Mike Warkentin (00:02):
Yes, my lawyer friend. That is a horrible, horrible story that’s like trapped-in-a-hot-elevator-on-seafood-delivery-day bad. Listeners, this is Worst-Case Scenario Week on “Run a Profitable Gym,” lawyer Matthew Becker just told me a business horror story that will make your toes curl. We’re going to share some of this stuff with you today, and Matthew’s going to help you avoid problems. At the very least, you can feel better about your own bad days when you hear about the bad days that other gym owners have from time to time. Do me a favor before we get to that: Hit like and subscribe wherever you’re watching or listening. I really appreciate it. Now, Matthew Becker is the owner of gymlawyers.com. He’s the former owner of a gym in Pittsburgh. He’s here to tell us about partnerships from hell and all the things that can go wrong and make your day a living nightmare. Before we do that, we’re going to note that the scenarios we’re going to talk about here have all been anonymized or even fictionalized, just to protect the identities of people involved. But you’re going to find that the stuff that we’re talking about is all too common. You don’t have to think very far before you can find something like this that happened in the real world. So, Matthew, welcome. How are you doing today? Are you ready to get dirty?
Matthew Becker (01:08):
Hey, Mike. Great. I’m fantastic. Yeah, thanks for having me on again. It’s always a pleasure to hop on here and talk to you guys. Yeah, I was quoted once on a different podcast to say I live in the worst-case scenario. And literally they quoted that; they still quote it to this day that that’s what—
Mike Warkentin (01:25):
That’s why lawyers are around. What’s the worst that can happen? How do we prepare for that? And that’s kind of what we’re going to do today. And listeners, we’re going to give you some fun stuff to make you laugh and maybe even, you know, shiver a little bit. But then we’re going to give you some solutions and some ideas on how to stay out of the muck, so you don’t need to wade through it. So, Matthew, let’s talk about some horror stories here. I’ll go first. There’s a classic one, and it happens in partnerships all over the world, and it’s one owner wants to date members; the other one maybe thinks that’s a bad idea. What else? What other stuff have you seen that causes major friction that gets legal very fast?
Matthew Becker (02:00):
Oh, sure. So, maybe one partner wants to spin off and start their own supplement company. And this can go one of two ways. They would then put all of their time and effort into that supplement company and just don’t go and do anything in the gym at all. Or even worst cases, they start to siphon off gym company money in order to fund the startup of the supplement company, without telling any of the other partners.
Mike Warkentin (02:29):
That sounds pretty, like that could be very common, right? Like, I see that kind of stuff happening where you’ve got entrepreneurs, and they just think, “I have a business. I would like to chase that shiny object over there, but maybe I’ll take a little from this and that and the other.” And that’s basically, I think that that happens more often than you would think. And here, I’ll give you another one related to that: What if two partners start the gym company and one partner just doesn’t feel like doing anything at all?
Matthew Becker (02:56):
Yeah. Oh, that is the number one reason that partners call me or one partner calls me to say, “How do I get my partner out of the business? Because we were in this, and like a year in, they realized it’s not all roses and cupcakes or whatever, running a gym. It’s very rewarding, but it’s tough business sometimes.” And so, they just like don’t do anything. They go back to their corporate job. They stop coaching. They disappear. That is also a really common one.
Mike Warkentin (03:28):
I’m chained to a deadbeat.
Matthew Becker (03:29):
Yeah. Right? Yeah. And then you’re chained to them, and you’ve got to share profits with them because they’re partners.
Mike Warkentin (03:34):
Or how about this one, Matthew, worse than that, what if there’s no profits, the gym is dying, needs additional cash, and one partner says to the other, “Hey, we both got to kick in 10 grand,” and the other guy’s like, “Sorry. You’re breaking up here, dude”?
Matthew Becker (03:51):
Yeah, I don’t know. For some reason my bank account’s locked up.
Mike Warkentin (03:54):
I never got your message.
Matthew Becker (03:56):
What else you got? Yeah, well, a common one that I’ll use when I’m talking to partnerships and putting together operating agreements is one partner becomes like the nutrition guru in the gym, and they start to build a nutrition practice in the gym, but they start to get a lot of traction. And so, they decide they’re going to go online and build a nutrition practice online, and all of a sudden, they start siphoning off the gym’s nutrition clients. Well, that’s a loss of revenue for the gym company and a gain of revenue for this individual partner who’s over here now operating their completely independent business. That can cause a lot of problems between partnerships because it’s like you’re now benefiting from what we did together in the gym.
