Orangetheory Franchise Profits Do Not Keep Up with Gym Openings (2023)
Written by: Brooks Gammill
This article is based on its 2022 FDD.
Orange Theory Franchise was founded in Boca Raton, Florida in 2009. Co-founder, Elle Latham, decided to open a gym to implement her personally designed workout, which eventually became the basis for Orange Theory‘s system. After establishing a strong reputation across the fitness industry, Latham decided to seek a larger challenge and transitioned from the study of physiology to owning a gym that implemented a business model that remains in place across all studios to this day: offering trainer-led group workout sessions, which are broken into intervals of cardiovascular and strength training.
Franchising began one year later, and today Orange Theory studios can be found in 18 countries, and across 49 states. The concept currently has over 1,400 franchises in the United States and another 150 international locations and is a subsidiary of Ultimate Fitness Holdings. Orange Theory is currently headquartered in Boca Raton, Florida and is run by its CEO Dave Long who previously served as the main developer and owner of the European Wax Center.
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So, Orange Theory‘s success is quite similar to Peloton’s rise to fame. Both of these fitness companies, while they differ in business models, use your own fitness data and others to create a competitive atmosphere. Orange Theory uses your heart rate to show your exertion potential compared to maximal effort and compares you to your peers in classes. This model has become extremely sticky in the fitness industry because while many people want to achieve their fitness goals they innately lack motivation. By building in competition to workouts it enhances one’s motivation and keeps consumers coming back.
Orange Theory Investments in Franchisor
Orange Theory Fitness has raised a total of $4.8M in funding over 3 rounds. Their latest funding was raised on Sep 10, 2018 from a Private Equity round. Castanea and CreativeCubes.Co is the most recent investor in Orange Theory. Both of these private equity firms invest in consumer-related services and thought the business model of Orange Theory and its projected growth strategy was a selling point to invest in growing the company. This is a good indicator to have reputable firms backing Orange Theory and are behind the company’s growth and profitability initiatives.
How Much Is an Orange Theory Franchise?
Orange Theory Franchise Fee
The Orange theory franchise fee is $59,950. This is the upfront fee that must be paid when opening an Orange theory franchise.
Orange Theory Franchise Cost
The estimated total investment necessary to begin the operation of an Orange Theory Franchise ranges from $657,542 to $2,105,322
Additional Cost Breakdown
The following costs are part of the upfront costs included in the initial investment. Many of these are one-time fees that are needed to launch the franchise.
Orange Theory Franchise Cost
| Travel and Living Expenses During Training | $1,200 – $4,800 |
|---|---|
| Deposit for Leasehold | $3,360 – $206,000 |
| Rent (One Month) | $3,360 – $38,000 |
| Leasehold Improvements and Construction Costs | $309,000 – $1,309,000 |
| Fitness Equipment | $140,000 – $210,000 |
| Technology – Software Licensing Fee | $3,272 |
| Fitness Equipment Maintenance | $900 – $2,400 |
| Initial Inventory of Retail Merchandise | $4,000 – $6,000 |
| AED and First Aid Equipment | $1,000 – $5,000 |
| Exterior Signage | $5,000 – $14,000 |
| Technology System | $60,000 – $88,500 |
| Pre-Sale and Grand Opening Advertising | $30,000 – $40,000 |
| Presales Training Program | $0 – $4,900 |
| Business Licenses / Miscellaneous Opening Costs | $1,000 – $3,000 |
| Insurance | $3,500 – $5,000 |
| Additional Funds – 3 Months | $32,000 – $105,500 |
| Total | $657,542 – $2,105,322 |
The biggest expenses in the additional costs section is leasehold improvements and construction costs which vary greatly from $309,000 to $1,309,000. This large discrepancy indicates the potential different costs you could face when building your Orange Theory franchise as a franchisee. Depending on the location and pre-existing structure that is being purchased you could see your expenditure being on the lower or higher end of this spectrum. It is important to talk to other franchisees and see what their costs were for leasehold improvements and construction.
These costs can be a large determinant if you have the available funds to begin an Orangethory franchise.
Ideal Franchise Candidate
The franchisor is particularly looking for candidates who are enthusiastic about fitness, are willing to run the business on a daily basis, and have the required capital to fund a location. That said, the minimum net worth required to own an Orange Theory franchise is $500,000 and the applicant must have liquid assets of at least $150,000.
Orange Theory On-Going Cost and Fees:
Royalty Fee: 8% of Gross Sales
Marketing Fee: 2% of Gross Sales
How Much Do Franchise Owners Make?
Orange Theory Franchise Sales Figures
Orange Theory does not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. However, if you are purchasing an existing Orange Theory, the company may provide you with the actual records of that Orange Theory.
