Mike Warkentin (00:02):
“Florida Man Buys Gym Infested With Pythons for 2 Million.” That’s not quite right. Wait. Oh, “Florida Man Selling Gym That’s Literally on Fire at Slight Discount.” That’s closer. But Nick, you are an actual Florida man. Can you give me a headline?
Nick Habich (00:17):
Yeah, “Florida Man Doesn’t Buy Bad Gym.”
Mike Warkentin (00:20):
Aha. That might actually help some of our listeners. So, let’s dig into that today. When should you not buy another gym? We’ll discuss that today with mentor and gym owner Nick Habich. This is “Run a Profitable Gym.” I’m your host, Mike Warkentin. Please hit “subscribe” so you do not miss a show. You want to get them all so that you can build your business and retire wealthy. My guest Nick, he runs Shark Bite Fitness and Nutrition Cape Coral, Florida. And like I said, he’s an actual Florida man, and he has bought and sold several gyms. So, we’re going to dig into it and tell you when should you not buy something that might be a millstone around your neck. So, Nick, let’s start at the top. What’s your experience when you’re buying or selling gyms? Like what have you done? What’s happened to you?
Nick Habich (00:58):
Yeah, Mike. So, I’ve been around for about 10 years now. We opened our first gym in 2014, originally, a CrossFit affiliate. I’ve had the joy of buying quite a few locations. I’ve had the joy of avoiding buying quite a few locations. And I’ve had the joy of getting rid of a few locations. We bought our first gym—I guess I bought my business partners out in 2017. So that’s basically like buying a gym.
Mike Warkentin (01:21):
That exactly is that, yep.
Nick Habich (01:23):
Yep. Bought another gym earlier that year to absorb into that gym and then bought another location in 2020 exactly one week before the pandemic shut us all down.
Mike Warkentin (01:34):
Oh. There’s probably a good story about that that we’ll get into it on another one, but it sounds like—so you’ve got experience with this, and I’m sure along the way you’ve seen some offers to buy and said, “Ah, that smells a bit funny.” Am I right?
Nick Habich (01:47):
Yeah, for sure. I’ve turned down way more than I’ve bought, that’s for sure.
Mike Warkentin (01:50):
Now, and that’s probably why you’re on our mentor team, because you don’t want to buy everything that comes up for sale, no matter how good a deal it is. So, let’s talk, do you have any horror stories from the buy-sell world? Like what’s some of the stuff out there that we really want to avoid, and what’s nasty?
Nick Habich (02:03):
Yeah, there are a ton. I think one of the really important things to remember is that, while this may not be fun to hear, most gyms are not profitable.
Mike Warkentin (02:12):
Mm-Hmm.
Nick Habich (02:13):
Right? So, the vast majority of gyms that exist are not actually making money. And you can verify this by speaking to most gym owners that are in Two-Brain; most profitable gyms are not looking to sell. So, if you have access to buying, there’s a strong chance that unless there’s some other motivation involved, like a retirement or somebody moving on to a new career, that gym that you can buy is probably not something you should buy.
Mike Warkentin (02:38):
Yeah. It’s interesting. You know, I’ve never been in the market really for looking at gyms, but a few have come up for sale, and I’ve kind of poked around, even looked at some financials and, there was one that I looked at, and I looked at their financials, and it was like a black hole. It was one of the worst things that I’d ever seen. And I literally said to my wife, I was like, “I wouldn’t take this gym off their hands if they paid me $50,000.” Right. Like, it wasn’t even worth the price of equipment because it was just going to be a disaster. Have you seen anything that bad or other instances where it’s just like, “This thing needs to end, or this is not a good thing to buy”?
Nick Habich (03:09):
Yeah, I’ve seen a lot of them; there’s an uncomfortable cycle that happens in gym ownership is, until you start treating it like a business and professionalizing it, a lot of us have done in most of the gym world, the cycle is this: Somebody’s extremely passionate about helping others, so they open up a gym. They run that gym for some amount of years; they get incredibly burnt out. They sell it to some new person who is incredibly passionate but also doesn’t know how to run a business. They run it for a couple years; they get incredibly burnt out—cycle repeat, cycle repeat, cycle repeats. So, in a lot of the P&Ls I’ve seen, oftentimes the owner had this idea that “I can fix the problem that was done before,” or maybe even worse, didn’t really address the problem and just thought like, “I am incredibly passionate about this; I can make this work.” But then that cycle just repeated and repeated and repeated, and now doubling down or tripling down, you’ve got members who’ve been there for four or five, six, seven, eight years who are used to not paying affordable rates or appropriate rates. And the culture is such that making money is not an important factor. So, the new owner has to deal with that as well. I think that’s a really, really common trend.
