Many entrepreneurs dream of owning a business they can eventually sell at a high business valuation amount to achieve a maximum Return on Investment (ROI), whether they want to have an exit strategy for retirement or to create new business ventures. As the fitness industry continues to grow, there are ample opportunities for franchisees to turn their investment into profitable ventures.
In a recent Alloy Personal Training Business podcast episode, Alloy founder Rick Mayo spoke with Michael O’Koomian, Managing Director & Founder of MOK Advisors and a mergers and acquisitions (M&A) specialist, about how fitness franchisees can maximize the return on their investment and build businesses primed for higher business valuations. With experience as both a fitness business operator and an investment advisor, O’Koomian offers franchisees a rare perspective on building scalable, valuable fitness businesses.
Here, we’ll dive into the key takeaways from this conversation, covering how fitness entrepreneurs can value their businesses, what factors drive the most return, and why the future of fitness investments lies in strength training and boutique models like Alloy.
How A Fitness Enthusiast Became A M&A Specialist
Michael O’Koomian’s journey into the world of fitness and finance is uniquely tied to personal experience. O’Koomian shares that he struggled with weight issues and emotional eating in his younger years, eventually losing over 130 pounds through disciplined exercise and diet. This transformation sparked a passion for fitness, and he began his professional journey by owning and operating fitness studios.
His fitness background, combined with his corporate and banking experience, equipped him with the perfect skill set to bridge the gap between fitness entrepreneurship and business valuation. His understanding of the operational side of fitness, coupled with his experience on Wall Street, enables him to assess fitness businesses comprehensively and provide insights on maximizing value, scaling, and exiting with optimal ROI.
Understanding Business Valuations Through EBITDA
For fitness franchisees, the most crucial metric to business valuation is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Ftness franchisees should consider their business valuation as a multiple of EBITDA, with the range falling between two and four times EBITDA for smaller, standalone franchises. However, for larger, scaled businesses, particularly those with 50 or more locations, the multiple can increase significantly.
So, how does this valuation framework work in practice? For instance, if a franchise is generating $500,000 in EBITDA, a buyer may offer between $1 million and $2 million for the business, assuming a multiple of two to four times EBITDA. However, for well-established, larger franchise groups with strong brand visibility and a proven growth record, the multiple could be higher, sometimes reaching five or six times EBITDA.
For franchisees considering an exit strategy, aiming for increased profitability through scalability, can substantially boost valuation. By building multiple locations and achieving a streamlined, efficient operation, franchisees can elevate their business valuation from a small-scale operation to a high-value asset. Franchisees looking to expand or eventually sell their business should focus on optimizing their EBITDA and improving operational efficiencies.
The Power Of Scalability: How To Increase Business Valuations
In addition to profitability, scalability plays a significant role in determining the value of a fitness franchise. Scalability refers to the business’s ability to expand smoothly, maintaining consistent quality and operational efficiency across multiple locations. O’Koomian explains that for a franchise like Alloy, where members’ needs are unique, scalability hinges on balancing personalized service with standardized practices that are replicable across all franchise locations.
O’Koomian stresses that the simplicity of Alloy’s model—a small, intimate setting that requires only around 150 clients to operate successfully—makes it particularly attractive from an investment standpoint. Once a franchise achieves its target client base, the focus shifts primarily to retention, enhancing customer satisfaction, and building loyalty. The streamlined, small-group personal training model at Alloy is scalable, easy to replicate, and financially efficient, making it an appealing investment for franchisees looking to scale and exit at a higher multiple.
Keys For Maximizing ROI In Fitness Franchises
While profitability and scalability are fundamental, O’Koomian discusses several other “levers” that can drive the return on investment for fitness franchises. Here are some critical areas franchisees can focus on increasing their business’s value.
1. Strong Management Team
A high-quality, capable team is essential for creating a franchise that can operate autonomously. Franchisees with regional managers and experienced leadership teams can command higher valuations, as they present lower operational risk for buyers.
2. Brand Reputation And Market Presence
As a franchise brand grows, its collective reputation also rises, benefiting all franchisees within the system. For example, as Alloy grows to 800 locations by 2030, the visibility and reputation of the brand will drive up the value of individual franchises, as buyers will be drawn to the brand’s market dominance.
3. Exclusive Territories And Expansion Rights
Franchisees who own the rights to exclusive territories or have future development agreements in place with the franchisor can increase their business’s overall value. These exclusive rights can be attractive to buyers looking to expand their footprint and minimize competition.
