SellingAGymInmypositionasmentortohundredsofgymowners,I’vebeenthroughthepurchaseorsaleofagymdozensoftimes.Afewyearsago,ItraveledtoBostontovisitaTwoBraingym.Theownerswereonlyafewyearsin,buttheywerehugelysuccessful.Andtheysawanopportunitytopurchaseoneoftheothergymsnearby.Iwascalledtobalancethenegotiationandprovideindustryperspective.Iwantedtobepartofthedeal,becauseIsawashiftintheindustry:well-rungymsareabsorbingpoorly-rungyms.AndIthinkthisisagoodthing.Itmeansthatthebestclientsgotothebestgyms.Itmeansthatcoacheshavebetteropportunitiestomakecareers.Anditmeansthatmanygymowners,whostartedabusinesstobuythemselvesajob,cangetajobasacoachatabiggerbox.IwassoexcitedtohelpthatIregisteredtwodomainnames—gymbroker.organdgymtransitions.com—andstartedtalkingaboutbuyers’groupstoourmentoringteam.Butafterasingledayofnegotiationswithgymowners,Isaid:“I’mneverdoingthisagain.”Everygymownerwemetthoughttheirgymwasvaluable.Theywereemotionallyinvested,spending14hourseveryday,coachingmostoftheclassesthemselves.Theyknewtheirclientsinsideandout.Theywereallin.Buttheywereallselling,becausetheyweregrounddownby“thebusinessside.”Thatshouldhavebeenmyfirstredflag:thereisno“side”inabusiness.It’sallthebusinessside.Tothem,theirbusinesswasworthhundredsofthousands.They’dcollectedthatmuchinrevenueovertheyears,thoughmosthadn’tpaidthemselvesmuch.Theyhadloyalclientswhowerededicatedtothecoach,buttheirratesweretoolowtocovercosts.Theyhadvolunteercoacheswithoutanyrealtietothebusinessandequipmentthathaddepreciatedtozero.Mostwerestillinunbreakableleases.Andafterafewyearsinbusiness,theywerebroke.Buttheyhadhighhopesforabuyout:afterall,their“sweatequity”musthavebeenworthsomething,right?Nope.Wheneachsawtherealvalueoftheirgymonpaper,theywereupset.Onesobbed.Somethoughttheirbusinesswasworth$300,000becausethey’dsold$300,000worthofmembershipsover3years.Buttoabuyer,thegymwasalmostworthless.

Myfriendsmadeagenerousoffertooneowner—approximatelydoublewhatthebusinesswasactuallyworth,withaslidingpayoutbasedonclientretention.Itwasstillathirdofwhattheownerwanted,buthetookitbecauseheneededtogetoutfast.Andnooneelsewouldgivehimadollarforhisfailingbusiness.Ithought,“I’mnotdoingthisanymore.”Icouldn’tstandtoseegoodpeoplegettheirheartsbrokenwhentheyrealized—toolate—thattheyhadn’tbuiltarealbusinesswithvalue.Gymsareboughtandsoldeveryday.Sometimesthebuyerismakinganemotionalpurchase,andtheywindupbuyingtheowner’smistakes.Sometimesthesellerpaintsarosypicturethatisn’ttrue.Neitherofthesethingsarenecessary.Ifyoufollowthestepsinthisbook,you’llbuyORsellabusinessforitsfairvalue.OryoumightdecideNOTtobuy.OrNOTtosell,buttofixyourbusinessinstead.Afterall,ifagymismakingmoneyanddoesn’trequiremuchtimefromtheowner,there’snoreasontosellitinthefirstplace.Keepthatinmind.Alsothese:It’snotyourbaby.They’renotyourfriends.Whenyou’rebuying—orselling—agym,repeatthesemantrasoverandover.Asentrepreneurs,weinvestalmosteverythingintoourbusinesses.Wedrainourfiscalandemotionalbankaccountstostart.Westressourbodies,mindsandrelationshipstothebreakingpointtomakeitwork.Weknowwe’rebuildingsomethingvaluableforourclients.Butwhenitcomesdowntoatransaction,there’ssimplynoroomforemotionalattachment.Agym’svalue,atpurchaseorsale,isdeterminedbyitsprofitability.There’snolineonabalancesheetforhowhardyouhustled,howbadlyyou“wantedit”,orhowcautiouslyyoupursuedexcellence.Sorry.ThebestwaytosellabusinessistolookatitwithadispassionateeyeanddetermineitsREALvalue.Andthemostvaluablegymtobuyisonethathaslittleattachmenttoitsowner.

