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Diagnosing Financial Failure at Your Health Club

Keep your club healthy by recognizing the symptoms of bad business.

Many business decisions can lead to a club's downfall. Some decisions can come before the club grand opening, some can come after. Either way, the decisions can turn an energetic club into an empty facility with boarded-up windows.

Although it's difficult to tell how many clubs go under annually, small businesses do close with alarming frequency — and many clubs fall under the small-business category. According to the most recent statistics from the American Institute of Small Business, 590,000 new small businesses were started in 1999. At the same time, 530,000 closed.

Don't let your club become one of these casualties. To help keep your business alive and well, Club Industry asked the experts to dissect the practices that frequently cause clubs to fail.

Diagnosis: Bad Location

Location, as they say, is everything, and the wrong location can be the “kiss of death” for a club, says Bruce Carter, founder of the Longmeadow, Mass.-based consulting firm Optimal Fitness Systems.

Location means more than just the club's address (although an operator probably shouldn't settle for a facility hidden behind several storefronts off a rural country road 10 miles from the nearest neighborhood). Rick Caro, president of the consulting firm Management Vision and part-time chair of Spectrum Clubs, points out that an operator should also take into account the demographic density of the area. In other words, is there enough demand (i.e., prospects) to match the club's supply?

To answer this question, consultants and other experts can analyze the potential location and determine whether the area will bring success or failure. Unfortunately, club owners skip this step, looking at price instead of nearby demographics.

“What happens is people will choose a site because of very low rent,” explains Joe Cirulli, the owner of the Gainesville Health and Fitness Centers in Florida.

In addition to picking a site rich in prospects, operators should look for a location lean in competition. “If you go in the same as the competition, but the competition has been there longer, why should anyone switch?” argues Cirulli.

Diagnosis: Poor Business Planning

A bad business plan is all too common with many entrepreneurs — whether they are opening a fitness club, restaurant or antique shop. This is because the entrepreneur may lack business experience to back up his passion.

Frank Margarella, the president of Premier Club Consultants in Tampa, Fla., gives this example: “People who like to play golf and have a little money think they want to open up a golf club…. They don't really understand it takes a lot of work.”

Similarly, in our industry, people passionate about fitness may decide to open a health club. Yet they may not have the slightest idea what a functional business plan entails.

“They think that the club is driven on fitness, but it's not,” Carter says. “It's driven on business.”

And that drive includes a sound business plan. In fact, companies with business plans are 50 percent more likely to succeed than those without one, according to Max Fallek, director of the American Institute of Small Business.

Potential entrepreneurs who don't know how to put together a business plan can still open a club — as long as they work with someone with the proper education and experience. Operators new to the business of operating a club should hire senior staff with plenty of expertise, Caro recommends.


Diagnosis: Inadequate Capital at Launch

Ill-prepared club operators can suffer from a number of financial constraints during the business's early days — all potentially lethal. “This might mean that they had inadequate capital to complete the hard costs [of opening the club],” says Caro. “Or they finished it, but they finished it poorly.”

Consider this scenario: An entrepreneur envisions a 60,000-square-foot, high-end, multipurpose club, but then finds she can only afford a 10,000-square-foot, fitness-only gym with no amenities. Unfortunately, her marketplace is already saturated with small, fitness-only clubs, so her 10,000-square-foot facility won't be able to compete. Therefore, she decides to go ahead with her initial ideas, but borrows too much money from the bank in order to launch the business.

The day the club opens, the owner is already over her head, and she can't hope to cover the cost of the club. Soon, the facility and its equipment begin to look unkempt. Members start leaving. This is the beginning of the end.

Most owners should expect to make back their initial financial investment within 12 to 18 months of opening the club, Caro claims. However, operators who don't include savings to help them through the first few years may never survive.

The morale: Budget wisely and realistically. “Most people get so giddy about their clubs' success that they become overly optimistic about the budget,” Margarella explains. “Most developers understand the first year or the first two years are not going to be financially lucrative or [will] even be in the red ink.”

On the plus side, clubs that make it through those first two critical years triple their chances of survival, according to Margarella.

Diagnosis: No Reinvesting

In addition to setting aside enough capital during the club's infancy, operators must earmark money for crucial reinvestments later on. Clubs need to reinvent their look every three to five years to remain a player in the fitness industry, according to Carter.

“One of the main reasons that clubs are going out of business is because they're not updating — they're not remaining competitive,” he says.

