Should I Open a Studio Gym or Franchise Gym?

In short, it depends. 

The Studio Gym

Right now, studio, niche gyms are all the rage. Fitness entrepreneurs like Thomas Plummer, Rachel Cosgrove, Bedros, Frank Nash, and Rick Mayo have been singing their praises for almost 10 years now. And in all honesty, they should. When done correctly with the right positioning in the right community with the right systems, they are lucrative, especially when you look at the profit per square foot and compare it to traditional gyms.  I know this firsthand because I've sold one and currently co-own a successful one, Iron Orchid Studio.

So what makes them particularly appealing, especially to first-time gym owners? 

  • Startup Requirements: A small franchise gym costs around $200,000 to open its doors. Studio gyms cost anywhere from $30,000-75,000 depending on the size and equipment needs. Often times, it can be opened without a loan, making it very appealing to entrepreneurs with little or no credit/equity. 
  • Personalization/Community: Most trainers enjoy the hands-on nature of the fitness business. It's an extremely rewarding experience to be part of a client's fitness journey. The thought of simply "renting equipment" to members doesn't strike the same chord as coaching a client's session where she hits her first deadlift PR. With a small studio, the owner tends to know every client's name and usually has the time to develop a relationship with each one of them. That's not necessarily the case with a traditional gym. And for some, that IS the business. 
  • Space Requirements: Because studio gyms don't have the amount of equipment traditional gyms do, they need much less space. In crowded, expensive markets, less space can result in a rent that's thousands if not tens of thousands of dollars lower than a traditional big box gym. Plus, it's easier to find spaces in the 1,500-3,000 square foot range. 
  • Equipment Replacement: Treadmills, ellipticals, and cable machines are expensive. Worse yet, they don't last nearly as long as a dumbbell or kettlebell. Because studio gyms rarely have machines and almost completely rely on barbells, dumbbells, and kettlebells, owners rarely have to replace equipment. A single treadmill can cost $6,000 or more to replace. 
  • Less Risk: Because the startup costs are significantly less than a traditional gym as well as the equipment most studio gyms have has a higher resale value than machines, there is definitely less risk with studio gyms. Rent is about the only expense you won't get back, and even if you don't end up fulfilling your entire lease, you can often negotiate out of it or find a new tenant.  
  • Less Turnover: In the gym business, the churn rate is critical to an efficient, successful gym. A higher client turnover rate almost always results in a higher cost to acquire new clients. Because studio gyms have a small community feel, they tend to have a lower churn rate, which reduces your marketing expense

Sounds great, right? Not so fast hombre.

Let's look at some of the issues I have with studio gyms. 

  • Low barrier to entry: It's relatively easy to start a studio gym thanks to the low startup costs and an ample number of studio gym business coaches (Seriously, does every successful studio gym owner become a coach?). That alone should scare you. Remember a few years ago when everyone was making money designing and selling t-shirts online? Look at how many individuals are printing t-shirts now thanks to companies like TeeSpring and Facebook ads. The market is saturated because of the low barrier to entry, and as a result, it's not nearly as lucrative as it once was. The same thing appears to be happening with Crossfit gyms
  • Limited markets: You aren't selling a $10 monthly membership like Planet Fitness. Thus, even in a big market, you're still only selling to a very select market with either a large disposable income or a passion for fitness. With the number of studio gyms popping up year after year, that market is going to get smaller and smaller. Plus, the big box gyms are starting to invade the small group training space too. 100 members at $100 per month sounds easy in a community of 30,000 people but don't overestimate your ability to differentiate your service from a $10 monthly membership, even if the guy is driving a $100,000 Benz.  
  • Tough to sell: One of the best pieces of business advice I ever received was, "Even if you don't have any intentions to sell, still build the business like you will sell it." Of course, I ignored it, and then 2 years later when I decided to sell, I had to take $75,000 off of the price tag because I couldn't prove the numbers on the P&L. Studio gyms are typically harder to sell because: 1) The owner usually attaches her name to it, and thus basically becomes the business. Please read Built To Sell so you don't get yourself in that pickle.  2) The owner has such a great bond with her clients that the potential buyer wonders if the clients will stay once the owner sells. From my experience, the positioning draws the clients into the gym, but the trainers/owner keeps them there. If you remove the trainers/owner, who knows what the client will do.  3) Most studio gyms are not designed for absentee ownership, and thus the pool of potential buyers, or in this case investors, is limited to owners that want to be hands on just like you were. 
  • Tough to duplicate: I've seen some very successful studio gyms, yet I've rarely seen that same owner open up additional gyms. In fact, more often than not, they start selling online fitness products or fit biz coaching. Why? As I mentioned above, clients tend to stay because of the unique community the trainers and owner have created. That's extremely hard to replicate. And it should be because that's one of the main advantages studios gyms have over the big box traditional gyms. 
  • High payroll: There are very few expenses you have control over. Payroll is one of them. It's also going to be one of your largest expenses (And the one that causes you the most headaches. Kettlebells and barbells don't have moods, show up late for work, or ask for raises. People do). If you heed my advice from above and build your gym to sell, you're going to need additional trainers. Good ones will cost you. I personally think, especially during the first 2 years of business, the hardest challenge you will face as an owner is trying to balance the numbers of trainers and number of training hours available while still making a profit and also ensuring there are enough hours available for your clients' convenience. And if numbers and P&L's scare you, check out this book, Simple Numbers, Straight Talk, and Big Profits. 