Inthisshortebook,I’llgiveyoutipsandtoolsforsellingyourgym.I’llanswerthesequestionsandprovidethesetools:

• What’syourgymworth?Ourcalculatorwilltellyoufast,oryoucanalsousemy“back-of-the-napkin”math.

• Shouldyouputclientsoncontracts?• What’sitworthtokeepthegym?• Howtoshopthegymaroundtopotentialbuyerswithoutshowingyourcards• WhyyoushouldNEVERfinancethetransactionforthem• Isyouraffiliatename/website/brandworthanything?• Howtoannouncethesaletoyourclientsandcoaches

YoucanalsolistentoJasonAckerman’sstoryonsellinghisgymonourpodcasthere.Andyoucanreadanin-depthvaluationanalysisbyJoeCormierofRigQuipmenthere.

What’sYourGymWorth?Yeah,Iknow:it’spriceless.Butyou’recomingtothetabletosell,soyoushouldstartwitharealisticideaofwhatit’sactuallyworth.Thisisthehardestpartformostgymowners,becausetheactualvalueisoftenfarlessthantheythink.Thevalueofagymisdeterminedby:PredictablerevenuesintothefutureTheclient’swillingnesstostaywithoutthecurrentownershipOutstandingliabilities(loans)andcommitments(leases)Equipmentandassets.PredictablerevenuesInallofmybooksandinseveralblogposts,Itellgymownerstoavoidusingcontracts.Butifyou’resellingagym,youmightwanttohaveyourclientsoncontracts.Thisguaranteesthebuyersomepredictablefuturerevenues.Ifyouhaven’tbeenusingclientcontracts,don’tsweatit.Ifyou’reaTwoBrainclient,you’realreadytrackingretentionclosely,andyouhaveastep-by-stepretentionprocessthatcanbeimplementedbysomeoneelse.You’vealreadydonetheworktoattachyourclientstoyourbrandinsteadoftoyou,theowner,oroneparticularcoach.Yourbusinessistransferable,andthatmakesitvaluable.Ifyou’renotintheTwoBrainfamily,askyourselfthis:“CanItaketwofullmonthsawayfromthebusinessandstillseehighretentionandgrowth?”Ifnot,youmightconsidertakingayeartobuildthebusinessintosomethingyoucansell.Evenifyou’renotthinkingaboutsellingyourbusiness,buildingittobeasaleableassetwillhelpyoumaintainobjectivityanddistancewithyourbusiness.ClientRetentionWithoutTheOwnerAretheclientsattachedtothebrand,ortotheowner?IftheclientscometoCatalystGym,aren’tquitesurewhoownsitanddon’treallycare,thenyouhaveastrongbrand.That’svaluablebecauseit’stransferabletoanewowner.Ontheotherhand,ifyourclientsgoto“Chris’gym”,youhavetheIconProblem.

Ifyourclientswill“followyouanywhere”,yourgymislessvaluabletoabuyer.Canyoureallytaketwomonthsawayfromthegymwithoutanycontact?Ifso,it’svaluable.Ifnot,makeitso.OutstandingLoansandCommitmentsIfyoustillowemoneyonyourequipment,someone’sgoingtohavetopayoffthatloan.Ifyoutookapersonalloantopurchasetheequipment,makesureyouaddthevalueoftheequipmenttocovertheloanbalance(atleast).Ifyoutookabusinessloantopurchasetheequipment,subtractthatamountfromthepurchaseprice,becausethenewownerwillhavetoassumethatdebtontopofthepurchase.Ifyou’relockedintoalease,thenewownerwillneedtoassumethesamelease.Isyourleasetransferabletothem?Askyourlandlordbeforeyouconsiderselling.Aleasemightactuallylockyouintokeepingthebusinessuntiltheleasetermends.Ifyourleaseisfavorable(farbelowmarketrate,orinahigh-demandarea)itmightactuallybeanassetthataddsvalue.Butthisisn’tthenorm:usually,theleaseisaliabilitythatreducesthesaleprice.EquipmentandAssetsYourequipmentisworthitsreplacementvalue,notitspurchasevalue.Todeterminethevalueofyourequipmentonthemarket,lookforequipmentresellers:canabuyerpurchaseusedequipmentmorecheaplyonline?Ifso,theywill.Thebasicruleofthumb:Ifyourequipmentislessthan3yearsold,it’sworth30%ofwhatyoupaidforit(.30conthedollar).Ifyourequipmentismorethan3yearsold,it’sworth10%ofwhatyoupaidforit(.10conthedollar.)Ofcourse,ifyou’vedepreciatedyourequipmentaggressively,itmightcarryavalueof$0onyourbooks.Inthatcase,you’regoingtohavetopayforsomeextraaccountingifyouselltheequipmentlater.