Mike Warkentin (04:38):
What about this one? What about illegal activities? One partner starts doing something that’s clearly not legal.
Matthew Becker (04:47):
Yep. Yep. Selling drugs, smoking weed outside the gym if you’re in a state where that’s not legal, between classes, during classes, dare I say. Yeah. And members start to get a little tee-ed off, and they start to leave. Just selling—you know, I actually, he was never a business partner of mine, but he helped me get my gym started, and thankfully we parted ways prior to this happening, but then he moved into another state and was eventually brought up on federal charges for dealing in steroids. And so, things like that can happen.
Mike Warkentin (05:23):
Yeah. That’s actually, sadly, that is a gym funding plan that’s part of a business plan for some gyms, and it’s not good. And there’s other aspects of like illegal stuff. Like, I’m not paying these taxes. I’m not declaring this stuff. I’m not doing these things that are required. I just refuse to do it. One partner wants to check the boxes, the other one doesn’t, and all of a sudden, you’ve got gaping holes where all sorts of problems are going to start to link in.
Matthew Becker (05:49):
Yeah. Yeah. And a couple scenarios that are common, but maybe aren’t quite as shocking as the member or one of the partners dating an influencer, and now the influencer comes in from Instagram and starts stealing services from the members. That’s another one that we’ve seen. But another common one is we start with one individual and a couple partners come in, or we start with a pack of three guys and the fourth comes in like five years in and finds out that he was not disclosed all of the tax problems because the company hasn’t been paying their federal taxes for the last five years. And all of a sudden, the IRS comes knocking on the door, and this partner’s like, “Am I stuck? We’ve got $150,000 worth of tax debt. I was never told about this before I bought in.” That’s another problem that crops up when partners join that they weren’t exposed to prior. That’s another common one that we get. What do I do now?
Mike Warkentin (06:49):
What about this one? What about substances, drugs, alcohol? We mentioned a little bit, but like massive personal problems. Like two partners start a gym, one partner gets a very crippling addiction that kind of spirals out of control, and all of a sudden, everything is bad. And it could be theft in the business. It could just be absenteeism; it could be anything else. What happens there? You see that?
Matthew Becker (07:12):
Oh yeah, yeah. I’ve seen that in my own personal experience, not as a gym lawyer, but as a gym owner where one of the gym owners does that. They develop an alcohol addiction. They show up hung over the next day to coach the 5 a.m. class. They disappear for a week on end only to find out that they’re binge drinking in a hotel room somewhere. And the gym is just barely holding on because the coach who’s supposed to be there, the operating coach, isn’t there. And the partner’s having to then come in and try to operate the business, even though they were just supposed to be sort of like the backend business side of it, while the other coach was supposed to be the day-to-day operations. And that one, I’d forgotten about that one in my own personal life, but yeah that is a situation that happens.
Mike Warkentin (08:05):
How about this one—and this is interesting in the climate of our times where there’s a lot of rage going on based on a whole bunch of different things—what if one partner decides, “I want to speak out on this political issue very broadly on all of our platforms,” and the other partner thinks maybe that’s a bad idea? Have you ever seen something like that?
Matthew Becker (08:23):
Yep. Yep. With coaches as well. Especially, it happened four years ago; it’s probably going to happen again. Gym owners get ready over the next couple of months.
Mike Warkentin (08:33):
There’s an election coming down in the States, I hear.
Matthew Becker (08:36):
Yep. And it’s going to be a hot one.
Mike Warkentin (08:38):
To say the least.
Matthew Becker (08:39):
And it’s partners, whether it’s coaches, sometimes it’s even members—that’s just a topic. And what is it? You never talk about money and politics. Right? And so, politics is a big one. And when one coach is very adamant about flying their flag, and the other coach is trying to keep the peace, that also can cause some big problems. Now with that one, we hope it really only comes up every four years. And so, it’s not like in the interim we really have to worry about that one too much, but it is a problem.