Owners who don't adequately prepare their budgets for reinvestments may witness waning retention and membership sales. “If you're the same club five years later, you're dead in the water,” says Dan Horan, co-owner of Hatfield Athletic Club in Hatfield, Pa., and a board member of the Delaware Valley Alliance of Health & Sportsclubs. “You need to have enough money for the initial investment as well as for reinvestment.”


When clubs become “dead in the water,” it's only a matter of time before they get eaten. As Margarella points out, “It's a shark pit out there.”

If you don't want to be chum, don't be complacent. Most clubs are, according to Margarella.

“Clubs don't stay up with the times,” he explains. “They don't challenge themselves to be on the cutting edge.…”

To keep your club's business razor sharp, clubs must invest in regular upkeep, such as adding new equipment. Owners also need to consider their club's “look.” Even something as simple as a new coat of paint can reinvigorate the atmosphere.

Sometimes more drastic measures than fresh paint or new equipment are needed, however. Carter describes how he “reinvented” one failing club, and subsequently saved it from extinction. He had the facility redecorated, re-equipped, re-carpeted and re-painted. In addition, he updated the marketing and sales systems, plus he streamlined the financial controls.

Reinvention may apply to people as well. Carter once consulted with a club that was doing badly, yet the staff resisted change.

“I had 33 people, and I fired 31,” he says. “We needed new blood.”

Diagnosis: Failure to Evolve

During the course of a club's life-span, its demographics and market will probably change. If clubs don't change too, they risk failure.

“Sometimes you have to evolve into something else,” says Cirulli.

Cirulli speaks from experience. During the course of his career, Cirulli watched six clubs where he had been employed go out of business. This was because the clubs didn't budge when market conditions shifted.

“Doing nothing will kill business,” Cirulli says.

Just as Cirulli has seen inaction destroy clubs, he has seen evolution save clubs. He offers this personal example: One of his clubs drew most of its membership from the student body of a nearby university. He learned that the school planned to open a new, state-of-the-art recreation/fitness center — free for students. This new competition could destroy Cirulli's club.

“I had to think about the worst-case scenario,” he remembers.

Cirulli considered turning his club into a rehab center if he lost much of his student clientele. In the end, however, he saved his business by raising member prices. Why?

“If I was going to get less people, I had to get more money [from each person],” he says.

Diagnosis: Killed by Competition

A big part of remaining competitive is, in fact, understanding your competition. As the old proverb states, “Keep your friends close at hand. Keep your enemies even closer.”

While the neighboring club down the street isn't your enemy, you should still keep close tabs on it. You can take a long, critical look at the competition by paying the club a visit. Your staff can visit too. However, don't just go into the club looking for flaws.

“Most of the times you go snickering around about the things they're doing wrong, but that's easy to do,” Margarella says. “Go look for things that they do right that you're not doing at all.”


Besides taking a look at the competition, take a look at yourself. In fact, hire a fresh pair of eyes to examine your club. Arrange to have a consultant or even ask a respected industry friend come into the club to take a trial membership.

Since employees tend to be on their best behavior when the boss is nearby, the person should come into the club when you aren't around — just to see what the club is like when you're not there. The goal is to have the person report the things your club does well — or the things that need improving — with an unbiased view.

When inviting this sort of scrutiny, club operators must be willing to accept criticism. “They really have to be open to what mistakes they may be making to be open to the solutions,” says Carter.

Diagnosis: Lack of Niche Marketing

Lack of niche marketing is synonymous with suicide. Small clubs that try to compete with large, low-priced chains and not-for-profits by offering the same services at the same rates are killing themselves.

When faced with big competitors that sell inexpensive memberships, small clubs should differentiate themselves and find a niche. Operators can look outside the fitness industry for examples of successful niche marketing. Consider the restaurant business.

“Think about all the restaurants there are,” Cirulli says. “If there was just one kind of restaurant, they'd go out of business. If you're not the biggest [club] in town…, you just have to become something different.”

For instance, if you open a club in an area predominantly populated by large, coed facilities, perhaps your club should cater to women only. Or if the competitors draw single men and women, gear your programming toward families.

Above all else, offer personality. “Provide an exciting, beautiful, motivating decor,” advises Carter. After all, many chain clubs and not-for-profits feature a “generic” look, and offer standardized programming, according to Carter.

This standardized way of operating can offer small clubs an edge. The typical small-club owner doesn't need to answer to a board of directors. She can change hours of operation or implement new services that the competition doesn't offer — without setting up meetings or waiting for approvals.


