Fitness Business

Comparing financial projections, returns and risks within Fitness Businesses

Below is a summary table of the financial projections, returns to the owner (profits) and financial risks in each fitness business type.

These numbers are projected based on perfect execution of the fitness business which, as we will later discuss, is not as easy as it sounds in some circumstances.

About the calculations

‘Start-up capital’ is the amount of money required to open the doors of the business for trade.  It is made up of an estimate of items such as equipment, graphic design, printing, fit-out of the premise, uniforms etc.

‘Operational expenses’ are the amount of money spent running the business.  It is an estimate of the costs of running the fitness business for a year.  This would include where applicable; rent, power, staffing, phone, water, maintenance and so on.

‘Income fully geared’ is the amount of money coming in to the fitness business if it was running at ‘full capacity’ serving (and selling to) as many customers as was possible given its size.  This would include, where applicable; session fees for personal trainers, monthly fees for bootcampers, weekly membership fees for the fitness club.

A breakdown of the income calculations is as follows:

‘Projected profit before tax’ is the amount of money left over from trading in the fitness business.  It is the difference between the income and all expenses.  It does not include the costs of finance related to the start-up capital.  Where start-up capital is large the repayment of finance can significantly reduce overall profitability.

‘Average weeks to break-even’ is calculated using operating expenses and linear income growth projected at a reasonable rate (that is each week the income grows consistently and no drop-off in customers occurs). 

A breakdown of the ‘weeks to break-even’ follows:

‘Operating accumulated deficit’ is how much money the fitness business owner will need to put in to prop up the cashflow while they work to get the fitness business to break-even.  It is the ‘weeks to profit’ x 'weekly OPEX' (calculated by taking annual OPEX and dividing it by 52).

This calculation over-estimates the deficit as it doesn’t account for any income over the weeks up to the break-even point.  This is necessary given the simplicity in this comparison.  Other matters also complicate the comparison as with personal training, personal training studios and fitness clubs some customers may pay well in advance of using the services (for example memberships paid in full at joining and personal training sessions bought in packs of 10 or 20).  However, because I have treated all fitness businesses under the same criteria the comparison remains reliable if not entirely valid.

‘Total financial exposure’ is the most money, if the income projections hold, that the fitness business investor/operator will have exposed (that is could lose if it all goes wrong).  It is made up of the start-up capital and the operating accumulated deficit.

‘Profit potential vs. financial risk’ is calculated by taking the ‘projected profit’ and dividing it by the ‘total financial exposure’.  It’s essentially a comparison of ‘how much money have I got at risk’ against ‘how much money might I make’.  The higher the value the lower the risk and/or the higher the potential returns.

Commentary on Fitness Business Finances

From the financial analysis alone we can assess:

An individual who is setting up a fitness business where they plan to be an ‘owner-operator’ is better to become a contracted Personal Trainer within a club than set up an independent Personal Training studio.  The profit potential vs. financial risk is 8 times better.  So, purely on a financial analysis alone, being a Personal Trainer in a club where there is a fixed rental base (in this example we’ve worked on $200 per week) is best.

For individuals who are looking to grow a larger client base within their fitness business and amplify their profits bootcamps out-perform fitness clubs financially.  Of all the fitness businesses analysed bootcamps have the highest profits against financial risks with a 35.05 ratio. Remember though, I haven't talked about what it takes to get the business to work – so take a breath and keep reading.

My experience is too many 'new-comers' to the fitness sector decide to set up a Personal Training studio which is higher risk and has lower returns than personal training in a club. 

I also note that many are setting up bootcamps which is financially robust however you will note in latter sections that it can be considerably more challenging (that is, the skill sets and execution demands are significantly higher)

Recommendation

Aim for the highest profit, lowest exposure fitness business if you are starting out.  In this case it’s either going to be as an independent personal trainer within a club or as a bootcamp operator.

If you are brand new to the fitness business sector I’d recommend setting up as an independent personal trainer within a club.  We do not recommend being an employed personal trainer as long-term this has linear returns and although being employed may be perceived as lower risk in terms of execution (you'll likely get paid even if you mess it up some days), because the club is more motivated to help you find clients, it is not a ‘fitness business’ opportunity but rather a job with little leverage.  If you are happy to be employed whilst you ‘learn the ropes’ or if you ‘like the feeling of security and belonging’ then possibly employment is an option.