4. Operational Efficiency
Buyers look for well-run businesses with streamlined operations. Franchisees should invest in strong operational practices, advanced technology, and effective marketing systems to create a model that is both profitable and easy to manage.
5. Retention Rates And Customer Loyalty
Retaining clients is crucial for fitness businesses. Alloy’s retention-focused model, which offers a personalized training experience in a small-group setting, has shown to keep clients longer, thus increasing the franchise’s value and appeal to potential buyers.
By optimizing these factors, franchisees can significantly enhance their business’s appeal to potential investors and buyers, leading to a higher valuation and better returns upon exit.
The Boutique Fitness Sector: Challenges And Opportunities Post-Pandemic
The post-pandemic fitness landscape presents unique challenges and opportunities. O’Koomian observes that boutique fitness, particularly those with limited square footage, faced challenges during COVID-19 due to social distancing restrictions and concerns over virus transmission. However, as people return to fitness centers, there is a renewed interest in strength training-focused, small-group formats that offer both accountability and personalization.
Alloy’s small-group personal training model, for instance, naturally lends itself to this trend. With limited capacity and personalized attention, Alloy studios can create a safer environment that still offers the social benefits of group exercise without overcrowding. The pandemic has underscored the value of offering a controlled, exclusive experience in a fitness setting, which aligns well with Alloy’s service model.
Strength Training: The Future Of Fitness Investments
Another exciting trend in the fitness industry is the increased demand for strength training. As more people understand the health benefits of resistance training, the focus is shifting from cardio-based workouts to strength-focused routines. The rising popularity of medical interventions amplifies this trend, like GLP-1 weight-loss medications, which are often complemented with strength training to maintain muscle mass.
For franchisees, the focus on strength training not only differentiates Alloy from other fitness brands but also aligns with a growing trend that is here to stay. With its small-group personal training model focused on strength and functional fitness, Alloy is well-positioned to capitalize on the demand for strength training and appeal to an older, more affluent demographic. This demographic often has higher disposable income and is willing to invest in quality fitness experiences, leading to increased client retention and higher business valuations.
Opportunities And Risks: What’s Next For The Fitness Sector?
Looking ahead, O’Koomian believes that while the fitness industry will continue to grow, not all fitness models will have the same longevity or investment appeal. For instance, he notes that single-modality studios, like cycling-only or yoga-only studios, may face challenges due to evolving consumer preferences. In contrast, multi-functional, strength training-focused brands like Alloy are more resilient, as they offer a well-rounded fitness experience adaptable to future trends and consumer demands.
Additionally, the trend towards health and wellness as an integral part of consumer spending is expected to grow. O’Koomian points out that younger generations are growing up with fitness as a core part of their lifestyle, making them more likely to invest in fitness services as they age. This shift could increase gym memberships from the current 20-22% of the population to as much as 30-40% over the next decade. As the market for fitness services expands, franchises like Alloy, which appeal to affluent, health-conscious clients, will likely continue to thrive.
Final Thoughts: Build A Fitness Business Primed For An Exit Strategy
For fitness entrepreneurs, understanding the factors that drive business valuation and the current market trends is essential for building a valuable business. O’Koomian’s advice to fitness franchisees is clear: focus on maximizing EBITDA, invest in operational efficiency, and build a scalable model with strong retention. By doing so, franchisees can ensure their fitness business is not only profitable in the short term but also well-positioned for an eventual sale or recapitalization.
The fitness industry offers tremendous growth potential, especially for brands that combine scalability with a targeted, strength-focused approach like Alloy. Franchisees looking to build a valuable business can learn from O’Koomian’s insights and focus on creating a sustainable, high-quality fitness experience that meets the needs of today’s clients.
Podcast 267
Key Takeaways
- Intro (00:00)
- Emotional eating and personal weight loss journey (03:07)
- Transition from corporate consulting to fitness entrepreneurship (10:57)
- Combining banking experience with fitness to offer unique business solutions (19:55)
- How to value a franchise business using EBITDA multiples (26:54)
- The benefits of scalability in fitness franchises like Alloy (32:28)
- Opportunities in the fitness sector for growth and acquisition (38:44)
- The impact of post-pandemic consumer behavior on boutique fitness (43:22)
- Future trends in strength training and fitness investments (48:37)