One of the biggest attractions of owning a gym is the freedom – you have complete control and flexibility over how you run your business. This also means that you will be facing a LOT of decisions, and these decisions begin long before that first client ever walks into your facility.
The first big decision you’ll face as a business owner is how to financially plan for your opening. Here in Part1 of this 2-part series, we’ll dive into the upfront costs of opening your new fitness facility so you can set yourself up for financial success.
Your Budget Is Your Roadmap to Success
You’ve probably heard the saying,“Failing to plan is planning to fail.” This is particularly true when it comes to starting a business.
As you start the planning process, establishing a budget is one of the most powerful things you can do to set your business up for long-term success. Beyond providing a road map for your business goals, it will help you understand and prepare for the financial consequences of the decisions that lie ahead.
Small business failure is most commonly a result of being undercapitalized, as the owner doesn’t have sufficient funding to cover all of the start-up costs while maintaining adequate cash reserves to support ongoing operations as the business ramps up.
This problem isn’t simply caused by running out of money; it’s a function of failing to appropriately anticipate and project the costs associated with a new business. This ultimately leads the owner to underinvest in the very services that would generate growth and profitability as cash flow gets tight.
The goal of this article is not only to help you identify the key costs associated with opening a new fitness facility, but also to help you quantify how much you should have in reserve in case everything doesn’t go as planned (because it won’t!).
We’ll break the budgeting process into 2 primary phases: upfront costs and ongoing costs.
Upfront Costs: Getting the Doors Open
Many first-time business owners underestimate the variety and magnitude of upfront costs, and further, how timeline delays and unexpected expenses can impact their overall budget.
Let’s dive into the key sources of initial costs, which we break into 6 phases:
1. Establishing a legal entity
2. Securing a facility
3. Preparing the facility
4. Outfitting the facility
5. Building the business
6. Preparing to open
1. Establishing a Legal Entity
Far from the most exciting step in the process, establishing a legal entity is nonetheless a vital starting point. The legal entity – such as a limited liability company (LLC), partnership, or corporation – establishes the business with the state and helps protect you from liabilities incurred by the business.
Having the legal entity established is also necessary for setting up a bank account in the business's name, which will help keep business-related expenses separate from your personal expenses.
Typical expenses in this phase include:
o State filing/registration fees
o DBA/name registration fees
o Operating agreement or similar
o Tax planning/advisory for entity selection and to opine on operating agreement structure
o Fees for opening and funding a business bank account
2. Securing a Facility
Apart from actually running the business, finding an ideal location and negotiating an acceptable facility lease agreement is generally one of the most challenging and time-consuming steps in opening a fitness facility. Prepare to find your dream location and then have it fall through. In fact, prepare yourself for this to happen multiple times.
You will undoubtedly have to look at a lot of different options, will likely have to submit applications on multiple properties, and may even end up negotiating multiple leases before finally getting across the finish line. This will ultimately result in a variety of costs, both in getting to the point of having a finalized lease and in making the payments required upon signing the lease.
Typical expenses in this phase include:
o Lease application fees
o Legal counsel to review and negotiate the facility lease
o Prepaid rent due at the lease signing
o Security deposit due at the lease signing
o Permits and approvals, including hiring an expeditor if necessary or typical in your market
3. Preparing the Facility
Once you have a signed facility lease agreement in place, you can begin transforming the space into something that best meets the needs of your business model and customer base. This might include:
o Demolition work
o Building out offices, bathrooms, and locker rooms
o HVAC, plumbing, and electrical work
While this kind of work won’t begin until the lease has been signed, it’s important to have an estimate of the anticipated cost of these improvements before signing the facility lease agreement. Not only does this allow you to better estimate the cost necessary to prepare the facility for your business, but it will also allow you to negotiate with the landlord as to any amounts they will contribute or cover towards these costs (or other concessions they may offer in lieu of direct financial contributions, such as rent abatement).
As with most construction projects, permitting delays, cost overages, and unforeseen expenses are common occurrences during the build-out phase and can have a dramatic impact on the total start-up budget.
Key items to consider during this phase include:
o Cosmetic improvements, furnishings, and finishings
o Exterior signage (including installation costs, which can be significant)
o Facility improvements and build-out costs
An Important Note on Build-Out Costs
You will want to make additional considerations in these 3 areas as you calculate your potential costs.
A. Tenant Improvement Allowance
This covers not only how much the landlord is willing to pay toward these costs, but also the logistics related to their contribution. Common structures for tenant improvement allowance that can significantly impact both the total cost as well as the timing of cashflows include:
o Landlord pays the contractor/construction company directly for part or all of the cost
o Landlord provides reimbursement after completion/occupancy, but you are required to front the cost of the contractor/construction company initially
o Landlord provides reimbursement by crediting base rent in future periods, but you have to initially front the cost of the contractor/construction company
o Landlord effectively finances the cost of the build-out and pays the contractor/construction company directly, but you are required to pay it back over time (separate and apart from what is already included in the rent schedule of the facility lease agreement)
B. Payment Schedule for Contractors
When will payments be due? What is the amount of the initial deposit vs. ongoing progress payments?