If you are experienced and successful as a personal trainer (particularly if you understand how to market and sell solutions, and you have a group fitness skill set as well) then a bootcamp operation could be for you. 

Comparing business growth elements within Fitness Businesses

In the charts below I’ve summarised the degree of resource required for business growth for each type of fitness business.  Resources include time, money, knowledge / skill. 

The scale used is as follows:

1 = Low requirement

2 = Moderate requirement

3 = High requirement

You can see from these charts that the profile of each fitness business is rather different in terms of the skills, money and time required by each.

A personal trainer working within a club needs only moderate marketing skills, the ability to sell (i.e. take a potential client through a solid consultation process) and the rest is low cost in terms of money and time.

The reason for only moderate marketing skill is that to grow a personal training business in a club you only need 2-3 marketing tools (I also call these lead generating tactics) that really work for you and you should quickly generate enough leads.  Then, with some focused practise, your consultation should soon be producing a high sign up rate. 

The sell-off is in time cost.  All the activities are completed by the personal trainer themselves so all have a moderate time cost.

Service delivery is the highest skill required as delivering the exact solution a client needs in the most customised way keeps clients long-term and gets them results (which helps immensely with marketing of course!).

So, with a personal training business it’s about getting good at several areas of the business quickly and then investing the time in executing those areas well.  Simple.

On the other hand a personal training studio has a higher requirement for marketing and sales skill.  This is because with a studio you are trying to generate exposure for the other personal trainers as well and this takes more time and money.

Sales skills are also required to a high level as sometimes you’ll be selling someone the idea of training from a studio rather than a fully equipped club and you’ll also be selling a higher level of commitment because most of the sessions will be with a personal trainer (a higher cost).

Service delivery features as a high requirement for skill and time and low on cost. 

As we’ve seen with bootcamps the pay-offs can be substantial – but there is a catch.  To achieve the business growth projected an operator of a bootcamp must have extensive marketing resources and sales capability.  This, in part, is because the bootcamp offering is less ‘tangible’ and the operator must generate leads in a competitive market creating all their own exposure to potential bootcampers.

For this reason I’ve rated the skills and time required as ‘high’ and the money required as ‘moderate’.  Admittedly once the bootcamp is established and referral begins (provided existing bootcampers love the offering and stay on) things get easier.  But, in the ‘growth’ phase of the bootcamp a lot of time, energy, money and skill are required in marketing and sales. 

With regard to money spent most of the bootcamp operator’s variable expense is in the marketing area.  This is not to say that marketing needs to be expensive but rather that a number of marketing mistakes often occur prior to several lead generating strategies that work well for a particular bootcamp operator emerging. 

The only other feature of bootcamps that warrants a mention is that the service delivery is a little less time consuming and the skill base is slightly different.  Training 50 bootcampers in a circuit fashion or in teams or with challenges is, once done for a year or so, a rinse and repeat process.  The customisation to an individual level is limited by participant number and therefore the requirement for deep skills in prescription and assessment is less pronounced.  You simply don’t have the time one on one to implement the full range of training interventions you might be able to if the client was Personal Training with you alone.

The marketing of a fitness club requires a lot of marketing skill, time and money.  Thankfully I believe marketing costs are slowly dropping as the internet allows better targeting of prospects.  That said, there is still a significant requirement for activity across a range of marketing channels within targeted populations.  It becomes even more challenging as more clubs open, home equipment becomes cheaper, bootcamps, PT studios and other opportunities arrive to market. 

Given the resources invested in marketing you can then see that the skills desirable within the sales team are vital.  Here, for a club of any reasonable size, you’ll have at least two people with significant sales skills and a process for tracking and selling to prospects effectively.  There will be time required in training and managing sales and there will be a moderate cost related to those activities which support the sales roles. 

Because of the high fixed expenses within clubs any failure to market effectively or sell well has a significant and rapid effect on the operating capital required (read your bank account!).  Projecting to break even at week 16 is fine when the plan is to sell 20 memberships a week.  But, should the reality become sales of 12 memberships a week (60% of the projections) the fitness operator will need to find additional funds in significant amounts for a reasonable period of time.

The job doesn’t stop there though.  You’ll also need a broad skill base around service delivery and the services being delivered are generally more varied in fitness clubs than the other fitness businesses. 