CalculatingTheValueofYourGymUsethedetailedcalculatorfromourfriendsatRigQuipmenthere.Linkdoesn’twork?Copyandpastethisaddressintoyourbrowser:http://twobrainbusiness.com/wp-content/uploads/2016/02/Rigquipment-Finance-DCF-Worksheet-for-TwoBrainBusiness.com_.xlsxBaseyourvaluationonthreeyears’revenues,notfive.Somebusinessesuseafive-yeardiscountedcashflowmodel,butthesebusinessesusuallysellaservicewithextremelyhighretentionrate,likefinancialplannersanddentists.Inthefitnessindustry,3yearsisprettylong:mostequipmentisturnedoverinlessthan3years,andretentionratesforclientsisfarless(around4monthsinglobo-gymsand13monthsinmicrogyms.)Wanttogetaroughestimation,fast?Here’sthemathIuseoverthephone:Takeyourtotalprofitforlastyear.Profit,notrevenue.Profitincludeswagespaidtotheowneranddividendstaken.Ifyourgymisn’tprofitable,it’snotworthanything.Multiplybyzero.Skipdownto“sellyourassetsandclose”.Multiplyyourprofitby3years.Multiplyitagainbyyourretentionrate(ifyouhave80%year-over-yearretention,multiplyyour3-yearprofitprojectionby0.8.)Addtherealvalueofyourequipment(probably30%ofitspurchaseprice,or10%ifit’smorethan3yearsold.)That’sthemaximumvalueofyourbusiness.Example:Bill’sgympayshim$60,000peryear,andhisP&Lshowsaprofitof$5000lastyear.Todetermineitsvalue,Billmultiplies$65,000(thesumofhispersonalwageplusprofit)timesthreeyears.Hestartswith$195,000.Buthisretentionrateispoor:mostofhisclientsareoneight-weekchallengepackages,sohecalculatesthathehasa50%year-over-yearretentionrate.Thatbringsthevaluedownto$97,500.(Yes,animprovementof10%inhisretentionratewouldmakehisbusinessworth$19,500more.AnotherreasontodotheIncubator,evenifyou’replanningtosell.)

Thenheaddsthevalueofhisequipment($42,500purchaseprice,mostlymorethan3yearsold,withsomenewerrowers.)Totalvalue$7000.Themathis($65000x3x0.5)+7000=$104,500.Notbad.Obviously,tomaximizethesaleprice,Billhasacoupleofoptions.Bothinvolvewaitingayeartosell.Buthecould:TakealargerpaycheckinsteadofbuyingnewequipmentImprovehisretention(goingfrom50%to70%isprettyeasy,comparedtorecruiting20moremembers.)Thethirdoptionistotryandincreasegrossrevenueorheadcounttomakethegym“morevaluable”.Butunlesstheownerpayshimselfmore,ortakesalargerprofitdividend,thevalueofthegymdoesnotincreasejustbecauserevenuedoes.ThereISafourthoption,andthat’stryingtooverstatethevalueofthegymandfindingasuckertobuyitformorethanit’sworth.Thishappens,butdon’tcallmeforhelpifthisisyourplan.FindingABuyerIgetit:you’redone.Maybeyoujustcan’tseeapathtofixingthegym.Maybeyouinheritedsomeinsurmountablemistakesfromapreviousowner.OrmaybeyouDOseethelight…butyou’retired.Maybeyou’rejustreadytoleavetown.Sellingyourgymisabalancingact.Ifyourmembersfindoutit’sforsale,they’llstartlookingforotheroptionssotherugisn’tpulledoutfromunderthem.Butifnooneknowsit’sforsale,youcan’tsellit.Weteachafour-partprocesstofindingabuyer(andyourmentorcanhelp):1–YourCoachesYourcoachesarethemostlikelytowantyourgym.Thekeytosellingtoacoachistoletthemsecurethefinancing.Ifyou’reinarush,itmightbetemptingtofinancethepurchaseforthem(youessentiallyholdtheloan,andtheymakepaymentstoyoueverymonthuntilthegymispaidoff.)Butfinancingthepurchasemeansyoustillownthegym;you’rejustabdicatingtheresponsibilityforrunningit.You’returningoperationofthegymovertosomeonelessskilled,lessknowledgeableandwithlessriskthanyouhave,andhopingthey’lldoitbetterthanyouwill.

