How to buy a gym OR sell your studio for the best price! (Part 1) (Interview with Joseph Dispenziere)

Highlights from the interview

[11:38] – Things to consider for a successful sale of a Small Owner Operated Personal Trainer Studio

[22:16] – How to create value by growing your fitness business with a team of high quality dedicated trainers

[44:52] – How to use a numbers-based business plan to get bank financing

[57:30] – Things to consider when deciding if you should Buy or Open a new gym?

[01:06:49] – Most importantly, how to estimate what your gym is worth.

 

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About our Guest

Our guest today, Joseph Dispenziere is a serial fitness business entrepreneur with over 35 years of experience in the health and wellness industry. 

One of his ventures, a cross training fitness studio, was an in-home personal training business and also a small group and one-on-one personal training studio that had 18 trainers, and at its peak 20,000 one-on-one sessions a year before he successfully sold it. 

He went on to start Core Fit Consulting, which consults gym owners from sales, to facility design, to lease negotiation, and even financing. And as an extension, he also formed, “The Gym Broker”, which as its name suggests acts as a broker for gym buyers and gym sellers. 

I wish I met him when I was selling my gym!

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Edited transcription of Fitness Business Secrets Podcast, Episode 28

A Past Gym Entrepreneur Life

Kristy: I’m so excited to have you with us today, Joe. Thanks for taking the time. I have a lot of seriously burning questions as a recent gym seller myself, and I really wish we had a conversation about a year ago when I started that process. So, I think whatever you have to say and what your company does is super valuable.

To start off, we’re going to talk about valuation. I guess I’m just curious about your background. It’s a very specific niche — gym brokerage. How did you get into the fitness gym brokerage business? 

Joseph: Well, our company is corporate consulting, so we started consulting for gym owners to help them become profitable. We train their sales teams. Let’s say a gym wasn’t making any money. We would come in, look at their financials, and see where we could make changes. 

We have strategic partners who would come in and take a look at your building lease, and see if we can renegotiate that because what we do know about the industry is that your two biggest expenses are always going to be rent and payroll.

If we can impact those and get someone to profitability much sooner, which is great for the business owner, and if they do want to have an exit strategy to sell, it’s much easier when you’re selling it to strength when your business is profitable. 

So, it was a natural extension of the consulting business, and it’s been great for us. We really appreciate working on the brokerage side, matching up the buyers and sellers, and putting together really great deals. 

Kristy: I’m not sure how big your company is and what your position is. How did your company even come into consulting for gyms?

Joseph: I’ve been a serial entrepreneur in the industry. I bought my first gym at 24. Prior to that, I worked for different natural gym franchises. I was an area director, so I had a lot of experience in each different business. I kind of hone my skills and try to figure out what part of the market was best for me.

That turned out to be one-on-one training and small group training, which was very early on probably in the early nineties, so we were kind of ahead of the curve. 

I like the high-end part of the market. I built up a couple of very successful businesses, sold them and then figured, “What’s next for me?”

I liked the business side. I didn’t want to do the day-to-day operations anymore, so consulting was a natural progression. I had worked with a consultant for years who has passed away. His name was Michael Scutter. A great guy and I learned a lot from him. 

I figured if I could impact people in our industry, then that’s something that I want to do because we struggle. We work so hard. We work long hours and sometimes we just can’t figure out a way to make ends meet. 

So, it was really important to see if we could impact those people. When they do want to exit, then we can help sell the business. You know firsthand that it’s a daunting task to sell your business.

We have a lot of experience. I have close to 40 years experience, and have already made the mistakes, so our clients don’t have to make them. That learning curve is much smaller, and hopefully we can impact them. 

How much does it cost for a Gym Consultant?

[11:38] Kristy:That’s big and helpful. I think that gives any viewers and listeners some context that you really come from a background of operations and kind of an overview of being a coach. I know we’re going to get into valuation. I’m dying to get into how we value companies.

I have one question because when I was running the gym, I went to score and I got some people who had a dance studio, but it wasn’t super helpful. In my mind, I didn’t think I could afford a coach or a consultant, but it could have definitely paid off in the long run. About how much can someone expect to pay to have a consultant help? 

Joseph: Well, it really depends on the scope of the work. Normally, what we do on the consulting side is we come in and take a look at your financials, then we’d have an in depth conversation.

We’re going to want to figure out how we could be most helpful. Believe me, inside one day, I know how to fix your business. Now, we have to go fix it. You have to take the steps to do so, but we’ve seen it. Every gym has a different personality and marketplace in different parts of the country. They’re all different. 

It’s got to fit your personality. Then, we’ve had to figure out how we can help you. Normally, depending on the scope of work, we’ll put together a proposal and it’s based mostly on an hourly rate.

You’d sign a contract with the retainer, and then we would work those hours off, but we’re going to have a pretty good idea from the beginning on where we’re going to start.

Once you work with us, you’re only a phone call away. Even on the brokerage side, after we close a sale, buyers are calling me constantly, especially now with COVID-19, on what to do with their businesses.

My phone is always on 24/7 to answer any questions. We love the industry, and we’re happy to help. 

Kristy: If someone wants to get a ballpark idea of the hourly rate, could you give me a range like $125 to $250 an hour or something?

Joseph: It all depends on who you’re working with. So, there’s me, my business partner, Matt Moriello, and then we have a couple of consultants who work with us. It also depends on the project. 