And, finally, there is a requirement to administrate a significant number of areas well within a club.  This will include compliance, leases, facility maintenance, accounts, membership, communications, staffing, legal requirements related to all the above and cashflow.  Yes, you may hire people to do these things but you will need to know all the areas listed above quite well yourself to understand how each may impact the business.

Summary of resource requirements for Fitness Businesses

When considering the resources required to grow a particular type of fitness business, and in line with the earlier financial projections, you must be very confident that you;

1. Have or can find the money (capital) required (including contingency funding for 50% sale scenarios and 15% increase in expense scenarios)
2. Have or can find the knowledge/skill required in each area of business
3. Have or can find the time required to grow the fitness business at the rate projected

How do fitness businesses fail?

The three major failings of small to medium sized businesses, and within that category nearly all fitness business failures, are;

1. Under capitalisation (couldn’t find or didn’t have enough money to fund the start-up and operations until break-even)
2. Inexperience (didn’t have or couldn’t hire the right capability in time)
3. Excessive workload (the owner/operator exhausts themselves using all their time and energy trying to do all the work, including the little jobs that weren’t income generating)

By far the most common failing identified in media is under-capitalisation which is only half the truth.  To illustrate, the story generally goes like this...

So you can see, although it appears to be ‘under-capitalisation’ it is also ‘inexperience’ and ‘excessive workload’ that occurs when a fitness business fails.  And, it certainly doesn’t have to be this way!

Looking closely at the failure of the fitness business the ‘under-capitalisation’ only came to bear when the operator’s inexperience (or lack of capability in this specific type of business) created a need for more capital.  The root cause then of most business failures is actually a lack of capability. 

In the example the new operator had budgeted and secured enough funding (capital) for what they expected from their projections.  But, when their inexperience caused a slower and lower income generation than planned, they quickly found their finances wanting.

Recommendation

If you’re taking on a fitness business that you have little experience in – pace yourself.

The most predictable fitness business is personal training and it will allow you to polish up your service delivery skills, develop your marketing and sales skills and within a few years you may be ready for one of the other businesses.

The most natural, and likely lucrative, progression for a successful personal trainer is currently into bootcamps.  Beware though; they are not personal training businesses, they are bootcamps.  As such you're operating with a different delivery model and a different marketing and sales approach is also required.  Also notice, I wrote successful personal trainer.  Too many unsuccessful personal trainers are jumping into more challenging bootcamps and wailing away at them until they fail a second time.  Work hard to be a successful personal trainer first, and then set your sites on your next prize.

Leave fitness clubs and personal training studios to people who want their names on buildings in return for worry and often empty bank accounts.  To run a fitness club or personal training studio extremely well is difficult and there are few who can do it and sustain it long enough to gain the returns they deserve.  That said, I should also comment that there are a number of franchises on the market now that have a history, market niche and approach that are worth considering - so it's not all bad news in the fitness club arena.

Fitness business survivability

To be clear, when I talk about ‘business sustainability’ in this investigation I mean – ‘how likely will the business continue to produce the profits projected’.  In order to consider this we have to consider anything that could impact the income, expenses or margins within the fitness business over time.

Factors I’ve included;

• Skills sustainability – how hard is it to attain/sustain the skills required from the growth stage so that you can continue to execute the activities within the business effectively
• Income flux and its effect on profits – with two consecutive months at half the income projected (this can happen with seasonal fluctuations, a new competitor opening, illness/sickness etc.) what happens to the profitability in the business
• Retention of customers / income – how likely is it that the customers will stay month on month due to some unique offering the fitness business has and/or the quality of the offering the fitness business has.
• Depreciation of physical assets – are there assets that depreciate over time and have a high capital cost of replacement
• Margin cushion – what margin is there within the fitness business to withstand expanding costs over time and/or price competition

For the purposes of this assessment I don’t include competition as this varies from country to country and city to city, from time to time.

Skills sustainability

On the following graph I rate how easy from 1 (easy) to 4 (very difficult) it is to attain/maintain skills within the business that will allow it to run well and for the customers’ expectations to be met.

Commentary

From my ratings you’ll see it’s much easier to maintain skills in a Personal Training business than it is in a studio, bootcamp or particularly a fitness club.

The reason for this is two-fold.  Firstly in a Personal Training business you only need to keep your own skill sets up to date.  With studios and potentially bootcamps there may be other people delivering the training and you need, as the fitness business owner, to manage their development too. 