Mostofthetime,owner-financedpurchaseofaservicebusinessdoesn’tworkoutwell.Usually,thepurchaserquicklyfiguresoutit’salothardertorunthebusinessthantheythought,andthebusinessgoesdownhill.Thebuyercan’tmakethepayments,andtheownerhastoswoopbackintosalvageabusinessthat’sfarworseoffthanwhenheleftit.Itmightalsobetemptingtohelpthecoachfindthemoneybylinkingthemupwithawealthyclient,orconnectingthemwithalender.Again,thecoachneedstofindthemoneyontheirown.Any“assistance”onyourpartcouldbeseenasanegativeifthegymfailslater.I’vespokentomanybuyerswhofelt“hustled”afterbuyingagym.Sometimestheydidn’tdotheirdiligence;sometimestheydidn’tunderstandwhattheywerebuying.Buttheyalwaysblamedtheseller.Andwhenmoney’sontheline,peoplechange.Stayoutofthefinancing,period.Ifyouhaveacoachwhomightbeabletobuythegym—orfindthemoney—askthemtolunch.Say:“Ihavesomethingimportanttotalkabout,butIneedyoutosignanondisclosureagreementbeforewedo.”Ofcourseyoutrustthem.Ofcoursetheytrustyou.Ofcoursethey’llpromisetokeepyourtalkasecret.Buttheyprobablywon’tunderstandtherealimportance(hundredsofthousandsofdollars)ofstayingabsolutelymute.UseanNDAtohelpthemseehowseriousyouare.YoucandownloadacopyofourNDAfromourmodules,ifyou’reintheTwoBrainfamily,orhirealawyertodraftoneifyou’renot.Tellthem:“I’mpreparingtosellthegym,andIwouldobviouslypreferitstaysinthehandsofsomeonewhocaresasmuchasIdo.SoI’mgivingyouthefirstopportunitytobuyit.”Waittogaugetheirinterestbeforeyoutalkaboutmoneyoranyotherspecifics.Iftheyaskabouttheprice,showthemyourvaluation.Don’tgivethemaroundnumber,andneveraskwhattheythinkit’sworth.Keepthepriceobjective.Iftheyaskhowtheycouldgetthemoney,youcanmakesuggestions,butdon’twalkthemovertothebank.Iftheyplantoaskamembertofundthepurchase,themembershouldalsosignanNDA.Allowthecoachandmembertoworkouttheirownfundingagreementwithoutbeingpartofthatdiscussionatall.Finally,givethecoachadeadlinetosecurethefunds,justlikeanyotherbuyer.Thiswillhelpthemtakeactioninsteadofsittingon“maybe”fortoolong.Ifyoudon’thaveaninterestedcoach,turntoyourkeymembers.

