Opening and developing a new international business

Case StudyBackground:

Having worked in large corporate entities in several countries, I had decided that I would utilise the knowledge and skills I had acquired and set up and develop a business in my own right.

I had certain criteria’s in as much that it would provide a reasonable income and capital growth and that at some future point the business would be able to run with minimal involvement from myself, becoming more of a passive income.

An important criterion was to be involved in a business that I could take pride in being involved with. Whilst I had capital to invest it was limiting factor. At this point, the Malaysian economy was still recovering from the 2009 financial crisis.

Challenges:

To find and engage in a business that would fit with my criteria. This being within reasonable means to set up the business leaving adequate working capital. That gave the greatness possibility of success for a new business, with resilience to economic downturns.

The target was to become a successful business start-up with a fast transition to a stable cash positive trading position. From a stable and sustainable base move to growth and expansion of the overall business.

The measurements I used during the start-up phase of the business were cash generation, EBIT, company & share valuation, and the number of locations we could expand into when appropriate and once growth was achievable.

When starting up the gym business, I set-up, tracked and managed a series performance stats. These KPIs included gross margin by Gym, number of inquiries, conversion of inquiries to members, retention of members, salary as percentage of revenue and EBIT.

Solutions:

– Evaluation of business opportunities and the selection thereof. I identified “The Little Gym” (TLG) franchise as filling a gap in the Malaysian child development market. Offering a gymnastics and motor skills development programme with child development strategies, that focus on building a child’s self-confidence and self-esteem. The franchise was well developed having been in operation for over 35 years. It offered comprehensive proprietary lesson plans (A key differentiator), excellent training and development resources plus professional marketing collaterals. Albeit these would need to be adapted for the local Malaysian market.

– Negotiation of terms and prime territory (high income areas) for the initial franchise in Malaysia.

– Attracted initial investors and business partner. I developed a business plan for five years, using a DCF spreadsheet model. I was able to demonstrate a good ROI over several scenarios based on a certain number of members being reached. With a breakeven point of 200-250 depending on the staffing strategy an achievable number with the correct planning and execution.

– The business model was underpinned by an evaluation of the price of the programme to be charged to the members based on a market-based pricing strategy. The pricing strategy I developed was used as the opening price offering and proved to be set at an accurate level. It has remained the basis for the pricing strategy to this day. Providing the right balance between attracting members and producing healthy margins.

– I had determined the strategy for the location of the gyms to be in community shopping malls. I entered negotiations with such a mall securing excellent rental rates for the initial gym and subsequently signed a tenancy agreement.

– Running parallel, I identified qualified individuals to teach the programme, for the initial team. I approached several potential candidates, whom I had observed in other educational based programmes. The quality of the team is a key differentiator and it was important to begin the programme with a team who held the correct personalities, background and skills.

– Along with my business partner, we planned an initial marketing strategy for the period to opening and beyond. This included the development of a website and Facebook campaign, advertising in relevant periodicals, attendance at child-related events and tie-ins with local mother and child groups. The result was a healthy number of inquiries converting to members, and a fast transition to a profit position for the business. The pre-sales campaign ultimately resulted in 99 members being signed on before our actual opening, close to 50% of the breakeven number required before opening.

– The first gym opened in February 2012 and was an immediate success, reaching over 400 members in the first year of operation and continued to grow. Producing healthy positive cash and profit margins.

– Growth and expansion strategy – I agreed, together with my business partner, to fund the business expansion through a combination of organic growth, loans and share issues. In 2013, I put together a business prospectus. I calculate the overall business value and price per share, using a discounted free cash flow method. There was a successful take-up of the share offering (20% of the revised total equity) in addition I also secured a business loan.

– With the experience gained in Malaysia, expansion is planned into Indonesia. We have negotiated and signed for the “The Little Gym” master franchise for Indonesia. The programme is to be brought to the Indonesian market under the trading name of “The Funtastic Gym”. We have identified our first franchisee and partner and have secured a location for the 1st gym in South Jakarta. This first gym will open in 2020. I determined and set up the company structure with the holding company to be based in Malaysia. Along with my partner, we decided on the high-level market entry strategy

Benefits:

Since opening the first gym in February 2012. The business has grown from one gym in 2012 to five gyms by the end of 2019. A further two gyms are due to open by the end of 2020, expanding into a 2nd Country, Indonesia. Turnover has increased 7-fold from 2012 to 2019. The Company has a valuation of £1.3m from its initial investment of £150k, excluding the future committed gym openings in 2020.

We achieved stable cash/profit and financial growth. Increased shareholder wealth. Increased number of locations to open new bases. Brought an excellent fitness & health programme to nearly 2000 children in Malaysia.

Overall, the absolute numbers have increased. As the business transitioned into maturity the KPI percentages have stabilised and have fluctuated which enables the business to be manage under performing areas.

EFM Expert: Neil Outram