HALO Talks Fast Break: Navigating Franchise Growth-Greenfields, Acquisitions, and Scaling Fitness Brands with Private Equity

0:00 So Mark, maybe take a couple of minutes and explain to everybody when you started with the Crunch what you built and then how do you think about greenfields versus acquisitions as you build out the platform with your private equity partner? Sure. So I joined Crunch fitness back in 2018. Prior to that I owned a small independent brand. We had about nine clubs, which I had only sold two Fitness holdings at the time. Fitness holdings had about eight clubs. They were one of the early fitness franchise groups within the Crunch system. And so I kind of looked at it coming from the northeast, dealing with Planet Fitness. Crunch started to make their ways blink. Fitness was making their waves and as an independent operator I just said, you know what, I think I better join them than keep trying to fight them. And so I ended up ultimately sold to Fitness holdings and joined Crunch. And at the time I looked at it as maybe a one or two year old rest invest period. You know, as we migrated from our train into the, the Crunch ecosystem. Fast forward 2020 comes along, Covid strikes and our PE firm decided they wanted to make some changes with the management team and ultimately I became the CEO and you know, back, you know, took over probably in 21. And we had probably about 20 to 22 clubs at that time. And obviously since that time you can see our territory, we've grown. We currently have about 52 locations, we're in 10 states and our

1:30 goal is to really grow from the 50 that we're at today to 100, 150 with the development rates that we have growing from Tennessee all the way up to Maine, Vermont. So I'm going to go back two slides here and let's take a look at this. A lot of the Crunch logos that are in the top left hand corner are all ARI developers. So the way an area developer agreement works for everyone's knowledge here in Crunch is you get a territory, you pay a fee to own the exclusive rights to that territory and you can't sub franchise it. You actually have to build and hit milestones on your own in order to keep that exclusivity. So Mark, when you take a look at trying to potentially do acquisitions and you and I have done a couple and somebody knows, hey, I heard that the Crunch area developers are trading at 9 to 11 times EBITDA. I've got one club in South Jersey. How about you pay me 9 to 11 times my club level EBITDA? Yeah, we get that a lot. Especially when we do like roll ups of other, you know, smaller Crunch clubs. And, and I think, you know, ultimately it comes down to having a real conversation. And you know, and I like to say is that, hey, we're not the same. I know we both have crunches and you see some of these crunches that are trading at 10x.

2:45 But you know, you're a single operator, you have one club, you don't have a lot of development space. I think development space is key, especially in the franchise system in terms of how much can you grow. And you know, ultimately it's a, sometimes a tough conversation to say, hey, look, you know, we're a hundred million dollar company, $20 million of profit, we have room to grow to 150 locations, you're a single club or two clubs, you don't really have a lot of Runway. We're not the same. But again, this is a good return on your investment. And so when we're looking at, I mean, one of the big discussion points that we have, obviously when we're looking at an acquisition is strategic. What does this mean and do we want to go into this market and what does that open up to us? Right. Obviously the ability to take a competitor out of our space is huge. Right. I mean, at the end of the day, we all think we're going to open this brand new shiny club and everyone's going to migrate from this gym to our gym. But the reality is that's not always the case. And so, you know, the ability to take a competitor out is definitely something that goes into the equation.

3:47 But yeah, you also have kind of the build versus buy, you know, so you have to do that math and say, all right, if I'm going to buy this club and it's going to cost me 2 million to buy the club. And then you know, obviously as a, as a franchise, we have branding that we need to do. We have to, you know, certain things that we'll have to rebrand. New signage, new equipment, new amenities, all of that stuff. So if I look at that and I say, well, it's going to cost me another 2 million to rebrand it. Now I'm at 4 million. Well, heck, I could go build a brand new club for two and a half million. And so, you know, that definitely becomes that calculus of build versus buy that you have to take into effect. So one of the things I did was how do you finance a deal, right? So if you take a look, it's a million dollars, say it's a million dollars to open up a store for Orange Theory Fitness. How do you finance that if you don't have a million dollars? Right. So certainly SBA loans were a piece of that if I didn't have the rest of the cash, I would go out and find a partner or two partners to put some cash in.

4:46 And remember that what I brought to the table was the expertise. So I had to put a little bit of cash in. They had to put more cash in. But I brought the expertise to the table. And then I would typically sign a guarantee for the lease and I personally then would guarantee the equipment lease. Right. And so that's how I would finance. Then we would get some ti money back of course from the landlord, but that's how I would finance. But I, I mean I was on the line until we did the private equity deal. Pete. I personally was on the line for, you know, 15, 20 locations with 10 year leases. I mean it was a lot. Do the math. So people know $20 million? Yeah, I mean it's, it was every bit of that. I mean I, yeah, I mean, yeah, our leases will be anywhere from, you know, 30, 30 to 50,000amonth and you have a 10 year loan. So each new location might be, you know, 3 to 5 million dollars.

5:37 Yeah, so. So as you add up and being an entrepreneur and then when, you know, I hear certain people saying like we should tax more, you know, small businesses or we should go after people that make money. The amount of risk that's taken to build a business is so extreme to create the jobs that are being created that it should be rewarded at the end and not vilified. The one thing I want to talk about related to Orange Theory, when you, I used to ask you on your, when we did a deal with, with Clearlight, you had a saying of, they said, hey, how fast can you grow? And you gave your, your, your, your microwave crock pot. If you could kind of talk about that quote, which I love. Yes, I, I think, you know, when you talk about. One of the things we were talking about also is, and I think there was a earlier conversation of how many stores do you own versus in our model, the franchise model is the franchisor, an area developer and a franchisee. As an area developer, we have the option to sell or sell additional.

6:32 We call them sub Zs or sub franchises within a given market territory. So what's the ratio? If you look at that up there, you probably see about 133 locations that were under my umbrella. I owned about 50% of those. But that wasn't originally the goal. Their goal was to actually own about 2/3 of them. And then all of a sudden what happened is from 2015 through 2019, there was this frenzy going on around Orange Theory Fitness, and everybody was bombarding me.