Mike Warkentin (09:14):
Yeah. I mean, I can think of off the top of my head about 10 issues right now that I would be terrified to post about.
Matthew Becker (09:20):
Yeah, oh yeah.
Mike Warkentin (09:20):
There’s so much stuff going on right now, and it gets heated fast, and I could see that becoming a partner issue.
Matthew Becker (09:27):
Or something—I’ll throw one last one out there. One partner, you know something like the George Floyd situation that happened down here a number of years ago, and gyms were scrambling for like, what do we do? How do we show support? Are we not going to show support? Are we going to do this or that? And then you end up with two partners who are butting heads about—they may agree politically, but one partner doesn’t really want to get the gym “involved” in that kind of a situation, while the other partner does want to go out and be a forward voice about that, and that also can cause some massive butting of heads between partners.
Mike Warkentin (10:02):
Is the gym a political platform for whatever issue, right? That becomes a huge one. And there are consequences to each decision. Let’s do this. Let’s dial in now on a specific scenario with the idea that many of the things that we’ve talked about, listeners, things that you are dealing with in your partnerships or things that you see in the community, all of this is going to come down to some partnership issues that Matthew’s going to help you solve. So lay out something, Matthew, a scenario that we can kind of hang our hat on here for the rest of this discussion. Tell us what is going on, and then we’ll get into how we prevent this, how we deal with it, that kind of stuff. Here’s the scenario. Yeah.
Matthew Becker (10:36):
Yeah. So, this is just—we’re just going to kind of refer to this as like the triggering event. So, everything we’ve talked up to about, to this point is sort of like various triggering events that are common in the gym space. And the one thing that I want the gym owner who’s listening to this to really hold onto throughout the entire conversation is as this snowballs and snowballs and snowballs, preparation from the beginning is going to be the name of the game. And so, we can head off a lot of this stuff if we’ve prepared for it properly because somebody like me lives in this worst-case scenario. OK? Alright. So, the fact pattern, if you will, the law school fact pattern: One guy starts up a gym, and he’s got the, he’s the regular guy who became a CrossFit member, grew a passion for it—we’ll just call it a CrossFit gym; I don’t care. Call it a functional fitness gym, whatever it is. He became a member; he grew passionate about it. He decided that he doesn’t like his corporate job, and he wants to go start his own gym, so he does. He goes and he opens up a gym. One year in, realizes, “This is a little bit more difficult to grow and grow and grow than I thought it was going to be. I need some help. I need some financial help.”
Mike Warkentin (11:39):
And he didn’t call Two-Brain Business for mentorship. We’ll just say that right now. He has not made that important decision. Keep going.
Matthew Becker (11:46):
That’s right. Which is also, always get mentorship. OK. So, he doesn’t have a mentor, so he has got to bring some people in. He needs some operations help. He needs some influx of money, so he brings in two other partners. So again, these were not partners of the gym originally. We’re now buying them in.
Mike Warkentin (12:02):
This is his baby, and he’s getting help.
Matthew Becker (12:04):
That’s right. So, these two other people come in, and they are now a partnership of three. OK? We’ll just say they have a limited liability company because that’s the easiest thing to talk about versus corporations and shareholders and everything else. They just have a run of the mill limited liability company. They’re now three partners, and they move, and they’ve brought in, let’s say $75,000, and they in flux, and they’re trying to get things going again. But the original owner is still the day-to-day operator. OK? They never did anything about an operating agreement. They never did anything about designating roles about what needs to be done on a day-to-day basis and who’s in charge of what and whatever. The whole lease is in the original owner’s name or the personal guarantee. All personal guarantees throughout the way that we’re going to talk about were all in line with the original owner.
Matthew Becker (12:52):
The original owner didn’t have any membership agreements, never talked to anybody about registering the gym with the state, doesn’t have any employment contracts, nothing like that. He was just shooting from the hip because that’s the way the old gym owner did it. So, this is the way he’s doing it. OK? Because he is there day to day, he starts to develop a little bit of a thing for one of the members, and it starts innocent. It starts just with maybe a couple tactile cues here and there. Maybe they meet up out in the parking lot after the gym a little bit there. Maybe he needs some waiver language about personal contact. Anyway, sure enough, it starts to get out. Because they can’t keep it quiet forever. Gym social events, they’re seen a little bit too close together.
