How to Sell a SkyZone
This week, Ed had the opportunity to visit with Joe Dillon. Joe is an entrepreneur and a deal-maker. He has facilitated a number of transactions and most recently, he’s been doing several jump parks. It is interesting to sit down and listen to what Joe has seen in the marketplace because it’s an expanding industry, and anybody who’s into the children entertainment world can learn a few things from him.
Who is Joe Dillon?
Joe started, like a lot of entrepreneurs did, with a mowing business when he was 12 years old. He then transitioned into being an ice hockey official at the age of 13 and did that for about 30 years. And then he progressed throughout his career. He started a couple of businesses, he started a franchise, sold the franchise. And today he is invested in 4-5 different businesses, and he’s in Sky Zone – the latest and greatest as far as entertainment for kids.
Joe has been with Sky Zone for 7 years now. It’s been a great business for him. The industry is constantly evolving and changing, so innovating and bringing new things to the park is what’s making the business go.
Where is value tied in Sky Zone?
EBITDA and every-day revenue is the biggest part of the value. Joe is not sure what the jump park industry’s averages are, but the Sky Zone average is $300,000 to $500,000 on EBITDA on an annual basis. A lot of these parks are absentee-owned, so it brings a lot of opportunities – potential investors that don’t want to be there dredging to the day-to-day. If you have the opportunity to own one and work in it, I think it’s a bigger opportunity because you can keep your eyes on all balls in the air and do the negotiating locally. And it really helps add value that way as well.
In Sky Zone land, keeping all the balls in the air means you got 60-70 employees, you got 2-3 full-time managers, you have to constantly be innovative both your concession area and all your different attractions within the park, and keeping all those things moving in sync and up and running is vital to keep the business successful.
What is innovation?
When Sky Zone first opened, customers basically only have 4 things that they can do – they have a main court where you can jump, they have a dodgeball court, they have a foam pit where you can jump into, and a sky slam where there are a couple of different basketballs that you can slam into. As that business evolves, it was really cool for a couple or three times. People came to it, but then they started to get bored with those 4 things. So, now Sky Zone added things like the warrior course, climbing wall, warped wall, parkour blocks… Just doing different things within the park to make it new every time that a child or a jumper comes in is keen on having them come back again. And these were all done within the same four walls – no need to build anything.
The day-to-day is really where the profit is. They’re making $2,000-$3,000 an hour when it comes to revenue and you’re running the park with overhead of about 90 grand a month. Sky Zone recently started a membership program. They have 3 different memberships – the Basic membership (60 minutes at $20/month), the Elite membership (90 minutes at $25/month), and the Supreme membership (unlimited at $39/month). People are concerned about capacity. In Joe’s park, they have about 170 capacity spots, so they can have 170 jumpers an hour. And they haven’t run into capacity issues.
The good thing about membership is that it is recurring revenue. And usually, people are bringing a friend. From the start of their program, Sky Zone Evansville has about 600 members now and that’s been really beneficial to their business. They have roughly $15,000 membership revenue right now and they’re hoping to grow it to $25,000-$30,000. It cost Joe roughly $90,000 to run their park all-in for a month. So just having that built-in basis is really beneficial. This is rolled out to the franchise system. Joe’s park is one of the pilot parks to do the membership. Roughly 40% of the parks are offering memberships at this point. Some parks are not doing it due to capacity concerns.
The Sky Zone Franchise
Sky Zone was the very first franchise that created the industry as far as trampoline parks go. It was originally intended for the trampoline courts to be used as part of a new sport with professional athletes, but it didn’t work out. Rick Platt had created the stadium with a bunch of trampoline beds and the local kids wanted to come over on the weekends and jump, and he said, “Ok, just throw $5 in that coffee can.” And a month later he found a bunch of $5 bills in his coffee can and realized it was a great idea. They opened their first franchise park in 2010 and they have a little over 200 parks right now within the system.
The biggest thing for the franchise is that they provide insurance. All parks are using the same insurance carrier. They help provide the supplies – socks, foam cubes, etc. They also help develop all the innovations and test those to make sure they’re safe to be in your parks. That’s what the franchise provides in terms of support.
What is the market form?
Joe thinks Sky Zone is a great business. Being in a broker world for a little bit now, Joe thinks people are looking for absentee-owned businesses. And if you have the right people to run your parks, it is an absentee-run business. It also generates quite a bit of revenue. The revenue is pretty good. And Joe thinks those are the two things that attract people to it. Hire the right people and let them do their job, then it’s an absentee-run business.
What do the employees look like?
The core customers are 9 to 15-year olds, but the biggest customers are the moms because they’re bringing the kids. So you have to have someone that mom’s going to trust when she walks in the door. In Joe’s opinion, the most qualified manager is the 35-45-year-old person who’s had some restaurant experience and who understands evenings and weekends because they need the general manager to be in on Friday nights and Saturday nights.
In every park that Joe has sold, one of the biggest park sellers was that the management team will stay in place. The people aren’t coming in and wanting to run the parks. They want to maintain what they have and what they know and take it from there, step into the franchise partner shoes and deal with the big stuff behind the scenes – dealing with corporate, making sure the royalties are elsewhere, making sure you’re on top of your advertising and making sure the staff is good. You need two full-time managers in this type of business. This is a business where managers last for about 2-4 years if you’re lucky because it’s evenings and weekends. You get in trouble when you are not prepared with the bench of managers. The biggest concern of potential buyers is always the management team: How’s the management team? Who do we have? How long have they been there? What’s their background?
