$2M Pilates Studio Group — Sell-Side Quality of Earnings to Support M&A Valuation

‍The Challenge

Our client, the owner of three Pilates fitness studios, was preparing to take the business to market and needed financial credibility before engaging with prospective buyers. The business had grown from a single location to three studios over several years, with the newest location having been open for less than twelve months at the time of the engagement. Combined revenue across the three locations was approximately $4M.

Sell-side Quality of Earnings engagements serve a fundamentally different purpose than buy-side diligence. On the buy side, the objective is to identify risk — to find the problems in the financials before committing capital. On the sell side, the objective is to establish credibility — to produce a financial picture that a buyer and their advisors will trust, that supports the valuation the seller is seeking, and that minimizes the likelihood of price reductions during buyer diligence. A well-executed sell-side QoE does not inflate earnings. It presents them accurately, with adjustments that are defensible and a narrative that is supported by the data.

The M&A advisory team working the engagement had identified the valuation as the critical variable. Fitness and wellness businesses, particularly boutique studio models, trade on a multiple of adjusted EBITDA — but the multiple a buyer is willing to pay depends heavily on confidence in the earnings figure, the sustainability of the revenue base, and the growth trajectory. Three specific factors made this engagement complex.

First, the financial records across three locations needed verification. Multi-location service businesses at this scale are frequently managed by the owner with a single bookkeeper or outsourced accounting provider, and the quality of the records varies by location. Revenue may be tracked through different POS or membership management systems. Expenses may be allocated between locations inconsistently or not at all. Intercompany charges, shared overhead, and owner-related expenses may be commingled in ways that obscure the actual unit economics of each studio.

Second, the operating cost structure needed recasting. Owner-operated businesses carry expenses that will not continue under new ownership — above-market owner compensation, personal expenses run through the business, one-time costs, and discretionary spending that a buyer would not replicate. Conversely, the business may be underinvesting in areas that a buyer would need to fund — management compensation to replace the owner, marketing at normalized levels, or maintenance that has been deferred. The sell-side QoE must identify and adjust for both categories to produce a normalized EBITDA that represents the actual earning power of the business under new ownership.

Third, the newest studio — open less than a year — was not yet at mature revenue levels. If the valuation were based solely on trailing twelve-month financials, the immature location would drag down the overall earnings figure and suppress the multiple. The advisory team needed a defensible pro forma revenue forecast for the new location that a buyer's diligence team would find credible — not a hockey stick projection, but a data-driven model grounded in the ramp curves observed at the two mature locations.

What We Did

We conducted a comprehensive sell-side Quality of Earnings analysis covering financial verification, EBITDA normalization, unit economics analysis, and pro forma revenue modeling for the new location.

Financial Verification Across Three Locations

The first workstream was establishing that the reported revenue and expense figures for each location were accurate and complete. Multi-location fitness businesses generate revenue from several streams — class packages, monthly memberships, private training sessions, retail product sales, teacher training programs, and in some cases corporate wellness contracts or event revenue. Each stream has different recognition timing, different margin profiles, and different growth characteristics.

We reconciled reported revenue against source data for each location. For membership and package revenue, we traced reported figures back to the studio management platform — verifying member counts, package pricing, average revenue per member, and the treatment of deferred revenue from prepaid packages. Prepaid class packages are a significant accounting issue in studio fitness businesses because the revenue is collected upfront but should not be fully recognized until the classes are attended or the package expires. Improper recognition of prepaid revenue — booking the full sale at the time of purchase rather than ratably as classes are consumed — inflates reported revenue in the period of sale and creates a deferred revenue liability on the balance sheet that many small fitness businesses fail to record.

We verified that revenue recognition was consistent across all three locations and that deferred revenue from outstanding prepaid packages was properly reflected. Where it was not, we adjusted the reported revenue to its correct figure.

On the expense side, we reviewed each location's cost structure independently. Rent is typically the largest fixed cost for a Pilates studio, and we verified lease terms, escalation schedules, and any tenant improvement allowances or rent abatement periods that affected the trailing cost figures. Instructor compensation — whether W-2 employees or 1099 contractors — was verified against payroll records and contractor agreements. We confirmed proper worker classification, because misclassification of instructors as independent contractors when they should be W-2 employees creates a contingent liability that a buyer will price into the deal. We reviewed marketing spend, insurance, software and technology costs, equipment maintenance, and all other operating expenses by location to produce a verified cost structure for each studio.

EBITDA Normalization and Add-Back Schedule

With verified financials in hand, we built the adjusted EBITDA calculation — the figure that would serve as the basis for the valuation multiple applied by the advisory team.

