The Club Operator's Guide to Consolidation

As the former owner/president of Highpoint Athletic Club in Chal-font, Pa., Frank Napolitano has experience in selling a club. His own. Recently, Highpoint joined Town Sports International (TSI) and became a Philadelphia Sports Club.

Now TSI's vice president of special programs, Napolitano claims that he looked for three things in a buyer-and recommends that potential club sellers do the same.

First and foremost, look for honesty and integrity. "You can't do a good deal with a bad person," he says.

Second, look for a buyer with clubs that fit culturally with your club. "A cultural fit is having the same business philosophy and the same business modus operandi," Napolitano says.

Finally, you want to look for the buyer offering the highest price.

Some club operators may want to arrange these three things in an order that suits their own style. However, if you are dedicated to your employees, you must put your priorities in the order Napolitano listed. By giving greater consideration to honesty, integrity and a cultural fit, you put your employees in the hands of the best possible owner.

If you're interested in selling your club, you may be tempted to seek out potential buyers. Napolitano believes that you are in the best position when a buyer approaches you. He adds that you shouldn't operate the facility as if you were going to sell it. "You take your eye off the ball of running a business well," he says.

By running your business well, you can enhance your club's value-and, thereby, increase your sales price. If this means turning away potential buyers until your strategies are firmly in place, so be it. For example, say you just invested a substantial capital outlay into construction. This will lower profits in the short term, but the work will eventually pay off. Therefore, you don't want to sell the club immediately after construction; you want to wait until the club experiences the benefits of your investment. Remember: You are in the best position with a profitable club.

Indeed, a buyer will want to know exactly what kind of profits your club is generating. That's why due diligence is such an important step during an acquisition. As a seller, you can't do much once due diligence begins. Therefore, you should be worrying about the condition of your books long before you open channels of communication with a buyer. "Run a business with clean and accurate financial information from the beginning," Napolitano says.

While the buyer will do due diligence on you, you should do the same on the buyer. If the buyer is a club company that has been required to file with the SEC, then the financial information you want is generally available. Even if the buyer hasn't filed with the SEC, you should ask to have a look at its books. Naturally, the buyer won't disclose everything, but a flat-out refusal to share anything is a good sign to pull out of the deal, according to Napolitano.

There are a number of reasons why you, as a seller, would want to do due diligence on the buyer. If part of the sale includes stock and things other than cash, then you must know the financial shape of the buyer. What's the point of having stock in a company that could fold at any moment? Even if it's a cash deal, you still may want to do due diligence-to make sure your employees are becoming part of a strong, thriving company.

In addition to due diligence, the final stages of an acquisition include all kinds of paperwork. That's why Napolitano offers one simple, parting piece of advice: Get a lawyer. "Competent legal advice is absolutely critical," he says, "even if you are a lawyer." After all, you want somebody to make sure you didn't miss anything.

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