Mike Warkentin (04:12):
Yeah. And you know, it’s interesting because there are gym owners out there, they’re rare, but I have interviewed them on this show who will actually look for gyms, and they’ll do their due diligence and say, “I can turn this around.” And they actually have a track record of doing so, and they know how to do it, and they put a timeline in place, and they do it, and then they have valuable assets that they can either sell or hold and profit from. But that’s super rare. You know, what’s more common is exactly what you’ve laid out where it’s like, “Oh man, owning a gym is awesome. I’m going to crush it, and then I’m burned out.” And then the next person says the same thing and it just goes over and over again. And along the way, one of these things happens is that you see owner operators who are super invested in their business, they overvalue what they’ve built, right?
Mike Warkentin (04:49):
Because they’ve got tons of sweat equity; they put in all this time scraping gum off the rower seats and stuff like that. And they know that like, “Man, I put in a ton of work,” and they say, “Well, my gym’s worth one hundred grand.” And it’s not, you know? So, when you’ve looked at these P&Ls, and you look at the numbers there, when you see what they think it’s valued at, what do you see—like, what’s often there in your mind, and are you seeing mistakes or inflated values?
Nick Habich (05:12):
Definitely mistakes and inflated values. And like you said, we tend to overvalue things that are important to us, right? So, this is important to me, therefore it must be valuable to others. And you can see why somebody would make that mistake, right? Someone who’s put in two, three, four, six, 10 years of their life into something, it’s almost impossible to put a true financial number as to what that means to them, right? But if we’re looking at this from a P&L standpoint, if the net owner benefit times three is inappropriate, then it’s not worth that number, right? So oftentimes, I think the most recent one I looked at was probably four years ago—I have to be careful about some of the numbers here because I signed an NDA—but they were asking for a number that was six figures, and the owner hadn’t taken home more than $2,000 or $3,000 a year for the last five years, and they weren’t paying the coaches.
Mike Warkentin (06:03):
So there’s no profit essentially.
Nick Habich (06:05):
There was none there. There was absolutely none. You know, and then factor in the fact that some of those members would probably be lost on any kind of change that happened culturally, you would immediately go to unprofitable and, and profit is even there being a vague word because there is no profit if nobody’s being paid.
Mike Warkentin (06:22):
Yep. And I built that; that was the gym that I built because it was my gym was a hobby when I started, and I didn’t pay myself, and on paper, the gym showed a profit at the end of the year, but I didn’t take a salary. So, all the money or the work that I put in was unpaid. If you had paid me—and again, Two-Brain recommends as an owner that you pay yourself for every role and task that you do for exactly this reason—if I had done that, the business would’ve been unprofitable, but on paper it’s like, “Oh, it’s making a modest profit at the end of the year,” but it worth a 3x multiple on that because there was no profit. So, I mean, I’ll point that out to listeners. I’m not a financial expert, but if you see that an owner is not making any money and their gym is not profitable, it’s not worth a lot. Right? Like, at that point, Nick, would you ever buy a gym that was unprofitable personally?
Nick Habich (07:03):
Yeah. I think there are reasons that you could do that, right? So, for example, one of the ones that I bought back when I had business partners was unprofitable. We bought an unprofitable gym. It came with assets though that we couldn’t otherwise attain.
Mike Warkentin (07:16):
Now that’s a different story.
Nick Habich (07:17):
Yeah, totally. Right? So, one was a ton of undervalued equipment. We didn’t have a lot of equipment. They didn’t want to be a gym owner anymore. It worked out really, really well for us. We were able to almost double our equipment at nowhere near the cost that it would’ve been to buy those things new. Another one was, we acquired a new location, like a physical location, a bigger space, at a really affordable rent number; that made it worth buying the technically unprofitable business just to get that. But neither of those reasons were to acquire that gym necessarily. We shut that gym down immediately. It didn’t exist as soon as we bought it.
Mike Warkentin (07:53):
No, so you bought assets essentially and a building, right? Or whatever you want to call it.
Nick Habich (07:56):
Exactly. Yeah. It was that, even though it sounded like a gym buy. But if you were going to buy an unprofitable business or a non-profitable gym, I mean, you would have to look for ways that you could very easily change that unprofitability, right? So, if I was looking at something that had an extremely low ARM, or average revenue for member, see, “Do they have the ability to raise this?” And if they do, then could I change the profitability pretty quickly? Does that gym have incredible staff members who are looking for opportunities? If so, maybe I would do that. Honestly though, without those, I would probably not do that.
Mike Warkentin (08:31):
Yeah. Because there, I mean, you’ve been in the game long enough, and as a mentor, you know in our toolkit the things that you can do to improve a gym really fast. So, it’s like, yes, I could get rid of all the legacy rates, and I could increase rates by this much, and I’ll do my math and find out from a great staff member, this many people will leave, this many people will stay. I’m going to be positive. I can get to profitability here. This staff member sucks. I get a fire. Like there’s all this stuff that you can do, but here’s the thing—I’ll ask you this. Like, would it be better to just start another gym at that point with the help of a mentor potentially and not have all those knots to untangle?