For instance, if it’s a small group training facility, I’m going to recommend one of our consultants who’s great in that area and they’re junior to us. So, they’re probably going to be a little less expensive. 

A lot of times we’ll oversee the project, but then they’ll go in and actually build the programs and we work together. I would say it’s probably somewhere between $100 to $250 per hour, depending on who you’re working with.

Kristy: Okay. 

Joseph: Is that helpful? 

Kristy: That’s helpful. Thank you for that. 

Joseph: You pinned me down. 

Kristy: I need to know the numbers, but I think that’s helpful. It is realistic. If it can help you get to profitability, I think that’s doable. 

Joseph: It can save you from throwing good money at bad. There are times where we may evaluate a place and think it’s just not fixable. Sometimes it depends on location, on your rent, and on your business model. 

We’ve seen things that are phenomenal. We’ve impacted a lot of businesses and made some great turnarounds, but the one thing when you work with us is we’re very realistic as far as setting our goals and expectations. It’s got to be the right match.

How to Sell Small Owner Operated Personal Trainer Studio

Kristy: Let’s say someone’s right in the middle, but because of the current situation, it’s getting a little tricky. What is the number one way you value a gym? Someone calls you, maybe they are not working with you, but they give you their numbers, so you see the numbers.

Just to make it easier to follow along, let’s give an example. For example, you have a trainer. They have a private studio and a couple of trainers. We can do two scenarios. 

Let’s say the first scenario is in a positive situation where the trainer themselves is not training too often, and the gym itself is making about $5,000. They train a little bit, but that’s not counting their salary. 

That seems like a typical scenario. They’re like, “I could definitely pass off my clients,” but maybe some of them will be passed on. How much do you think they could sell their gym for?

Joseph: So, are you talking about after expenses, the gym is netting $5,000? 

Kristy: Yes. That seems like a lot. That might be a lot, 

Joseph: It really isn’t. It shouldn’t be. There’s a few factors if we’re talking about a small studio. So, your question is spot on.

The biggest challenge with selling the studio where the owner is the face of the business is we always have to look at it from the other side. So, look at it from the point of view of the buyer. I’m going to come in and I’m going to buy Kristy’s studio, and it’s called Kristy’s Training.

So, when Kristy leaves, what am I really buying? You have to look into that. I look at this almost as if I was buying a dental practice or a single practitioners business. 

How do you replace the face of the business? That’s going to be your biggest challenge.

There are plenty of ways around that. Maybe Kristy stays on for three to six months, does a consulting contract, and kind of eases her way out of the business. That would make me, as the buyer, very comfortable because I know that the clients are going to be around for three to six months.

During that transitional period, it’s up to us to win them over. I feel much more comfortable then. That’s the psychology of the sale or of the buyer coming in. 

That wouldn’t be valued as much as let’s say an owner, who was very hands off, had a manager in place who was getting a salary and the facility was profitable. That would be much easier to sell. 

Again, we always have to look at it from the buyer’s point of view. Is that helpful? 

Kristy: Yes. It is helpful. Just curious if you could give me examples, even if there is some type of goal you want to give this seller of where they want to get it to, but let’s say they’re like, “I can definitely get a manager or something.” How much could the range be? 

Joseph: What you’d have to do is whenever you value the business, if there’s not a manager in place who’s taking a salary, then you have to discount that from your profitability. Let’s use your $5,000 number just for an example. 

Let’s say Kristy studio was netting, and putting in her pocket at the end of the month $5,000. That means she’s netting about $60,000 a year. Normally, that would sell for somewhere around three times that number ballpark, so that gym’s probably worth $180,000, assuming that she wasn’t doing a lot of the training. 

If Kristy was doing a lot of the training, then you might have to discount a little bit from there or work on the consultant contract like we talked before where you stay on for awhile and transition a new owner to make sure that the business stays.

Additionally, do the trainers sign a non-compete clause? I’ve seen this where somebody sells a business, and then a month later, the trainers go to a studio down the street. It’s not very nice, but it happens. You want to protect yourself for as many things as possible. 

We can’t protect everything. Sometimes people will be dishonest, but we’ve probably seen it. So, we’re going to at least educate you from the beginning on what to look for and what the pitfalls are as you sell your business.  

Kristy: Since I think this specific scenario is a common one regarding small trainers who own it, let’s go ahead and do the math. We can kind of calculate how much they’ve trained from that $5,000. So, we can discount that out. 

Let’s give it a location, which would help us determine the cost of a manager if you want to discount that out, then we can come to a price that they could get to. Then, also remind the listeners that this might be a goal for them if they want to bring on a manager, but it’s tricky. It’s hard to bring out a manager. 

Joseph: Again, it depends on the facility. If we’re talking about a very small facility, you may not need a manager. You may just be the owner or operator, and that’s fine. 

Always look at it from the other side. Look at it from the buyer’s point of view. I’m asking you. What would make you nervous about buying that business? What would be your answer? 

Kristy: It’s absolutely going to be human capital. It’s definitely things you can’t control, which is humans. 

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Can you successfully manage a growing fitness business with a team of trainers and train clients also?

[22:16] Joseph:That’s right. If that owner is doing 50% of the work and more, because I’ve seen it many times, that’s a tough place to be. I’ll change hats for a minute and go back to the consulting side.

When we’re consulting for an owner, they will always say, and I’ve heard this a thousand times, “They only want to train with me.”