Matthew Becker (13:37):
Alright? Some rumors start to crop up in the gym, and suddenly some members start to have an issue with this. And because some of the members start to have an issue with this, they think the coach is giving favoritism. They just don’t like the fact that there’s this co-mingling of the coach with the member because it’s not very professional. So, they start to back out. Now all of a sudden, the two partners catch wind of this, and they’re like, “Well, oh crap, we’re not there on the day-to-day operations, and this is going to go bad.”
Mike Warkentin (14:05):
It feels bad already. They smell something going south.
Matthew Becker (14:09):
Yep, so, they start to really worry. Now coaches are starting to back out because they’re feeling like—or some of the other coaches because they’re feeling like this coach, he’s not doing a good job. He’s showing too much favoritism to the member. He’s not treating other members properly.
Mike Warkentin (14:25):
I’ll pull this at you: Maybe this member suddenly has keys to the building and is showing up at weird times.
Matthew Becker (14:30):
There you go. Yep. That stuff also happens a lot. Right? OK. So, we have this sort triggering event that is now going to snowball into big problems. OK? So suddenly, because all these members are backing out and the coaches are starting, the other employees are starting to have issues with this, the two members who came in and brought their money in, who really just wanted to be a part of this and help this guy out are really starting to get cold feet, and they want to run for the hills.
Mike Warkentin (14:57):
“We didn’t sign up for this level of risk.”
Matthew Becker (14:59):
That’s right. “We’ve got to get out. We’ve got to get out of here. I don’t care about our investment money. Just get us out.” Right? And that brings us to the first problem because what I said a few minutes ago was they just gave this guy money, walked in, were considered partners and never did anything formally about it legally. There’s no purchase agreements; there’s no operating agreement—there’s nothing in play. The problem becomes, the default to most states when there’s no operating agreement saying otherwise, is that the only way you can get in and out of an LLC is by consent of all other members. And so, we have a situation here where we’ve got two guys who won out and the third guy, the original gym owner who is perhaps also kind of panicking at the moment because he’s realizing that he made some mistakes, and he doesn’t want to carry all this on his own. So, there’s a potential that he’s not going to agree to allow these two guys out. And so how do they get out? And that’s a big problem, and it’s a problem that we don’t have a really clear answer to other than “should have had an operating agreement.”
Mike Warkentin (16:05):
Yeah. And I’m going to jump in, Matthew—listeners, you can think of infinite variations of this scenario that happen all the time. Maybe it’s three people; maybe it’s just two. Maybe it’s not sleeping with a member. Maybe it’s something else; maybe it’s whatever. But you see the pattern here is that something bad is happening, there’s no documentation, and someone wants out. Alright, Matthew, take us forward here.
Matthew Becker (16:30):
Yep. So, we could have had buyout clauses that allow people to leave. We could have had, I’ve now used triggering events in two different situations, but we could have triggering events in that operating agreement. If this was a scenario where like, we go back to some of the other common scenarios—that third partner is now doing something illegal, that can be an automatic triggering event that allows us to actually kick that guy out of the LLC, get him out of the business so these two new partners can try to fix things. OK? So that’s kind of like problem number one is how do these two guys get out if they don’t get the consent from the third member or the third partner to allow them out? And really the only scenario there, if he won’t consent to let them out, is to basically sue him, to get a court order to force these two partners out. So, if you’re the original gym owner, and this is what happens, now, you’re potentially looking at already a lawsuit coming from these two other partners that you’re going to have to deal with while all this other stuff is happening within the gym.
Mike Warkentin (17:33):
Well, that sounds horrible. At the best, if this is happening and there’s no documentation, at the very least you’ve got a huge problem to try and figure out what’s going on because you don’t know, right? Like you just made some handshake deals with some napkins and so forth, and all of a sudden you’ve got partners. There’s no agreements or anything like that. And that’s in a best-case scenario. So, in the best case scenario, you are confused as hell. In a worst case scenario, it’s getting legal, and lawyers are getting involved, people are being sued, and money is starting to go out of the bank account and into lawyers and judges and all that other stuff. What do we do? Like it’s good for you, Matthew. You get paid. Take us further.