2–YourMembersAskingyourmemberstobuyyourgymisevenmoretenuousthanaskingyourcoaches.It’shardtokeepamembersilentaboutyourplans.Ontheotherhand,yourmembersaremorelikelytohavethemoneytobuyyououtthanyourcoachesare.Followthesameprocessabove:invitetheclienttolunch,askthemtosignanNDA,andlayoutyourplans.ItmightfeeloverlyformaltointroducetheNDAwithaclient,butit’salsoafilter:anyonewithbusinessexperiencewillunderstand.Anyonewithoutbusinessexperiencewon’t.Iftheywon’tsigntheNDA,thedealwillprobablygobadlyanyway.Justenjoyagoodlunchandlookelsewhere.Whichmembertoask?Thinkabouttimeswhenamemberhassaid,“Ifyou’reeverlookingforaninvestor…”Oreven,“Here’showyoucanimproveyourgym…”Lookforentrepreneurs,especiallytheoneswhoaren’tfrazzled.Don’tlookforthetopathletes;lookforthemostexperienced.Sharethevaluationwhenasked.IncludeP&Lstatementsandaccountingdocuments.Stayawayfromvagaries.Neversay“Ithinkit’sworth…”ortrytoforecastfuturevalue.3–OtherownersnearbyIfthere’sagymowneryoutrustnearby,invitethemtolunch.HavethemsignanNDAbeforeyouevenhintaboutthepurposeofyourmeeting.Ihatetoadmitthis,butmanygymownersstillseeeachotheras“thecompetition”.Itmightbeterrifyingtotellanothergymownerthatyouwanttosell,andforgoodreason:they’llbetemptedtorecruityourclients.Butothergymownersarealsothemostlikelytowantyourgym.It’sstillabadgeofhonorintheindustrytoownmultiplegyms.Icanthinkofmanyexampleswhereagymownerboughtasecondlocationbecauseofits“potential”insteadofhavingalogicalreasonforexpansion.Insomecases,othergymownersreallyarerunningprofitablebusinessesthatcanscale,andtakingoveryourgymmightappeareasierthanstartinganotherfromscratch.Maybeyouhavealeverageablelocation.Maybeyourgymisoneortwohardconversationsawayfromprofitability,andthey’rewillingtohavethoseconversations.Maybeyourgymneedsacashinjectiontogetoverthehump.Maybethey’rejustbetteratbusinessthanyouare.

Ifyouhaveastrongrelationshipwithanotherlocalgym,considersellingtothem.Followthelunch/NDA/valuationprocessthesameway.Butifyoudon’thaveahistoryofmutualsupport,don’ttellyourplanstoanotherlocalgymowner.4–OnlinelistingserviceIfyou’redesperatetosell,youcanlistyourgymanonymouslyonline.Theseservicesactuallyhavealotofpositives:youcanstayanonymous;yourclientsprobablywon’tseethead;andownerswhoareactivelylookingtoexpandwillseeyouropportunity.Thereareafewonlinelistingservicesforgymsnow.5–SellYourAssetsandCloseIfyourgymislosingmoney,it’sworthlessthan$0.Itmightactuallybemoreprofitabletoclosethedoorsandselltheequipmentthantokeepgoing,especiallyifyouhavetocommittoanotherleasetermorlargerspace.ListyourequipmentinFacebookgroups,orcontactareseller.Ifyouhavetime,putitintostorageandspreadoutthesaletomaximizeyourreturn.Ifyoudon’thavetime,sellitasa“startuppackage”orsomethingsimilar.What’sYourBrandWorth?Ifyou’resellingagymnamed“CrossFitAsset”,it’sprobablynotworthanything.Youdon’towntheCrossFitbrand.You’realicensee(justasIam.)Youcan’tsellthedomainname,becausetechnicallyit’snotyourIP.Youcan’tsellthesignage,becausetechnicallythebuyercan’townituntilthey’reapprovedasaCrossFitaffiliate.Anythingthatsays“CrossFit”onitisthepropertyofCrossFitHQ—youcan’tsellit.TransferringyourCrossFitgymiseasy:affiliatesupport@crossfit.comhasalwaysbeenstaffedbysmart,caringhumans.Thebuyerofyourgymwillhavetoapplyforaffiliationandpaythelatestaffiliationfee,buteverystoryI’veheardabouttransferhasbeenpositive.Justdon’texpecttocollectontheCrossFitbrand.Ifyouhaveanotherbrand,withgoodrecognitionthatyoucandemonstrate,itmightbeworthsomething.Inanowner-operatedbusiness,brandvalueisverylow(trytothinkaboutanotherlocally-ownedbusinesstowhichyou’re100%loyal,andyou’llseewhy.)Tocalculatethemonetaryvalueofyourbrand,addupthewaysyoucansavethebuyermoney:

Ifyoualreadyhaveawebsite,thebuyerwon’tneedtobuildanewone.Ifyouhaveaplaybookthatyourstaffcanfollow(orotherturnkeyassets),yourbusinessisworthfarmore,becausethenewownerwon’tjustbebuyingherselfajob.Ifyouhaveasignonyourbuilding,thebuyerwon’thavetohaveonemade.Tshirtinventory,logos,flyers…theseareallassetsunlessthey’reoutdated.Calculatethesethingsthewayyou’dcalculateyourhardassets(they’reworth30%ofthecosttobuildoracquireuntilthey’re3yearsold;thenthey’reworth10%.)Theintrinsicvalueofyourbrandisthemoneyitwillsavethenewowner.Unlessyou’vebeenopenforadecade,“brandrecognition”isprobablyworthnothing.Butifyou’reinasmallertown,andfrequentlyhavewalk-invisitors;oryou’reinalargecityandpeoplegoogleyourspecificbrand(not“CrossFitinxcity”)youmightbeabletochargesomethingforthebranditself.Thelitmustest:doesthebranditselfactuallyattractclientswithnofurthermarketing?Mostofthetime,itdoesn’t.Catalysthasbeeninoursmallercity(75,000people)for14years.Whenpeoplethinkofexercise,mostwouldplaceCatalystontheirlistofoptions,becausethey’veheardofit.Buttheydon’tGoogle“catalystfitness”unlessthey’relookingfordirections(iethey’vealreadydecidedtotrainatmygym).Thatmeansthey’renotcomparingmetootherservices,likeyoga;they’relookingforpersonaltrainingoraCrossFitgym.Unfortunately,thatmeansmybrandhasnointrinsicvalue.Mywebsitecost$3200tobuild,andit’sstillgood;mysignageisbacklitandhuge,andIownmybuildingandproperty.Thosecarryvaluebecauseabuyerwouldhavetoreplacethem.ButIcan’tcharge$10,000for“thebrand”.

ShouldYouSell?Afterallthismath,youmightbediscouraged.Youmightevenfeeltrapped.Maybeyourbusinessisn’tworthwhatyouthought.Maybeit’snotworthenoughtocoveryourdebts.Maybeyou’rewondering,“Whatnext?”Here’sthegoodnews.TheprocesstomakingyourgymprofitableistheSAMEprocesstomakingyourgymvaluabletoabuyer.There’sahugedifferencebetweenaturnkeygymandaclientlist.Intheformer,thebuyerwalksinthefirstday,conductsbusinessaccordingtoyourplaybook,andretainsaprofit.Inthelatter,thebuyer’snotreallybuyinganythingbutalistofnames.Ifyouwanttoprofitfromthesaleofyourgym,thebestthingyoucandoismakeyourgymasprofitableaspossiblebeforesellingit.Ifyou’veeverwatchedahouse-flippingshowonTV,orevensoldacar,you’llknowthevalueoffixingsomethingbroken.Addadeckfor$20,000,andthesalepricegoesupby$40,000.Putnewtiresonthecarfor$600,andsellthecarforanextra$1,000.It’snottrickery:thevaluecomesfromsavingthebuyersomework.Sinceit’ssoeasytostartagymfromscratch,yourgymmustsavethebuyeryearsofworktobevaluable.Andyoumustbeabletoconfidentlysay,“Thisgymwillfeedandclotheyou,asitdidme,ifyoufollowthesamestepsIhave.”Ifyourgymisn’tprofitablenow,makeitprofitable.Getamentor—noneofusfiguresthisoutalone.Buildittosell.Ifyou’retooburnedouttokeepgoing,adoptthemindsetof“buildingtosell”—insomecases,it’sworkedwonders.Wanttotalkaboutmentorship?Bookafreecallwithmehere.If,however,you’rereadytopassafunctional,profitablegymofftosomeoneelse,thenkudostoyou,myfriend.Iunderstand:you’removingontonewopportunities.Sharethefruitsofyourlabors,reapyourreward,andknowthey’regettingawinninglotteryticket.Congratulations!