First of all, you’re not that good. Nobody is. If you want, then you should just go work for somebody. If you want to be an entrepreneur, you have to be able to take your knowledge and teach that to your disciples, so your trainers. It may not be as good as you, but it’s going to be pretty good, and then you oversee it. 

I’m going to give an example. Like I was telling you before, I started a small group training and one-on-one training facility. Now, I already had eight in-home trainers and a nutritionist working for me in the field.

So, I opened up the studio and before you know it, this thing exploded. We built it up to where we had 18 trainers working there, so we were doing 20,000 one-on-one sessions a year. 

Kristy: Wow. That’s a lot. Did you say in-home as in these were trainers going to other people’s homes? 

Joseph: Yes. 

Kristy: Was there a physical studio? 

Joseph: There wasn’t. 

Kristy: Oh, wow. That’s impressive.

Joseph: The whole idea about opening the studio was let’s have a place where our trainers could go train their clients. If they were close by, we would have our staff meetings there, and then we caught the market just right. It really just exploded. 

My point was you can’t oversee 20,000 sessions, and still have a big book of business yourself. You just can’t do it, so you have to scale. I’m going to go back to my consultant, Michael Scutter. Loved him. Rest in peace. 

That’s the thing that he taught me from the beginning, because I was at that point where I just didn’t know how to grow my business to the next level. 

He was very good at kind of just talking to me and giving me back what I needed to know from my own words. So, there’s a lot to learn there as an entrepreneur, but the first step is to get past your own ego and become a teacher. If you’re a teacher, you’re going to scale your business.

If you keep all the business because you think you’re the best trainer in the world, you’re never going to grow. You’re going to be exhausted. You may put a few dollars in your pocket, but you’re not building anything. You want to build something you have to teach. 

How do you train & build a great team of trainers for your business?

Kristy: I completely understand. In the service business, you could apply this book called The E-Myth, and it’s talking about systems. We still have to get back to valuation because I’m not gonna let you go on that one. 

Joseph: It’s okay. I love to talk about valuation. 

Kristy: I want to get into the question that you brought up that I think other trainers and I faced. Maybe they don’t want to train. They don’t mind teaching, but they let it happen. They pass on the client, and then the client complains about something they’re not happy with and they feel like they’re teaching. 

Before the pandemic, we would try to hire trainers and the tricky thing for our business was we’re a women’s only. We were very strict because of the religious area we’re in, so we had to only have women trainers. Not just women’s only, but also men trainers and women trainers. 

If someone applied, we were really pleased if they showed up to the interview because it’s so hard to find staff. Women trainers wouldn’t even apply. There was so little. 

So, I guess the question is, what are your tips? Because I know there’s no magic bullet for staffing, training, and being a teacher, but what are your tips for the person who says it’s just hard to find trainers, and then the trainers that I have are hard to train or when I do train them, it doesn’t seem to work? 

Joseph: It’s a simple question, but there’s a lot of answers. We have to look at the industry as a whole. Since the financial downturn in around 2007 and 2008, what happened then was you had Planet Fitness, Retro Fitness, Crunch Fitness, Gold’s gym, and Powerhouse that are all now valued gyms. The low price point. 

There’s tons of those gyms. Then, you have Equinox and Life Time at the top. There’s very little in the middle anymore. Then, we have to talk about your boutiques like Orange Theory, F45 Training, and a million other places. 

My point is since 2007 and 2008, 12 years ago, there’s been a huge increase in the number of facilities and options. You only have so many quality health and wellness professionals, so that is very diluted. So, you’re right. Sometimes you can’t even get somebody to show up for an interview.

With that dilution, it’s really tough, which brings me back to the point of how you attract good talent. Another pet peeve of mine, if you look at the industry, unfortunately, trainers always have quote unquote, a ‘blue collar mentality.’ “How much am I getting paid for this half hour or this hour?”

That’s all they think about. I don’t think that’s a good way to do business. In my facilities, if you were hired, I would bring you on. You’d build a book of business. I would subsidize you until you built up that book of business, but then you were an employee. As long as you maintained a certain book of business, you were good and you could help out with other things in the facilities.

It wasn’t just about how much you made for that half hour or that one hour session. It was more about, “Where can I hang my hat and can I build a career here?” That’s a different mentality.

Was your facility in Brooklyn? 

Kristy: Yeah.

Joseph: Think about New York in general. All the studios that open and trainers are going from place to place, training somebody here, running uptown, going downtown, going to Brooklyn, and running around. That’s great because you get a decent, hourly rate, but how long are you going to do that for? 

That’s my point. If you want to build a career, that’s a different type of health and wellness professional. The challenges are dilution because there’s more places. I think we’ve got to get away from, “How much am I getting paid for this session and how can I build a career in the industry?”

Team Building Through Role playing, team meetings, team sharing

Kristy: I just wanted to get some big concepts. I think you said your coach or mentor, Scutter, was like, “You have to do this and this.” 

He was telling you to be a teacher and everyone’s like, “I love it.”

Then, they go and try, and you’re like, “I tried.”

Joseph: That part is easy. There’s trial and error here, but you constantly have to meet with your people. Once they’re an employee, if you call for a meeting at two o’clock on a Monday, they have to be there. If they’re a subcontractor, they don’t have to be there.

So, going back to the point of building a great team. Once you have your team in place, it comes down to training and role playing with them. That’s something that we could talk about. Even with the gyms that read open with COVID-19, what owners have to do with their staffing to make the facilities safer and make the experience still great for the members.

