There are some business categories that are particularly difficult to apply a simply formula to calculate business valuation for and Massage Therapists and Spas fall into this category. Clearly the financials and the profitability come into play. Generally the rule of thumb that a Buyer will not pay more than 3 times the cash flow or EBITDA is a pretty good starting place. Expressed another way, look at 35% of annual revenues. Massage Therapists individually can be viewed as simply a reflection of monthly client income, which could be from 3-10 times depending on if the clients are repeat and transferable and also how many new clients are added. The trends going upwards or downwards for monthly income, from month to month, at best over at least 3 years, will determine where on that 3-10 continuum this multiplier might be applied. Another variable is FF&E. Furniture, Fixtures and Equipment can be added to the above multiplier but only at FMV, Fair Market Value.
This takes us more into Spas where the FF&E and location, cost of build-out and other fixed costs become a dominate factor. Valuation of Fitness Clubs, (Membership Dominated) for example, may start at one year revenue, but then be reduced by memberships already contracted and paid for.
A recent CrossFit Appraisal
This past year I was paid to do a Certified Business Appraisal and Valuation for a Crossfit Fitness Center. It was a very nice one, although the equipment was not purchased new. (Some was quite worn, but that seemed to be fine with the actual members). The value proposition was as much in the quality of the Instructor(s) and classes as in the actual revenues.
After completing the paid appraisal of the Crossfit, I was then tasked as a Business Broker to list it and sell it. It this situation, the owner happened to be Active Military. He was looking at being relocated in a few months, so time was of the essence. Because I happen to also be a Vet and a flag waving, mist up every time the National Anthem is played, patriotic guy myself, I probably put more effort into marketing this than my former branch of the service affords the other branch. Many other Crossfit owners responded to my marketing and this gave me added perspective on Value. It also was an excellent “real world” test of my assumptions in the written Valuation Report. What I learned was that existing Owners of other established CrossFit undervalued my listing even though they wanted to acquire it. (Wanted to buy it cheap) However, others who wanted to start a new CrossFit had no issue at all with my valuation, as they had already counted the cost of not only starting from scratch and buying equipment, finding a location and hiring Instructors, but also that it would take a year or more to build enough new membership to break even. Much less make a profit for an owner’s Income.
Thus the existing cash flow, multiplied by 3 was a very solid starting point for negotiations.
Interestingly, there was very little general buyer response outside of the CrossFit community. The CrossFit community itself, however, I learned is HUMONGOUS and Worldwide. This is instructive for a generic Spa, of course. It means Buyers are scarce. And if Buyers are scarce, and if the business valuation’s purpose and intent is to achieve a fair asking or strike price for a closed sale, achieving 3 times EBITDA may take 6-12 months or longer. One thing this CrossFit owner did to improve value and that I gave credit for in the valuation is to offer Yoga Classes. I’m happy to say it sold and at a fair price to both buyer and seller. And my valuation was spot on.