Opening a gym, studio, or any kind of fitness franchise is exciting. You get the benefit of a known brand, built-in system,s and support that can make the startup process smoother. But it’s still your business at the end of the day, with real numbers to understand and manage. That’s where taking a step back and asking the right financial questions becomes so important before buying a gym franchise.
Read through this practical guide to help you spot what really matters when reading the Franchise Disclosure Document (FDD), and what else you need to know before you sign on the dotted line.
Get Your Accountant In On The Numbers Early
The Franchise Disclosure Document is the giant packet of information you’ll receive from the franchisor before you can sign on the dotted line. It might look like dry legal paperwork at first glance, but it’s the playbook that tells you who you’re getting into business with, what it’s going to cost, and what you can expect.
There are a few sections that are especially important for your accountant to review:
Item 19: Financial Performance Representations = Half Truths and Omissions
This is where the franchisor is allowed to share any numbers about how their existing franchisees are performing. Not all franchisors provide Item 19 data; in fact, most of those we’ve seen don’t. But if they do, this is where you’ll find averages for sales, costs, or profit margins. The key here is to understand how realistic these numbers are. Are they based on all franchisees or just the top performers? Are they gross sales or actual take-home profit? What slice of data is being presented, and is it truly representative of what your location should expect? Your CPA can help you dig into the fine print so you don’t mistake marketing fluff for real, usable numbers.
Item 21: Financial Statements = Health of the Franchisor
This section includes the franchisor’s audited financial statements, basically their income statement, balance sheet, and cash flow. These documents tell you if the franchisor itself is financially healthy. You don’t want to invest in a brand that looks strong on the outside but is struggling with debt or losing money year after year. Let your CPA read these statements carefully to check whether the company behind the franchise is stable enough to support you long term.
Item 7: Estimated Initial Investment = Gives you a Realistic Picture of What it Costs
After you look at the franchisor’s financial statements in Item 21, the next stop is Item 7, which lays out the franchisor’s estimate of what it will cost you to open your gym. When you couple it with your own due diligence, you’ll arrive at a clear budget of what it realistically costs to open a fitness franchise.
Item 7 of the FDD presents a range of costs from the lowest a franchisee could realistically spend to the highest:
- Leasehold improvements and construction
- Architectural and engineering fees
- Furniture, fixtures, and equipment
- Building permits
- Pre-opening expenses and training
- Marketing and grand-opening advertising
- Working capital (typically only estimated for the first three months)
This cost ranges often look reassuring on paper, but the truth is that your actual cost will depend heavily on your location, local construction pricing, and the specific requirements of your brand.
For example, opening in a tier-2 Southern city may put you near the lower end of the range. Opening in Los Angeles, New York City, or any high-density metro? Expect to land at, or even above, the high end.
The only way to know for sure is to start getting real quotes for real estate, construction, and the fit-out of your facility. They can vary more than most people expect, typically around 20%. But we’ve even seen costs double from the estimate of $350,000, and end up costing more than $700,000 by the time the doors opened.
To give you a practical idea of total opening costs:
- Smaller pop-up concepts can be tens of thousands to $150,000 +
- Trendy boutique concepts and small gyms often begin around $500,000 and go up from there, depending on the complexity of the build-out and the finishes the brand requires
- Larger gyms, health clubs, and any size of aquatic facility start at $1 – $2+ million.
Opening and building out a fitness center is not for the faint of heart and requires a risk appetite. This is why it helps to work closely with your CPA to build a line-by-line budget. A good accountant will not soften the reality for you. If you’re not sure it’s the right path, it may help to read our posts on the only two reasons to open a fitness facility and the ten reasons not to own one.
Build A Conservative Cash Flow Model
One of the biggest mistakes new fitness franchise owners make is building their budget around best-case scenarios. It’s easy to get caught up in the excitement of big membership projections and glossy sales numbers from the franchisor. But the reality is that any fitness concept usually takes time to build momentum, whether it’s pilates, barre, or boxing. It takes time to build a strong word-of-mouth referral network in your community, and many new members who excitedly sign up will cancel within the first few months. On top of that, franchise royalties and national ad fund contributions are due every single month, whether or not your location is profitable.
This is why you should ask your CPA to put together a conservative 12 to 18-month cash flow model. Think of it as a stress test for your business. Ask yourself, “What if things take longer than planned?” This way, you’ll know if you have enough money set aside to make it through the ramp-up period, without running into cash problems. Here’s what a good cash flow model should include.
Payroll And Staff Costs
Fitness is a people-heavy business. Between front desk staff, trainers, cleaners, and studio managers, payroll is often one of your biggest expenses. On top of wages, you’ll also be paying payroll taxes, insurance, and possibly benefits, and most facilities begin onboarding staff prior to opening day, before any revenue starts coming in.
When it comes to staff costs, a common mistake is misclassifying staff, like treating trainers as contractors when they should be employees. This can lead to back taxes and penalties down the road.
Unexpected Sales or Local Tax
Memberships, personal training sessions, or even retail sales can be taxed differently depending on where your fitness center is located. In some states, fitness memberships are taxable just like buying a product at the store. Your accountant will check the rules in your state and make sure you’re collecting and remitting sales tax correctly. Forgetting about this in your forecast could leave a big gap in your budget.
We’ve had locations come to us from other accountants, unknowingly owing thousands of dollars to the state. Those locations had to come clean and pay the back taxes, regardless of whether they knew or not.
Franchise Obligations And Hidden Fees
Beyond royalties, most franchise agreements include other obligations that affect your cash flow. These might include minimum local advertising spends, mandatory training costs, renewal fees, or requirements to buy equipment and supplies from specific vendors. Individually, these costs may not sound huge, but when you add them all up over a year, they can eat into your bottom line quickly.
When you roll all of these moving parts together, you get a much more realistic picture of what your first year in business will look like financially.
Need Help Evaluating A Franchise Agreement?
Buying a fitness center franchise is more than signing an agreement and hanging a logo above the door. It’s a business partnership model with rights and obligations. That means it’s not just smart, it’s required that potential franchisees dig into the FDD, build a realistic cash flow model, plan for payroll and taxes, and know the hidden obligations that can chip away at profits.
It’s a lot to juggle, but you don’t have to do it alone. Working with a CPA who knows the fitness industry can give you clarity and confidence, whether you’re evaluating a franchise opportunity or managing the numbers after launch.
If you’d like an experienced partner to help you make sense of the financial side of owning a gym or fitness center, get in touch with The Fitness CPA! We’d be happy to walk through the details with you.
You can get in touch with our team by filling in our Getting In Touch page here.
Fitness is such a big part of who I am. Maintaining a healthy lifestyle, eating well (mostly paleo), hiking, backpacking, mountaineering, practicing yoga and Crossfit are all important cornerstones of life. But I love ice cream and cookies too much to say no!
I love helping owners make sense of their business and finding ways to grow it. It’s an honor to help you see situations, scenarios and opportunities from all sides so you can make informed decisions.
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