At some point, every business owner has to make a decision about how they plan to exit their business.
Too often, this important detail gets neglected.
It’s hard to think about the future when you’re still trying to pack 300 members in your facility.
Maybe it seems too far away, or maybe you don’t ever see yourself retiring… Whatever it is, we promise you that not having an exit strategy only hurts your business.
This week on Just One Thing we are launching into an entirely new series founded in building your exit strategy.
In this episode, we discuss:
- The formula you should be using to assess the value of your business so you understand how much it’s worth.
- Actionable steps you can take to increase the value of your business and the ease of sale.
- The most common mistakes fit pros make and how you can avoid them with your exit strategy.
And much more!
If you’re starting to think about the future, or simply want to know how to figure out how much your gym is worth, then this episode is perfect for you.
Now that you know how incredibly valuable all those systems are that you’re putting in place, how about leveling up your operations? Naamly makes it easier than ever to systematically scale your operational efforts and manage your brand reputation (helping build the value of your business). Want to try it for FREE? Start your free trial now!
Watch The Full Episode
Sumit: So, welcome Tom and welcome listeners to another episode of just one thing. We’re training gym owners get actionable insights to build a dream business. I’m your host summit, Seth and I am with the legendary Tom Plummer again and over the next 12 minutes or so we will unpack one thing to help you move forward in your business.
So let’s just get started. Um, Tom, uh, today’s topic is and
getting ready to sale. What should I be thinking about and what can I possibly get for my gym?
Thomas Plummer: Uh, the 12 minutes. I always laugh when you say that, because our personal conversations are two hours, and now you want me to do this whole topic until I’ve finished yet.
Right? So listeners, it’s probably going to be 20 minutes. Just getting guys know that right now. So the. The big thing is that people, they don’t understand the exit strategy when they open the gym. The it’s I say this a lot of times when people just stare at me, like, uh, you know, like, um, just got dropped off a space ship under a streetlight, you know, it’s just like, well, alien, it’s just like, I tell people no, Get into a business until you know how you’re going to get out of the business.
You have to build the exit strategy in to the purchase. Now, a lot of the gym guys they’ll say, well, look, I really don’t want to sell well, you don’t today. You might in five years. You know, your life changes your, you know, you’re a kid gets sick, you get divorced, you know, a parent gets sick and you have to move to another state to take care of the parent there there’s we always don’t, you know, a dreamworld issue, you know, I’ll try and tell ’em 80 or 90 and people will love me and they’ll come to my gym and it’s, it’s just gone.
No training as a coach. It, this is a tough business. It’s very customer service intensive. It just, it is an extremely difficult business to manage over time. So you, if you run your gym as if you’re going to sell it always. And you always have a five-year escape plan, then you all, you run it better. And I, if you hold it for 30 years, you know, just great trade.
God, bless you. Go. Just do what you’re going to do. But. If you ever have to sell it, you’ve always have a maximized asset. And it’s a, I use it like some, like a really nice car. You wouldn’t buy, um, a high end, you know, like Lexus or high end Ferrari, and then park it in the driveway. Wax it don’t ever park it in the garage and just let this $300,400,000 asset just.
Tara itself thought by did let you, but that’s what guys do with gyms. They buy, Jim’s like, okay, I’m going to hold this. This is my desk. And I don’t need to reinvest and I don’t do this. And they just, they hang on to the asset, assuming they’re always going to have it. Then when they need to sell it, it’s worth nothing because they never valued the asset.
So rule one is always assumed that you’re going to at some point, want to sell this and always assume it’s five years from the date. So every year rewrite your five-year escape plan. But the asset that you have is the gym.
You don’t even know how to put a value on it. If somebody wanted to buy it, you have no idea and you run it. Like it’s a little clubhouse. You just take enough money out of it. So you never maximize the potential of the asset. So if I’m always going to sell it and assuming I want maximum dollars for it, if I have to sell it, then I run it better.