However, using the Franchisor income statement we can deduce from look at the income statement line item “Franchise Revenue”
2019 Sales Figures and Break Even Point:
Royalty Fee: 8% of Gross Sales
In 2019 Orange Theory royalty revenues were $73 million
Estimated Total Franchise Sales: $913 million
Estimated Average Franchise Revenue: $948,200
1- Based on a midpoint investment of $1,378,500 with estimated profits of $94,820 (10% profit margin) it would take about 15 years to recoup your investment.
2- Based on a midpoint investment of $1,378,500 with estimated profits of $142,000 (15% profit margin) it would take about 11 years to recoup your initial Orange Theory franchise investment.
3- Based on a midpoint investment of $1,378,500 with estimated profits of $189,600 (20% profit margin) it would take about 8 years to recoup your investment.
2021 Sales Figures and Break-Even Point:
Royalty Fee: 8% of Gross Sales
In 2019 Orangetheory royalty revenues were $68.6 million.
Estimated Total Franchise Sales: $858 million
Estimated Average Franchise Revenue: $707,337
1- Based on a midpoint investment of $1,105,199 with estimated profits of $70,734 (10% profit margin) it would take about 16 years to recoup your investment.
2- Based on a midpoint investment of $1,105,199 with estimated profits of $106,100 (15% profit margin) it would take about 10 years to recoup your initial Orangetheory franchise investment.
3- Based on a midpoint investment of $1,105,199 with estimated profits of $141,467 (20% profit margin) it would take about 8 years to recoup your investment.
In 2020, Orangetheory saw a revenue decrease of over 35%, and we can conclude that this sharp decrease was due to the spread of COVID-19 and the fact that many gyms and fitness centers were unable to open and operate as normal. Furthermore, we could find that the revenue in 2021 increased by more than 45% percent compared with 2020, which, to a certain degree, indicates that the Fitness industry is recovering and getting rid of the influence of COVID.
This is just an estimate of sales based on the franchisor’s income statement and can vary greatly depending on the length that the particular franchise location has been open and how well the business is run.
Is Owning an Orange Theory Franchise Worth It?
As seen in the sales figures above, it takes a long time to recoup your investment if you own one singular Orangetheory franchise. The best-case scenario would be, based on 2019 sales figures and a 20% profit margin, you would recoup your investment in 6 years.
This exemplifies the opportunity cost of investing your money in this franchise. The Fitness industry median is an average profit margin of 16.5%, so based on 2019 Orangetheory sales it would take 7 years to recoup your investment.
If you own multiple Orangetheory franchises, take out an SBA loan to finance your gym, and/or have a passion for the Fitness industry, then the investment could be worthwhile.
Systemwide sales are not keeping up with the opening of the new units. As reflected in the below chart by Franchise Times, sales are barely above 2018 levels despite 200 more gyms open. Starting in 2019, Average Unit Volume (AUV) has struggled to increase, and it was further made worse by the pandemic.
How Much Can You Sell an Orange Theory or Other Gym Franchise for?
To assign a valuation multiple for Orange Theory franchises, we leverage estimates from DealStats, a database of acquired private company transactions sourced from U.S. business brokers and SEC filings. We reviewed the larger franchise industry as well as selling price multiples for larger systems like Anytime Fitness where more transaction data is available.
Under $1 Million Net Sales
- Estimated Selling Price = Net Sales – 0.54
$1 Million – $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.67
Over $5 Million Net Sales
- Estimated Selling Price = Net Sales – 1.21
When you go to sell an Orange Theory franchise based on the median multiple of .54 and net sales averaging between 2019 and 2020 of $732,600 it would sell for $395,604. This is significantly lower than the midpoint investment of $1,378,500.
However, as an owner of multiple Orange Theory franchises, you do have the ability to make a profit. Gym owners with over $5 million in sales have a median multiple of 1.21. So if you had 10 Orange Theory franchises this would be ~$7,326,000 in sales. Therefore, selling your multiunit franchise system would amount to $8,864,460. The more franchises you own, the more earning potential you have private equity firms become interested in your business instead of individual owner-operators.
Orange Theory Income Statement
OTF Franchisor, LLC Statements of Income. Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |
| Revenues | ||
| Royalty Income | $46,875,489 | $73,052,389 |
| Franchise fees | $7,788,142 | $5,769,229 |
| Other revenue | $16,211,591 | $10,378,774 |
| Total revenues | 70,875,222 | 89,200,392 |
| Operating expenses | ||
| Commissions, area representatives | $15,313,881 | $22,546,011 |
| Selling, general, and administrative expenses | $30,714,651 | $21,951,360 |
| Total operating expenses | $46,028,532 | $44,497,371 |
Orange Theory Income Statement Key Insights
Overall, Orange Theory is a profitable business, with a net income of $24.8 million in 2020. However, this is a 45% decrease in net income compared to the year prior which was $44.7 million. This net income decrease was a result of lower revenue of $70.9 million compared to $89.2 million the year prior and SGA expenses increased by 28% to $30.7 million.
