Curves Franchise 2

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Introduction This team has chosen to take a financial look at what it would take to start up a Curves gym franchise. Every Curves gym franchise is franchised by Curves International, Inc. located in Waco, Texas. Curves is the largest fitness franchise in the world with nearly 10,000 locations worldwide. Curves clubs can be found in more than 85 countries. Curves gyms are womenonly gyms which provide a 30-minute workout to help women lose weight and become fit. Each gym provides members with a workout, called the circuit, which is comprised of resistance machines that give members a complete cardiovascular as well as strength-training workout in only 30 minutes. Identifying Costs Start-Up/One-Time Costs (total: $44,620) Franchise Fee and Delivery To initiate a Curves gym franchise, the franchisee will have to pay a franchise fee. The fee, based on the population of the territory you are providing services to, includes all the equipment (resistance machines) that your club will need to provide members with the circuit workout. Additionally, the franchise fees also includes advisement from the corporation as to methods of training staff to work in and assist in operating the franchise, assistance in the planning of office design showing the best location of equipment for efficient use of equipment and utilization of space, as well as advice as to the promotion and advertisement of your franchise. Since we intend to open our franchise in the Chicagoland area, our franchise fee will be $31,900 based on a population less than 10,000 people. Additionally, a delivery fee of $2,350 will also need to be paid for the delivery of the equipment. Other Start-Up Costs

We have also identified other start-up costs associated with opening our gym. To update our dcor, we will need paint our space, install new carpeting, install a new counter, install wiring for speaker wires, and purchase a table and two chairs. Costs for dcor are estimated at $3,180. We will also need to send the manager for a 4 day required training class in Texas. While the training classes themselves are provided by the corporation, any expenses incident to attending the training (meals, travel, and lodging expenses) are to be paid by the franchisee. We have estimated these costs to be $1,500. Other start-up costs include office supplies and other miscellaneous supplies. We will need to purchase a stereo, a new computer, a fax/copier/printer/scanner, phone, a vacuum, as well as a refrigerator for staff. These costs are estimated at $1,580. Additionally, a $2,000 security deposit for the rent of our office space is also needed. Finally, we will need to purchase a new sign for the front of our office space priced at $1,100 as well as advertisement in the local newspaper to promote the new gym ($300). After year 1, our miscellaneous costs will be $710 for years 2 through 5. This is for upgrades to our computer software, attorney fees, and insurance. Fixed Costs (total $81,080) Fixed Costs are costs that the company will occur independent of any sales (Investopedia, 2011). Our total Fixed Costs (FC) is estimated to be $81,080 and will remain fixed throughout the five years. These fixed costs include $18,580 in rent and utilities (internet, water, gas, electric, and phone) for the year. The Fixed Costs also include salary wages for a full-time manager ($30,000/year), a full-time trainer ($23,000/year), as well as a part-time student ($9,500/year).

Variable Costs (total for year 1: $12,500) Variable costs are costs that vary directly with amount of sales (InvestingAnswers, 2011). Our yearly variable costs consist of costs for office supplies as well as an advertisement and royalty fees that are paid to the corporation. For year 1, we estimate office supplies at $500 with a 2% increase in years two through five. The advertisement fee is 3% of monthly sales. We have estimated this fee for year one to be $4,500. This was calculated by dividing total sales for the year ($150,000)/12 =$12,500 in monthly sales. We take 3% of this value and we get $375 per month. The total yearly amount for the advertisement fee is $375 * 12 = $4,500. For years 2 through 5, the advertisement fees will be $5,400, $5,448, $5,340, and $5,388 respectively. The royalty fee is 5% of monthly sales. Again, for year one we divided the yearly sales ($150,000)/12 = $12,500 in monthly sales. We took 5% of this value and we get $625 per month. The total yearly amount for the royalty fee is $625 * 12 = $7,500. For years 2 through 5, the royalty fees will be $9,000, $9,084, $8,904, and $8,976 respectively. Total variable costs for years 2 through 5 are $14,910, $15,052, and $14,774, and $14,905. Proforma P& L Selling Price The calculated Selling Price (SP) for years 1 and 2 is 50.00/month. In Year 3, there will be a 3% increase in price ($51.50/month). In year 5, another 3% increase will take place accumulating with a final price after 5-years at $53.05/month. Quantity This project assumes there will be 250 active members in years 1 and 2 with slight decreases in the amount of members in years 3, 4, and 5. Quantities (QU) is figured by taking the total number of members and multiply it by 12 to get the total monthly memberships that are

