As with any fresh business prospect, it can be difficult to know where to start when purchasing a health and fitness business. Whilst the transaction may seem quite straightforward, there are many nuances to the industry and it’s important to do your due diligence before leaping off the starting line.
If you’re looking to purchase a health or fitness business, first read through these six key considerations to help you get started.
1. How should you own it?
Whilst owning a business comes with rewards, there are also many risks and exposure to liabilities you may not have considered, for example tax liabilities, rent and employee entitlements. It is therefore important that you seek advice on asset protection and tax effectiveness before you sign a contract to buy any business.
Owing a business as a sole trader, company or trust all have their advantages and disadvantages, and different structures will suit different business arrangements. It’s worthwhile discussing these options with a professional adviser to ensure you’re starting out on the right foot for your business.
Also consider whether you want to expand and buy additional businesses in the future, in which case structuring your entity with flexibility will become important.
2. Are there any alligators lurking?
Check that your contract to buy the business has a due diligence clause which will allow you, your lawyer and your accountant to ‘investigate’ matters relating to the business. These matters may include checking membership numbers, how many memberships are on hold with a right to terminate pending and any complaints by members which have not been addressed by the owners.
After all, memberships are your driver and without them you don’t have a business. Some interested buyers will even take up a membership with the gym or studio and spend some time there to observe the culture as a part of their due diligence.
3. Employees or contractors?
Many staff members working in the fitness industry are contractors, meaning they are sole traders with their own ABN who work between different businesses.
As part of your due diligence investigations, review the terms any contractors have with the current employer and check whether there are suitable restraints in place.
Contractors have different entitlements to employees, so it pays to understand who is on the team and how they need to be paid and managed. Trainers bring the crowds, so you don’t want to lose a good one with the change of management, particularly to a competitor.
4. Who owns the brand name?
Buying a business with a well-known brand, for example an F45, 12 Rnd or Pilates Studio, generally means you are buying into a franchise system. This means that you are accountable to the franchisor who will provide rules and restrictions on how that brand is used. You will not ever own the business name, rather you will simply receive a licence to use it.
If you are buying a fitness business which is not a part of a franchise system, for example a personal training business, ensuring you acquire the business name and logo as part of the transaction is vital. In a competitive industry, brand is everything, and members will often be loyal to a name.
5. What are the terms of the lease?
Gyms and studios obviously have a premises attached to the business, being where the business operates. Most often, these premises are leased from a landlord.
Entering into a lease is a serious and long-term commitment. It is important to have your lawyer review the lease to check for things like:
- A make good clause – you don’t want to spend a large sum of money returning the space back to its original state, particularly when you were not actually in possession at the commencement of the lease.
- How many options to extend the lease you have – location is important as it forms part of the members’ routine, so a change in premises could hurt the business.
- How the rent is reviewed and if you can afford the increases.
- What type of security the landlord wants.
- Nuisance issues – landlords often require that your business does not cause nuisance to other businesses in the centre, so ensure you understand the requirements and that you will not breach the lease.
6. Get the ‘stuff’ free from encumbrance
A business owner will often have bank debt so there is a good chance that the assets of the business are secured with a ‘security interest’, which is basically a mortgage over the assets.
On settlement of the purchase of the business, you may want to ensure that you have identified which assets are caught by this mortgage and that they are released before you take over.
The Redchip team has years of experience working with varying businesses in the health and fitness industry, so we know the unique considerations and what to look out for. If you’re looking to buy a business, get in touch with us to make sure your business is setup to make it to the finish line.