Nick Habich (09:05):
Yeah. Right. Like, that’s the calculus that has to be done. I mean, is the startup cost of a new location going to save you more money than it would be to potentially burn cash as you change this gym over, right? I mean, I think that that’s the other really important thing to look at here too is “How much money are you paying for this gym?” You know, if you can get the gym for free, if you can effectively pay nothing for it, then it might make sense to buy a non-profitable gym and fix the issues there. But if you’re going to put down 50, 100, 150, $200,000 to do that, like you said, it might make more sense to just start fresh with no bad habits and no bad issues.
Mike Warkentin (09:39):
Right? Like you could—Chris Cooper’s put this together—but you could start a gym, and we even have a “Start a Gym” course. You could start a gym for like—if you’re really clever in a small space, like 400 or 500 square feet with like two barbells, a plywood box and a couple of dumbbells, and you might be all in for like 15 grand or something like that, maybe, if you’re really clever about it. And then you can expand and scale up as you see success. And if you have the help of a mentor, you’re going to avoid all the huge monstrous mistakes. I’m not saying you shouldn’t buy a gym, but if you want to start a second one, there are easier paths and faster paths to success than untangling all these horrible knots. Because I’ve heard some stories, and you probably have too: Someone buys a gym, and there’s just like this deep rot, and it’s in the clients, it’s in the staff, it’s just horrible, and to rip it out, you almost have to gut the place to the studs. And at that point, you might as well just started with your own building, right?
Nick Habich (10:31):
Yeah. Yeah. That’s a real thing, right? If you—the same way that somebody maybe overvalues their own gym, there is just history associated with that gym that you may or may not be privy to that may not be beneficial, that may not match with your culture. One of the ones we took over for about eight months, the owner hadn’t been coming to the gym, and his wife was opening the doors and then letting people work out and then leaving. And that was their version of coaching, right? And I think that people could look at that and say, “Hey, area of opportunity, like I can attack this; I could do better.” But those members had become very accustomed to that culture, so you come in and you say, “This isn’t the way we do things,” all of a sudden they don’t want to be there anymore.
Mike Warkentin (11:10):
And then there’s the other thing to think about. If you have a very successful gym, and let’s say you’re a top Two-Brain gym owner, maybe you’re in the Tinker group, and you’ve got like—this gym is running A1. You’ve got a great general manager. You put in maybe four hours a week just meeting with staff, but you’re doing other stuff, and you want to maybe open a second gym. You then have a replicable model that you can just say, “I could just take this that’s working, put it over there, build it again, rather than buy someone else’s problems.” Right? Like you could just rubber stamp your success and do it there again, faster in a thing that you already know, right? Like, you know how to build a gym. Doing a second one works; untangling knots can be just brutal. You know? Would you look at something like that? Like if you—again, you’re not in the market right now necessarily, but if you were going to do that, would you think about replicating your gym and just starting another one?
Nick Habich (11:57):
Yeah, I would say that if I had the appropriate staff member who wanted to grow and replicate that with me, I would do that. Otherwise, no. But I like what you just said, the deep rot or the behaviors associated with that gym, when you buy the gym, you buy those too. When you start your own, there’s no expectations other than the ones you set.
Mike Warkentin (12:17):
Yep. And if you’re a good gym owner, especially if you’ve had mentorship and you’ve built something that’s solid and you’re at the Tinker level, which is our upper-level gym owners who don’t necessarily work very much on their gyms, you are a good entrepreneur. You know how to cut a lot of corners and get a lot of speed and just like, “I’m not going to make that mistake.” Like, for example, in my second gym, “I’m not going to just set my rates at $150 for an unlimited group membership because that doesn’t indicate the value that my coaching provides. I’m going to set them at exactly this number plus my hybrid option and my ARM is going to be 285 right out of the gate. I’m going to run Two-Brain’s Founders club, and I’m going to start with 58 members on day one who are paying. I’m going to be profitable within two weeks, and I’m going to expand.” Like that plan sounds, to me, pretty good, right? Mm-Hmm.
Nick Habich (12:54):
Mm-Hmm. A whole lot easier. Yeah.
Mike Warkentin (12:56):
Yeah. So, talk to me about this. So, when you look at P&Ls and stuff—you’ve seen this stuff; gym owners have potentially inflated these sale numbers. So how does someone start looking at this and saying—when do you know that a sale number is kind of legit or kind of out of whack? What do you think?
Nick Habich (13:14):
Yeah, I think an important thing to do is to gain access to a P&L and to also gain access to the billing software that they use.
Mike Warkentin (13:20):
Mm-Hmm. Have you done that? Like, can you ask for that in a sale?
Nick Habich (13:23):
Yeah, you totally can. Oftentimes when a sale’s happening, they’ll ask you to sign an NDA, a non-disclosure agreement. And as long as you’re willing to sign that, they’ll usually start giving you access to whatever you need to get access to. I’ve never gotten so far with any I didn’t buy that I had to get to bank accounts or anything, but the reason I say you want to see the P&L and the billing software is that oftentimes they don’t line up.
Mike Warkentin (13:42):
Oh, tell me—yeah, talk about this.