So that’s the first thought is, okay, I have to sell this assets at some point, I need to get the best books. So using that mindset going in, then we have to start to figure out, okay, what could this thing be worth? And that’s the hardest thing about this now is there’s just the multiples and how things sell these days are just stupid.
Still going to have at least a base reference point, just some base reference point. You know what Luber sold for Oregon? I was like, well, we’re not quite Uber, but so the base formula is EBITDA. Plus owner’s compensation times 3.5 minus the debt and EBITDA is interpreted as earnings before income tax.
Depreciation amortization. And I, you have to use that. We’re going to talk about, I think, partnership agreements somewhere in here as well, because that makes it hard to sell unless these are in place, but the formula, a lot of your accountants will go, well, you know, the especially older accounts they’ll go, well, no, that’s wrong.
I don’t know where he got that. It’s certain things before interest in taxes. We don’t sell for 20 million or more. There is no, you know, $2 million in debt where the interest passes back to the buyer. You know, our, our gyms sell for 500, 800 a million too. If you own five or six gyms, they might sell for a few million dollars.
But so when you define this it’s earnings before income taxes, depreciation, amortization will come back to that. Plus owner’s compensation and owner’s compensation is salary. Bonuses to shareholders, which is usually, you know, you or your LCC partners, uh, phones, cars, insurance, as you take out travel expenses, the on going to London for a workshop for one day.
And I stay 10 days while we write the whole thing off as a business trip that goes back through there. So owner’s compensation is what the owners take out. And then the 3.5 is the art form of all this 3.5 is where the beauty comes in. If we looked at a hundred gyms that really sell, most of them do come down to that multiplier, which is 3.5.
So let’s back up and put it all together. So earnings before income tax on your tax return is that there’s a, let’s say I do a million dollars in revenue this year. Well, I’m showing topline of, uh, a mill and then I show, uh, expenses of 800 while your salary should be in the 800, but I have 200,000 pre-tax that means before the accountants terrible.
Play with it, make you reinvest in equipment to cut your tax burden. So earnings before income taxes, that would be the 200. The depreciation is a line item that if I buy the gym, you’re deducting it, but it’s. To me, it’s just, it passes back through me in cash, and then they have amortization. If you’re a franchise, you have amortization memorization for us in a gym business is intellectual property.
Like if you have a books that you’re passing through. So Mike Boyle sold his gym and he passed all his book revenue through the owner. Well, that’s intellectual property. Amortization that passes through. Uh, also if you’re a franchise and you paid $50,000 to buy your franchise, that’s built in, so that we’d lump that in the amortization process, the bigger companies have different ways to interpret that.
And your accountant, if they work with huge companies may say, Hey, in our world, just keep it simple. It’s either intellectual property or it’s the franchise. Most of you when you sell will not have. A any listing under amortization, unless you own like anytime fitness and you have franchise fee that you paid.
And then that, you know, of course that, you know, that’s that’s value. You should get paid for that. You paid it already. So that either passes through to me, or I have to pay it myself, but either way you as the owner selling it this value. So if I look at the. And then let’s say I bet, 200,000 for pre-tax.
I’ve got 50,000 on amortization. Cause I got a lot of heavy duty equipment in there. Zero in this I’ve got two 50 plus owner’s comp. I tell all owners when they run their gym, pay yourself a base salary of like $40,000. And I can’t live on dying. I know I don’t breathe. So I pay myself $40,000 and then every two months I sweep the account and pay myself bonuses.
To shareholders or owners. So the 40,000 makes it easier to get key performance indicators. You know, I can look at most training gyms, for example, their rent is about one third of their operating costs. So if my rent is 15,000, my total operating costs around 45 or 50% of that should be. But if you’re taking every dime out of the gym, you’ll never ever ascertain your key indicators.
So when you pay yourself a base salary, like you just a base 40 to $50,000 salary, then you take your money out every two months. And now it’s easier to track, easier to figure it out. And when you sell it, it’s much cleaner because I can see you paid yourself this and the expense. You swept the rest over here.
