Welcome to Part Three of Building Your Exit Strategy!
Did you miss the first two episodes of this series? Check them out here.
This week Thomas Plummer is sharing some serious wisdom for setting up your future.
In this episode, we discuss:
- The entity structure you want to avoid if you operate and intend to sell your gym.
- How to get paid for the sale of your gym (it’s harder than you think).
- Why owning the building can be an incredible investment.
If you want to get paid for the sale of your gym, or just want to learn how to build passive income into your exit strategy… This series is a MUST WATCH!
Want help increasing the value of your gym before selling? Naamly can help you seamlessly build valuable systems into your business. Start your FREE trial today!
Episode Resources:
- Start Your Complimentary Naamly Trial!
- Watch Episode 16: Exit Strategy Part 1: How Much Is Your Gym Worth?
- Watch Episode 17: Exit Strategy Part 2: How To Handle Debt, Salary, and Selling Your Gym
Watch The Full Episode
Sumit: All right. So welcome viewers to another episode of just one thing. We’re training gym owners get actionable insights to build a dream business and with the legendary top plumber again, and this is a multi-part series that we’re doing on getting ready to sell your gym and things that you need to be mindful of the, the formula itself.
And, uh, thanks for take care of, so Tom, we talked about the formula. We talked about what the owners should be thinking about in terms of debt, in terms of the earnings, in terms of salaries, owner’s comp, all of that. Tell me this other piece,
Thomas Plummer: uh, which is
Sumit: I’ve got the valuation now, most buyers. How do I take that money?
Is it one big lump sum pay? Like I’m assuming there’s a lot I can do in terms of, or maybe I con are you telling me about how do I get that money in which is the most favored way that benefits me? Most people I’ve heard or I’ve seen when I exited my company. Hey, we need you to stay in the business for X months.
It’s almost like a retainer or put in an escrow kind of a thing. I don’t know what happens in the training gym environment, because the money is a lot less comparatively. It’s a brick and mortar thing. So you tell me how, how does it work? What should I be thinking of? What should I be mindful of? What should I not give into it?
And from a buyer’s perspective, mistakes tricks. Good.
I’d like to tell everybody that they sell for cash, but I would say 90% of the gyms owned by one person or a couple or something like that.
The owner’s going to end up carrying. So you, you have to decide what I can live with down and what the payments would be. Normally, I wouldn’t sell it unless I could get 30 to 40% of the sale price down and then carry the note over three years. Um, and, or even five, and I will charge, you know, three, 5% interest on that.
Excuse me, as well. Um, there’s a risk you don’t get paid and then you have to take the gym back. We sold one of our businesses, uh, probably a decade ago and sold it to an experienced owner. And, um, we sold it with about 1400 members and she completely destroyed. Uh, uh, just within a couple of years or not even couple of years, probably 14, 15 months completely completely destroyed the business.
Um, We also sold the building to her, but we carried a note on that and there was a primary note was through a bank. Uh, she defaulted and we had to take the business back and, and, and actually a good fight to get our building back because she was a default at the bank as well. The bank were good. They knew us good people.
And they said, look, we’re going to give you a few weeks to clean this up, but we still had to scrape up a hundred thousand dollars to get the bank right. And we wrote off her whole note and had to step in. We sold 14 of members. Got it back with 360 members. Uh, it was one of the just complete tank jobs.
So even we’d do the right thing. Sometimes you don’t, but overall. Well, you’ve still got it back, built it up and we didn’t really lose, but we were still tied to it at that point when you carry the, no, even if they go bad, you’re still getting the asset back, but the assets usually damaged. And so you have to be smart enough to know, okay.
The business is worth 500,000. I get 150,000. I’m carrying a note for the balance and they pay two years in tanked, you know, do you want to take the business back or do you go, okay. I got 150 up front and I got two years of payments, you know? And, uh, so I’m good. You know, at some point you just, so you, you may not get the full sale price.
Now you can help that with personal guarantees, where if they have a house with equity, you can tie up some of those assets and kind of chase. A little stronger than you would if they have nothing. But a lot of times, small training gyms just sell to another coach and there, they don’t have a lot of stuff they give you.
