Originally Posted by Greg Light
A few things I think you overlooked that could significantly reduce the value of the business.
1. There are a TON of other expenses that you are overlooking. Insurance, accounting, management wages, advertising, cleaning, etc. These can reduce your calculated profitability by a lot.
2. While a multiple of 3 can be a good benchmark, it can be influenced by a variety of factors and could really range from 2 - 5x.
3. The value of the equipment shouldn't be added to the capitalized value of the business. The earnings of the business are generated in part by the assets of the business, so they are implicitly included in the capitalized value. If you were going to add the value of the equipment you would be using an excess earnings method which generally would imply a lower multiple.
4. The limited pool of buyers reduces the value significantly. You can't just put an ad in the paper and sell a CrossFit affiliate to any Joe Schmoe
As someone who buys and sells businesses for a living (large ones as an investment banker, and smaller ones as a private investor), I tend to agree with Greg's assessment here.
Basically, unless there is some proprietary secret sauce that all but guarantees the business to enjoy its customer base for 3-5 years, I'm not paying for future earnings that I have to go retain or generate. The longest of contracts in this business rarely exceed 1 year, so I'm probably not dishing out much more than 1-2x earnings.
I would generally place the value of an affiliate at Book Value (Original Cost of Equipment, Leasehold Finishes, less depreciation, if any..whatever is fair) + 1.0x to 2.0x Earnings (including owner comp added back). The end result can get up to 3.0x-4.0x depending upon the assets.
1.0x earnings if the contracts are up to a year
Up to 2.0x earnings if the culture and expertise is right and resides in the training staff as opposed to the current owners, and if the gym is on the larger side of things (~200 members). I would go up to 3.0x if there was some level of sophistication, planning, and track record around growth - attracting new customers. Again, that feature can't leave with the seller though, otherwise I'm not paying for it.
Greg is absolutely right in that the limited pool of buyers creates a difficulty for the seller. The business is small, geographically focused, and requires some degree of subject matter expertise, which narrows the pool significantly in contrast to say, a local Dairy Queen franchise.
Brendan also raises a great point, which is that the right price in theory and the right price in practice are completely different. If you find a buyer who will take care of your legacy, your friends, etc, and value the relationships over pure economics, and there are no other suitors, the price is the price. I would never say someone who transacted got a bad deal; you did what you wanted to do, otherwise you would not have transacted.