Are Fitness Franchises Profitable? (Sales vs EBITDA)

Fitness franchises have become very popular businesses in recent years. 

It can be assumed that, given their popularity, fitness franchises are profitable businesses to own. In this tutorial, we will be diving into the profitability of popular fitness franchises in the United States.

Are fitness franchises profitable?
Yes, if the franchise can earn adequate sales revenue and keep costs low (variable costs and fixed costs such as salaries, rent, utilities, debt) this will result in net income (profit). In this case, a fitness franchise can be profitable. 

When we discuss profitability, the traditional measure for this would be net income. Net income is the true measure of profit as it is the amount of money left after all expenses, taxes, and debt have been paid.  

Unfortunately, due the high variability of taxes, rent expense, advertising expense, debt, and other metrics, it is tough to nail down an exact measure of net income for individual franchisees. 

And for a variety of reasons, most franchisor’s don’t publish their franchisee’s financial statements. Most often though, they may report aggregate data, often in the form of sales revenue collected to show how much a location might earn in total sales revenue, on average. But sales revenue is not a measure of a fitness franchise’s profitability.

A fitness franchise’s most common measure of profit: earnings before interest, taxes depreciation and amortization (EBITDA)

However, we were able to find some solid data on EBITDA and gross profits in some franchisor’s FDD filings about individual franchises’ financial statements. 

EBITDA or Earnings Before Interest and Taxes plus Depreciation and Amortization is an extremely important measure when determining the profitability and invest-ability of a business. 

To find out why, let’s break down EBITDA and what it means: 

• Starting with the E for earnings (net income), this means that EBITDA is heavily reliant upon net income. 
• Next is the I or interest expense — this is the interest you pay on business debt and it offsets your taxable net income. 
• Skipping T (for now) and going straight to D & A (Depreciation & Amortization), both are non-cash expenses that also offset your taxable net income. 
• Last is T or taxes which are based on net income. 
• So, as a review, EBITDA is Net Income + Interest expense + Taxes + Depreciation & Amortization (non-cash). 
• This makes EBITDA one of the best measures of free cash flow for a business.

So, when measuring the profitability of an investment like a fitness franchise, we need to look at cash flow. And to measure net cash flow to the franchisee, we will be looking at EBITDA.

Looking at these measures, the answer is yes, owning a fitness franchise is profitable for franchisees in many cases, as long as they keep their cost structure low and their sales revenue high.

In the rest of this tutorial, we will be discussing average expenses, cash flow, and profitability of fitness franchises based on official FDD filings.

Measures of Fitness Franchise Profits: Sales and Expenses

Let’s start with sales revenue, the first measure of profitability and arguably the most important. That’s because if you are not making enough sales to cover expenses, the other measures do not matter. 

We can find significant, reputable data on average yearly expenses and revenues of national fitness franchises. Here is a sample breakdown of the average sales and expenses of some major fitness franchises (per location) to help estimate the profit of some fitness franchises:

As you can see, many of these expenses are highly variable. Most of this variability comes from different franchises requiring different amounts of space, equipment, and are more niche so they have less sales revenue. 

Although, as a general rule of thumb, the franchises that have an average lower sales revenue have lower average expenses which may or may not contribute to more net income. It really is a case by case scenario.

Controlling Expenses

For the last section of this tutorial, here are some of the more impactful, individual expenses that you may incur as a franchise owner and how they will affect your net income and EBITDA.

Fixed Costs

Fixed costs are costs that are fixed amounts that stay the same month after month. Examples of these expenses include utilities, insurance, rent/lease payments, and payroll expenses. Fixed expenses are important expenses to keep in check because they can not be easily lowered.

Some of these expenses are non-negotiable, such as utility expenses. But, by shopping around for different locations for rent/lease, insurance policies from different companies, and not hiring unnecessary employees, you can keep your fixed expenses low. Your franchisor should have some options to help you keep your fixed costs in check. Keeping these expenses low will increase your monthly cash flow along with your EBITDA and net income, giving you more money to take for yourself or re-invest back into your business.   

Debt

Similar to keeping fixed expenses down, keeping your debt payments low is also imperative. While it may be tempting to buy the most expensive, top-of-the-line equipment as soon as possible and financing it, this significantly hurts your bottom line. 

The more debt that you take on, the higher your monthly payments, and therefore the lower your net income and EBITDA.

Another tip with debt is to get the lowest interest rate as possible. If you have to finance equipment, shop around at different lenders and pick whichever gives you the lowest rate. Even a .1% lower interest rate can mean thousands less in interest expense over the life of the loan.

Owning a fitness franchise can be a profitable investment, especially if it is managed correctly. 

Several franchise’s data shows that they are able to generate significant, regular revenue and if the franchisee can keep expenses low, this may be a recipe for success. With proven business models, fitness franchises can be a profitable business for the right franchisee.