I get it. It’s clean. So you, you, that it makes it so much easier at that point to sell. So you take 40 or 50 sweep. The only thing I tell guys is make a metal deal with yourself. And if you definitely have partners, definitely do. This is a breed that leave a minimum in the checking account. So I might agree to leave $10,000 in the checking account.
We never go below that that’s emergency money, but so every two months we sweep there’s $20,000 in all the bills paid. Yeah. We need anything. Nope. No equipment needed this month. I got $10,000. I either take it out myself or it’s dispersed apart. So it’s EBITDA. Plus owner’s compensation, which is the bonuses we sweep.
And then I look at the value, okay, you’re taking your car payment and you’re running it through the business as an expense while I buy your business. I, that money goes to me because it’s not going to your car payment anymore. Uh, so your cell phone you’re running through. Cool. I get that, that money comes to me.
So the owner’s compensation is all in then times 3.5. And then once I get that number, then it’s minus the debt. That is the number that I never share with anybody. That that is what my business is worth as a, just a flat line number. This is what it’s worth. If I’m selling, I might use EBITDA plus owners compensation time since.
And so when, if you and I are buying a gym, we’re going to figure out this offered times one because, but what it’s really worth is 3.5 to four, right around in there. Even the highest sales in the gym business in the last 30 years have only been the top ones have only been based on an eight, multiple.
the number and that was, people will pay more. And this is a very big thing. Is guys go well, I want a franchise. Well, Y, well, you’re going to make, I mean, look well, franchises haven’t been overall that successful in our gym business. Only a couple, like maybe anytime, you know, curves back in the day, anytime fitness have really proven to be successful as franchises.
Um, you know, Gold’s has some issues there. They’re kind of restructuring their company. Now these days, world sold at one point and their, their total number of units I think, is down from their peak. Some small companies like powerhouse, it may be a two or 300 gyms. That was a lot of fun. That was a real fun company, fun brand.
And I don’t think much is left of that organization as far as sheer number of units. So when things come and go like that, there there’s a, a point of, if you’re looking at that, there’s almost a, a point of no return on what these things could generate. So if I go back to even. Plus owner’s comp times 3.5, then, then if I know what that number is worth, then I can use the multiplier.
Now back to the franchise thing. If I’m, if I’m trying to build a concept up and I have five gyms. And they all are running on the same thing, same system, but there are different markets. Somebody might want to buy that to scale it because you’ve already validated your business systems in five different locations.
So I don’t want to be the guy that runs the franchise. I want to be the guy that sells the constant. To the franchise. Equinox is the same thing. The family ran that was extremely talented.
They were way ahead of their time, brilliant gym owners. Uh, and they sold their units to a company that wanted to scale it. So the multiplier was. Right because you’re buying a scalable product, but if I own a single gym, it’s going to be worth 3, 5, 4, 5, somewhere in there, but I never offer it that I’m going to sell it for six or seven times.
And that’s what I show the potential buyer. And then if I’m buying it, I know what it’s really worth. 3, 5, 4, or five somewhere in that range, but I’m not going to pay you full price for this. So I’m going to offer you 1, 1, 5, 2, then we start to negotiate. So when you have this, you know, it now let me figure one big point and I know you missed some of the questions.
A big point is if I have that formula, then I constantly try to keep the value in the formula. So that’s why I reinvest in my gym every three years. So a tear off the turf, it’s three or four years old. It’s all beat up, but new turf. Then I’m looking at reinvesting. So my leases example, I always want two to three five-year leases or option periods on my lease because that builds up value because when I’m selling with EBITDA and I can go look, I’ve got a great lead.
And I’ve got two often periods with the same number, only a 2% increase and I’m under market value. My gym is worth more money because I’ve made the decisions to do that. That is reflective of the total package of Ebola because I’ve got the screen. This is, so my multiplier might be six because look at the value I brought through the leases.
