In the second of our article series providing legal guidance for those in the fitness industry, we’re sharing more advice from Scott McKenzie from Mills Oakley. This time he’s focusing on 12 things to watch out for when buying or selling a health club.
Buying an existing gym may seem like a relatively simple process; however there is a significant risk that the investment may turn sour if either:
- appropriate due diligence is not carried out; or
- a sub-standard sale contract is entered into.
For a purchaser, it is important that you know exactly what you are buying. For a vendor, it is very important to understand the key items that the purchaser will be looking at and to optimise the value of the business prior to sale.
Some of the ‘big ticket items’ in sale transactions include:
- The historical financial data of the business. We would ordinarily expect the vendor to provide some degree of comfort to the purchaser (via the sale contract) in relation to the accuracy of the financials of the business.
- Existing membership contracts in place and whether their terms and conditions are desirable. For example, you must be careful to not inherit liability for membership contacts which are non-compliant with legislation and / or you may wish to overhaul the membership model.
- Existing employment contracts. Given that personal trainers are often a key source of recurring revenue, it is important to ensure that appropriate and enforceable employer protections are included in their employment contracts (e.g. cascading restraint clauses). You should also consider whether the people working in the gym are in fact employees or independent contractors.
- Concentration of competitors in the surrounding region and whether there are any newly established gyms due to open after the sale is complete.
- Lease / property due diligence, including the terms of the lease, landlord consent provisions, make good obligations, operating hours and rent review mechanisms (to name a few).
- Assessment of the safety and suitability of any gym equipment being purchased. This is a critical aspect of minimising any potential future exposure.
- Parking facilities. Inadequate parking can stifle membership growth and cause issues with neighbors and the local council.
- The adequacy and cost of current insurance arrangements, including levels of cover and premiums payable.
- Litigation history. This includes considering whether there are any current, pending or threatened litigation, arbitration, mediation or other dispute resolution proceedings which have been brought by or against the Vendor.
- Existing banking and finance arrangements (including the nature of any registered security interests).
- Intellectual property. Whether any trademarks have been registered and whether there have been any actual or claimed infringements by competitors.
- Licenses and permits. Ensuring that they are valid, have been complied with and there are no circumstances which might prejudice the continuance or renewal of any such licence or permit.
If issues with any of the above matters are identified, then it is worth engaging with the other party and discussing how any risk should be appropriately covered off in the legal documentation for the sale. Carefully tailored provisions are often required to ensure that both parties are comfortable to proceed.
Conducting due diligence and getting the legal documents done properly are the legal equivalents of leg day. They are often overlooked, massively under-appreciated and failure to do it results in sub-optimal outcomes.
To read the first article in this series – Membership contracts: How to protect your club – click here.