In 2007, I ran out of money.
I had $0 in the bank to pay my staff but over $12,000 in receivables.
It was incredibly stressful. I called the bank prepared to declare bankruptcy, but the banker instead converted my line of credit into a three-year loan. The interest rate went down—and so did my heart rate. The payments were cut in half, so I could pay myself and my rent and my staff on time.
With less stress, I had the mental bandwidth to fix the real problem: I stopped billing clients at the end of the month and started selling packages and memberships up front.
The banker’s solution was simple and very common—but as an entrepreneur living on my own little island, I had been trying to invent a fix.
If you’re struggling for cash, you have options. In this series, I’m going to give you a few. This advice might go against the worn-out stuff you’ve heard about “bootstrapping” and self-funding, but it might also save you from handing over millions in equity by mistake.
Four Sources of Cash for Gym Owners
In general, when you need money, four sources are available:
1. Your clients.
2. Your ownership group (mostly your savings account, but maybe your partners).
3. Your staff.
4. A third-party lender, like a bank.
Here, I’m going to talk about raising money from partnerships, banks and staff investment.
Banks: The Partner That Eventually Goes Away
I know, I know: everybody hates banks. But sometimes they’re actually the best choice. Nobody likes paying interest on a bank loan, but the good thing about banks is that they eventually go away.
That’s not true with partnerships, where you’ll keep splitting income forever. Don’t try to save a small interest payment by giving up long-term equity.
Many gym owners take a partner when they need cash. But they exchange equity (long-term value) for cash (short-term value). They give up the freedom to make decisions and often wind up feeling like employees. Some partnerships in small gyms can work, but these situations are very rare.
In general, a partner should bring one or several of these things:
- Significant capital.
- Significant knowledge that you don’t have.
- The ability to do a task that you can’t do.
For example, in a gym a partner should provide the startup funding if:
- You can’t get a loan from a bank.
- The partner possesses business knowledge you can’t buy from a mentor.
- The partner can work in the gym and you can’t.
One key benefit of taking a partner: If the gym needs money, it’s easier to go back to a partner for a cash draw than it is to get another loan. Of course, if you take a loan and you’ve paid some off, it’s easy to get another loan from the bank, too.
In most cases, a gym is an owner-operator business. A partner might feel like a security blanket, but it’s almost always a lot cheaper (and more effective) to take a loan, invest in mentorship and hire staff.
Staff as a Source of Cash?
Years ago when gyms were failing very often, some of them tried a “co-op model.” Owners sold some shares to their staff members or even their clients.
None of those gyms are still around.
One gym in my city tried to do it with six co-owners. In the bad months, everyone put money in. In the good months, they took money out—but they never saw any true ROI. In fact, they never even recouped their principal investments. The pie was simply sliced too many ways. And there was never enough work for all six people, so some owners wound up working a ton and some didn’t work at all. Friendships were severed as a result.
When you need cash, the best place to get it is usually the bank.
Let’s say you need $20,000 fast. If you borrowed $20,000 today at 6 percent, you’d pay $386.66 per month for 5 years. Then the loan would be gone. As the company grew, your loan payment would stay the same. You’d end up paying $3,199.36 in interest. That would be the entire price of the loan.
If you traded $20,000 for 20 percent of your company and the company grew at a reasonable rate, in five years the value added to those shares would be much more than $3,200 if you wanted to buy them back. And, of course, you’d have been paying out 20 percent of your profits to the partner every year.
For example, if your annual profit was just $10,000 every year (we’ll ignore growth to keep it simple), you’d fork over a total of $10,000 ($2,000 x 5) to the partner over five years—more than three times what you would have paid to the bank in interest. And the kicker: You’d keep handing over that 20 percent forever, not just for five years, unless you buy the shares back at a price above $20,000.
If you sold 20 percent of the equity in your company to your staff to raise $20,000, the company would probably stop growing. When you sell equity, you lose agility—the biggest advantage a small business has. At best, it would stay the same until someone said “I want my money back!” and the others had to either buy them out or fold.
Sometimes, stock purchases are motivating—for example, in a product business or a software company. But a service business is really an owner-operator business, where all shareholders are actually buying themselves jobs. It’s so much harder to scale because all the money goes to the partners. As the business grows, the partners become overpaid employees, slowing growth. If the gym doesn’t grow, the partners become expensive anchors.
In the next post in this series, I’ll tell you how to raise money from your actual service fast without harming your gym long term.
Other Media in This Series
“5 Ways to Make Money Fast Without Hurting Your Gym”
“How to Use Debt to Buy a Gym—Finance Secrets for Gym Owners”