“You have the ability to make instantaneous decisions and break the mold, and think outside the box,” Margarella says.

Another advantage for small-club owners: People may feel insignificant in a larger club, so they may prefer a smaller club with personal service. This can be a plus for small clubs that favor a hands-on approach.

“If you can offer more personnel or a higher level of service that [larger competitors] cannot…, then you can run with those clubs in that type of market,” Margarella states.

Diagnosis: Cheap Memberships

Membership dues are the lifeblood of a club. Yet many club owners insist on weakening this vital cash flow by either undercharging or selling highly discounted, paid-in-full memberships. These sales practices won't simply put your financial ledgers in the red; they'll make your ledgers positively anemic.

Historically, clubs that utilize monthly dues systems are more successful than those that rely on paid-in-full memberships, Horan claims. Why?

“You've got cash flow each month,” Horan answers. “You don't live and die by the sale.

“Too often if clubs do have paid-in-full memberships, they don't allocate [those dues] over the next 12 months.”

Members who pay in full can become a liability since, essentially, club owners won't be getting any money from them until next year's contract. And that's if they sign up again. Often they won't. As Carter points out, clubs with monthly dues systems in place have better retention rates than those that sell paid-in-full, long-term memberships. This is because members who pay in full for a yearly contract may come up for annual renewal at a time where they are low on funds — or on motivation. Therefore, they may not rejoin.

Members who pay with monthly EFT of credit card transfers, on the other hand, don't get annual reminders to renew their membership, and they are not forced to re-evaluate their memberships. This “out-of-sight, out-of-mind” philosophy means better retention — and more money — for health clubs.

Cheap memberships can be as deadly as paid-in-full contracts, even if the memberships come from monthly dues. And cheaper memberships are ubiquitous. Unfortunately, many clubs try to sell memberships through price-driven ads, which cheapen the image of the industry as a whole. Because the industry is perceived as cheap, clubs feel they can't compete with their competitors unless they lower their prices. But, according to Horan, club owners need to look outside this industry for selling techniques.

“People will go into a bar or a restaurant and blow $20 to $30 in an hour and not even think about it,” he explains. “Why? Because of perception.”

Therefore, clubs must teach prospects to perceive their value. Instead of selling on price, operators must sell on service and quality, Horan advises. And he should know. When he worked for a price-driven club that charged $19 a month, he saw people leave and go down the street to join a club charging $18. Cheap members are not loyal members.

As a club owner, Horan has raised rates consistently, and he encourages other owners to do the same. Don't panic and drop your prices because your competition does. If you offer more, you should get more.

“Make sure you charge what you're worth,” Horan says. “It's that low-priced perception that holds us back.”


Industry consultant Michael Scott Scudder, of Taos, N.M.-based Fitness Focus, is a big believer in raising rates. Whether just starting out or reinventing an existing business, club operators should increase prices, according to Scudder.

“If building a new club, go in with a solid, well-financed business plan and higher-than-average-in-your-area monthly dues,” he says. “Do not discount. Sell predominantly monthly dues memberships. If running an existing club and already in trouble, re-market your club, pick your niches, up your prices and stop selling cash.

“Cash memberships should not equal more than 25 percent of total revenues,” he adds.

And don't rely solely on memberships to generate profit. Clubs should also look to personal training, pro shops and other internal profit centers to make money from existing members. Do that, and your club can expect a long, happy life.

Budget Basics 101

A good business plan must include a budget. According to the Small Business Association (SBA), a start-up budget should cover:

  • personnel (salaries/wages/training)
  • legal/professional fees
  • occupancy
  • licenses/permits
  • equipment
  • insurance
  • supplies
  • advertising/promotions
  • accounting
  • income
  • utilities
  • payroll expenses

And don't forget the operating budget. The SBA outlines the following essentials:

  • personnel (salaries/wages/training)
  • insurance
  • rent
  • depreciation
  • loan payments
  • advertising/promotions
  • legal/accounting
  • miscellaneous expenses
  • supplies
  • payroll expenses
  • utilities
  • dues/subscriptions/fees
  • taxes
  • repairs/maintenance

For a step-by-step outline of a business plan, visit the SBA's online tutorial at The American Institute of Small Business also has published a model business plan (Business Plan Example) that could be helpful to club owners. For more information, visit or call (800) 328-2906.

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