FDD Talk 2019: Crunch Fitness Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Crunch Fitness franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Crunch Fitness franchise, based on Item 7 of the company’s 2019 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Crunch Fitness franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned Crunch Fitness outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of Crunch Fitness’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 average gross revenue for the 78 franchised Crunch Fitness clubs that had been open for 24 months or longer, grouped according to size (greater than 20,000 square feet and less than/equal to 20,000 square feet) and then further segregated into three groups based upon total gross revenue (upper third, middle third, and bottom third)

• 2018 average membership revenue, other revenue, total revenue, total cost of goods sold, payroll and benefits, sales and marketing, club expense, rent, total operating expense, and cash operating profit for the median performing Crunch Fitness club open greater than 24 months, for two groups of franchised Crunch Fitness clubs (those with greater than 20,000 square feet and those with less than/equal to 20,000 square feet in size)

• 2018 average annual gross revenue, monthly gross revenue, number of members, and number of months open for the 78 franchised Crunch Fitness clubs that had been open for 24 months or longer, grouped according to size (greater than 20,000 square feet and less than/equal to 20,000 square feet)

Section I – Background Information

18 Things You Need to Know About the Crunch Fitness Franchise

Acquired by Management and TPG Growth

1.  At the beginning of July 2019, Crunch Fitness announced that it was under new ownership after management of the company partnered with TPG Growth to acquire the company from Angelo, Gordon & Co. LP. Financial terms of the transaction were not disclosed, but Jim Rowley, CEO of Crunch, told Club Industry that it was “significant and we are very pleased with the outcome.” The transaction includes Crunch’s global franchising business as well as all Crunch locations, including company-owned Signature facilities.

2.  TPG Growth is the middle market and growth equity platform of alternative asset firm TPG, which owns Life Time Fitness headquartered in Chanhassen, Minnesota. Jonathan Coslet, chief investment officer of TPG, was personally involved in the deal along with Chris Kelly, who helps lead investments for TPG Growth in the consumer, retail, and education industries.

3.  Rowley added, “The big thing is that Angelo, Gordon’s private equity arm was relatively small, and now we will be owned by one of the giants in the business. It would stand to reason that it will bring a lot of opportunities.”

4.  Crunch’s new owners plan to double the size of Crunch in the next three to five years, with a focus on franchised growth both domestically and internationally as well as continuing to grow the company’s Signature properties, which are its premier clubs that offer members expanded facilities, upgraded amenities, dedicated RIDE and yoga studios, full-service locker rooms, and more.

5.  In 2009, Rowley and Mark Mastrov acquired Crunch with the private equity arm of Angelo, Gordon and began franchising the brand in 2010. Mastrov, who is chairman of Crunch, and Rowley had owned Crunch as individuals through a company they formed called NEFC Crunch. Previously, the two had built and run 24 Hour Fitness. The two also own New Evolution Ventures.

6.  After the deal with TPG Growth, the principal owners of Crunch are TPG Growth, Mastrov, and Rowley, but these other members of Crunch management are also investors: Mike Feeney, executive vice president of New Evolution Ventures; Keith Worts, CEO of Crunch Signature; Ben Midgley, CEO of Crunch Franchise; and Craig Pepin-Donat, executive vice president and partner of Crunch Franchise.

7.  Mastrov added, “With TPG, we’ve found a partner who understands our vision and industry. They have a long history of working with companies to build authentic brands, and we’re excited to welcome them to the Crunch team.”

Synergy Capital Investments Makes Growth-Oriented Investment in One of Crunch Fitness’s Largest Franchise Groups

8.  In mid-April 2019, Fitness Holdings Northeast, LLC (“FHNE”), a leading franchisee group in the Crunch Fitness network in the Northeast region, announced that Synergy Capital Investments, LLC, a diversified private equity firm based in Atlanta, Georgia, has completed a growth-oriented investment in the franchise group.

9.  Headquartered in Greenwich, Connecticut, FHNE’s mission is to launch a network of Crunch gyms across the northeastern United States. The company currently operates 18 locations in the New York, Pennsylvania, New Jersey, and Massachusetts areas, and is set to open four more locations in 2019. FHNE’s partnership with Synergy will enable the company to expand not only regionally, but also nationally through a mix of acquisitions and new development to achieve its 50-club growth plan.

10.  Bob Cooke, FHNE’s chief executive officer, will remain in his current role and continue to lead the company. Cooke said, “In seeking a partner, I wanted to find someone who shares FHNE’s ambition of becoming the largest franchisee group in the country with at least 50 clubs in its name. It was apparent during talks with Synergy that they indeed share this vision. Our alignment in culture and values will make for a long-term, fruitful partnership.”