Nick Habich (13:44):
When they don’t line up, that’s a clear sign that you’re going to run into a problem. Right? So, I think it’s more common that somebody’s willing to share the billing software information. And if you know any of the popular billing softwares, it’s also very easy to have a billing issue with one of those. Or maybe you think they’re billing monthly, but they’re actually billing bimonthly, or they’re supposed to be billing weekly, or that somebody’s membership has been comped and nobody realizes how many members have been comped at that point.
Mike Warkentin (14:09):
I sold a paid in full to 10 people, and they never paid again.
Nick Habich (14:13):
I’ve got a story about that one. We’ll hit that in a second.
Mike Warkentin (14:15):
Let’s hear—finish your thought, and then tell me that one. Let’s just go to both.
Nick Habich (14:17):
But it’s very important that we see that those numbers are at least relatively near each other, right? And whichever one they showed me first, I would want to see the other one too. So, whatever they wanted to show me, I’d want to ask for the other one.
Mike Warkentin (14:29):
Because that’s true. Like I’ve seen in my own billing software this number, but there’s tax included there; there’s a whole bunch of other stuff. And then I look at other stuff, the P&L, there’s all the expenses that eat into that number, and sometimes the “Oh, $25,000 in Zen Planner” or whatever equals about like 18, and your expenses are 22.
Nick Habich (14:47):
Yeah. Super, super important. We’ve already talked about this one, but I think just staffing cost is really important, right? If you want to create a professional staff, you’re probably going to have to pay them something. I know that in the recreational fitness space, it is not wildly uncommon for some coaches to work for free or maybe to work for undervalued prices. But if you—or excuse me, undervalued wages—but if you want to grow this business, that staff is probably not going to grow this business. So, somebody will need to get paid here. If it turns out that there’s $2,000 or $3,000 a month in profit, but there’s no staff pay and there’s no owner pay, you start paying those staff, that $2,000 or $3,000 goes away immediately.
Mike Warkentin (15:23):
Yep. That’s a big one. I’ll balance that with another thing that I’ve seen where sometimes there are too many staff members, and they’re overpaid. And that’s a different problem altogether too, where if you look at a P&L and you’re like, “Wow, my revenue is here, my staff costs are way up there, and three of them are terrible,” you might have a different problem there because sometimes these things crop up. And interestingly enough, I interviewed Ben Bergeron a little while ago, and he was talking about the early years of CrossFit New England where he looked at his staff, he’s like, “This doesn’t quite work here.” And he had to make some cuts. He made a whole a big change and sat everyone down and said like—I think it was called the “official picnic table conversation,” it became known as in CF any lore—and he just said, like, “Some of you’re not going to be here anymore because we’re making a change, and you didn’t sign up for that. So, let’s discuss and go forward.” So, you look at that; there are sometimes staff members embedded in there that are like, maybe they’re old school, maybe they’re dug in deep, maybe they’re not very good, maybe they’re pulling down too much money for what they’re giving.
Nick Habich (16:13):
Yeah, I had exactly that scenario when I bought my third buy, but second location. I had a meeting with all the staff members. Luckily the previous owner and I are friends, so I was able to get very deep into what was available. I got real numbers on everything. We had a big staff meeting, and I spoke to everybody, and I said, “You guys have been doing things a certain way, and I’m happy for you, and I’m proud of you for that. We’re going to be changing things a lot. This is going to change a lot. Here’s the expectations that are going to be going forward. I understand that some of you are not going to want to do that. Here’s your understanding of what’s going to be happening. So, you need to make a decision about what you want to do.” And honestly, I think we had four out of 12 of them stay with us after that meeting. And it was better for both parties because of it.
Mike Warkentin (16:53):
Yeah. Way better. And good for you for being clear about it. But that’s the kind of like fire sale you have to—you remember “Entourage” when Ari went through with a paintball gun and shot everyone who was being fired, and that’s like—you might have to do that in some of these scenarios because they didn’t sign up for that. And if you’re making a U-turn, you can’t force people onto that bus with you, and they shouldn’t be there, you know? Tell me about that paid-in-full situation. What do you have there?
Nick Habich (17:15):
Yeah, so the gym that we acquired so that we can get the better space and the equipment, we made a handshake deal, an agreement on an amount of money; between then and the signing of the deal, that owner decided to sell like 30 or 40 paid in full memberships in cash to the current members. So in like six months, eight months, nine months, 12 months, basically whatever anybody would say yes to at just wild, wildly discounted numbers. We didn’t find out about that until after the paperwork. So, we had almost none of their members now paying a month in membership.
Mike Warkentin (17:49):
What did you do?
Nick Habich (17:51):
We went back and forth on this a lot. I don’t know if this is exactly how I would’ve handled it now. We’re talking like 2016 or 2017 now. We honored the amounts that they paid, but unsurprisingly, they were basically paying the average of like 70 bucks a month or 80 bucks a month. So, at the time, our membership was like 130 a month, and I think we were already the most expensive in the area by a lot. Not surprisingly, not many of those people wanted to pay that when it was time to re-up. So, we were in a poor situation there.
