Are You Planning to Buy a Health, Fitness or Sports Club? Understand Your Financing Options.
If you are planning to buy a health, fitness or sports club it is important to understand your financing options. The purchase price for a club is made up of two components, equity and debt. In most transactions equity accounts for 25%-50% of the purchase price while debt is used to finance 50%-75% of the purchase price. The more equity you invest, the less risky the overall business is because you will not have to service as much debt. The main sources of equity financing are
- Your personal funds
- Investments by family and friends
- Seller financing (in most transactions the seller is expected to finance 10%-30% of the equity required)
The main sources of debt financing are
- traditional lenders (banks)
- non-traditional lenders (non-bank lenders)
- private investors
- equipment suppliers
- private equity funds
For debt financing, traditional lenders are offering commercial loans at rates ranging from 4.5% to 8%, for terms of three to 10 years—depending on the club’s history, the value of the hard assets and other collateral available, the projected debt coverage ratio, the predictability of cash flows, the business experience of the ownership group, the expertise of the operating team, and the general economic environment. SBA lenders make loans that are guaranteed by the Small Business Administration for much longer terms. Keep in mind that personal guarantees are usually required by all traditional lenders.
Non-traditional lenders have a higher risk tolerance and provide loans at rates ranging from 8% to 13%, for periods of three to six years. They look at the same underwriting issues as traditional lenders but they are able to customize the structure of their loans to reflect the unique needs of the club or transaction. They are often willing to structure loans to require interest only payments during the early years of the loan with large balloon payments of principal at the end of the loan term. Personal guarantees are often waived by non-traditional lenders.
Private investors can also be a good source of debt financing. They expect returns of 7% to 14%, depending on the current rates of return. They often require an option to be cashed-out of their entire investment within a specified number of years. A 5-7 year investment period is common. Private investors can also be a good source of equity financing, however their capital comes at a premium. Generally, private investors like to see a 15%-20% return on investment and they want their capital returned to them in five to seven years.
If vacancy rates are high around the club, your landlord may be willing to finance your club’s build-out costs, although this usually leads to a higher rent. In addition, almost every fitness equipment company offers attractive equipment leasing or financing plans.
Finally, if you are acquiring a large club with over $5 million in revenues and over $1 million in EBITDA, a private equity fund or mezzanine fund may be willing to provide either debt or equity, and sometimes both. Generally, this type of investor requires a 20% return on investment and wants their money back in five to seven years, but they are experienced at helping companies grow and often bring more than just money to the table.
If you are thinking of buying a health, fitness or sports club, putting together the right capital structure with the right financing can greatly increase your chances of success. To learn more contact Rich Jackim, Managing Partner at Sports Club Advisors, to learn more about your options.