11.  According to Murad M. Karimi, director of Synergy Capital Investments, “FHNE’s outstanding leadership team, along with leading marketing and financial analytics, have provided a great foundation to this point. It is a tremendous organization that has built exceptional clubs with top customer service for Crunch members. Its success is a result from the talented people that are a part of the Company.”

12.  Munir Karimi, chief executive officer of Synergy, will be joining FHNE’s board in conjunction with the firm’s investment. He added, “The Company’s results to date and growth model attracted our firm and we are thrilled to work alongside their group and be a part of the Crunch network. We intend to support the Company in all aspects of growth to accelerate the Company’s expansion nationally along with Latin America rights in the pipeline.”

Celebrates 30th Birthday with Sweepstakes

13.  At the beginning of September 2019, Crunch Fitness announced that it was celebrating its 30th birthday by taking 15 lucky winners and guests on a once in a lifetime trip to a private island in Belize. This amazing 4-day, 3-night #NoJudgments vacation will include: round trip flights, 3 nights accommodation on an island beach resort off the coast of Belize in beachfront villas and overwater bungalows, all-inclusive meals, daily optional Crunch-led group fitness classes, water sports and activities, traditional Belizean evening entertainment, and more.

14.  The sweepstakes was open to members and non-members. The sweepstakes ran until September 30, 2019.

Company History

15.  Crunch Fitness, commonly called just Crunch, was founded in 1989 by Doug Levine, a former stockbroker, in New York City. To stand out from other fitness clubs of the time, Levine put an emphasis on group exercises, which the company maintains today. Crunch also became popular by appealing to young upscale members and featuring heavy promotions and marketing with some humorous and sexual connotations. The company also did well by successfully promoting its logo merchandise within its clubs.

16.  Throughout the 1990s, Crunch Fitness had grown to a few locations and in 2001, the company was acquired by Bally Total Fitness for $90 million. Initially intending to double the size to 40 gyms, Bally found the business unprofitable and was unable to get out of long-term leases in poorly performing locations. In 2005, Bally’s sold Crunch to Angelo, Gordon & Co., a private equity firm, for $45 million.

17.  In May 2009, Crunch Fitness filed for bankruptcy as part of a reorganization by which it was acquired by New Evolution Fitness Company (“NEFC”), a company founded by Mark Mastrov (co-founder of 24 Hour Fitness), Jim Rowley, and some of the Angelo Gordon principals. Under the new ownership, Crunch Fitness began franchising in 2010. In July 2019, Crunch Fitness was once again sold, this time to private equity firm TPG Growth.

Entrepreneur’s Franchise 500

18.  Crunch Fitness ranked No. 148 on Entrepreneur’s 2019 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Crunch Fitness franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Crunch Fitness’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

• Outlets at the Start of the Year:  87
• Outlets at the End of the Year:  121
• Net Change:  +34

2017

• Outlets at the Start of the Year:  121
• Outlets at the End of the Year:  148
• Net Change:  +27

2018

• Outlets at the Start of the Year:  148
• Outlets at the End of the Year:  196
• Net Change:  +48

Company-Owned

2016

• Outlets at the Start of the Year:  20
• Outlets at the End of the Year:  21
• Net Change:  +1

2017

• Outlets at the Start of the Year:  21
• Outlets at the End of the Year:  26
• Net Change:  +5

2018

• Outlets at the Start of the Year:  26
• Outlets at the End of the Year:  25
• Net Change:  -1

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

• As of December 31, 2018, 264 Crunch Fitness franchised locations were open or engaged in presale activities. Of those locations, 221 locations were located domestically in the United States, and 43 locations were located internationally.

• Of the 221 locations, 213 had completed their first workout and had initiated member billing activities. Of these 213 locations, 25 locations were affiliate-related and operated within the holding structure of the Company. Of the 188 franchised locations, 78 had been open for 24 months or longer and are considered mature. The following chart represents average gross revenue in the 2018 fiscal year for the franchised locations that were mature as of January 1, 2018.

Part 1 – Gross Revenue of Franchised Units

• “Gross Revenue” is defined as all revenues you receive from the performance of all services and the sale of all products from or related to the Franchised Business, including membership revenue, both recurring dues and cash sales, personal training sales and retail sales, less any sales taxes, refunds to customers, and discounts.

• The chart has been segregated into groups greater than or equal to/less than 20,000 sq. ft. The 78 mature clubs in the table below have been segregated into three groups based upon total gross revenue (Upper Third, Middle Third, and Bottom Third).

A.  Greater Than 20,000 Square Feet

Upper Third