They’re only 50,000 bucks and they really buying it with your cashflow. And that’s a, that’s a tough thing. I have a very successful. Small training gym client that selling it to his manager. Um, the gym was worth, uh, I think we put a value on it, maybe 600,000. Um, she came in, uh, one year as a trial. He knew her, she ran, but he gave her sweat equity for five, 5% for one year.
At the end of the year. Everybody agreed both of them that she would come on as a physical owner was stock for 10%. But he goes, okay, you can own the gym. I want to take 150,000 out for the next five years. You do that in each year. Stock will transfer back to you. So he’s got a five-year buyout from a, uh, a trainer within this system, but he’s getting what he wants because five years he’s sitting on the beach, but he’s still coming by a couple of times a year to train the staff.
He’s still involved in the process. You know, he’s still kind of doing those things to ensure that she stays in business and he’s controlling the numbers until she’s out. So there’s always a way to sell it if you want to sell it. But most of them bluntly are solid. 30, 40% down. The owner carries a note.
There is risk on. And you, you do carry it over three to five years and usually there’s, uh, some interests above. And if I can get a personal guarantee, I definitely will do that. Uh, sometimes at work, sometimes it just does not. So selling a gym is that there’s not many of them that sell outright for that.
A weird phenomenon. The training gyms is, and this. I would never believe that I’d ever have to have this conversation, but, uh, in the last three years, cause even the good guys made it through the virus, pretty much unscathed, but I had, uh, some conversation with guys. One of them is a Western part of the country guru and his gym.
He wants out, you know, a nationally known, internationally known speaker. He is. Tremendous person. Um, he’s been my personal client for a long time. Well, his gym is worth $3 million. Well, you’re never going to get $3 million for a 7,000 foot gym. Yeah. It’s just not going to happen is valuation because it’s him is based so high that he can’t sell.
And it’s a, so you have to go and say, okay, what can I get for this? That’s a very recent phenomenon. I have some guys up in the Northeast that are like that, that their gyms are so productive, so efficient that they almost impossibly sell, because you’re asking for a guy to put, you know, to buy something for two, two and a half million dollars.
And, you know, a small gym when I can actually go build a building and open the whole structure for. So that’s unusual, but it training Jim does have that possibility of being so successful that you almost drive the valuation too high. Um, and then leads me to one point is you, if you can own the. If you’re going to be in the market for, uh, 10 years or longer, meaning that’s home, you know, your family’s there, you love the area and you’re willing to hold for 10 years.
Uh, buying the building. If you can, is always a good investment, very anti bilineal that don’t want a debt, but it’s a very positive thing for people that are trying to build wealth into the future. So, if I can get, you know, an owner we’re in a small Midwest town, or we’re a suburb of Chicago or something, and we can buy a, uh, a building then that building, we get a 20 year note, pay it off at 10 years.
Anything after that, then when you pay yourself, rent goes to your pocket, becomes passive income or better yet. You sell the business or just close it and rent the building out. And it becomes your future income because you might pay yourself $15,000 a month while a tenant might pay you 15,000 a month is debt free.
You’re just collecting 50,000 a month in rent. So a building is a great escape plan for a lot of people because it does create. Path forward. An interesting side note is guys go, I can’t buy a building. I just can’t afford it. But if you look at it, roughly roughly today’s debt service, $5,500 is, is about the debt payment on a million dollars.
So I, you know, so you’re paying rent, you’re paying $10,000 a month rent you’re in essence, buying a $2 million building for somebody else. So at some point, if this is your place and you’re paying some pretty decent rent, then you’d want to consider buying the building because you have essence, you’re paying it off anyway.
So
Sumit: right there, Tom, like you went through it so nonchalantly, but that’s, that’s a beautiful point. $5,500 is worth a million dollar buildings if you’re paying 11 grand or so you are. You are paying for someone else
Thomas Plummer: since $2 million buildings.
