Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Local Gym Sold at 16x EBITDA with Memberships
Transcript
- Lucas: Luna, when you think about a small gym — I'm talking a single-location CrossFit box, maybe two thousand square feet, a couple of instructors — what multiple would you expect it to sell for? Luna: Honestly, I'd guess somewhere around four to six times EBITDA. Fitness is hit-driven. Members come and go, equipment depreciates, and the owner is usually the main trainer. It's tough to underwrite. Lucas: Right. That's the conventional wisdom. And it's true for most gyms. But I found a case recently where a gym in Columbus, Ohio — let's call it 'Iron Forge Fitness' — sold at sixteen times EBITDA. Sixteen. Luna: Sixteen? That's more than a software company. How did they pull that off? Lucas: Recurring revenue. But not just any recurring revenue — it was contractually locked-in, annual membership revenue with an auto-renew clause. The gym had three hundred and eighty thousand dollars in annual recurring revenue from two hundred and ten members. And here's the kicker: eighty-five percent gross retention. Luna: Eighty-five percent retention in fitness is remarkable. Most boutique studios hover around sixty to seventy percent. Lucas: Exactly. The owner achieved it by bundling a nutrition coaching add-on into the membership. So members weren't just paying for classes — they were paying for a weekly check-in on macros and meal plans. That created a sticky ecosystem. Once someone is tracking their food with your coach, they're not switching to the gym down the street. Luna: So the nutrition piece essentially became the moat. Did the owner also require annual contracts, or were these month to month? Lucas: They converted from month to month to annual contracts over eighteen months. They offered a discount — ten percent off the monthly rate — if you locked in for twelve months with auto-renew. About seventy percent of existing members took it. New members were only offered the annual plan. By the time they listed the business, annual contracts made up ninety-two percent of the membership base. Luna: That changes everything for a buyer. Because now the cash flow isn't speculative — it's under contract. You can underwrite it almost like a subscription software business. Lucas: Exactly. And the buyer in this case — a small regional fitness chain — valued that predictability. They paid six point one million dollars for the business, which represented the sixteen times multiple on an EBITDA of about three hundred and eighty thousand. The owner's discretionary earnings were actually higher, but the deal was structured on adjusted EBITDA. Luna: Three hundred and eighty thousand in EBITDA from a single gym — that's impressive. What were the margins? Lucas: Gross margins were about seventy-two percent. The biggest costs were rent and the two part-time coaches. The owner himself was drawing a modest salary, but the business didn't depend on him being there every day. He had a head coach who handled all the programming and training. So the buyer wasn't buying a job — they were buying an asset. Luna: That's crucial. A lot of gym sales fall through because the buyer realizes the owner is the business. But here, the owner had stepped back to maybe ten hours a week by the time of sale. Lucas: Right. And the buyer also liked that the equipment was mostly leased, not owned. That meant less capital expenditure risk. The lease payments were already built into the cost structure. So the EBITDA was a cleaner reflection of the cash-generating ability. Luna: Let's talk about the multiple for a second. Sixteen times is high even for a recurring revenue business. What did the buyer see that justified it? Lucas: A few things. First, the annual contracts averaged fourteen months of remaining term at closing — meaning the buyer had over a year of locked-in revenue from day one. Second, the nutrition add-on had a ninety percent attachment rate and its own gross margin of eighty percent. So the buyer saw a platform to upsell additional services, like one-on-one coaching or merchandise. Third, the location was in a growing suburb with limited competition. The buyer's underwriting assumed they could grow membership by twenty percent in year one just by adding marketing, which the previous owner never did. Luna: So the multiple was partly based on growth potential, not just current cash flow. That's common in these lower middle market deals. Lucas: Exactly. But here's the thing — the seller didn't just stumble into this. They spent two years engineering the membership structure and the add-on. It wasn't an accident. Luna: What's the takeaway for someone listening who owns a gym or a similar service business? Is this replicable? Lucas: I think so, but it requires discipline. The key steps are: convert your customer base to annual contracts, create an add-on service that increases switching costs, and then step back from day-to-day operations so the business isn't dependent on you. Those three things together can move a multiple from five to fifteen. Luna: That's a huge leap. And it's not just for gyms. We've seen similar plays in cleaning, landscaping, even hair salons. The pattern is the same: recurring revenue, high retention, and owner independence. Lucas: You know, Luna, conversations like this — breaking down real deals and the strategies behind them — that's exactly why we do this show. If these episodes have helped you think differently about your own business or a potential acquisition, there's a simple way to support the work we do. It's ad-free, listener-supported, and it costs less than a coffee. You can find us at buy me a coffee dot com slash fexingo. No pressure, but if you've gotten value, that's where we keep the lights on. Luna: Yeah, and it really does make a difference. We put a lot of research into each episode, and that support lets us keep digging up these specific case studies. Lucas: Alright, back to the gym. One thing I didn't mention: the buyer also required the seller to stay on for a six-month transition. That's typical. But the seller used that time to help the buyer build relationships with the nutrition coaching clients, which smoothed the handover. Luna: Smart. Because the nutrition coaching is the sticky part. If the buyer had fumbled that, retention could have dropped. Lucas: Exactly. And the transition went smoothly. The buyer actually retained all two hundred and ten members through the first six months, and added twenty more by month nine. Luna: That validates the multiple. When a deal performs post-close, it sets a precedent for similar businesses. Lucas: Right. And I think the fitness industry is going to see more of these deals. Private equity has been circling boutique fitness for a few years now, but they want scale. A single location at sixteen times doesn't move the needle for them. But a platform of five to ten locations, each with similar recurring revenue characteristics? That could command even higher multiples. Luna: So the real play might be to build a small chain using this model and then sell to a larger operator or a PE firm. Lucas: Exactly. One gym at sixteen times is great. Five gyms at eighteen times is a life-changing exit. Luna: What about the risks? If someone tries to copy this model, what could go wrong? Lucas: The biggest risk is retention. If you push annual contracts too hard without the added value, members will leave. The nutrition coaching was the key to retention. Without it, annual contracts just feel like a trap. Also, you need the right location. A gym in a declining area won't command the same multiple, no matter how good the contracts are. Luna: So the playbook works best when you have a genuine value-add that members want, not just a contractual lock-in. Lucas: Precisely. The contracts are the mechanism, but the moat is the service. And for a small business owner, that's a reassuring message — you don't need a tech platform to get a tech-like multiple. You just need a sticky, recurring revenue model that a buyer can trust. Luna: I love that. Alright, next episode we should look at a business that failed to get a premium multiple and figure out what went wrong. Lucas: That's a great idea. Maybe a cautionary tale. I've got one in mind — a tutoring center that had high revenue but zero contracts. That'll be a good contrast. Luna: Looking forward to it. For now, thanks for listening, and we'll see you next time on The Buyer & Seller Podcast.