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CFE Study > Capstone 1 Case > Flashcards

Capstone 1 Case Flashcards

1
Q

Original concerns

Cap 1 Case

A

Declining members, revenue and profits starting in 2018

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2
Q

Number of locations & size

Cap 1 case

A

40 locations - in BC, AB and MB

10,000 to 13,000 square feet each

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3
Q

Share structure

Cap 1 case

A

5 shareholders with equal equity value

Philip’s shares are multi voting shares giving him 60% voting power.

4 remaining shareholders have 10% voting power each

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4
Q

Shareholders

Cap 1 case

A 
Phillip Rogers (founder)
Sandra MacCarthy
Brian Mitchel
Frank Chang
Rosa van der Schuren

Phillip & Sandra are the only Shareholders that still visit gyms in BC on regular basis
Others only visit facilities once a month.

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5
Q

Annual growth rate

Cap 1 case

A

4.6% - expected until 2025

Industry in growth cycle due to healthy lifestyle benefits being publicized by government and corporate programs

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6
Q

Industry revenue segments

Cap 1 case

A

Page 2 to 3
Membership fees - 69.4% - generally monthly. High turnover & shorter membership periods are driving operators to generate revenue from other sources

Personal training - 10.9% - increasing segment

Amusement & recreational services - 5.9% - not common in the industry so those that provide these services have little competition

Fitness & recreation admission- 3.3% - one time fees for special events (competitions)

Food & beverages - 2.7%

Athletic instruction - 3% - coaching and training for specific sports

Spa services - 2.3%

Other - 2.5% - apparel & accessories, late fees & penalties

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7
Q

Customer segments (gender)

Cap 1 case

A

Page 3 to 4

Women - 40% and increasing

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8
Q

Customer segments by age

Cap 1 case

A

Page 3 to 4

55+ = 35%

40 - 54 = 20%

20 - 39 = 27.9%

19 and younger = 17.1% - growing segment, parents looking for fitness alternatives as schools cut back on Phys Ed and obesity in kids increases

Two oldest segments tend to be more health conscious & have more disposable income

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9
Q

Factors for choosing a fitness facility

Cap 1 case

A 
Cost
Member profile
Equipment and programs
Busyness of facility
Extra features (daycare, massage/spa, tanning, food, etc)
Accessibility (location of facility)
Cleanliness 
Maintenance 
Hours of operation 
Personal training
Membership privileges
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10
Q

Key success factors

Cap 1 case

A

Page 8

Customer service and skilled/trained employees
Clean Facilities
Good quality equipment
Types of services offered (range of services)
Locations (ease of access to clients)
Effective promotion of products (brand recognition)
Membership retention
Innovation to meet ever-changing member demands

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11
Q

% of fitness establishments with less than 10 staff

Cap 1 case

A

80%

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12
Q

Industry Demand drivers

Cap 1 case

A 
Disposable income
Consumer confidence 
Available leisure time
Weather/seasonality 
Attitudes toward healthy living
Obesity rates
Ability and desire to participate in sports
Cost and availability of services
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13
Q

Fitness industry trends

Cap 1 case

A

Page 8 to 11
Individualized service
Employers & insurers covering health facility costs
Wearable fitness trackers
Fitness apps with video/audio prompts for exercise routines
Streaming options for exercise classes
Outdoor obstacle races and inter-facility competitions
Flexible membership terms
Using data analytics
Hybrid establishments: Cafe/restaurant at facility
Creating sense of community at gym
Apps that allow access to multiple facilities without paying membership fees
Using technology
Environmentalism
Churn rate is close to 50%

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14
Q

Fitness industry risks

Cap 1 case

A

Page 11 to 12

Products and services risk - to retain members and attract new ones

Location risk - must be in close proximity to target market

Health and safety risk - member could be injured

Compliance risk - regulations related to health and safety

Reputational risk

Technology risk - safeguarding members data

Human resources risk - shortage of skilled & experienced fitness instructors

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15
Q

Phillip’s original goals when opening CFL

Cap 1 case

A

Fitness facility to appeal to all types of people.