Role playing is important. Making sure that your team is very coherent. We would have sales training meetings twice a week. We would also have technical training meetings every single week. 

So, Kristy, you work with me. You’re one of my trainers. I would give you a topic, and you’re going to research it. Then, you’re going to present to the whole group, and then maybe see trainers who are junior or senior. Everybody participates together. We share ideas. We build a philosophy as a company as opposed to individual trainers, so that’s another thing.

Everybody just feels like they have their own training style and modality. That’s great, but somewhere there’s gotta be a common thread. If you want to build a team, when I felt like our team was running on all cylinders and it was called the Cross Training Fitness Studio. This was where we did the 20,000 sessions a year.

That team ran like clockwork. It was like we hit the sweet spot, and it took time. So, you constantly have to evaluate, make small mistakes along the way, and then hopefully find a great mentor or coach to help you, like I did. 

Should you make your trainers Contractor or Employees?

Kristy: I think there’s a couple of big steps. You said to constantly meet, train and role play. For example, regarding having the sales training meetings twice a week, and then you had technical meetings once a week, and they would even present and share ideas within the team. So, it increased the team feel.

I also hear that you’re basically pushing the sense of making the personal trainers feel like a team and requiring these meetings. Do you basically tell all your clients to change all your contractors to employees?

Joseph: Again, it depends on the business model. I have clients that have very successful businesses with contractors who come in. Those are a more urban type of facilities. For something in the suburbs, I would absolutely say you want to build a team of trainers who are your employees. That has never changed.

Kristy: It was a big discussion in my head all the time about employees and independent contractors. I don’t know if it would have severely affected if I could retain them because if they were employees, it couldn’t work. I really don’t know. 

Joseph:  Well, I think the thing for you specifically is I don’t know if it might’ve been flawed from the beginning. Let’s think about it for a minute. I’m not putting you down for your business. 

Kristy: It’s fine. I’m open to anything. I’m not running it right now, but it’s always interesting to hear your thoughts.

Joseph: Well, what I’m thinking of is this. It’s women only. Right away, half the people are not coming to your place. With all the competition, that’s a really hard thing to do. I’d have to know more about your rent. Where’s your rent? Were you in an area where it was really expensive? Did somebody negotiate that rent for you to give you the best possible chance to be successful?

What was your pricing structure? Did you sell packs or did you sell programs? I’m a program guy, so I sell programs. If you sell packs, then get back to the, “How much am I getting paid for this half hour?”

There’s so many factors. How did you build your team? I know you sound like a very organized person. I’m sure you wrote a very intricate business plan. How close did you get to your plan? Was it a breathing, moving document that you could change as you went when something wasn’t working? 

Like I said, every business is different. Every single location is different. Even if you’re a Retro Fitness, which is a franchise, it all depends on where you are and who your clients are.

It’s the same thing with Lifetime, Equinox, and Gold’s gym. You know who your clients are. Your business has to change a little bit. There’s still a common thread that’s going through there to make people healthier. 

Using 3 Scenarios to Create Your Business Plan for the Gym: Breakeven, Good, Homerun

[36:25] Kristy:I think that’s interesting. The three things that I thought were interesting were kind of getting into your mind of what you first start asking yourself when you look at a gym and the business models. You said, “How do you build your team? How do you minimize rent? Or how did you negotiate rent?”

Because that totally is something that affects whether you’re going to be profitable or not. What types of programs do you do? If we’re talking about the gym I used to own or anybody else’s gym, it sounds like you kind of start asking yourself that.

Joseph: Part of writing your plan is you have to see what fits, and then what we do as consultants is we’ll do three scenarios.

Once we know what your rent’s going to be, and what your model is, we’ll put together three different scenarios. “Here’s our break even. Here’s if we’re doing pretty good. Here’s if we’re ripping the cover off the ball and hitting a home run.”

I’ll give you an example. There was a year where studios were starting to run pretty well, and our goal for that year was we wanted to do a million dollars in sales.

$83,333. I still have it up here. That’s what you have to do every month to hit a million dollars in sales. That goes on your white board at the beginning of the month. You just have to hit your numbers every darn month. 

People don’t look at the numbers. Sometimes I’ll talk to people and I’ll ask for their numbers, whether we’re selling their business or evaluating their business. They’re like, “I’m like six months behind on my P and L.”

 And, I say, “How is that even possible?”

I knew every day what we were making. I knew exactly at the end of the month, “Were we profitable? Were we hitting our numbers?” 

It makes me crazy because you can’t sell your business unless you know what you have. You can’t grow your business unless you know where you need to fix it.

Kristy: You mentioned you do three different financial scenarios: breakeven, good, and home run. From your long experience helping gyms in different sizes and places, I don’t know if it’s possible, but could you give me some ideas of what break even is? I mean, obviously break even just means you’re making nothing which isn’t good.  

Joseph: Break even might mean you’re paying your bills and keeping your head above water. Maybe you’re paying yourself a little bit of money, but that’s not a place where you want to be. That’s exhausting. It depends on the business, the size of the business, and on what’s possible as far as profitability goes. 

We’ll sell a franchise gym. They’ll have anywhere between 3,000 and 6,000 members. Some of these gyms will net anywhere between $300,000 and $750,000 just in one location.

So, it’s not impossible to make a lot of money in the industry. Not that that’s the most important thing, but if you’re going to work really hard, why not make really good money? Why can’t you do both? 

Kristy: I want to talk about this thing about making money. Can you give me some examples of what good and home run is?