Matthew Becker (18:16):
Yeah, it’s great for me. I mean the only thing you can really do in this situation is sit down now before any of this stuff happens. It’s like going into a marriage. When you go into a partnership, you’re going into a marriage better or for worse, right? And if you are thinking, “Yeah, I need a prenuptial agreement when I go into a marriage in the event that I ever get divorced,” think of your operating agreement as the prenuptial agreement. This is what happens to pay us and how we’re going to do taxes and where the company agrees to provide you the limited liability protection and that good stuff. But it also talks about what happens when crap hits the fan.
Mike Warkentin (18:51):
So I’m going to jump in and ask you this question right now: Can you, through gymlawyers.com, backfill operating agreements for partnerships right now that are already in existence but maybe not documented?
Matthew Becker (19:01):
Yes, you can. Yep. Piece of cake. Easy thing to do, and we can do it at any time.
Mike Warkentin (19:06):
Easy to do, and it’s probably easy to do when there’s not acrimony and fighting going on, right? Yes.
Matthew Becker (19:11):
Yes.
Mike Warkentin (19:11):
So, if you’re listening—
Matthew Becker (19:12):
Do it now while everybody’s happy.
Mike Warkentin (19:14):
If you do not have something like this in place, it would be in your best interest to put it in place now before the worst-case scenario. So gymlawyers.com, that’s where you can find Matthew. Check that out because it’s hard to unravel really tight knots. It’s much easier to tie ropes together properly in the first place. Keep her going, Matthew. That’s right.
Matthew Becker (19:32):
OK, so let’s move the partnership off to the side now. Because we now know that that’s going to be a crap show, and that’s going to blow up. So, these two partners are trying to exit, and they’re leaving this operating guy with no backing whatsoever. Money is already tight because perhaps they pre-sold a bunch of memberships because remember this partner, he was struggling for some money. This the original owner operator, that’s why he brought these two guys in. So, he probably was also pre-selling memberships maybe six months, a year paid-in-full so he could get a big influx of money in order to keep the gym going, meet rent payments, maybe try to do some marketing to try to build the gym a little bit more, but the problem was, now that he’s pre-sold these, he’s closing mid-year, what are we going to do about it? Which I forgot to say—so now that we’ve got these problems, with his partner leaving, this guy says, “You know what? I can’t do this on my own. I’m done.”
Mike Warkentin (20:28):
But I take in … money.
Matthew Becker (20:30):
And it happens, right? It happens where, for whatever reason, when gym owners get to this state, they just “boom” immediately, and it’s like, “I don’t want to deal with this. I don’t want to have any fallout from this. We’re closing right now.” And we’ve had situations a couple of times where gym owners have called us with these sorts of similar situations and wanting to close, and they listen when we say, “Pump the brakes, pump the brakes, pump the brakes, hold on,” because of everything we’re going to talk about from this point forward, you can’t just shut down right away. “Like I get that you’ve got some financial hardships, but you can’t just shut down right away.” But occasionally they don’t listen, and they go, “Nope, I’m done. Shut the doors.”
Mike Warkentin (21:10):
And that’s when some clients get upset, I’m imagining.
Matthew Becker (21:13):
Now we’ve got clients who are going to get tee-ed off. OK, maybe he wasn’t pre-selling or paid-in-fulls, and he only took money at the first of the month, and it’s the 15th of the month, and people are just going to be off because they lost half their membership maybe. OK? That’s probably best-case scenario in this instance.
Mike Warkentin (21:31):
It’s still bad.
Matthew Becker (21:32):
Worst-case scenario is he sold 12 months paid-in-full, he sold six months paid-in-full, he sold a package of 24 private training sessions at $100 per session. OK? And he should be sitting on all this cash. But he isn’t because he was paying for coaches. He was paying for marketing. He didn’t have enough money to come in and pay for rent, so it’s been going to rent. And so, the company now doesn’t have the cash to cover its debts. And when that happens, the company is insolvent, and we’ll come back around to that at the very end. But the problem is now we got a bunch of members who are saying, “I want my money back. I want my money. I’m out. OK, I quit. I gave you 12 months in advance. Too bad. I want my money back.” And the gym owner has to say, “ I can’t—I don’t have it.” OK, well now, we’re going to walk down a path of: Is this gym in a state where the gym has to register with the state, and it’s in a state where they have to register, and they have to have a written membership agreement? And because they’re paid in full pre-selling, they also have to post a surety bond. And if they didn’t do all of these different things, there’s now potential criminal charges that could come from the state to this gym owner.