Then, comparing the net income in 2020 of $24.8 million to the net income in 2021 of $46.5 million, the increase in net income is due to the overall increase in the revenue, which has increased about 46% percent from 2020 to 2021.
The drastic decline in revenue and net income in 2020 was most likely a result of the COVID-19 pandemic as during 2020 gyms were forced to shut down causing business-wide declines in revenues. Some states did not allow gym access for several months and consumers grew skeptical of gyms during the height of the pandemic.
Orange Theory Cash Flow Statement
OTF Franchisor, LLC
Statements of Cash Flows. Years Ended December 31, 2020 and 2019
| 2020 | 2019 | |
| Cash flows from operating activities | ||
| Net Income | $24,846,690 | $44,703,021 |
| Adjustments to reconcile net income to net cash flows from operating activities | ||
| Bad debt expense | $248,353 | – |
| Changes in operating assets and liabilities | ||
| Accounts receivable | $1,405,558 | ($718,403) |
| Deferred costs | $1,853,635 | ($1,391,694) |
| Prepaid expenses and other current assets | $885,655 | ($543,846) |
| Other assets | $16,250 | $13,542 |
| Accounts payable and accrued expenses | ($1,155,707) | $809,408 |
| Deferred income | ($6,345,995) | $5,025,394 |
| Net cash flows provided by operating activities | $21,754,439 | $47,897,422 |
| Cash flows from financing activities | ||
| Contributions from member | – | $5,100,000 |
| Distributions to member | ($26,845,713) | ($47,897,422) |
| Net cash flows used in financing activities | ($26,845,713) | ($42,797,422) |
| Net (decrease) increase in cash | ($5,091,274) | ($5,100,000) |
| Cash | ||
| Beginning of year | $5,100,000 | – |
| End of year | $8,726 | $5,100,000 |
| Non-cash financing activity | ||
| Contributors from member of non-cash net liabilities | $ – | $(26,823,569) |
In 2020, Orangetheory had a net income of $24.8 million, and their cash, cash equivalents, and restricted cash was $8,726 a significant decrease from the cash at the start of the year, which was $5.1 million, which then increased back to $10,827 in 2021. The change in cash is seen in the cash flow from operations, where there was deferred income of $6.3 million compared to the prior year of $5 million, which decreased to $6.1 million in 2021. In 2020, the distributions to members was proportionally equivalent to the prior year based on revenue and accounted for $26.8 million; this is almost a 60% decrease in distributions.
However, compared with years 2019 and 2020, in 2021, the proportion of the distributions to members decreased based on revenue and accounted for $16.4 million, which is around a 60% increase in the distributions compared with 2020.
End of year cash of $10,827 is a little concerning as the company does not have much money at the start of 2022 for expansion efforts. However, due to COVID-19 affecting the revenues during 2020 and 2021, one would assume that Orangetheory was using the 2022 fiscal year to gain back customers’ confidence and cut costs and grow margins to get back on a steady path of revenue growth and profitability
How Many Orange Theory Units Have Opened and Closed?
The rate of franchise growth has declined since 2019. However, this is to be expected as the market for fitness centers can only grow so large, and Covid hindered the development of the fitness centers during these years. Orangetheory currently has 1,262 studios in total, and 1,247 of these are franchise locations. Over the past three years, the company has added 284 franchise locations. This expansion into the fitness market is needed to beat out competitors and establish brand recognition.
I would not expect much further exponential growth from Orangetheory but do expect that franchises will continually be added to meet consumer demands for an involved, competitive workout experience, and an alleviation of the influence of Covid in the coming years.
Should You Invest in an Orange Theory Franchise?
Investing in an Orange Theory franchise is an interesting opportunity, especially for individuals looking to make their way into the Fitness industry. The prospects for growth and success within the industry and the Orange Theory brand itself, are extensive and some markets continue to be available as they move forward with growing their presence across the country. If you are an individual with a passion for fitness and are willing to invest an amount ranging from $589,129 to $1,621,269 or more, Orange Theory might be the right fit for you.
We strongly recommend you speak to at least 5 Orange Theory franchisees to better understand the financials (see questions to ask).
Think Orange Theory is the right franchise for you, or are you interested in other franchise opportunities in the Fitness Industry? Check out our listings page on the Vetted Biz website for thousands of franchises available for your investment.