Just because I think that there are some gym owners who are working really hard, making some money, and telling themselves that’s good enough. I think that they could either do better or they’re kind of almost breaking even. 

They’re working and training. So, I was wondering if you could give us ideas on that. 

Joseph: They’re going to burn out because you can’t do all the work all the time and not reap any of the benefits. There are some great technicians, trainers, and owners out there, but if you’re working long hours and have taken on all the stress of starting your business, paying your rent every month, paying your employees and all of your bills, then you’re exhausted by the end of the week. 

You’re working weekends. Sometimes you’re filling in and working nights. If you’re not making a decent living, it will just wear on you. I’ve seen it hundreds of times. 

Kristy: So, what is a decent living? Because I want to give someone a number, so I can say to them, “If you’re not making this much, I know they’re going to burn out.”

They’re going to sell their gym for nothing, but maybe they could get help where they could change their strategy. Something to give them a call that says, “You could do things differently.” 

Joseph: That’s such a tough question because it depends on your lifestyle and where you are in the country.

Where we are in the Northeast, things are not cheap. If you own a property and have property taxes, your insurances are high and your cost of living is much higher. So, it’s really hard to say, 

Example Scenario: What should a CrossFit owner in  major city be making?

Kristy: I’m going to give you an example, and then you can give me a number then.

Let’s say we are near a city that’s a little bit going to be like New Jersey. It’s not cheap to live there. For example, I can even think about the CrossFit gym I used to go to. He seemed like he was doing good.

Let’s do the math. I think he was charging around $180, but let’s just say it was $150. That makes it easier. He said he had about I think 100 or 200 members. I don’t know if they’re monthly or they paid in full.

He had a huge space, but he downsized. He was still training, I would say, 25% of the classes. I think he had some personal training. So, he has a risk because he has this lease, and then he’s still training. He’s pretty much the face and he was managing.

Then, he had somebody who helped him with the front desk. Their hourly was not too much, but I think he did have at least maybe two main trainers. Just like in that area, they probably also train at other places because he can’t give them full time hours. He seemed like he was making money, but I know he’s working hard.

He’s probably working weekends and writing emails. How much money do you think a person like that makes? 

Joseph: I would think anywhere close to Manhattan where Jersey city is, you gotta be making six figures somehow. I would think. 

Kristy: So, he should be making at least a hundred thousand dollars, 

Joseph: I would think so. Again, we’d have to look at the numbers, and you said 100 or 200 members. Then, we’d have to look at his rent, at the other verticals, and other revenue streams. 

Are they doing meal planning and nutrition counseling? What else are they selling? 

Kristy: I think he had the Kettlebell Kitchen that he was connected with. I just wanted to give people an idea. If we were in an urban area, how much money should they be making to consider themselves doing on average good compared to other gyms?

Joseph: Did you live in Jersey city? 

Kristy: Yeah, I did. 

Joseph: I’m sure the rents were not cheap there. 

Kristy: They were not. 

Joseph: So, figure it out. Again, it all depends on what part of the country, but I think whenever you write your plan, you have to really focus on, “What do I need to get to to be successful?” Then, execute from there.

You have to have the plan. Most people don’t have a plan. They just open up and think, “I’m a great trainer. I’ll open a CrossFit.”

“Okay, great. How much is the rent? “

“I don’t know. We’ll figure it out.”

 It just doesn’t work. 

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How to use numbers-based business plan to get bank financing

[44:52] Kristy:So, you’re talking about a numbers plan because people can have all kinds of plans, but they need to have a numbers plan of how many members they need to reach, what they’re going to charge, subscriptions, and rent and payroll. Right?

Joseph: Yes. Let’s say somebody was going to buy a franchise gym. We saw a lot of franchise gyms, and this is a business that is making a significant amount of money. The buyer would like to use SBA financing, so small business administration financing. 

We actually have a banking partner, Reginald Heard, who does a lot of our banking for our gyms. So, we go to him and he looks at the deal and at the financial. We represent the seller, and then we go out to the market and bring in buyers. 

Let’s say the buyer will call Reggie, and then he’ll help them put together their plan to buy the gym, and then they have to build a whole proforma. They have to then show the bank, “This gym is making $300,000 today. How are you going to grow it from here?” 

So, they will actually do their projections. “Well, I’m going to increase membership and decrease the amount of members that are leaving the gym. We’re going to drive more personal training sales, do small group training, and build that up.” 

Then, they put a number on that and projections going forward for a few years to show the bank what they’re going to do. 

My point is you always have to have a plan. Not only should you have a plan so you can get financing, but you need a plan so you can put it on your whiteboard to see how you’re executing it and to make sure you’re going to get to your numbers. 

Valuing a Franchise Gym Business

Kristy: Since you mentioned an example situation with a franchise and you do a lot of franchises, and I don’t talk about that as much since I wasn’t a franchise.

This is just getting straight to numbers, and like you said, they should have a plan. Let’s say, they’re going to buy a franchise that’s operating, and you throw out the number $300,000, which I know is totally an example.

We’re assuming that’s $300,000 in revenue, right?

Joseph: $300,000 in profit. 

Kristy: So, let’s say it’s a franchise with $300,000 in profit in that scenario, but how much would the seller list it for? 

Joseph: We would probably list that for somewhere around four times what that profit was. So, about $1,200,000.

Kristy: What would you assume the revenue to be?