paid throughout the year. For instance, in year 1, we have 250 members. To find QU, we took 250 * 12 = 3,000. Sales Sales are calculated by multiplying the QU by the SP for the same year. For year one, the QU is 3,000 (250 monthly memberships * 12 months) * $50 (SP) making total sales $150,000. It could also be calculated by SP * monthly memberships * 12 ($50 * 250 * 12 = $150,000). Sales will increase for years 2 and 3 and have a slight decrease in years 4 and 5. This decrease is due to the decrease in overall memberships for those years. Total Variable Costs The Total Variable Costs (TVC) was reached by adding the costs for the advertising fee, royalty fee, and office supplies for each year. Please see Variable Costs section to see how these costs are calculated. For year 1, the TVC is $12,500, year 2 is $14,910, year 3 is $15,052, year 4 is $15,194, and in year 5 the TVC is $15,325. Variable Cost per Unit Variable Cost per Unit (VCPU) is calculated by taking the TVC and dividing it by the QU. For year one, the VCPU will be 4.17 ($12,500/3000 memberships) = 4.17). For years 2 through 5, the VCPU are 4.14, 4.27, 4.40, and 4.53 respectively. The VCPU increased in years 3 through 5 due to the decrease in total memberships. Contribution Margin The Contribution Margin (CM) is the difference between the selling price and the VCPU for that same year. The CM for years 1 is $45.83 ($50-4.17). The CM for year 2 is $45.86, year three is $47.23, year 4 is $47.10 and in year 5 it increase to $48.51.

Net Income Net Income (NI) for this project is computed by deducting the TVC, onetime/miscellaneous costs and the FC from the sales figures of that respective year The projections are as follows: $11,800 year 1, $83,300 year 2, $84,850 year 3, $81,000 year 4 and $82,389 for year 5. The low NI in year 1 ($14,510) is due to the high start-up/one-time costs that we occurred in year one. Break-Even Analysis Breakeven analysis is used to determine how many monthly memberships that Curves needs to sell in order to start making a profit. In order to calculate the breakeven analysis of units, we divided the fixed cost by unit selling price minus the unit variable costs and then divide by twelve to get the number of monthly memberships. For year one, we will need to sell 147 monthly memberships in order to just breakeven (($81,080 / [$50.00-4.17])/12). For year three, we will need to sell 143 memberships (($81,080 / [$51.50-4.27)/12). For the fifth year, we have another decline to 139 memberships (($81,080/ [$53.05-4.53])/12). When we sold each additional unit above the breakeven point, it will increase the profit by the amount of the unit contribution margin. We have calculated that for the five years, we will need to make these dollars in sales to break even: $88,451(year one), $88,403 (year two), $88,404 (year 3), $88,648 (year 4), and $88,648 (year 5). We also used the target-profit analysis to determine how many units we must sell to reach our desired profit levels. We set our anticipated profit amount as $50,000, $75,000 and $100,000. To reach the $50,000 target profit, our Curves gym must sell 238 monthly memberships in year one ([$81,080 + 50,000] / [$50.00-4.17] / 12). For years 2 to 5, here are the numbers respectively: 238, 231, 232, 225. At the $75,000 profit level, the breakeven is 284 monthly

memberships ([$81,080 + 75,000] / [$50.00-4.17] / 12) for the first year, 284 monthly memberships for the second year, 275 monthly memberships for the third, 276 monthly memberships for the fourth, and 268 monthly memberships for the fifth year. For a $100,000 target profit, our gym must sell 329 monthly memberships in the first year ([$81,080 + 100,000] / [$50.00-4.17] /12). These numbers of memberships 329, 320, 320, and 311 are corresponded to the years 2, 3, 4, and 5. Net Present Value/Payback/Internal Rate of Return Net Present Value The net present value, payback and internal rate of return are the capital budgeting tools to help us decide whether a project is worth the risk and undertaking. The net present value is the discounted value of future cash flows from the project minus the initial investments. To calculate the NPV, we will use 12% as the discount rate. Next, we will use the cash flow for that year and divide by 1 plus the discount rate and take this to raise the power to the corresponding year (Wikipedia, 2011). For example, the present value of year one is $33,608 (37641 / [1+0.12] ^1). Then, the present values for years 2 to 5 are $45,409, $41,319, $35,374, and $32,140. The net present value equals to $49,650. Since the NPV is greater than 0, then this project is profitable and worth the risk. Pay Back The payback period is used to determine how long it takes to recover the costs of the initial investments (Investopedia, 2011). We used the payback calculator to get the projects payback time, which is 2.75 years (Lane, 2007). Since the payback period is not over 3 years, the project is not considered a risky investment and should be implemented. Below is the output from the online payback calculator