Mike Warkentin (22:40):
This is spiraling fast.
Matthew Becker (22:42):
Yes. It will.
Mike Warkentin (22:43):
And this is not uncommon. Listeners, you know, this is not uncommon.
Matthew Becker (22:46):
No, no. It come—and it spirals very quickly. And so, all it takes is one member who prepaid a membership who’s now off, who calls the attorney general’s office of the state, reports the gym. And there are only a few states where you can pre-sell without having to register with the state. Most states, if you’re selling anything beyond just like month-to-month, you’re going to have to register, you have to have a membership agreement that’s very specific, and you’re going to have to post a surety bond, which I think, Mike, is something that we’ve talked about in the past, but—
Mike Warkentin (23:21):
I bet … knows this.
Matthew Becker (23:23):
Tight? A surety bond is a very large monetary bond that you post with the state in the event that you close after pre-selling a bunch, and the members can go and request back their money back from that bond with the state.
Mike Warkentin (23:37):
How many gym owners, off the top of your head, Matthew, do you think actually do this? What percentage? Is it low? It feels like it would be low.
Matthew Becker (23:45):
Oh boy. It’s not as low as it was two years ago before it started.
Mike Warkentin (23:49):
Probably new. Yeah.
Matthew Becker (23:50):
It’s not as low, but it is very low.
Mike Warkentin (23:53):
Like less than 50%, would that be accurate?
Matthew Becker (23:56):
Yeah, I think that would be accurate. I would say so.
Mike Warkentin (23:59):
So, 50% of gym owners might be at risk, right?
Matthew Becker (24:01):
Right, and the only reason that that number is going up is because we’re catching more and more gym owners from the beginning with Two-Brain. They do a lot with starting gyms, and we have a lot of the material in that “Start a Gym” book, and some of the modules and stuff. And so, we get those gym owners early enough that we can say, “Hey, phase three of opening a gym, from our perspective, phase three is now your gym contracts, your waivers, your membership agreements, your staff agreements,” and we can then talk about state registration if they’re in one of those states.
Mike Warkentin (24:31):
Yeah. And I’m going to jump in and just say Two-Brain is all solving problems before they happen. We’ve all made too many mistakes. It’s all documented. You can avoid these potholes. Paid-in-full discounts kill gyms. Chris Cooper has written about this in detail. They’re the worst idea you can possibly do. Do not offer them. And that relates to what Matthew’s talking about. In addition to that, paying trainers in advance for services also probably not a good idea.
Matthew Becker (24:57):
You’re jumping ahead on me, Mike.
Mike Warkentin (24:58):
Sorry. No, I just—you started, like my alarm bells went off here. Because I’m thinking stuff. Yeah, I won’t go further on that, but let me just say this: The stuff that Matthew is laying out, these problems, with the help of a mentor become, they’re don’t appear because you took the right steps at the beginning. Sorry for derailing your train.
Matthew Becker (25:16):
Now you didn’t derail, you didn’t derail—just next on my list was employee issues. So, alright, so we’ve got these problems now with the members, right? Like they want their money back, and the gym owner, the other partners are gone, right? And he’s like, “I don’t have any money. What am I supposed to do? I can’t give you guys your money back.” Lawsuits are going to come; we’ll talk about chargebacks in a few minutes. Those are going to come, alright, but now you’ve got the other staff, the employees, right? Maybe they’re independent contractors; it doesn’t matter in this instance if they’re independent contractor versus employees. Can you fire the employees? Do you have—let’s change the scenario for a second. Let’s assume that it was one of the other coaches who was sleeping with the member. OK? That also happens a lot. Just as likely as one of the owners sleeping with them.
Mike Warkentin (26:04):
Very common.
Matthew Becker (26:06):
Can you fire that coach? Do you have an employment agreement that says that this coach is at will, and you can terminate them at any time for any reason as long as it doesn’t violate the law? We’ve run into scenarios in these situations where the gym turns over their employment agreement to us, and we look at it, and it literally says in the employment agreement, “The gym has to give the employee 30-day notice and a right to cure before they can terminate them.” That’s terrible language. Never give your employee a right to cure under these circumstances because these are really bad.