The Franchise 

Although a few fitness coaches will convince you this model is on its way out the door, don't be so easily swayed. Not everyone can pay $99-399 per month for small group training at a fitness studio. Planet Fitness opened 195 new clubs in 2016. OrangeTheory Fitness expected to have over 500 gyms by the end of 2016. This model is definitely not dead and/or dying. 

If you're a bookworm like I am, make sure you check out the book Sweat Equity. Fitness is hot right now, and as the book shows, it's not just limited to the smaller, niche gyms. 

Benefits:

  • Proven System: Essentially with a franchise, you're really just buying a business in a box, plug and play as they say. The franchisor has already made the mistakes, tested hundreds of different variables, and created a system that can be plugged into your market and work almost immediately. Not only will you sleep better at night knowing you won't have to go through the growing pains of testing and tweaking the systems and processes that operate behind the scenes, but franchises overall tend to be less risky than starting your own independent gym. 
  • Ongoing Support: You'll have ongoing support from the franchisor, but you'll also be connected to a group of franchisees that will be extremely valuable assets as you grow. It's comforting to have access to a group of individuals who are going through or have gone through what you are about to. It's nice to know you're not alone. 
  • High Barrier to Entry: The barrier to entry for franchise gyms is definitely higher than a studio gym because: 1) They are typically more expensive than a studio gym thereby eliminating a lot of cash-strapped trainers and entrepreneurs. 2) Most franchisors require a minimum net worth from potential franchisees. If you have little equity and mostly debt, it's going to be extremely hard to acquire a franchise. 3) Territories are limited. 2 years ago I called OrangeTheory Fitness about opening one or two OrangeTheory gyms. Every territory I was interested in was already taken. Franchises do an extremely good job of keeping the market unsaturated so that they give its franchisees every opportunity to succeed. 
  • Easier To Replicate For Multiple Units: If you enjoy the business aspects of training more so than the hands-on nature of training, franchises are more conducive to absentee ownership. In fact, most franchises will give you a discount if you open 3 gyms or more as opposed to just a single location. Once you know the system the franchise uses, it simply comes down to finding markets that seem viable. Growth can be extremely quick. 
  • Easier To Sell: Because you basically have a business in a box, a new owner should be able to step in and immediately pick up where you left off. Thus, there's a larger pool of potential buyers out there, including other franchisee owners. 

Cons:

  • Expensive: As mentioned above, most franchises require a minimum net worth as well as substantial franchise fee. Startup costs can easily hover around $200k, even for a small 24 hour gym. Most trainers or first-time entrepreneurs won't have the cash or equity to pursue a franchise. That's primarily why you see multi-franchise owners with a background in business or a history of franchise ownership in other industries. 
  • Monthly Fees: Some franchises charge you a flat monthly fee of around $500 while other franchises charge you a percentage of sales. In addition, they'll also charge you a fee for website hosting, security, etc. Although initially they don't sound like much, they will add up. If you do a search on the internet for unhappy franchisees, the number 1 complaint is the amount of monthly fees they pay to the franchisor. 
  • Restrictions: People forget that you are buying a business in a box, not new car where you can pick the features you like and disregard the features you don't like. Because the franchise is a system, the franchisor is very restrictive on who you can purchase equipment from, the prices you offer, the marketing you can do, etc. They're selling you a completed puzzle, and you can't remove the pieces you don't like. It is the franchisor's job to make sure its franchises are similar in appearance, price, and service no matter if the client is in California or New York. The system has been proven to work so you can't change it no matter how great ideas you have.  
  • Robotic: Because you're buying a business in a box, it's harder to create a unique company culture that to many makes entrepreneurship so attractive. Other than the fees franchises charge, this was the biggest drawback for me personally. I enjoy creating, testing, and putting my own stamp on things. A franchise system was too limiting to me. I didn't want to be just a manager. 

A lot to think about right? 

It almost reminds me of the Mac vs. PC commercials. The studio gyms seem to be what all of the cool kids are doing. If you're friends with a bunch of fitness professionals on social media, it's all you'll see. Franchises seem to be the old, boring PC, still profitable and growing simply because the industry is growing, but not nearly as cool or edgy. 

 

Which one would you start? 

 

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