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Do You Know What Your Health Club Is Really Worth?

It may be more important today than previously to know what a realistic value of your club is. IHRSA fitness club specialist Rick Caro explains and shares his expertise.

By: Rick Caro

It may be more important today than previously to know what a realistic value of your club is. This is further compounded if your company has more than one club in the company. Traditionally, club owners and CEOs have used shortcuts and quick simplistic formulas to obtain a broad valuation. However, there are a variety of factors which suggest that a proper independent valuation may be needed. Too often, a club's own accountant or a local real estate appraiser is not knowledgeable enough about this club industry to be accurate. There are at least 10 different situations where an independent club valuation may be needed.

1- Potential Club Purchase

In any economic time -- and certainly during downtimes -- clubs may be available for purchase. In many cases, the seller may be a proficient club operator but not a learned expert in valuing his own club. He may be using inappropriate valuation methods or may be referencing measurement techniques used by other industries. A great deal of time and money can be saved with the use of a proper third-party club valuation.

2- Sale of Club (Or Partial %)

Similarly, if you or your fellow owners have an inflated sense of worth of your club or clubs, no purchase may ever occur. This may save the club needless expense, an avoidance of unnecessary rumors and a major distraction of the owner's time. If selling a minority share, it may only lead to a successful result if there is an independent calculation of a share of club value.

Do you know what your health club is worth today? Owners need to really understand their club's real value and fully understand their worth for a wide variety of reasons.

3- Purchase of Minority Shareholder

There are numerous reasons why a specific shareholder of a club may want to sell his ownership position and the majority shareholder might be in agreement to do so. Unfortunately, any investor may want liquidity of his interest due to financial, personal or business reasons. Sometimes, it is due to fundamental disagreements amongst owners. In other cases, it is due to unfortunate factors beyond an individual's control (e.g., illness, death, financial problems, re-location, etc.). There are elements that are part of a minority shareholder's calculation that are more complex than a simple multiplication of a percentage of ownership times the club's total value.

10 REASONS TO KNOW WHAT YOUR CLUB IS WORTH

Potential Club Purchase
Sale of Club (Or Partial %)
Purchase of Minority Shareholder
Estate Planning
Divorce of Shareholder
Obtain Debt Financing
Reduction of Real Estate Taxes
Personal Net Worth Calculation
Incentive For Senior Company Executives
Legal Situations

4- Estate Planning

In small closely-held businesses, it is common to transfer ownership from one generation to another at key opportune times. IRS and other government entities may question such ownership transfers without proper independent evidence of valuation.

5- Divorce of Shareholder

A club may be treated as a jointly held asset by an individual and his spouse. Clearly, with legal representation involved, there is a need for a defensible third-party valuation of the club or clubs and the size of share owned. The valuation firm may also be required to defend such methodology leading to the valuation total in a legal proceeding.

6- Obtain Debt Financing

It is common for debt institutions to require an approved local real estate appraiser to value a business to obtain a mortgage if real estate is involved. For leasehold properties, business debt may be tied to personal collateral and resources. If a club owner has a previously successful track record, then an independent club valuation may be needed to help secure the debt.

7- Reduction of Real Estate Taxes

It is often the norm that local tax assessors assign a much greater value than appropriate to clubs. They are not familiar with unique industries, like the club industry, nor are they competent to value single-purpose buildings where the business and real estate are so entwined. In some cases, the assessments have been lowered by 40% when proper club valuation methodology has been used. Also, in cases where the club is leased, the landlord is not equipped to protest such a real estate tax reduction. The landlord will often allow the tenant to do so on his own. In some cases, such tax reductions have been financially beneficial to the club operator.

8- Personal Net Worth Calculation

In some cases where owners of clubs are pursuing certain financing opportunities or needing to defend their net worth on a personal financial statement, a large part of their assets may be directly related to their ownership of clubs. Due to recent mortgage industry failings, much more scrutiny is now common, thus requiring independent, third-party support.

9- Incentive for Senior Company Executives

More club companies are trying current and future compensation to the increased value of clubs. In some cases, this has even penetrated to the General Manager Level. In certain larger club companies, this has translated to "phantom stock" holdings. In all cases, the fairness of this arrangement is validated when the annual calculation is done by a proper third party.

10- Legal Situations

There are a variety of legal circumstances where a club valuation is pivotal. A proposed eminent domain annexation by a local government entity was thwarted once they were confronted with a defensible total club damage valuation. Recent accounting regulations now require club companies of certain size to have an independent analysis of their goodwill total to determine if there is any "impairment." In some cases, clubs that are closing and dealing with creditors need a valuation of the club or its component parts. Today, clubs need to really understand their real value and fully understand their worth for a wide variety of reasons.

About the Author

Rick Caro is President of Management Vision, Inc., a consulting company focused on the club industry. He is an expert in the areas of finance, market feasibility studies, valuations, member research, expert witness testimony, club sales/purchases and operational analyses to improve existing club businesses. Management Vision can be reached at (800) 778-4411.

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