IRR The internal rate of return is the discount rate that makes the net present value of all cash flows equal to zero (Investopedia, 2011). According to the Microsoft Excels calculations, the IRR for this project is 24.82%. It is quite a bit more than the required rate of return of 12%. Cash Flow/Funding Needs To start our Curves franchise, we will have to invest $138,200 as the initial costs. A listing of all costs is provided in the appendix section of this paper. The initial costs include a $31,900 franchise fee and a delivery fee of $2,350. We also need to invest in upgrading the dcor of the business. This update includes painting, installation of a counter, new carpeting, installation of wiring for a stereo system, and purchase of a table and two chairs (these will be purchased so that customers will have a place to sit when waiting to be served by one of the staff). The dcor costs are estimated to be $3,180. The costs also include wages for three employees: one full-time manager, one full-time trainer, and a student trainer. Total

wages/salaries are estimated at $62,500/year. We have also estimated costs for rent. Beside the

$2,000 security deposit, rent is estimated at being $1,000/month. We have estimated utilities (internet service, phone service, gas, electric, and water) to be $6,580 per year. We have also estimated costs for office supplies and other materials (such as copiers, computers, etc.) needed to run the office. We estimated basic office supplies (such as paper, pens, staplers, etc.) to be $500. Other materials that are needed are a computer, fax/copier/scanner machine, stereo, vacuum, and a refrigerator. These costs are estimated at $1,580. According to the franchise agreement, we will also need to purchase a sign for the storefront which is estimated at $1,100. Other estimated costs are: $300 for an advertisement in the local newspaper to promote the business, $60/year for upgrades to our computer software, $350 in accountants fees to prepare tax returns, etc., and $300 in insurance. Risks & Assumptions Competitive Market The marketplace for gyms is very competitive. The Curves franchise is up against very high competition from other gym establishments. Curves gyms have limited hours of business which may not be suited for many people who have hectic schedules and would prefer gyms that are open 24-hours. The Curves circuit 30-minute workout may be a selling point for some people because they know exactly what machines to use and how long to use the machine for 30-minutes. There is no need for any guess work because the workout is laid out for you. Others may find the circuit workout to be very limited. Members may look for more variance in their exercise routine by having more variety of exercise equipment and classes that are available. Other gyms also offer services such as nutritional supplements, personal training services, and workout attire which are

not currently offered by Curves. The fact that Curves gyms are women-only may also be an attractive feature for some women who are looking for an environment in which they feel more comfortable and secure to work out. Others may find a women-only gym inhibiting and may be looking for a more eclectic environment. Recommendations The following sections contain recommendations from each team member contributing to this project. As each individual recommendation varies, a follow-up final recommendation has been provided as to whether this project should remain just a project or if it should become a business entity. Laura I find that opening a Curves franchise will not be a wise business proposition. Even though a positive NPV and low payback years suggests that this project will be profitable, an IRR rate of 24.82% (which is over the 12% minimum required rate of return) suggests otherwise. I also feel that Curves gym may not be able to compete with other gyms which offer 24-hour services, more variety in exercise equipment and exercise routines, as well as other services which are not offered at a Curves gym. Arun I find that opening a Curves franchise will be a risk as basically its a gym only for ladies and since the competition in the market is high and there routines are very minimal and i don't find it any ways so special then other gym that it would attract people but as per the NPV,IRR,Break even and profit it looks viable but still as per the current economy and the competitors in this field its a big risk to put a step forward in this project. Shannon