Owner compensation was the largest adjustment. The owner was drawing compensation that included both a salary for active management of the studios and distributions that reflected a return on ownership rather than payment for services. We normalized owner compensation to the market rate for a general manager or multi-unit operator — the cost a buyer would incur to replace the owner's day-to-day management function. The difference between actual owner compensation and the normalized replacement cost was added back to EBITDA.

We identified and adjusted for additional non-recurring and owner-related expenses: personal vehicle costs run through the business, one-time buildout costs associated with the new location that would not recur, legal fees related to lease negotiation that were deal-specific rather than ongoing, and above-market rent on a location where the owner also owned the real estate (requiring a related-party rent adjustment to market rate).

We also identified areas where the business was underinvesting relative to what a buyer would need to spend. Marketing had been reduced at the two mature locations because word-of-mouth and organic growth were sufficient — but a buyer projecting continued growth would likely need to fund marketing at a normalized level. We included a pro forma marketing expense adjustment so that the adjusted EBITDA reflected a sustainable cost structure, not one that was artificially lean due to owner-specific advantages that would not transfer.

The resulting add-back schedule was fully documented with supporting calculations and source references — designed to withstand buyer diligence scrutiny. Each adjustment was categorized as owner-related, non-recurring, or pro forma normalization, with a clear explanation of the methodology and the data supporting the figure.

Unit Economics and Location-Level Analysis

A buyer evaluating a multi-location fitness business needs to understand the economics at the individual studio level, not just in aggregate. We produced a four-wall profitability analysis for each location — revenue less all direct operating costs attributable to that studio (rent, instructor compensation, front desk staff, utilities, marketing allocated to that location, supplies, and equipment maintenance).

This analysis served two purposes. First, it demonstrated that each of the two mature locations was independently profitable at the four-wall level — meaning the business was not dependent on a single outperforming location to subsidize underperformers. Second, it established the mature-state margin profile that the new location could be expected to achieve once it reached stabilization — providing the empirical basis for the pro forma revenue forecast.

We also computed the key operating metrics that buyers of boutique fitness businesses evaluate: revenue per square foot, average revenue per member, member retention rate (monthly churn), class fill rate (average attendance as a percentage of class capacity), instructor cost as a percentage of revenue, and customer acquisition cost. These metrics were computed by location and benchmarked against the observable range for Pilates and boutique fitness studios in comparable markets.

Pro Forma Revenue Forecast for the New Location

The newest studio had been open for less than twelve months and was not yet generating revenue at the level of the two mature locations. If the valuation were based solely on trailing earnings, the new location's immature revenue would depress EBITDA and result in a lower enterprise value than the business warranted — because the buyer would be acquiring a location with a proven ramp trajectory and remaining upside, but paying as if it were a permanent underperformer.

We built a pro forma revenue forecast for the new location grounded entirely in the observed ramp data from the two mature studios. The model mapped the new location's member acquisition curve — month-by-month member count from opening — against the same curve observed at location one and location two during their first eighteen months of operation. We adjusted for differences in market size, local competitive density, and marketing spend to produce a forecast that was conservative, data-driven, and defensible.

The forecast projected the new location reaching stabilized revenue — defined as the average monthly revenue achieved by the two mature locations at month 18 — within its own month-18 horizon. We presented the forecast as a range rather than a point estimate, with a base case reflecting the average ramp of the two prior locations and a conservative case reflecting the slower of the two ramp curves.

This pro forma figure was incorporated into the adjusted EBITDA on a clearly labeled basis — trailing actual results for the two mature locations, plus pro forma stabilized revenue for the new location — so that the buyer could see exactly what was historical and what was projected. The methodology was documented in detail for the buyer's diligence team.

The Impact

The sell-side QoE package gave the M&A advisory team the financial credibility they needed to take the business to market at a valuation supported by defensible data. The verified financials eliminated the risk of revenue or expense surprises during buyer diligence. The normalized EBITDA — with a fully documented add-back schedule — presented the business's actual earning power under new ownership rather than the owner-specific cost structure that would not transfer.

The unit economics analysis demonstrated that the business model was repeatable across locations — each mature studio was independently profitable with consistent operating metrics, giving a buyer confidence that the model could be replicated further through organic expansion or acquisition.

The pro forma revenue forecast for the new location was the critical element in the valuation. By demonstrating — with empirical data from the two prior locations — that the new studio was on a measurable trajectory toward stabilized revenue, the analysis allowed the advisory team to include the new location's earning potential in the enterprise value calculation rather than discounting it as an immature, unproven asset. This directly increased the valuation basis and supported a higher asking price.

The client went to market with a sell-side QoE package that anticipated the questions a buyer's diligence team would ask, provided the data to answer them, and presented the business in its most accurate and favorable light — not through inflation, but through the discipline of proper financial verification, normalization, and data-driven forecasting.

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