C. Cost Overages and Timeline Delays
Your overall budget can be impacted by an increase in raw material costs, unexpected costs (i.e., demolition reveals problems that no one was aware existed initially), or the project taking longer than anticipated. In the case of timeline delays, be mindful of budget impact from:
Scheduled rent commencement date in the facility lease agreement
Is it a fixed date, or is it contingent upon receipt of certificate of occupancy? Build-out delays can have a significant impact on the former, wherein you may be required to pay rent prior to operating at the facility.
Rent abatement terms in the facility lease agreement
Similar to the rent commencement date impact, it’s important to understand whether the abatement period is designed to be used for the build-out process or whether you will receive additional months without rent once the business opens. Be mindful of whether rent is to be abated in full or if you will still be required to pay common area maintenance (CAM) or triple net lease (NNN) expenses during this period. Finally, watch out for language that truncates the abatement period upon opening for business.
4. Outfitting the Facility
As the facility build-out nears completion, you’ll be working with equipment and flooring vendors to finalize quotes and determine delivery timelines.
Like the cost estimates in the sections above, you’ll want to have a reasonable estimate on these expenses at the beginning of this process even though they are included here from a sequencing perspective. Depending on the nature of your business model, you can determine what is necessary to get open for business and what can be added over time, letting you balance against the incremental shipping costs of splitting into multiple orders.
Whenever possible, try to consolidate your gym equipment and flooring orders with as few vendors as possible. You will be more likely to receive a bulk order discount and can significantly reduce shipping costs. Instead of relying on retail prices, make sure you are budgeting for taxes, shipping costs, and installation.
Key costs to identify in outfitting your facility include:
o Fitness equipment and flooring
o Sound system (stereo/receiver, speakers, wiring, and installation)
o Member check-in station (computers, TVs, tablets, and desk)
o Office equipment and furniture (desks, chairs, computers, printers, and paper supplies)
o Member furniture (chairs, cubbies, benches, and lockers)
o Cleaning equipment and supplies (floor scrubbers, vacuums, mops, trash cans, buckets, and cleaning supplies)
o Security system and cameras
o Other equipment, office, IT, and A/V Items
5. Building the Business
While the facility is a key component in delivering your services, it is only one facet of your business. Your budget should also include costs to create and establish your brand, online presence, and key operating systems.
Plan on having these systems and processes established well in advance of opening your doors to boost market awareness, lead generation, and conversions. Make sure you have the appropriate legal and insurance requirements in place to do business.
Key categories and line items here include:
Branding and Design
o Logo design
o Website creation, hosting, and management fees
o Promotional materials
o Retail inventory
Software Systems and Services
o Business management and billing software
o Marketing automation/customer relationship management software
o Workout tracking and programming software
o Billing and revenue recovery services
o Accounting software
Other Business Expenses
o Affiliate, license, or franchise fees, if applicable
o Insurance policies and premiums, such as:
- Commercial general liability (CGL)
- Business personal property (BPP)
- Workers’ compensation
- Business interruption
- Cyber liability
- Professional liability
6. Preparing to Open
With all the other pieces in place, you’ll want to budget for marketing and pre-sale campaign so your launch is as successful as possible. Opening your doors with a strong member base will help with cash flow (and stress levels!) and significantly improve the member experience at your fitness facility.
In addition to attracting new clients, you’ll also want to be prepared to appropriately serve them. That means devoting time to finding, interviewing, hiring, and training staff for your facility, which can be both expensive and time-consuming.
Costs to keep in mind include:
o Hiring and staffing
o Marketing and pre-sale
- Paid search and paid social advertising
- Flyers
- Signage
What Comes Next?
With these cost breakdowns, you can build out an estimated start-up budget with assumptions specific to your market, facility size, and business model. We recommend establishing a high-low range for each item to build some cushion into your plan.
But you aren’t done yet: Your total budget should include the costs to open your facility and working capital and reserve capital to support your business until it reaches break-even. Estimating working capital and monthly operating expenses as your business grows can be more challenging, but it sets your business up for long-term success.
In Part 2, we’ll turn our attention to building financial projections and analyzing how start-up capital is impacted under various growth scenarios. Can you survive if membership grows at half the rate you’re projecting? What if it takes you twice as long to breakeven?
While it’s impossible to predict the future, quantifying the financial impact of events like these will leave you better prepared for the unexpected and more likely to overcome future hurdles.
By Clayton Ferrer
Founder and CEO of Rigquipment Finance.
.png)