Joseph: Again, depends on what part of the country because your rent is going to be your biggest factor. So, that would vary, but it would probably be north of a million dollars in sales.  

Kristy: Wow. I’m going to guess that the listeners aren’t near New York city or in that type of range. They could be in a good suburban area. So, let’s pretend that’s more the situation. If they’re making more than a million dollars in sales, about how much would you recommend their rent to be? 

Joseph: The main rule of thumb is probably no more than 20% of revenue ballpark. That’s ballpark numbers. Some are a little higher, but somewhere in that range. 

Kristy: So, no more than 20%. How about payroll? What percentage of that figure?

Joseph: Payroll is a little trickier because it depends. You have your core payroll, which means just management, cleaning, front desk, and people classes. Those are more fixed, but that payroll can go up depending on how much personal training you’re doing. 

Those numbers get skewed a little bit, but probably in the 20% or 25%. I would say in that ballpark or maybe a little bit higher, depending on the model. Sometimes they’re too high.

I went into a gym and evaluated it, and it’s a great gym. They were doing $2,000,000 in sales, but they weren’t profitable. Meaning it costs $2,000,000 to run it. So, you’re doing a lot of work and you’re not getting the benefits. When you look under the hood, the rent to revenue ratio was not good and the payroll is way out of line. 

There are a lot of positions that really needed to be cut for that business to be successful. It’s not that I want somebody to lose their job, but if it’s a redundant job, we don’t need it. At the end of the day, we’re going for profit. That’s the part people need to remember– for profit.

We want to do good work and help people. We want to be profitable because that means we can continue to do this right. 

Current Changing Trends in the Fitness Industry

Kristy: I definitely still want to get to the types of gyms you see being most profitable and most likely to sell. You mentioned there’s the value gyms, then there’s the high-end gyms. You also mentioned franchises.

If someone came to you and said, “I’m thinking about opening a gym. I definitely want it to be profitable and I would love to sell it in five years.” 

Let’s just imagine they have been a trainer, so they kind of have some experience, but they’re okay with being a manager, and then eventually hiring a manager. 

Joseph: I would think it’s less important that they were a trainer and more important that they had some business savvy. I think that would go a lot further than anything.

If you can get the combination of both, that would be great. Far and few between though, unfortunately. Trainers train, and occasionally, even on the hiring side, you had difficulty and challenges with hiring good trainers. 

It’s even more so when you look at entrepreneurs who either want to be trainers or trainers who want to be entrepreneurs, because a lot of times they’re very focused on helping their clients, but they never took the time to learn the business side. 

Now, we can help them a lot with that, but inherently, I think you have to have some business sense before you go into these things. I’ll give you an example.

Somewhere around 20% of the U.S. population workout in health clubs. Now, that number varies, but it’s somewhere in that ballpark. Some say 20% to 24%. We’re just going to use 24% for argument’s sake. That number hasn’t gone up that much over the years. 

But, since 2008, are there more or less gyms?

Kristy: More gyms.

Joseph: Exactly. If the market share really hasn’t gone up all that much, but yet there are a ton more opportunities or places for you to go, then everybody’s fighting over the market share. 

So, Planet Fitness. Everybody in the industry wants to say, “Planet Fitness. They’re horrible. It’s $10 a month. They give you pizza and bagels.” 

They have 2000 locations. So, obviously Planet Fitness is doing something right. What they did was they went after the marginal exerciser, and built it up at a price point where they’re probably not even going to cancel. Even if they don’t go, what’s $10 or $20 a month? It’s not a big deal. 

I figured what the slogan is. I think it’s, “No judgment.” Meaning if you’re not a fitness enthusiast, gyms can be intimidating. It was a brilliant idea. They made everybody feel comfortable when they went to the gym. There was no judgment. 

Now, probably powerlifters and bodybuilders are not going to want to go there because you can’t drop the weights, but who cares? They have plenty of other places to go. 

That’s my point. You can’t look at that and say it wasn’t successful. It was hugely successful. That opened up the value gym area. The problem is 12 years later, that space is a little crowded now. 

I think a value gym could still be good. If you want an open gym motto, I still think that could be good, but you’ve got to be careful. You’ve got to look in your demographic and pick very wisely what the rent is, what your competition is, and why you are going to be different once you get in there.

I think what happens is– and this happens just generally in business– you get boom and bust. We’ve been through the boom part. I think in the gym industry right now, we’re getting some consolidation, and some gyms are closing. I won’t get into the names, but there are four or five big names that are probably very close to bankruptcy and may go into bankruptcy.

They may come out of it and be leaner and meaner. I’ve seen this many times, but my point is when there’s oversupply, that has to happen. I don’t want anybody to lose their business. Sometimes it just has to happen. 

What happens is the strong gets stronger because they’ve endured and the other businesses go away, and sometimes that’s just a natural progression. It has to happen for the most part. 

Kristy: When you say a couple of large brands are going to close, you’re talking about franchise brands? 

Joseph: Well, not the franchise, but the corporations themselves. It’s been out there. So, Gold’s Gym closed 30 of their corporate stores, the ones that they own, and they are now in chapter 11 bankruptcy.

The franchises are fine and are thriving. Matter of fact, we just sold the Gold’s gym in Teterboro, New Jersey. It’s a great gym, by the way. You can look on LinkedIn and you’ll see 24 Hour Fitness and Town Sports. These are companies that are very leveraged, and they may have to go into bankruptcy.

Crunch Fitness when into bankruptcy. I think it was in 2013 when they came out leaner and meaner. They’re doing quite well right now because they’re selling franchises now. 

