Eagle Merchant Partners last year invested in Aligned Fitness, a Club Pilates franchisee.
Investors look for white space—whether that’s the ability to grow through acquisitions or de novo growth—when considering valuations for prospective transactions.
Fitness business valuations are stable, industry experts say, despite being down since the post-pandemic highs that reignited the category as a whole.
“Buyers are generally more discerning than they were … and buyers are digging in more on issues like the integration of the business, the growth rights of the business, the management team to where there’s more of a spread between those C, B and A assets than there were before,” said Jake Rubenstein, vice president at Eagle Merchant Partners. “But the A assets and the B assets are generally probably trading at the same level.”
Eagle Merchant Partners, which bought a majority stake in a Club Pilates franchisee last year, backs brands poised for longevity in segments backed by consumer trends, Rubenstein said.
“With Club Pilates, we felt very strong about the fact that Pilates has been around for 100 years, and there’s been a mass adoption in the last 20,” he said. “It’s a supplementary workout, not necessarily competing with other modalities.”
The firm invested in 34-unit Club Pilates operator Aligned Fitness alongside its acquisition of a six-unit franchisee and a three-unit franchisee. Eagle Merchant exited the fitness space in 2018 when it sold United PF Partners, a major Planet Fitness franchisee. Last year’s Club Pilates investments marked its reentry into the category.
Related: More Consolidation Is Coming to Franchised Fitness Systems
Mike Myszkowski of Citizens and Whit Steers of Pinnacle Financial Partners joined Rubenstein on a panel about fitness business valuations at the inaugural Fitness Finance & Growth Conference, presented by Franchise Times.
Myszkowski similarly said valuations are down, but that’s due to competition rather than a lack of capital.
“The ability to continue to build new studios or clubs has become more expensive, so that puts pressure on economic returns,” Myszkowski said. “Just as these businesses continue to grow and evolve, we may see more mature businesses that may not go for as high multiples, and then we’ve seen up-and-coming brands that have come in and things with more and more white space may trade at higher multiples.”
White space, he said, can mean a brand’s ability to grow through acquisitions or with new builds. Some buyers look to newer, proven brands with plenty of space to grow for their investments.
“People may be wanting to pay higher multiples to get in early to a brand that they know they can buy down that multiple over time through growth, whether it’s consolidation or new unit growth,” Myszkowski said.
That said, larger systems have their perks too. Major players like Planet Fitness or Crunch Fitness can more easily survive economic downturns or consumer trend shifts, Myszkowski said.
Big brands can afford more robust management teams with real estate and marketing aficionados, which lenders can appreciate, he said.
But getting too big has its disadvantages when looking for buyers and investors. The larger the system, the larger the investment required—which means the pool of interested parties is smaller, Myszkowski said.
“We’ve seen this not only in fitness but in some other systems where some of those bigger businesses end up getting carved out into … smaller packages to be sold off,” he said. “So it can go both ways. You can get too big in certain situations where you’ve limited your buyer universe.”