Secondly with Fitness Clubs you not only get multiple staff members who need to maintain their skills but you also have a broader range of skills within the business – everything from delivery staff, front line service staff, operational staff to back office staff.

Income flux

As mentioned another challenge to sustainability is consistency in income. 

Here I have calculated what two months worth of sales at 50% of that projected would cost from the profitability of the business both in gross terms and as a % of profit.

This is a method that allows us to see how vulnerable each type of business might be to this drop in sales.

Commentary

What you can see is that in most fitness businesses you lose upwards of 30% of your profit pretty easily.  In this scenario the fitness club comes out on top as they have contracted long-term membership and I’ve also filled their club to the brim with 1000 members.

To think of this in real terms imagine your fitness business was making you $9,000 a month.  After tax (say 30%) that left you usually with $6,000.  With this $6,000 a month you paid your mortgage, car finance, school fees, groceries etc. etc.  You managed to save about 1,000 a month (that was what was left). 

If you lost say 30% of your profitability then you would make $6,300 pre-tax.  After 30% tax that would be $4,410 post tax.  Given you used to use $5,000 post tax to live you are now either going to have to borrow to maintain your lifestyle or you are going to need to reduce your personal spending?  So, what will it be?  Which of the things in your life are you going to go without?  Or, are you going to make sure you always generate leads, follow through with a great consultation / sales process and keep that income (and profit) where it needs to be?  Business is an unkind master but one that has many lessons for us all.

Retention of revenues

Fitness is an interesting experience to sell.  Every time a client turns up for a session, a bootcamp, a workout, they make an assessment of the value they are receiving.  How clean is the place, how friendly are the people, how entertained am I, how much did I progress, how pleasant/unpleasant was it and so on.  As such retention of clients (therein revenues) is greatly affected by the fitness business operator's ability to engage and deliver to clients over and over and over again.

Below I’ve generated some reasonably accurate average retention rates for each of the fitness business categories we are looking at together.

What you can see is that generally retaining members / bootcampers is more challenging than retaining Personal Training clients mainly because the personal attention and flexibility in the experience you can deliver is greater with one to one training.

You should note that none of the original projections I have presented include any drop off in client numbers at all.  What this means is that I’ve presented you figures for one year of 100% retention for all these businesses.  That simply doesn’t happen – as you can see by the above average retention rates.

So, what does this mean in real terms?

Well in fitness clubs you are projected to lose half of the people who could re-join each month.  On a membership of 1000 that means every month, out of the 83 people who could re-join, only 42 do.  So you need to make 41 new sales each month just to maintain the membership level.  Our current projected sales are 1000 a year or 83 a month as well so we are well on top of that.  However, a spike in membership drop-off and a low new sales volume will quite quickly cripple a fitness club.  This has occurred in the U.S. over the last three years as the recession caused a massive drop in new membership sales combined with a higher drop-off rate of existing members.

The same recipe exists in bootcamps.  The new sales must account for the drop-off in bootcampers at a very minimum for the financial model to hold.

Although Personal Training and Personal Training studios are better protected in terms of retention they will also suffer during a recession and only Trainers with deep personal connections and unshakeable value being delivered to clients will have some degree of protection long-term. 

If you want to check this then have a friend (that your clients don’t know) ask your clients how their personal training is going.  The two statements you want your friend to get back are; “Oh, Steve is an awesome trainer I really like him, and I can’t believe I’ve lost 12kg and I’m training for a half marathon!”  The two statements are

1. A statement of the depth and quality of the relationship
2. A statement of the value of the results

If your friend gets both of these statements you are well protected and retention in virtually any circumstances will be strong.  Note, they may decrease the time they use you (reduce frequency or duration of contact sessions with you) but they won’t stop seeing you all together.

If you get one of the statements you are about 50/50 chance of getting dumped as their trainer.  If neither statement is made, it’s only a matter of time!

Depreciation of assets

The other factor to consider when looking at sustainability is how much value the assets in the business are losing each year – this is a figure that will eventually need to be paid to replace the various ‘hard assets’ you have in your business.

Below I’ve covered off the ‘depreciation rate’ as a percentage annually and then what that means in dollar terms.  To get the dollar figure I’ve simply multiplied the ‘set up costs’ of each business type by that percentage depreciation rate.

What we can see is that fitness clubs and personal training studios, with their higher ‘fit-out’ costs depreciate greater dollar value than the other types of businesses.