Provide a wide variety of classes & equipment

Environment for member to feel comfortable & not judged on appearance or fitness level

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16
Q

CFL hours of operation

Cap 1 case

A

24 hours a day
365 days a year
Unstaffed between 9pm and 6am

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17
Q

CFL revenue streams

Cap 1 case

A

Memberships and personal training

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18
Q

CFL membership inclusions

Cap 1 case

A

Use of facility, all classes and towel service

19
Q

CFL vision

Cap 1 case

A

Page 14
Approved in 2017

To provide the means to motivate and help adults to achieve their goals.

20
Q

CFL mission

Cap 1 case

A

Page 15
Approved in 2017

Company dedicated to educating & motivating adults to embrace fit & healthy lifestyle in friendly & nonjudgemental atmosphere, providing state-of-the-art equipment & innovative, fun, & challenging group classes. Also strive to further develop health & wellness in local communities.

21
Q

CFL core values

Cap 1 case

A

Page 15
Approved in 2017

  1. Employees are caring and understanding of members and work as part of a team to meet corporate goals and mission. Members, guests, and staff are treated with honesty, dignity & respect.
  2. Continuously update our equipment to ensure that is is leading edge and provide ever-changing group classes that stay up to date with current trends. Provide unmatched service by having uniquely qualified and passionate staff
  3. Staff are committed to their own fitness goals and healthy living & are able to motivate members to do the same
  4. Strive to build a community of friends in a safe and supportive environment and to be a driving and vocal force in the local community to promote fitness and healthy living
  5. Provide activities that are fun, challenging and designed to help individuals achieve their fitness goals
22
Q

CFL Code of conduct & ethics

Cap 1 case

A

Implemented in 2016

All staff will act ethically
Employees may anonymously report violations and mgmt commits to investigating reports

23
Q

CFL objectives

Cap 1 case

A 
Page 15 of the case
Goals Set March 2022 for 2025
- increase total revenues by 10%
- increase EBITDA margin to 25% of revenues
- increase total members by 15%
- target new customer segment
- Improve members’ level of overall satisfaction 
- reduce churn rate to less than 30%
24
Q

Board structure and processes

Cap 1 case

A

Meets once per month
Members of board are all five shareholders
No formal committees

25
Q

Shareholder agreement

Cap 1 case

A

Phillip has 5 votes on the board & all other directors have 1 vote each

Voting Clause: shareholders and board members given equal voting rights regardless of the multi-voting status of some shares. Invoked for change of control and other special shareholder resolutions

Exit provision: shareholder can offer a specific price per share to purchase the shares of other shareholders. Other shareholders are then required to either accept the buy-out offer or purchase the shareholder’s share at that price per share

26
Q

Phillip Rogers

Cap 1 Case

A

Board Chair & CEO, founder
Owns 100% Class A shares (60% voting power)
- Previous world class cyclist
- Strong believer in visiting gyms & engaging with members
- believes rapid growth is needed through expansion

27
Q

Sandra MacCarthy

Cap 1 Case

A

Director on board, VP of HR
Owns 25% of Class B common shares (10% voting power)
- Previous world class rower & Olympic competitor
- believes in visiting gyms & listening to customer & staff concerns
- believe rapid growth is needed through expansion

28
Q

Brian Mitchell

Cap 1 Case

A

Director on the board, VP of Marketing & IT
owns 25% of class B common shares (10% voting power)
- Previous elite rock climber
- Believes researching & gathering trend data is vital before making decisions
- wants to see CFL focus on niche & local markets; move away from generic one-size-fits-all approach

29
Q

Frank Chang

Cap 1 case

A

Director on board, VP of equipment & programs
Owns 25% of Class B common shares (10% voting power)
- Previous elite boxer
- wants CFL to focus on providing amenities & different types of equipment no older than 3-years
- Sees no value in group classes & wants reduction or elimination of general classes

30
Q

Rosa Van Der Schuren

Cap 1 Case

A

Director on board, CFO
owns 25% of class B shares (10% voting power)
- previous world class skier
- Believes CFL should cut dividends & reduce shareholder salaries, which are significantly above market rate.
- believes significant changes are needed to avoid any closures & wants to see instructors paid more