What do the buyers look like?
The buyers come from all walks of life. You got some older buyers who are retiring and want to buy the business for their children and help oversee them, you also got entrepreneurs who really want to expand their portfolio and diversify. There’s a whole wide range of people who inquire about Sky Zone and become a buyer.
What are the competitors?
There are several competitors. You got your moms and pops who buy trampolines and throw them in a barn. And then Urban Air – it has a little different concept. It’s a bigger facility and they charge more compared to what Sky Zone traditionally does. They have bumper cars, electric go-karts, warrior course, glider coasters, and stuff like that. It’s a totally different model. They did a lot of building in the last couple of years so they’re into that point now where their parks are older, so we’ll see if they can sustain the revenue from where they’ve opened.
In the trampoline business, your average jumper comes less than 2 times per year. If you can drive that to 3 or 4 times a year, you will see a much bigger increase in your revenue. You can do that by innovating – making new things, adding new things to entertain and engage the customers is vital to the success of the park.
Was it easy to get lending?
Joe has not had any issues with the lenders. It’s just about finding the right lender and who has the appetite for it just like any other business deal.
What does the deal structure typically look like?
It’s just like any deal. Some people want to hold back, some want to earn out just depending on what it looks like, some people pay straight cash for it. Some franchise partners want to stay out a little bit and do some consulting and help, some just want to take their money and run…it just depends on the franchise partner and the potential buyer.
How to mitigate business owner risks?
You have to do your due diligence to really understand your market and understand what’s going on. Joe thinks that the most successful buyers he has seen have really kept things status quo for at least 3-6 months and really get in to understand the business and then understand where they can have and impact. A new buyer traditionally is going to really sit back and absorb things for 3-6 months and then make their decision on what they want to do about the business moving forward.
When asked if there is an increase in the amount of attrition related to new ownership, Joe said that they have not had big attrition rates due to a new owner. He said you have to be hand-in-hand with your general manager on a daily basis. If you have that relationship and they understand why the transition is taking place then they can make their own decision. They also understand that one of the big reasons why the business was purchased was because of them. General managers usually take pride in their park because they’re running it on a daily basis, so they’re not that concerned about who the new owner is.
Why are people getting out?
Sky Zone opened the bulk of its parks in 2014 and 2015 then some in 2016. They have park owners now that when they opened their park their kids were just 12 years old, and now they’re in college. So, it’s not so cool now that your kids are in college. They don’t want to bring their friends to Sky Zone now like they did when they were 12 years old. And some parks are performing the same thing year after year after year, and people now want to see different things.
Advice to Sky Zone owners
Paying attention to your business is vital. A lot of times people want to sell their business when it’s on a downtrend. Having a plan and understanding what your exit strategy is and what you want to do. It’s a little bit cyclical as far as revenue goes for Sky Zone. Watching your trends, understanding the need for innovation. Ideally, you don’t have any concern from potential buyers if your business is trending upward. The biggest concern is if you have two or three years of declining revenue and declining profit and no end in sight.
Does the buyer penalize the seller for remodeling?
Some franchise partners don’t recognize that when they put $300,000 into the park they could see a $500,000 improvement. When potential buyers are looking at a park, they’re usually interested if they have a warrior course, if they have a climbing wall, etc. If they don’t, you have to understand that it’s an investment they probably have to make and what it will do your revenue.
A franchise partner recognizes that if they don’t have a warrior course and if there’s an opportunity in there they will probably put one in if they will buy the park and that will be taken as a little bit of discount when you’re selling.
What is a good demographic for Sky Zone?
When Sky Zone first started, there are a million people in the territory. It’s a 30-minute drive. And then it went down to 500,000 and then to 250,000. Joe said that 500,000 people in your demographic is a really good start. The territories are pretty much all set now.
How do I determine whether or not my park is going to get the optimal value?
The biggest part of selling any business is exposure. A lot of times business owners are concerned with people finding. Confidentiality is a big part of it, but exposure is the other thing that you really have to have to create the right pool to create the best value for that business. As a broker working in IBA, Joe had a lot of opportunities to get exposure to a business in this price range and that’s vital to really drive up the business and the opportunities.
How do I know if I will be able to sell the business myself?
The biggest part of your business is your financial package. You need to know the numbers and understand that. Understand that sometimes it takes 12-18 months to put a plan in place if you are ready to sell. And being able to present your finances for when you are ready to sell. Exploring and understanding that is vital to being able to sell the business comfortably and confidently. It’s not a simple process. It’s a long process, it takes a little bit of time. So having a conversation with a broker or an accountant or someone who has dealt with business transactions is vital just so you have all your documents around when you do find that buyer that is going to provide you the exit that you like.
Where to find Joe Dillon?
Joe offers confidential business brokerage services & business development at Indiana Business Advisors.
You can contact him through LinkedIn at https://www.linkedin.com/in/joedillon/
Joe’s advice to his Sky Zone brethren
Pay attention to your finances and really understand it. Plan for your next renovation – it’s vital. And you usually see a bump in your business, so if you want to keep running your business for the long term, make sure you are driving the business and hire a good marketing team.