When you look at the gross profitability of a fitness business you then need to consider the ‘unseen’ items such as these.  Case in point is the Fitness Club where although we have projected to make a gross profit of $527,400 we also have challenges with skills sustainability, retention and depreciation (as above - $25,000) to consider.

Margin cushion

Sounds comfy doesn’t it.  Well it is.  What ‘margin cushion’ means is how much could the margins in your business per customer come down before you’d suffer losses.  It’s a way to analyse how valuable you are to a customer (the higher the margin the more value you are delivering per customer when compared to the cost) and therefore how much ‘leeway’ you have for movement should it be necessary.  Below I have summarised the ‘annual margin per customer’.

Personal Training is by far the best however this is a double edged sword.  As margin increases per customer there is also a risk that a small swing in the number of customers can result in a significant and rapid change in profitability. 

As an example for the highest 'margin per customer' business – Personal Training – the profits of $92,200 are the equivalent of 20 customers.  20 customers leaving the Fitness Club would hardly dint the profitability.

That said, delivering high value experiences that change the customer is what Personal Trainers do – so the risk is somewhat minimised as long as the customer retention is good – again, you need to remember those two statements you want to have customers making ‘the depth of relationship statement' and the 'value of the results statement’. 

Your real protection in any fitness business is quality and customisation.  Deliver exactly what the customer wants and needs, perfectly, consistently and nothing else.

Sustainability summary

What all the analysis in ‘sustainability’ means is that although the figures can look attractive on the surface (gross profits) we must also consider carefully the skills required to grow the business, the effort required to maintain the business’s financial engine, and the likely problems that could occur should a fluctuation in sales, retention or margin occur.

My recommendation is for anyone entering the industry to again focus on Personal Training first before developing over time into the other business types.  And, I would almost always (99% of the time) recommend Personal Training independently from a club (subject to contractual provisions and obligations) rather than setting up a PT studio or bootcamp (unless you have pre-existing group fitness and marketing experience).

Business leverage

At the very start of this page I said I was going to compare leverage across the fitness business types.

Fitness business leveragability answers this question - 'how easily can I work less time but maintain the income from this business – will this business run without me?'

This is where Personal Training and Personal Training studios really suffer as they rely heavily on your time and skills to create the customer value and without you they will usually fold within a few months.

Bootcamps and 24hour fitness clubs are much more suitable to running without you. 

With Bootcamps it is usually possible to find an equally cool, fun, funky and addictive bootcamp instructor as you – just find a great PT, with lots of spark, and get them to follow your exact recipe (if you don’t have a recipe – then systemise now!).

24 hour fitness clubs are designed to run without you – particularly the franchised ones with automated entry, monitoring, exit, emergency care, maintenance systems, staff recruitment and training systems etc. etc.  So, they cost a lot more but they also use a lot more leverage to create more passive results for the owner.

I’d stack the ‘leverage’ up in the following order;

1. 24 hour fitness clubs – best leverage – first place if they are solid operations with clean systems that work reliably
2. Bootcamps – next best – but you must define your customer value recipe if you ever hope to leverage yourself out and another instructor in
3. Studios – second to last – studios really are an ego fest unless they are systemised and offer programmes that you enrol in.  They then have more leverage and can be much more profitable too
4. Personal Training – last – yep, sorry.  They are a cult of personality type business.  Clients buy you first and your skills second so if you remove the ‘you’ part you’re usually toast. 

So what’s the recommendation for creating a fitness business with good leverage?  Don’t worry about leverage initially.  Start out by running a fitness business without leverage and work hard to truly understand your customer.  This allows you to identify exactly what your niche wants and allows you to work on a way of creating a leveraged fitness business around that niche.

If I was successful at Personal Training females between 30-40 to great weight loss results I’d be looking to create a programme or bootcamp along those lines.  I’d document everything down to the colour of the sox you wear.  I’d then test the assumptions for a year or so running the bootcamp not just to make money but to perfect the model.  Once perfected I’d decide on a leverage model.  I’d either sell the bootcamp model to other trainers under licence or I’d stay local and build up camps paying instructors to deliver the experience. 

The key to all the eventual success I’d enjoy though would come from my initial understanding and intimate knowledge of that niche.  To leverage you need to be a specific something not a general nothing.  Product differentiation is happening in a big way in the fitness sector at the moment and will continue for some time.  Leverage is about finding a space and filling it better than anyone else in your town.