Mike Warkentin (18:19):
Wow. So that’s—I mean, that’d be a tough one. That I imagine, like you just—you expect something, and you look and you’re like, “What has this person done on exit? And now I’m screwed.” I mean, that would be a major red flag that you’d have to keep your eyes open for, but you might not know what’s happening.
Nick Habich (18:35):
Yeah, I mean, as simple as saying, like, “Hey, you can’t do this,” or “Don’t be a scumbag,” put that in the handshake agreement, you know?
Mike Warkentin (18:42):
Yeah. Wow. But, and so even in addition to that, there are gyms out there that have done all sorts of legacy stuff, and we know discounts are brutal in gyms. Like it does not support a profitable gym for the most part. And you’ll see these gyms, people will have 50 people who are at 17 different rates, and they’re all too low. And this is like 40 or 50% of their client base. And if you acquire this, what do you do with those people? And like, I’ll put this to you as a mentor; let’s say I’m that gym owner and I come to you, and you’re my mentor, and I say, “Nick, what do I do?” Like, what would you say in that scenario?
Nick Habich (19:17):
Yeah, right. Like what you’re saying right there is why I think it’s so important. And you see both the P&L and the billing software, right? Because for example, if I see unlimited membership times 100, it’s very easy to make the mistake and think that that 150 times 100 equals that amount of money, right? But if we’ve got discount A through discount Z layered into those things, we don’t really know how much money’s coming in. And not all the billing softwares will very easily lay out who’s paying 150 and who’s paying 86, right? Given the opportunity, I would want to get the income statements as well, right? I would want to get the bank account, actual income, to try and match up with what we have. I know that seems like monotonous work, but it’s worth it to know what you’re really paying for.
Nick Habich (19:56):
But as a mentor, if you came to me in this situation, I would want to see where we were in this. And funny enough, I did just work with a gym in Alaska through this about a year ago. Bought a gym, that gym had every amount of rates you could think of. The fact is if we want to keep these people, we probably can’t fix this problem right now, right? But we can create a plan where over time we level people out appropriately, right? If you’re—we generally teach in Two-Brain not to raise anybody more than 15% at one time, right? There’s a serious emotional and psychological situation that happens when you do that, right? But we can get everybody where they need to get over time. So, I would say we would look at what amounts are appropriate, like what do we actually want to be at? What do we believe is our right number? And we have a whole system of how we decide what the correct rates are for a gym. Once we get to that number, we see how far we are from that. We create maybe a 1, 2, 3 year plan to get everybody to that level.
Mike Warkentin (20:49):
And I’ll balance you by saying, if I’m that gym owner and I’m like, “Oh my God, this is a three-year plan,” it would be great to hit the rewind button and maybe not buy that gym in the first place and say, “You know what, Nick? I want to start a second gym. Can you help me set my rates at a market value that’s going to equal profitability within the first three weeks?” And you’d be like, “Yeah, dude. Let’s look at your expenses. Let’s look at this. Let’s look at your value. Let’s put this number together using math, and then let’s sell it, and I’ll teach you how to sell it and market your gym, and we’ll fill it with founder’s club program, and we’ll start with profitability.” And I’d be like, “That sounds a lot better than a three-year stepwise increase on a bunch of people that probably don’t want to pay another dime.”
Nick Habich (21:25):
Right? And that’s not their fault, right? The other gyms set that standard. No, you’ve got to deal with it. Yeah.
Mike Warkentin (21:29):
No, and I’m not trying to be down on buying gyms, but the point of the show is to say, “When should you not buy a gym?” So, we’re going over the horror stories. There are good times, like we said, but I’ll give you another one that I think is interesting, and you pointed this out: looking at big numbers. You’ve got to dig in. For example, average revenue per member. Let’s say someone has that number and says, “My average revenue member is 205.” And you’re like, “Well that’s not bad.” And you’re thinking about it, but then you start looking and you’re like, “This is based on a couple of really big sales, a really big retail order went in, a specialty program went in. This was the biggest month of the year, and the actual rate down the line, if I go to the next month, is going to be 140.”
Mike Warkentin (22:05):
Like, there’s a problem there. So, when you start looking at these big numbers and averages, I’d go with you Nick, look—dig into them. Like really dig in and say, “Where do these numbers come from? What’s the breakdown that equals this? Like, what am I adding up to get this average?” And then I would also encourage people to look not just at one month’s financial statement or a balance sheet for a business; start digging into like a bunch of them. Like, has this thing been profitable for a while, or was it profitable last month and now we’re selling, right? Because have you seen stuff like that where the financials are just in the red, in the red, in the red, in the black—it’s for sale.
Nick Habich (22:36):
Yeah. I think that that’s not wildly uncommon. I think that most people, if you’re in the market for buying a new gym, especially if you’re in the Two-Brain ecosystem or something similar, I think you’ve got to look back and remember where you were prior to joining Two-Brain or joining something like this and think about where your business understanding was, right? That’s probably the level of business understanding of the people selling to you.
Mike Warkentin (22:56):
And it wasn’t good for me. It was bad.