It’s not that I’m putting down one franchise or another. It’s just a matter of I think consolidation sometimes is needed, especially if the number of participants isn’t really going up that much. It’s just half of the equation. Supply and demand. 

Kristy: So, someone hears that, and let’s imagine they have some business sense. For example, I didn’t go into the gym business as a personal trainer. I had opened a tennis school before and I love to exercise. 

This person says, “I’m going to get together my savings and mortgage my house or something.”

Let’s just say they don’t have a huge budget, but let’s say it’s $150,000. I’m guessing that’s their savings. Maybe you might say that they can also get a loan. 

Joseph: Can we speak to that for a minute?

Kristy: Yeah, I’d love to. 

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Buy Or Open a new gym? With financing the optimal approach that makes you money on day one!

[57:30] Joseph:I have a great example. So, he’s working with a young couple who wanted to buy a gym. One was in sales and one was in the corporate world. He loved them. A really great couple. They brought a deal to me. They said, “What do you have to sell?”

We didn’t have anything that really fit their needs at the time. They wanted to be in a certain part of the state. “Would you look at this deal for me?”

So, I looked at. I didn’t think it was very good for them, and they had about $300,000 saved. They were a really bright and smart, young couple. Somewhere in that ballpark, it might’ve been $250,000. The gym that they were looking to buy was around that, but it wasn’t profitable. 

So, spend $250,000 on a gym and pay cash. Maybe it works and maybe it doesn’t. That’s all your life savings. My suggestion was buy something that’s already netting $250,0000 or $300,000, leverage that money, and let me introduce you to our SBA banker. 

Typically, you can get in one of these gyms for about 20% down or even less. Let’s just use a million dollars as a round number. 20% of that is $200,000. You can buy a business that’s now making $200,000 or $300,000 in profit.

The SBA program is a 10 year program. So, you get to pay that off over time, and then let your business pay your debt down and you get paid in the meantime.

They were a bright couple. They didn’t really know the gym business, but they were smart people. I would tell you to take that same amount of money and leverage up and buy something that’s successful, as opposed to something that might not work. Does that make sense?

Kristy: That is a big tip. If I go to another place, everyone I’ve met so far has basically said, “What’s my life savings? What can I buy with my savings?”

They just go with it. It could be a new business or they buy it. So, that’s interesting. 

Joseph: For us, we broker these gyms, but we don’t broker anything else. We’re very specific to this industry, so we do nothing else.

When I meet with somebody, I have a pretty good idea what’s going to be a good fit for them and what’s not. I may steer them away from something that they think they want to do. They can listen or not, but I want to make sure that I’m putting somebody in the right opportunities for them to be successful.

That’s very important to me going forward .

Which gym model is the best to own? And what gym models to avoid!

Kristy: I have two questions. Are there any gym models? It doesn’t have to be a franchise or not, but there’s the pilates model. Those could be tough because of the high cost with the equipment. 

Is there any model that’s around that you just don’t recommend? Something you just see would be very difficult to be profitable? 

Joseph: I think they all can be good depending on the operator. I also think that if you get involved with a franchise that tells you, “You’re not going to make that much money with one. You better do five of these.”

I would run like the wind. I won’t give an exact example, but I’ve heard that enough. That scares me because first of all, if you’re coming from out of the industry and they’re telling you I have to do five of these when I haven’t even been able to do one successfully, I’m a little nervous. 

Kristy: That’s a lot of capital. 

Joseph: It’s a lot of capital. The most important thing is to kind of match the buyer with the right opportunity, and you’ll never go wrong. I think that’s really what the best thing is. 

Kristy: You’re not just un-recommending certain models.

Joseph: I’m not because I have very good friends that we’ve helped with. They become friends and we’ve helped them on the consulting side and they own a Pilates studio. They may own kickboxing facilities.

That’s their passion. I can’t tell them not to do business with your passion, but what I can do is work on those projections, and have them hone their business skills so that they can make their passion a profitable entity. Then, it’s a win-win. 

Benefits of Franchising & bringing on an area director

Kristy:  Do you generally recommend for people to go with franchises versus maybe buying one of those mom and pop stores? 

Joseph: Well, we sell both. The easier answer is if you would like to use SBA financing, then a franchise is easier because they are, quote/unquote, franchise approved. Meaning they already have a relationship with the SBA.

So, they’ve kind of passed the test, and they usually have a significant amount of stores open, which is less risk for the bank. That’s the way the bank looks at it. 

That being said, there are some very successful gyms that are owned by one person or a family. Every deal is a little bit different, but I think if you want to use SBA financing, the path of least resistance is a franchise.

Kristy: I like the benefits of the franchise. I think the question is the fear of that overhead, the additional costs, and the franchise fee. 

Joseph: Most franchises are usually going to be somewhere around 5% of revenue. Then, there’s maybe a 2% advertising fund, which is kind of a synergistic fund. Whereas, the entire franchise will market the name. 

So, the reason you buy a franchise is brand awareness. For example, Retro Fitness has red and yellow  equipment. They’re a value gym, and very Northeast centric. They are breaking out a little bit now, but you know the colors. It’s the same thing with Planet Fitness. There’s Youfit in the South.

That’s certain colors. There’s brand awareness. I remember a few years back, did you ever go to the PNC center, which I think is at Holmdel, New Jersey for concerts? 

Kristy: I haven’t. 

