The Takeaway: A Q&A With Jeremy Hirsch on the Fitness Sector

So, we’re a good couple of years out of the pandemic, during which we saw some interesting new trends in the fitness sector. How has all that shaken out? What does the sector look like now?

Well, a couple of things happened. During the pandemic, a lot of the less well-capitalized operators had to shut their doors because they weren’t able to really sustain, and that’s across the traditional fitness landscape as well as across boutique operators. Something like 30% of the market, in terms of unit count, essentially shuttered. 

What that meant was the stronger operators that survived became stronger, and that dovetailed with another ancillary effect: people came out of the pandemic more focused on health and wellness. People are actually working out more post-pandemic than pre-pandemic. 

What is also interesting is that how consumers work out has also changed. The move toward at-home during the pandemic means that now they are working out a couple of days at home and two or three days at a gym. But that means their spending habits have also changed as well, because many consumers are spending money on home equipment and, as a result, don’t do 100% of their workouts at the gym anymore. In terms of operators, the clear winner coming out of the pandemic has been the HVLP category, which stands for High-Value, Low-Price. 

That’s the experience priced between $10 and $39 (with $10 quickly becoming $15), which I might add is also a low recurring charge for a lot of people, so they are more likely to keep it. So, when you look at the Planet Fitnesses of the world, the Crunches of the world, EōS, and Chuze, that’s where a lot of the growth has been happening. 

Interestingly, and more recently, I’m starting to see what I call HVLP 2.0 or Premium Value, which is the bottom portion of the mid-price sector. These subsectors are also really starting to grow because consumers want more amenities and value for their money. We are working with a number of companies now that fall into that subcategory, and we’re seeing more interest and, frankly, some pretty robust processes around those marginally higher-priced, 2.0/Premium Value assets.

Interesting. We’ve seen a slew of deals come to market recently, and it sounds like the pipeline is pretty strong from Houlihan Lokey’s perspective. What do financial sponsors like about the fitness sector? What is attracting them to this space?

Well, starting at a high level, people obviously like the general health and wellness trends, right? So, from a tailwind perspective, that’s a space that people want to be in. Drilling down a bit further, it’s the recurring nature of these businesses and the fact that many of them are on a membership-based model that is attractive as well. More specifically, in terms of what buyers are really focused on in terms of key attributes, I would say they’re focused on the experience. How does that experience differentiate itself? Are the facilities well-maintained with a modern and broad offering of equipment and classes? Does this option deliver a good value?  

In something like group exercise, what does user advocacy look like? What kind of net promoter score do they have, and how does that compare to the competitive set? That’s all about trying to answer the question of what’s the strength of intent to remain a member, right? Those are some of the key factors that users and potential buyers are looking for. 

I’d say, lastly, what is the likelihood of retaining a membership in a downturn? Those are some of the key factors outside of the usual analyses—the strength of the business, the financials, unit performance, and that sort of thing. 

Looking back over the past year or so—and some of the headwinds we saw before—tight financing, the interest rate environment, and disparity in valuations , have dissipated. What is still hindering the market, or is the dynamic overall relatively  healthy?

Look, it’s healthy, but lenders are focused on getting their capital back and that capital being protected. I think, unfortunately, there’s been a slew of bad experiences that folks have had in the past around fitness, and there’s a landscape of case studies around it. As a result, leverage kind of gets maxed out for these types of businesses. The other element is that there’s a capex component to maintaining those facility standards I mentioned earlier—that both members and investors like a well-maintained facility, modern and varied equipment, and things like that. 

These businesses are required to kind of continually refresh these locations, and lenders are not thinking only about EBITDA, right? They’re thinking about EBITDA less capex, right? So, there’s obviously a cash flow impact on that, which ultimately impacts the level of leverage that they’re able to offer and get comfortable with. 

Looking out to the remainder of the year and maybe going into 2025, what’s your outlook for M&A activity in the fitness space?

We are bullish. There are a lot of platforms out there that are starting to think about going to market. There are a number in market right now—bigger names in the space or deals that have just closed, notably Mountainside Fitness, Solidcore, and the second-largest Crunch franchisee. You have EōS Fitness, which is thinking about an IPO in the next 18 to 24 months, and we haven’t had a fitness IPO in some time. 

Buyers are going to be really focused on the white space of a concept as well—where a good concept can go and how far it can travel, so to speak. You might have a local or regional concept that does really well in its market. Can that concept travel to another market? A sponsor wants to feel like they can really scale this thing, so making sure that the portability checks out will be key to selling the value proposition to the investor world. 

So, what’s The Takeaway?

M&A in the fitness sector is likely to remain healthy, with the HVLP, HVLP 2.0, and Premium Value assets attracting the most interest due to the actual value that they offer within the box for the price. Pandemic and post-pandemic shifts in the way people prioritize health and wellness and how they work out will continue to support the long-term growth of the sector. 

Beyond the usual financial analyses, financial sponsors will be looking for strong recurring revenue, differentiated experiences, user advocacy, and resilience in a downturn, particularly the resilience of a company’s membership base.

Another key consideration will be how well a fitness concept can travel to other markets or otherwise be scaled up. Private equity is always looking to grow the companies in their portfolio and scale up the benefits of a successful business model.