So you, every decision you make increases the value of the asset by using the application of the EBIDTA from. Well, fair
Sumit: enough. I think you hit on it. One of my questions would have been, how do I increase that multiple, because I’ve also heard and read that the multiple, like, you know, you’re saying 3.5, uh, Tom, I, I also read it ranges from 2.75 to 3.5, 3.75.
And, and, and the trick really becomes from a gym owner perspective is like you said, I want it on the high end. So what parameters can I control? To make it look better and get a better value. And like you were saying, you know, just, just the least part of it, the amortization part of it, if you have that, which, which would you rightfully say most training gym owners won’t have, but what other things are in my control that I can do to get that higher?
Multiple, if you will. Um,
Thomas Plummer: the question there is like a couple of key items here. One, don’t put your name on the door. You know, this is, you know, if this is, uh, my name’s Freddy Johnson and I, this is pretty Johnson’s gym. Well, that’s pretty hard for me to buy Freddie Johnson, Jim, because his name’s all over everything.
So you you’re, you’re such a product in your own jam that I can’t, I can’t even buy it because it’s all you, it’s all your brain. Second thing is operation systems. Um, for example, one of the things that I think we’ve even talked about is the role of the assessor in the gym. One. Personal training experience, not afraid of asking for money.
That really is the first experience for every new potential client, the gym, and she places everybody into the system. We don’t let the trainers sell well, I buy your gym and you’ve got a 25 page training PDF on the computer for that job. Cool, you know, but that, that has value. You have operation plans, you have a library of workouts.
You have a YouTube library of your 75 most used exercises with the front view side view and a progression and regression, all that passes to me. Wow. So now you’re looking at six, seven times multiplier because I can come in and operate. But if it’s Freddy’s gym and Freddy is everything, it’s not worth much.
That leads to the next thing is 12 month contracts. You know, you’ve got packages and sessions. That’s, everybody can leave the day you sell. I don’t even have time to prove that I’m a good coach. So the there’s not a lot of guys left like that, but there’s still a significant number that still believe in packaging sessions versus 12 month contractual obligations.
Uh, so if I’m doing that that’s so if I’ve got 300 clients paying me an average of 300, Adjusted for the loss rates. You know, we usually use 0.8, eight in the gym for the multiplier. So if I take 300 clients, time to $300 times 0.8, eight, and they’re all on 12 month contracts, I’m looking at this going, okay.
That’s. Because the clients, they can’t run away. They can’t all quit tomorrow. I’ve got time to fight back. So the 12 month asset is enormous. Gym owners put all like, oh my God, that your equipment is I’ve got this great equipment. Well, you’ve got a three-year-old treadmill. It’s worth 500 bucks. You know, even, even the best treadmills in the market are only designed for about four years.
You know, they just, we beat them up and training gyms. So that’s not worth a lot. Steel is worth a lot, especially in the last year because of the virus, but steel is still somewhere in there, you know, use kettlebells, not going to deteriorate too much, but you get into bent bars and you get into torn up, workout benches with small rips in them or stains, or they’re just, you know, just overused and you start to apply.
Old boxes are all beat up and you’re like, oh my God. $80,000 of equipment and it’s worth about $20,000. So you, you only have really one asset well to, to sell one, if I’m buying your gym. And so I buy your 12 month base, you receivable base that receivable base means I have a whole pile of clients that I could project their income into the future.
If it’s packages and sessions, I have no receivable base because I have to collect money every time I see the guy, right. And I have strong leases. And you’re throwing the third factor, which I have, you know, training operations manuals for all the key points. Um, and then I’m looking at a gym down the street.
That’s it’s each gym pretty has none of the manuals. It’s all Freddy, these packets and sessions, same square footage, maybe even the same number of members, but I’m looking at these gyms going, this one’s worth zero. And this one’s worth, maybe, you know, this could be a 800, $900,000 jam. You know, this is really, the difference really comes down to those factors.