Joseph: Well, it’s amazing when we can actually go out to a concert again in life. It’s an outdoor place. It’s covered, but it’s kind of outdoor and great for the summer.

A few years back, Retro Fitness was one of the major sponsors. You would’ve thought that this place was called Retro Fitness. There were so many signs. We’re not specific to Retro. We’ve sold a lot of Retros, but only because they’re New Jersey based. They started in New Jersey.

For any brand or any franchise, if they have great brand awareness, I think that’s helpful. Then, you’re also working with business coaches and the franchisor who will help you along the way. A lot of them use ABC financial, which does a lot of their billing and their collections, so it’s very uniform.

Those are much easier to value because the numbers are fairly easy to look at. So, there are advantages to both. I think you just gotta look at them case by case. Now, if you said, “I want to have 10 gyms in 10 years,” then you should probably look at a franchise because those opportunities are going to come up a little bit.

Then, let’s say you get up to three locations, then you can bring in an area director. You have somebody who kind of oversees three of them and it goes from there. 

Kristy: I just want to remind the listeners the benefit of having the franchise, and then being able to scale to area directors.

You’ve really created a lot of value now because you have managers. Then, you have a manager managing the manager. Now, the person  who buys it thinks, “I never have to do anything.”

Joseph: Well, you always have to oversee it. Most owners can be at home on their computer looking at every gym. There’s cameras, so you can see everything. 

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How to estimate what your gym is worth 

A simple formula & things that reduce it’s value

[01:06:49] Kristy:So, to summarize valuation, let’s say they have a manager. One way to value the gym is just to take a profit and times it by two or three times.

Joseph: Well, three to four, depending on the opportunity. It really depends on the growth potential and the trajectory. 

Let’s say a gym is growing. Then, you’re going to get a higher multiple. If the gym is year over year, the numbers are lower. That’s the negotiation. Is there a great lease in place? 

For example, if somebody negotiated a really good lease, that’s a benefit. Let’s say over the next three years, if the rent doesn’t go up, you might pay up a little bit more for that. But, if the rent accelerates big time over the next couple of years, a buyer might have to take a pause with that.

It really depends on the situation. Going back to the industry, what are your two biggest expenses? You’ll hear me say this a million times, “Rent and payroll.” 

Kristy: Unfortunately, a lot of people are not going to be in this situation where there is a manager in place. We talked about the example where a person makes $5,000, trains a little bit, and it’s a small thing, so they’re kind of pretty much managing it. 

Let’s say a thousand dollars of sales is going to the head trainer who owns a gym. Let’s say they hadn’t taken that as a salary, so then I would say it’s really $4,000, not including the trainer, owners, and training, but there’s no manager.

So, that’s only $48,000. How would you value that? Because there’s trainers who don’t mind that situation and might want to buy this gym. 

Joseph: Well, they might want to buy the gym, but what role would they take? Would they go in and train the clients? So, like we talked about before, if Kristy was selling her studio and she had a book of business, could we get her consulting contract for three to six months to transition the buyer? So, that would keep the price a little bit higher because the buyer would then feel comfortable that those clients were going to stay.

I know I keep going back to that, but I think that’s really important when you’re buying a smaller business. Remember that we always have to look at it from the other side. So, the buyer has to be comfortable with what they’re buying or else you’re not going to get a deal or you’re not going to get a good price for your place. 

If we can create that value by the owner staying on in some capacity, then we wouldn’t have to discount it as much. 

Kristy: Let’s say the person agrees to stay on the trainer. They’re going to assume that they still get paid for the training that they do. Is that right?

Joseph: Yes. It may be a combination. They stay on and train. It would depend if who was coming in might be a trainer and they may transition those clients. That would be much easier to do. It’s case by case. 

It’s always a negotiation because one thing you’ve learned if you sold the business is both the buyer and the seller have to be slightly uncomfortable, then that’s the right price. Because if one is really comfortable, it’s probably not going to work. You won’t get to the finish line. 

Everybody has to feel a little bit of pain to get to the right number,

Kristy: It’s fully getting what they want, but they’re compromising. That’s what you mean? 

Joseph: Well, everything is a compromise. 

Kristy: So, you’re saying both sides should be compromising.

Joseph: Right. Well, that’s my job. My job is to be the buffer and to make sure that both the buyer and the seller see that for this to be a fair deal, here’s the number. Then, we work from there. Because if it’s not fair, any little bump in the road is going to cause it to fall off.

I’ve seen it too many times. You have to be fair and you always have to look at it. Even though we represent the seller, we probably have more arguments with the seller because they have to be fair. I’m constantly talking to them about that. 

You have to be fair if you want to sell your business. Be fair, and we’re going to get a great deal for you. 

Kristy: So, from the example we had earlier. Let’s take it from $5,000 to $4,000. We’re going to say $1,000 goes to the owner, and they agree to stay on to make the buyer feel comfortable. So, now they’re making about $48,000.

In that income at the end of the year, could you still multiply that by three to four?

Joseph: I would say probably closer to three for the studio. That would probably be about right. 

Kristy: That is really helpful. I think that’s interesting. So, everyone, start to get a manager.

Joseph: Or teach. You’ve got to teach your people, build your business, and don’t have the ego and think that you’re the best trainer in the world. Even if you are, go work for somebody else if that’s what you want to do. If you want to build a business, you have to be the best teacher in the world.

Kristy: I like that.

Stay tuned for the Part 2 of this interview with Joseph!