31
Q

Governance conflict

Cap 1 Case

A

Shareholders have conflicting viewpoints on achieving future growth
Phillip & Sandra want to expand while maintaining traditional & consistent gym format
Brian, Frank & Rosa want to differentiate & change with trends

32
Q

Timeline

Cap 1 Case

A

2002: CFL established by Phillip
2002 - 2007: 10 locations opened in BC
2007: Sandra, Brian, Frank & Rosa join as shareholders
2009 to 2016: 25 new locations opened across Alberta & BC
2016: stopped supporting & hosting community events due to costs
2017: 5 new locations in Manitoba
2017: Stopped offering nutrition, behavior & fitness topic classes due to cost
2017: Mission & vision approved by the board

33
Q

Vision

Cap 1 case

A

Page 14 & 15

To provide the means to motivate & help adults to achieve their goals.

34
Q

Mission

Cap 1 case

A

Page 14 & 15

35
Q

Industry benchmarks

Cap 1 case

A

page 39

36
Q

Gym, Health & fitness facilities industry - External environment

Cap 1 case

A
  • in growth cycle due to increased awareness & support for healthy lifestyles
  • 4.6% annual growth rate projected to 2025
  • competition is high & increasing
  • revenue segments (pg 2-3)
  • barriers to entry are low
  • 80% of establishments are small boutique operations
37
Q

Financial reporting requirements

Cap 1 case

A

ASPE

Dec 31 - year end

Gold Financial Bank - requires audited annual financial statements.

38
Q

Current Financing

Cap 1 case

A

page 23

Line of Credit:

  • Max limit of $1.5 million
  • Interest at Prime plus 2% (2022 prime is 2.5%)
  • Secured by a general security agreement

Mortgage payable:

  • interest at 6%
  • Matures on June 30, 2025
  • repayable in annual principal payments of $2.5 million on July 1st
  • Secured by PP&E
  • 2 covenants:
  • > Total-debt-to-EBITDA ratio below 4.2
  • > EBITDA-to-interest ratio above 4.0

Both LOC and mortgage provided by Gold Financial Bank (GFB)

39
Q

Alternative Sources of Financing

Cap 1 case

A

Page 40

Sale & lease bank of head office:

  • offer of $8.5 Million, 10-year lease back beginning immediately
  • $51,200 due at the beginning of the month, 6% lease interest rate
  • CFL responsible for all R&M, insurance & property tax

Loan from JAG trust bank:

  • 5 year loan of $3.5 million; interest at 6% payable monthly
  • secured by second lien against furniture, fixtures & equipment
  • personally guaranteed by shareholders
  • not allow to pay dividends
40
Q

Mighty Fitness Inc (MFI) acquisition

Cap 1 case

A
  • puchase 50% of the shares of MFI for $12 Million & have 2 of 3 board seats
  • owned by Gino Rossi & operates 35 trendy gyms throughout Ontario & Nova Scotia
  • Uses state-of-the-art equipment, focuses on niche local needs & a vibrant, friendly atmosphere
  • revenue sources include memberships, group class passes, personal training hours, admission to parties, competition training & merchandise
  • difficulties in integrating with CFL: branding & target market differences
41
Q

Indoor climbing wall facilities

Cap 1 Case

A
  • Build climbing & bouldering walls in 8 low-performing facilities with adequate space
  • cost is $700K per facility & $400K total start-up costs & salvage value in 9-years of $800K total
  • revenue sources include memberships, day passes & special events
  • requires significant changes including staffing qualifications, increased liability & temporary location closures
42
Q

Distribution & video contract with Zenfit Equipment Co.

Cap 1 case

A
  • Be exclusive distributor of Zenfit Equipment in western Canada (potential for Eastern Canada in the future)
  • Host Zenfit livestream video classes in exchange for royalties on video streaming
  • Purchase cardio equipment exclusively from Zenfit
  • Zenfit manufacturers traditional cardio equipment& award winning, cutting-edge cross training equipment
43
Q

PurCafes

Cap 1 case

A

Open PurCafes in 5 CFL locations; preparation is offsite & CFL not responsible for quality

  • would sell premium healthy products including tea, coffee, smoothies & light foods
  • CFL responsible for renovation, staffing, advertising & operating costs

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