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21 Tips For Buying an Existing Gym, Fitness Center or Health Club

Gro’s 21 recommendations when buying an existing fitness center
  1. Require the seller to put in writing and warrant every essential part of the business, including:
    1. The financial statements (which should be attached as exhibits)
    2. Statement confirming there are no hidden liabilities of any kind (tax claims, lawsuits, or supplier bills)
    3. A complete list of everything included in the sale: leases, contracts, outstanding debts (to suppliers), amounts owed by customers, inventory, fixtures, equipment, signs, computer hardware and software and anything else that will contribute to the success of the business
  2. If the financial statements have not been audited by a certified public accountant, you should have it done! If the seller won’t pay the cost, you should do so in order to make sure your investment is a wise one.
  3. Determine whether there is an industry association that can provide you with “normal” financials to be used for comparison against the financials of the business you’re buying.  Average financials for most types of business can be found in the Annual Statistical Report published by the Risk Management Association (RMA) and are also available in the business section of most libraries.
  4. Fairly safe investments will offer an annual return of 5%. Consider this when reviewing the selling price.
  5. If you are paying more for the business than the valued assets, you need to recognize that you are buying “goodwill” — an intangible asset that may be amortized over a 15-year period.
  6. Make sure to involve your banker. The purchase and sales agreements state the agreed upon price, indicates what is included in the purchase, includes what actions are required by the seller (such as an environmental study) and by the purchaser (such as seeking financing), and sets the time the agreement is binding on both parties. Your banker needs this agreement to determine how he or she can help you finance the selling price, and whether the down payment is adequate. The bank also needs to know what is included in the purchase as some of it may be considered collateral.
  7. Determine why the seller is selling the business.
  8. Determine how long this business can be expected to last. Are there factors that could terminate the business, such as plans for a new road that can destroy the business location?
  9. If there is a lease, talk to the owner of the property to be sure the terms of the lease will remain the same. This is an excellent time to discuss renewal terms and termination possibilities.
  10. Ask the owner to let you work in the business prior to making a decision to buy. There is no better way of judging whether the business volume is satisfactory, whether you will enjoy working in that business or whether there are any problems you need to straighten out before the sale is finalized.
  11. A business is often successful due to the personality of the owner. If this is the case, you have to decide whether you will be able to make the business successful with your personality.
  12. Make sure the seller signs an agreement not to compete for the next 10 years or so. This is especially important if you feel his or her personality was the reason for the success of the business.
  13. Investigate neighborhood businesses that are not direct competitors to learn what they have to say about the growth of business in your area, what problems they see for the future, and how they feel about the business you’re buying.
  14. Have a credit check done on both the owner-seller and the business itself.
  15. Check with suppliers to determine if the inventory you are buying is valued correctly.
  16. If there are employees, talk to them about whether they will stay on board if you buy the business. Get any other information they are willing to provide.
  17. Talk to some of the customers. Find out if they are satisfied with the current state of the business.
  18. Determine if this business’ prices are competitive. Visit every competitor to see if there are any changes underway that might influence your business.
  19. Check with government agencies. Local agencies can tell you about licensing, environmental requirements, zoning rules, and whether there are taxes due for any local or state agency (licenses, personal property tax, franchise tax, income tax, and property tax). Federal agencies can tell you whether income tax, social security, medicare, and unemployment tax payments are up to date.
  20. Prepare a business plan. If you need help, consult your local SCORE office. Your business library might have an actual business plan for your industry that you can study and utilize to prepare your own.
  21. When buying an existing business, it is important whether the Purchase and Sales Agreement is for the purchase of assets or stock.  As a general rule, it is preferable for the buyer to purchase only assets, not stock.  If the Buyer purchases all the stock in the company, he acquires all existing liabilities associated with the business, whether known or unknown.

On the other hand, if it is an assets-only purchase, the Purchase and Sale Agreement could, and should, provide that the Buyer is acquiring certain documented assets, including the exclusive rights to the use of the name of the business.  The Agreement should also provide that the Buyer is acquiring no liabilities associated with the business, arising before the closing, other than those specified, such as accrued vacation and other Human Resources benefits for those employees who will be retained.  The HR aspects are important.  The Agreement should identify which employees will be retained, and the level of pay and benefits they will receive.

Whether it is a stock or asset purchase, the Seller should be required to indemnify the Buyer against any unforeseen liabilities that may appear after the closing.  It is often a good idea to hold a part of the purchase price in escrow for a period of time, as a hedge against such unpleasant surprises.

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