said you can go in for about a quarter of a million. I assume that’s your equity piece, and the rest will be financed?”
Me: “Mark, are you thinking that you can get the entire 10,000-square-foot club started, built, finished, equipped and premarketed for $250,000?”
Mark: “Well…yeah. I mean, I can get leases for all the equipment.”
At this point in the conversation, we had a substantial talk about reality. Let’s jump to the conclusion of our pleasant discussion.
Me: “Mark, do you realize that it’s going to cost you about $450,000 just to build this club out in your particular area? And another $300,000 in equipment and other systems stuff? Plus about $60,000 in reserve operating capital? What do you have to contribute to this project?”
Mark: “I’ve been a fitness director and personal trainer at a club in the city for 11 years, and I have about $100,000 saved up. I can also get money from my family…probably another $100,000. Isn’t that enough?”
Me: “No, I figure you will need to come up with a minimum of $275,000, assuming you can get a loan, which is not likely. Otherwise, you will have to come up with some private investors.”
Mark: “Well, my cousin, who made a lot of money in real estate, said he would help. And my best personal training client said he would invest in me. I know he’s made a lot of money in the stock market, so I can probably come up with that amount if I have to.”
In my estimation, Mark should not have started his own fitness facility. I recommended to him that he drop the idea for now. Instead, he went through with it. He opened his own club in Smithville. Mark did not even realize that he would be a minority owner in his own brainchild—a position that is very shaky from the start.
In future columns, we will see how Mark did as an owner. For now, his story and the other information provided here should give you a basic background on what you need to start a club. You need money!
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