FBC UPFRONT Dag Lee and Bryan O'Rourke discuss


the return on investment (ROI) you can expect when expanding your facil- ity and building a new facility in this week's Ask an Industry Leader.


Q: "How can we compare the return


on investment between adding on ad- ditional space to our current facility and opening a new facility?"


prospects, macroeconomic factors, competition and so on. This can have an impact on your decision, as well as your own financial situation, the bor- rowing cost and weighted average cost of capital.


Consider the local market, growth times on the two opti ns, perhaps us- ing a 10-year horizon for the budget- ing, and then compare them.


Q A


Calculate the returns and payback times on the two options, perhaps us- os thait include all investments, top line developme t, as well as costs and ex- penses for both scenarios. Then do a re- turn analysis on the cash flow differen- tial between the two scenarios; 1 and 2.


rent facility. Here you should make two scenari-


ng a 10-year horizon for the budget- ing, and then compare them.


Adding additional space to your current facility. Here you should make two scenar- Running the club as is without the ine development, as well as costs and xpenses for both scenarios. Then do a return analysis on the cash fl ow dif- rential between the two scenarios; 1 S aimilar to 1, but with the added costs and investment of the enlarge- ment project (you may need to reno- vate tihe old part of the club as well), including additional rent and other pected P&L development.


ios that include all investments, top additi lonal space, but with the capital expen editures required to upkeep the club as needed, and with the expected P&L dfevelopmen . nd 2.


Running the club as is without


the additional space, but with the cap- tal expenditures required to upkeep the club as need d, and with the ex- variable costs that increase with addi- tional spac Sei, but also factoring in how you might be able to grow your mem- bershmip base with a (dditional space. Will you need more staff? Consider all costs and revenue changes from the


milar to 1, but with the added


costs and investment of the enlarge- ent project you may need to reno- vate the old part of the club as well), including additional rent and other projec vt. You also need to factor in any club downtime, or partial closing of


ariable costs that increase with addi- tional space, but also factoring in how the club. Try not to close, as this is like bership base with additional space. ill you need more staff? Consider all costs and revenue chan


s from the


project. You also n ed to factor in any surely increasing your average dues, PT and miscellaneous revenue. Projects like these, although positive for the members when finished, can create


12 Fitness Business Canada September/October 2011


you might be able to grow your mem- asking members to go elsewhere. You may a Wlso be able to cha ge a higher price after the refit and enlargement, at least from new members, slowly but club dow time, or partial closing of the club. Try not to close, as this is like asking members to go elsewhere. You may also be able to charge a higher


A: Consider the local market, growth


“How can we com- pare the return on investment between adding on additional space to our current facility and opening a new facility?”


Calculate the returns and payback prospects, macroeconomic factors, competiti n and so on. This can have an impact on your decision, as well as your own fi nancial situation, the bor- Adding additional space to your cur-


Expanding Your Club vs. Building a New Location: Which Has a Higher ROI? » Q&A


frustration from partial closings or lim- itations in the service offer while the projects lasts. Noise, dirt and dust may also impact the experience. Therefore good and complete information in good time through all channels is key: in the club, posters, staff, website, social me- dia, email and newsletters.


Building a new club – effectively a


club move. Here I have assumed that you close


rowing cost and weighted average cost of capital.


your old club and move it to the new site. You’ll need to make budgets for in- vestments and the P&L (and a balance sheet) for the new club project, as well as factoring in the costs of the move, as well as all costs associated with exiting the old site. This may include any rent obligations, repairs to the structure, etc. As you’ll build the new site while still operating the old one, you need to factor in duplicated costs during the project, if any. You also need to have a strong plan for ensuring that as many members as possible make the move with you, as well as a great presale plan to capture many new members to jus- tify the large undertaking building a new club is. Calculate the returns on the 10-year cash flow.


Now you can compare the returns between the two options: adding space or building a new club. Building a brand new club may require signifi- cantly more cash, and construction projects have certain risks you need to understand, as well as negotiating fa- at least fr m new members, slowly but surely increasing your average dues, PT and miscellaneous revenue. Projects like these, although positive or the members when fi nished, can


Now that you have an idea of what


each alternative costs you want to know what they’ll generate in cash flow. Prepare estimated revenues and operating costs for each option and be meticulous. When expanding an exist- ing club, make sure you have a clear understanding of what the additional space will be used for to create a reli- able basis for estimating net cash flows. A new club facility will require even more thoughtful analysis. If you have a geographic area identified engage a professional to conduct a market analy- sis estimating both demand and supply in the trade area. For each alternative, create a best case, worse case and an average cash flow forecast.


The final step is to use a net present


value calculation to determine which option is best. You can use an NPV cal- culator online. When doing so it might be wise to use a higher discount rate for a completely new facility as opposed to adding on space, given the added risks.


Finally, have you considered what


your strategic end game is for your business ? Managing multiple clubs can be far more challenging than a single location. Take time to really consider the options and what you are commit- ting to and good luck.


price af er the refi t and enlargement, vorable contracts with the landlord. In addition to the financial analysis, it is crucial to understand the market, your position, and in the end, have a good f gut feeling for the route you choose. create frustration from partial clos- ingHave you considered enlarging and


s or limitations in the service of- fer while the projects lasts. Noise, dirt and dust may also impact the expe- rience. Therefore good and complete information in good time through all channels is key: in the club, posters, stafDag W. Lee, Taipan Invest, chairman wsletters.


f, websit , social media, email and ne ACTIC Fitness, board member dag.wh.lee@gmail.com


Building a new club – effectively a club move. Here I have assumed that you close your old club a d move it to the new ite. You’ll need to make budgets for nvestments and the P&L (and a bal- ance sheet) for the new club project,


A: First calculate the cost of each alternate investment. Be as accurate as possible. Don’t leave anything out. s Miscalculating costs could result in a i poor decision.


upgrading your existing club, AND building a new one? Effectively making a little 2-club cluster with the advan- tages that can bring.


as well as factoring in the costs of the move, as well as all costs associated with exiting the old site. This may in- clude any rent obligations, repairs to the structure, etc. As you’ll build the new site while still operating the old one, you need to factor in duplicated costs during the project, if any. You also need to have a strong plan for ensuring that as many members as possible make the move with you, as well as a great presale plan to capture many new members to justify the large undertaking building a new club is. Calculate the returns on the 10-year cash fl ow. Now you can compare the returns


Bryan O'Rourke, CSO & Principal Fitmarc bryan@fitmarc.com www.bryankorourke.org


between the two options: adding space or building a new club. Building a brand new club may require signifi - cantly more cash, and construction projects have certain risks you need to understand, as well as negotiating


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