Sumit: Yeah. That is that that’s an aha moment. Even for me. I mean, it doesn’t hit that way till you mentioned that.
There’s always ways, but the big picture we’re talking about here is I, if I can own the assets in there, it makes my escape a lot easier.
It makes my valuation a lot easier and it gets me out of the business. Plus it creates wealth for my family because if I get hurt or something, I do it. My only side note on that is stay away from retail space. If you want to buy a gym, Uh, building buy it in space that isn’t part of town where it’s either class say office space where somebody might put a state farm office in it, for example, or it’s medical space.
But I don’t want to be a strip Plaza trying to compete in the retail world today because that’s such a garbage segment of the market. Now, a hundred malls. Empty
So, you know, you talked about this gym owner. He has, you have to carry the five-year note. So from a big picture perspective, if I have to think about getting ready to sell years, Then I still need to be mentally prepared that I just can’t walk away from the gym.
At the end of that five year, I should be mentally prepared to say, I need to spend another three to five years because I’ll be carrying that note. I need to train the new owner, because like you said, not most gyms are an outright sale or an outright cash purchase.
Thomas Plummer: Correct. Right. Uh, the, the, the new owner.
So it’s. I’d like to think through it. That’s good. You know, I buy the gym from you. I want you to stand on 90 days. Most guys like I’m tired of you at 30 days come and show me how the computer works, introduced me to your clients and then get out of my way. This is my gym. I’m excited about it so that that’s not.
That doesn’t happen too often where they’re there do that. There used to be, um, if there’s any gym owners out there that had been in business 10 years or longer, they need to check and see what their corporate structure is. If you’re an old sea club. Those are absolutely the kiss of death. You, you, you want to get out of that.
Tell your accountant. No, never. No. You’re if your accountant does that, that accountant’s got to be 90 years old. That is absolutely the worst vehicle to sell a gym in because you sell it and then you get taxed on the sale twice. Um, and. It’s hard. So you, but it takes five years to 10 years, uh, to work through a C Corp.
So if most of, most of these guys had never heard of them, the younger owners I’ve never faced that, but some of these owners have been in the same location, 20 years. Many of them might be old, see corpse, and you definitely have to get rid of that. That is definitely a bad, bad thing to be. And you don’t need to know much about it.
Just ask your accountant. Am I a C Corp? And if you are say no, and if the account does not want me to keep it, get a new. Because you’re getting bad advice. That’s absolutely the worst vehicle to operate or sell it to you. Right. And then,
Sumit: and then the go-to position should be an escort, right? At the end of the
Thomas Plummer: day.
That’s what you want to be. If you’re a single owner, an S or a LLC, um, for married couples, and this is always again, raises eyebrows is, uh, married couples often don’t stay married. So I recommend if you and your wife are working in the gym together, Uh, or even if you’re not one spouses, a gym owner, one spouse has another job.
I still recommend a C Corp where your partners in this corporation and then it’s not a C Corp. No, I’m sorry, a LLC. And you form an LLC. Sorry, I misspoke one. Yes. So I think it’s still thinking C clerk when I said that, but so a husband and wife, I recommend them to do, um, An LLC. Uh, even though he might be a school teacher, the gym has her life.
Uh, I still recommend the LLC because if you go back to the first episode we’ve done in this series, the formulation, the value, uh, that once I build that formula into my partnership agreement, which we probably need to talk about in another segment, but at some point, and if I get divorced, we’ve already put a value on.
So your local account and we’ll look at your situation and determine if you should be an ass or should be an LLC. Just never be the old C Corp. Of course. I don’t know if people are able to set those up anymore, but that just makes sure that you under you have one, you have one set up for you. Yeah, I’m a C corporate, so, you know, but yeah, yeah, yeah.
And change that tomorrow. I’m going to burn your house down.
Sumit: Well, thank you. Once again, Tom, it’s a pleasure to have you and I so appreciate the time, the energy, the inputs, the insights, and the wealth of knowledge that you bring to these sessions. So thank you.Thomas Plummer: My pleasure, man. Thank you.