I do not think that opening a Curves franchise would be a good idea. When opening a business or starting a franchise there are many risks as well as opportunities involved. In this case we have a positive NPV but the IRR contradicts this. Curves has a good concept but I do feel it lacks variety and should expand its target audience to attract a broader range of people creating another market niche that can thus create revenue. Also, as far as Curves goes, I feel they have a problem competing. For example, Weight Watchers has got Jennifer Hudson to endorse their product and attract male and female clientele. Also big name gyms such as Bally and Xsport offer a wider variety of products and services to increase their target audience and attract more customers. Final Conclusion The group consensus regarding this project is that opening a Curves franchise will not be a profitable business venture. Due to the IRR and the competitive marketplace for gyms, we feel that many women would prefer to join other gyms which may offer other services and more variety. Appendix Proforma P&L

Proforma P&L Year1 Selling price (cost of monthly membership) Quantity (active members per month) Quantity (total monthly memberships paid per year Selling Price (cost of full year membership (SP * 12) Total sales $50.00 250 3000 $600.0 0 $150,0 00 Year2 $50.00 300 3600 $600.0 0 $180,0 00 Year3 $51.50 294 3528 $618.0 0 $181,6 92 Year4 $51.50 288 3456 $618.0 0 $177,9 84 Year5 $53.05 282 3384 $636.5 4 $179,5 04

Variable Cost Per Unit Total variable cost Contribution Margin

4.17 $12,50 0 $45.83 $44,62 0 $81,08 0 $11,80 0 $0 $11,80 0

4.14 $14,91 0 $45.86

4.27 $15,05 2 $47.23

4.4 $15,19 4 $47.10

4.532 $15,32 5 $48.51

One time cost/Misc Fixed Costs

$710 $81,08 0 $83,30 0 $0 $83,30 0

$710 $81,08 0 $84,85 0 $0 $84,85 0

$710 $81,08 0 $81,00 0 $0 $81,00 0

$710 $81,08 0 $82,38 9 $0 $82,38 9

Net Income Other Income

Total Estimated Income

Proforma P&L With Break-Even Analysis

Proforma Statement

Identification of Costs1-Time Expense Fixed Cost Variable Cost

Franchise & Startup CostsFranchise Fee Delivery Costs Training $31,900 $2,350 $1,500

EmployeeManager Full-Time Trainer Full-Time Student Trainer $30,000 $23,000 $9,500

DcorInstall Carpeting Install Wiring for Sound Painting Installation of counter Purchase of Table (1) and Chairs (2) $2,000 $250 $500 $300 $130 $1000/mo. + 2,000 security $45/mo $70/mo. $150/mo. $200/mo. $500/semiannually

UtilitiesRent Internet Service (DSL) Phone Gas Electric Water $2,000 $12,000 $540 $840 $1,800 $2,400 $1,000 $850 $100 $200 $30 $1,100 $100 $300 $500

Material/SuppliesComputer Stereo Fax Machine/Copier/Scanner Phone Sign Vacuum Refrigerator Office Supplies (paper, pens, staplers, folders,etc)

Misc.Yearly Upgrade of Business Computer Software Accountant's Fees Insurance Advertising Fee (paid to corporation) Royalty Fee (paid to corporation) Initial Ad in Newspaper 3% of monthly sales 5% of monthly sales $300 $44,620 $81,080 $12,500 $138,200 $60 $350 $300 $4,500 $7,500

Gibson, R. (2011). Curves Loses Stamina, Closing Fitness Clubs. The Wall Street Journal. Retrieved on September 26, 2011 from http://online.wsj.com/article/SB10001424052748704862404575351293938715632.html How to Calculate Payback Period. Retrieved October 4, 2011 from http://www.youtube.com/watch?v=GghYr-iNaEs&feature=related Lane, Mark A. (2007). Capital Budgeting Calculator. Business Finance Online. Retrieved September 27, 2011 from http://www.zenwealth.com/BusinessFinanceOnline/CB/CBCalculator.html

Net Present Value Investopedia.com. Retrieved October 4, 2011 from http://en.wikipedia.org/w/index.php?title=Net_present_value&action=history

Payback Period. Retrieved October 4, 2011 from http://www.investopedia.com/terms/p/paybackperiod.asp#axzz1bFB1d7pO