Nick Habich (22:58):
Yeah. Mine either, you know. I was barely tracking how much income we made, let alone any other metric that was important, right? So, I would just operate with that understanding and that they probably don’t know what they’re talking about. So, even if they say they’re in the black right now, they may not be reporting numbers correctly. I know I wasn’t at that time.
Mike Warkentin (23:17):
Yep. What would you want to see in metrics? I’ll give you like two big numbers. Like what would you want to see—two numbers—that would convince you that a gym might be sustainable that you might want to purchase? Like are there any numbers that really stand out for you that you would really put a star beside?
Nick Habich (23:32):
Yeah, I mean the first one, I think—and this isn’t super sexy, but it’s really important—is I’d want to see really low expenses, really low recurring expenses.
Mike Warkentin (23:39):
You want to see low expenses.
Nick Habich (23:41):
Right, because you can change a lot of things, but I can’t change your $9,000 a month rent, right? I mean, maybe you can. There are rare exceptions, but odds are you cannot, and you’re locked into that number, right? So, it’s way easier for me to make a gym profitable if the recurring expenses are $6,000 or less than it is if they’re $14,000. So that for sure, that’s the number one. Next I would probably look for a low ARM, a low average revenue per member, right? Because there’s opportunities to fix that. So, for example, bringing in—and it doesn’t necessarily have to be raising prices, at least not right away. It could be something like just instituting new services. So, bringing in say, nutrition coaching or personal training or semi-private or a barbell club or kids or something, right? There’s an opportunity to raise that ARM up a little bit. But I would—probably, the number one thing I would look for right now is net cash flow. Regardless of whether it’s actually like “hashtag profitable,” whether the owner is taking pay or not taking pay, I would want to see how much money is left at the end of the month. Because that gives me a very understandable amount of “What can I do? What changes can I make right now with no other changes having been made?”
Mike Warkentin (24:45):
You bring up an interesting point. I’m going to plug gymlawyers.com; our friend Matthew Becker there, he reviews leases and so forth. You would want to take a look at the lease of a gym that you’re buying and see if there is any horrible stuff in there, because sometimes there is, and sometimes you will be tied to that lease that you didn’t sign that’s coming your way. So that’s a huge part of the business. And Nick pointed out, you might have—in certain businesses, like you can’t fix them. Like if you, for example, took this glorious, beautiful retail storefront in downtown Manhattan and your rent as just some ridiculous number, you may never be able to sell enough memberships. Like it may be unfixable. And you’ve got to look at that, and I would encourage you to look at a track record of profitability. Like if I saw something, at the stage where I’m at, I would want to see a business that’s profitable and is working well and shows it’s going to profit $4,000 a month or whatever it is, and it’s been doing that for two years. At that point, you can start saying, “Oh, this is worth a multiple of this, and I’m willing to invest that to get this, and that works.” But I would be very frightened if I saw the ups and downs and extreme revenue things and problems like that. Have you seen some expenses that have just been crazy on a balance sheet where you’re like, “What is that?”
Nick Habich (25:54):
Yeah, for sure. And the one I keep going back to is rent, because that is it. Like it’s very possible that you can’t fix this business. I know it’s not fun to say this, and everybody wants to believe that if they work hard enough, they can solve any problem. But where I live, if your rent is $12,000 a month, it’s not happening. You can’t do that. That is not an option. You cannot sell enough memberships at the size needed to make that work. That would be—I’ve seen that on multiple P&Ls, and I’ve also seen a couple where they’re about to kick into an extension that may or may not be in the lease. And the owners are aware that like, “Oh no, we’ve never shown we can do this. I don’t want to lock into three or five more years of this, so I better get rid of this now.”
Mike Warkentin (26:35):
Yeah. And sometimes in those leases there are like annual increases that pop up or build back fees—I think in triple net I think is the U.S. term; there’s a different one up in Canada, whatever it is. But I’ve seen people where all of a sudden what you are paying is now extreme. And so, you’ve really got to dig into that one. And so, Nick’s done a good job of pointing that out. If you’re looking at buying a gym, don’t stop at the P&L, take a look at that lease and see what’s in there. Because you might really be tying yourself to a cannonball going overboard. Talk about temptations. So, what are some of the temptations? Because I remember back in the day—this was maybe 2010 or something like that, and I was at a business conference, and people were talking about buying second gyms, and it was sexy. Like, this was the thing where if you had a CrossFit gym, it’s like, “I want to be the guy with two CrossFit gyms.” What are some of the temptations in 2024 for people who are looking? What really starts getting them to get the checkbook out?
Nick Habich (27:25):
Yeah, I was that guy. So, I understand. Temptation is the fact that you’ve done this successfully once, why not go ahead and do it again? Right? And just because you can do something doesn’t mean you necessarily should do something. That doesn’t necessarily mean that that is the right use of your time and energy and emotion. So, if we go back to Founder, Farmer, Tinker Thief, you should not be looking to acquire anything new until you’re at least in the Tinker phase, right? Because if you can’t take your attention off your current thing, you should not be looking for a new thing. You should be working on your current thing,
Mike Warkentin (27:55):
Which is going to be great.