So if you want to build up value one and create systems to, you’re not the product, you have to use a team to deliver the product and the service. Is it scalable? Can I duplicate this? Why can’t do the manuals? And if I buy it, what am I really buying? I can go to perform better tomorrow and get some great equipment delivered with the best service in the industry.
I can do all that type of stuff tomorrow. So your equipment is cool, but I can replace it so easily these days, and really not at a huge expense. What you have is a location that I could perpetuate my business in. A membership-based when I buy in that, I have time to get my name out and get my coaches in, get my brand going, and ma we might run it together for 30 days.
So I’m introduced to your clients before you run away, but we just it’s, it’s a assets. So those will help give you that six to seven multiplier. Got it. I would think, uh,
Sumit: Tom, would it be fair to say it also makes a difference on how long the tenure of the coaches is also with the business because that’s.
So you’re taking care of the staff. The staff knows the customers and, and there, again, coming down to the policies and procedures in place to train the trainers and, and, and the, the product that they’re providing, which leads to a higher retention. All those factors also come into place because at the end of the day, higher retention will follow up on, oh, these, these members have stayed with you for all this time.
The chances are they’re going to stick with it because now that’s their lifestyle. So I’m going to get more money, uh, because I’m buying a business
turnkey
Thomas Plummer: that way the, uh, the staff is such a wild card. It just it’s the way you described it is how it should be in a perfect world. But it’s also the one that can go badly very quickly.
Um, it’s that surprise? You never know what’s going to happen.
When I look at their longevity, sometimes longevity doesn’t mean that’s a good. Okay. Um, um, I was working with a, uh, very large gym, old gym, 42 years old in Nebraska. And the guy was quite, you know, owned it. Uh, he was, would he have been, uh, 78 years old? I think maybe right in that range, uh, you know, for an active gym owner in a 50,000 foot facility, that’s getting some age.
And a funny thing is I helped him write a 15 year life plan while I was there. But that’s, I’d love that, but he’s bragging about his staff and I’m looking at his staff here at three people. Who’ve been with them 20, 22, and I believe 24 or 25 years. And they were worthless, absolutely worthless. And they, he paid them so much and they didn’t.
I absolutely nothing. The sales woman, after 20 years couldn’t even show me how many leads they had in the previous month. She had no sales systems. She just sat in an office all day. And then somebody came in and said, I want to sign up. She took the money, no calls, nothing. The manager was worth us. The head trainer.
Hadn’t probably trained anybody in five years. So longevity is not necessarily a gift when you buy it. Okay. So when I’m buying it, I won, I should have at least a backup, but I have to look at the staff as an individual, one guy at a time, uh, analysis to figure out if what I really do own here. And I give them all 90 days.
So everybody has the right to fail. So when they come back in, they fill out new paperwork, new application, submit a fresh resume. Legally, I should do all that anyway to protect myself and they go back, you know, we’ve been, we’re starting again. And here’s what you make good. I’m going to, you know, at the end of 90 days, if you’re still here, I’m gonna pay you more.
I’ll pay you more on this. But if the end of 90 days, let me, I have to figure out what I have to even go on with that. So you have to be able to stop is sometimes a gift and sometimes a burden, but you always have to assume one, you hope for the best plan for the worst. I should have at least a coach in my pocket when I buy a gym because they, I could lose everybody the first day.
I might have a fire everybody by the second day.
Good question. So, but I just don’t see. Um, yeah, it’s an individual. It it’s either Freddie, the accountant or Freddy, the rabbit hat. And you don’t know until you get in there, you know, just hang out with them for that first 90 days of what you really. Okay. So on
Sumit: that note, Tom, I know I said 12 minutes and you’re right.
It’s more than 20, so we should probably end this here. I have some more follow-up thoughts that are brewing and maybe that becomes part of episode two, three, and four. Um,
I mean, I think, I think it could be a five-part series, so, so let’s, let’s end this and we’ll get into part two of this if you will.
Thomas Plummer: Okay. Sure. All right.