‘Gym Whale’ proposed investment

Gym Whale plc has an opportunity to purchase an existing building and associated car park
(all referred to as ‘the gym’), in an affluent suburb of Bicepton City, UK, at a cost of £1.8m.
There will need to be further capital expenditure of £2m for building works and gym
equipment and there are legal fees of £107k associated with the purchase and refit that will
be capitalised with the buildings. £85k of the legal fees have already been incurred on
purchase contracts, building regulations and negotiations with the seller.

The planned purchase date is January 2nd and the unit will be ready for building work shortly
after. It is expected that the gym will open to the public on 1st July.

Location and Catchment Area

The unit is located on a busy main road and just half of a kilometre away from a primary
school. The local area has high rates of car ownership with households often having three or
four cars to cover parents and children of driving age. Given the affluent nature of the area,
many of the cars are large family cars and large SUV’s, for example, Range Rovers and
Land Rovers, and the provision of public transport is poor due to perceived low demand.
Bicepton City has a number of public and private gyms already in existence but none within a
30 minute drive of the new Gym Whale gym. Gym Whale expects it’s target market to come
from primarily the local area but also up to a radius of a 20 minute drive away.

The new gym is seen as an ideal strategic opportunity for Gym Whale to establish itself in a
new geographical area of the UK.

The Building
Despite it’s age, the building is in good condition but needs remodelling and decorating for
purpose. The new gym equipment also needs to be installed. Energy needs are provided for
by electricity from the main grid and a gas central heating system. There is further work
required to assess the level of insulation in the building but this is expected to be poor as the
building is old. The costs of this are included in the information above. There are no plans to
upgrade the large car park adjacent to, and included with, the building even though it has
entrance and exit gates close to a bend in the road where visibility is poor. Given it’s
proximity to the primary school, a local protest group has been lobbying the local Council to
do something about this.

Financial Analysis

Forecast profit projections for the new gym has been produced (see below) with data being
extrapolated from a review of similar Gym Whale gyms located in other parts of the UK. The
cost of capital to be used in any further financial analysis is 8%. As Gym Whale’s financial
year is January to December the year 1 financial forecast is for 6 months.

The revenue model for the gym is based on a monthly subscription with no joining fee
required. Memberships will be £30 per month in year 1. Memberships are expected to reach
1,400 in year 1 and grow at 18% (taking into account the first year numbers for only six
months), 9% and 5% for years 2, 3 and 4 and then to continue at 3% per year thereafter.

Profit Projections
A forecast operating statement for the new gym is below:

All figs in £ Year 1 Year 2 Year 3 Year 4 Year 5 Total

Sales Revenue 252,000 642,298 756,113 857,432 953,807 3,462,649
 
Variable costs (17,640) (44,961) (52,928) (60,020) (66,767) (242,315)
Contribution 234,360 597,337 703,185 797,412 887,041 3,219,334
Overheads (see
notes 1 & 2 (131,500) (284,040) (306,763) (331,304) (357,809) (1,411,416)
below)
Payroll (see note
(155,000) (319,300) (328,879) (338,745) (348,908) (1,490,832)
2 below)
Depreciation (see
(208,050) (208,050) (208,050) (208,050) (208,050) (1,040,250)
note 3 below)
Total overhead
(494,550) (811,390) (843,692) (878,100) (914,766) (3,942,498)
costs
Operating
(260,190) (214,053) (140,507) (80,688) (27,726) (723,164)
Profit/Loss

Note 1: Breakdown of overheads

The following overheads have been used as the start point for the forecast operating
statement;

Full Year (52 weeks) £000

Allocation of Head Office Costs (25)
Other Overheads (238)
Total (263)

Note 2: Inflation

Inflation from, and including, year 2 is predicted as follows:

Membership fees and Overheads 8% per annum

Payroll 3% per annum

Note 3: Depreciation

Depreciation is charged on a straight-line basis. The £3.8m capital expenditure is broken

down for depreciation purposes as follows:

Freehold Buildings £2.3m

Fixtures, Fittings and Equipment (FFE) £1.5m
Of the total estimated legal fees of £107k, £85k have already been spent and capitalised as
additional buildings costs.

In line with Gym Whale plc depreciation policy, Freehold Buildings are depreciated over 40
years and FFE is depreciated over 10 years.