Nick Habich (27:57):
Yeah, right? And to be less theoretical and more tactical, if you can’t step away from sales and coaching at your gym, you should not go get another gym. If you’re still the person doing sales and coaching at your gym, you should not full stop, should not go acquire another gym. If you can successfully replace yourself in those and successfully replace yourself in, say, the management of that gym, the management of the day-to-day operations, then maybe start looking. But if not, don’t, right? Now, assuming you can do those things, looking to acquire another gym immediately puts you back into Founder phase. So, all those hard days at the beginning of your gym where you were there in the morning and there at night, and you were talking to people about why they shouldn’t spill chalk everywhere and why it’s not okay to throw kettlebells at the wall or how they have to wear a deodorant, or they shouldn’t come to the gym. Like any number of these things, welcome back to that phase. And is that the best use of your time when you just worked so hard to get it so that you’re not there? When talking one of my mentees through this process, my recommendation was they don’t do it. And they didn’t, thankfully. Their goal was to make an extra $4,000 a month. OK, let’s do that without acquiring $16,000 a month in expenses. Let’s do that— Right, right, right, right.
Mike Warkentin (29:09):
Yeah. So, I mean, I’ll summarize what you’re saying there. Like, there’s ego. I think ego is a temptation where you want to be the person who’s got multiple locations, like you’re that guy or the girl—that’s an issue. I think the other one is the temptation of glorious financial success where you’re like, “Oh, if I’ve got one and it does this; I’ve got two, it’s going to double that.” But like two gyms is not twice the work. It’s more than twice the work because all of a sudden your attention is—like, you’re split in five different ways because you’ve got a bad problem staff member there, and you’ve got one on this side; now you’ve got two, and they’re— It just spirals, and all your multiple—the more clients you have, the more bad clients you have in that mix, right?
Mike Warkentin (29:44):
So, all of a sudden, you’re multiplying stuff. And you made a great point, and this is something for people to think about. If you are—if you want to make more money, you might be able to do that at your current business really easily with the help of a mentor who just says, “Dude, you just need to do this.” And you’re like, “Oh, OK, I didn’t see that.” Right? So that’s a definite concern for people where they can just do something better at their current location. And Nick mentioned the Tinker level. Basic summary of the Tinker level is that you have a gym, it is running very well, it does not take up a lot of your time, it is paying you about $100,000 a year or more, and you are on your way to $1 million net worth. At that point, you’ve got a little more money than you need.
Mike Warkentin (30:22):
You’ve got a little more time than you need, and you can now invest this in something else. But I’ll tell you this, just because you can do 30 muscle ups for time does not mean you should do that workout every day. You should say, “What is the most effective thing that I should do?” And you might say, “Maybe I want to open a distillery.” We had a Two-Brain gym owner who did that and thought it was a great idea, and he is doing an awesome thing. We’ve had other gym owners who have gone into Airbnbs. We’ve had other gym owners who have done multiple locations. There are all different things that you can do, but it’s like, you can’t do all of them. What are you going to do? And how will you stop it from sucking, killing, your golden goose. That’s the other thing, right? Have you seen that one where someone’s like, “I’ve got a great gym; I’m going to buy another gym.” And all of a sudden both gyms suck. Has that happened?
Nick Habich (31:00):
I’ve seen that so many times. So, so, so, so, so I work with a lot of the multi-location gym owners in Two-Brain. And I’ve seen that so many times, and it makes sense, right? Because you don’t realize how vital you are to your gym.
Mike Warkentin (31:14):
You cannot replicate yourself.
Nick Habich (31:16):
Exactly. And I know we teach people in Two-Brain not to run into the icon problem where it’s Nick’s gym or Mike’s gym, but there is a level of that that you can’t really get away from at our size and style of gyms. And you are the only thing that can’t be replicated, right? Like you can only look in one direction at once. You cannot look in two; it’s impossible. So, when people make that leap a little earlier than they should—and you know, little transparency, I made that leap a little earlier than I probably should have—you start to notice that the place that you used to have all your attention on is just not doing as well.
Mike Warkentin (31:46):
The spinning plates.
Nick Habich (31:47):
Exactly. For me, my first gym was our cash cow. That was the thing that was supporting everything else. I was so focused on our second gym and then opening up the third gym, that the first gym started to struggle. That’s a really common story. Yeah.
Mike Warkentin (31:59):
Mm-Hmm. Yep. And it’s just because your focus is elsewhere. And that’s not to say—like there are some entrepreneurs who are so good at this that they can actually do that, but it wasn’t me. It wasn’t you. And maybe it is you now, but you still don’t want to, you know? So, it’s interesting, and Chris has talked this so many times: Don’t kill the golden goose, right? Yeah. So, there’s that thing, like you start looking out and up instead of down and in, and you lose your focus, and all of a sudden the thing that was great is now terrible. You’re bleeding members at two locations. So, what did you do? When you had that situation, did you just start unloading gyms and refocus, or what’d you do? How’d you fix it?
Nick Habich (32:32):
Yeah, that’s exactly what I did. I just killed the third gym. I said, “It’s not worth it. It’s not worth risking what we built with these other locations just for this new sexy idea that I had. Let’s kill that. Let’s refocus.”
Mike Warkentin (32:45):
Did you sell it, or did you just shut it down?
Nick Habich (32:47):
I just shut that one down.
Mike Warkentin (32:48):
Yep. So, there you go. And then what happened to your other gyms?
Nick Habich (32:50):
So, we ran them successfully for three more years. I closed the second one down last year. December of last year.
Mike Warkentin (32:57):
And did that increase your focus on your other tasks?
Nick Habich (32:59):
Oh yeah. Yeah. I mean, unsurprisingly, the first gym became significantly more profitable again.
Mike Warkentin (33:04):
And there you go. You know, so it’s a really interesting thing. So, let’s close this out. I’ll ask you this as a summary for people: What are some of just the bullet points? When should a gym owner absolutely not buy another gym? And I’ll tell you this, so I’m going to start it off with one thing that I harp on on the show every time to get it started. If you do not have a concise set of standard operating procedures in your current business—and I’m talking rock solid SOPs that every role and task is assigned, and the performance levels are indicated and reviewed regularly—if you do not have all this laid out and your business is not formalized and out of your head on paper, you should not look at buying another gym. Nick, what else have you got?
Nick Habich (33:42):
I love that one. If I can’t come to your gym and read your staff playbook and do your job, you shouldn’t start a new gym.
Mike Warkentin (33:48):
And I’ll take you one further. I’ll even say if you don’t see a playbook in another gym, you might not want to buy it, but that’s just me. But anyways, go ahead.
Nick Habich (33:56):
I would say that if you don’t have a very large cash reserve or access to a very large cash reserve, you should not buy another gym.
Mike Warkentin (34:01):
And there are ways to get that, but also know that debt comes with interest payments.
Nick Habich (34:05):
And I would just tell you, if you’re not ready to completely leave your first gym alone, don’t buy another gym.
Mike Warkentin (34:10):
That’s the “hit by a bus” test, right? So that means that if you can’t leave your gym for like a month, and you come back and it’s on fire, you should not be looking at another gym. Your gym—and that goes back to kind of my SOPs, but it has to be running like a machine where if you’re gone, it still goes. If you need to be there steering it constantly, why would you want another ship to pilot? You can’t do that.
Nick Habich (34:31):
Yeah, I would say the last thing is that if there’s honestly anything else you want to be doing and is important to you, don’t open up another gym because it’s going to stop you from doing any of those other things.
Mike Warkentin (34:40):
Yeah. And I’ll reiterate what I think was a great point that you made, and I think people will forget this: If you are an upper-level, Tinker-level gym owner and you decide to buy a second gym, you are now a Founder again. So, you have to go right back to the beginning. If that doesn’t interest you, don’t do it. If it does and you’re like, “I like uncoiling things, and I like building, and I like getting dirty and getting some stuff under my nails,” do that. But if you don’t, you should definitely not do that. There’s something else you can do. And some of our top gym owners—one of the things that Chris has talked about is have a plan for your spare time and your free time, and do something that really engages you. It might not be building another gym. It might be spending more time with your kids. It might be opening a distillery. It might be something else. So, really decide: Do I want to get back in the muck up to my knees?
Mike Warkentin (35:28):
Alright Nick, I want to thank you so much for giving us some info here and opening your horror stories from the past, but also cool for you for getting through some of that and noticing it, pulling it back and now refocusing because now you can help other gym owners do that. So, when you work with the gym owners who are looking at other gyms, do you feel like you can give them the advice they need to make smart decisions fast?
Nick Habich (35:50):
Yeah, most definitely. I mean, I put my 10,000 hours in there.
Mike Warkentin (35:53):
Yeah, so exactly. So, guys, we do have mentors that can help you with this kind of stuff. And if you’re looking, book a call, and we can talk about mentorship and can help you guys figure out “What should I do right now?” It might be buying a gym; it might not, but there are all sorts of resources that can be applied to your situation. So, Nick, thanks so much, and we’ll talk to you again next time from the heart of Florida.
Nick Habich (36:11):
Thank you.
Mike Warkentin (36:12):
All right, that was Nick Habich. This is “Run a Profitable Gym.” This is where the world’s best gym owners tell you exactly what they’re doing so that you can have the same success. And our mentors are constantly on here giving you all the info you need to help you run a better business. Please hit “subscribe” on your way out. And now here’s Chris Cooper with a final word.
Chris Cooper (36:28):
Hey, it’s Two-Brain founder Chris Cooper with a quick note. We created the Gym Owners United Facebook group to help you run a profitable gym. Thousands of gym owners, just like you, have already joined. In the group, we share sound advice about the business of fitness every day. I answer questions, I run free webinars, and I give away all kinds of great resources to help you grow your gym. I’d love to have you in that group. It’s Gym Owners United on Facebook, or go to gymownersunited.com to join. Do it today.