Mike Warkentin (26:39):
Now you’ve got to just try and fix them.
Matthew Becker (26:42):
Right? It’s going to come back to bite you. So, we just want employment agreements that say these employees are at will. We want independent contractor agreements that say, “We can terminate at any time for any reason.” Because of these situations, we don’t want to give them a right to essentially cure the problem or notice requirement before we can terminate them. And so, the next problem for this gym owner is everybody who’s worked up to this point has to be paid. If we’re shutting down in the middle of the month and they’ve worked the first half of the month, and you always pay them at the end of the month, or every two weeks or something, you still have to pay them.
Mike Warkentin (27:21):
But Matthew, I spent the money on a vacation to Hawaii with the member that he was dating.
Matthew Becker (27:26):
He already doesn’t have any money, right? It’s gone. So, now he’s got issues. He’s going to have wrongful termination issues. He is going to have claims, wage payment collection, law issues that are going to come back at him because he can’t pay. And then you brought up, Michael, what do we do about the fact that we’ve prepaid these coaches for private training? I saw this pop up, I think it was actually in the Two-Brain Facebook group, earlier. I think it was just on Monday I saw this where one of the members in there said, “Do you have any other way to do this?” Because the system, I think it was Wodify or PushPress or something like that, they do their payroll through that system, and they have to pay the coach in advance for what they’re supposed to be training that client.
Matthew Becker (28:13):
And then ultimately, that’s … that comes up here is that client quits, and the coach has already been paid to service that client. What do you do? Well, same thing here. The gym shuts down. The client wants their money back. The coach has already been paid to service that client. They can’t service the client because the gym’s closed. The gym owner doesn’t have the money to give the client their money back, and what are they supposed to do? Go to the employee and say, “Hey, give me the money back so I can give the client the money back.” It’s just not a good situation.
Mike Warkentin (28:45):
It’s so bad. And this, again, this spirals just from these small little things at the very beginning. And all of a sudden, if you look at the scenario and follow what we’ve talked about, dating a member has equaled a partnership blowup that has litigation attached to it. You’ve got staff members who are potentially litigating over wages and so forth and wrongful termination or whatever you want to say. We have clients who are potentially litigating over paid-in-full memberships that—”I haven’t got a gym to workout at, and I gave you $1,000.” All of this, like it’s terrifying. Like this is worst case scenario. Have you got—can you take us any further into the muck, or do we start solving it now?
Matthew Becker (29:21):
Oh no, we’re not. We’re we got like three more steps into the muck here.
Mike Warkentin (29:26):
I feel like Atrax in the Swamp of Sadness where my horse is just going underneath the mud in “The NeverEnding Story,” if you can remember that reference?
Matthew Becker (29:34):
Yep, yep, yep. And again, this triggering event is one we picked. It could be any of the ones that we ran with, anything just at the beginning. Yeah. So, the next problem is: What are we going to do about the lease? Right? OK, we’ve got to close the gym. You’ve got a giant contractual relationship with your landlord here in order to pay on a lease.
Mike Warkentin (29:52):
But I spent money, Matt.
Matthew Becker (29:53):
You can’t just close and walk away from the lease, and you’ve likely got a personal guarantee. So, in that instance it’s not even like, “Oh I can just bankrupt the LLC and walk away.” No, you’re personally tied to this lease, this original gym.
Mike Warkentin (30:06):
I forgot about that part.
Matthew Becker (30:08):
Now this original gym owner, before these other two partners came on, probably signed a personal guarantee on this lease. Now the landlord’s going to be coming after him.
Mike Warkentin (30:17):
That means like house and car, personal assets, are now in play.
Matthew Becker (30:20):
Yeah, exactly. Yep. House, car, bank accounts, you know, all that stuff is now potentially in play beyond that. OK? So, the gym owner goes, “OK, so here’s my saving grace. I’ve got like 50,000, $80,000 worth of equipment in this space. I can just liquidate my equipment, and that’s going to give me the money that I can pay off the coaches. I can pay off the clients, and maybe I can still have a little bit left over to give the landlord a lump sum payment in order to get out from under the lease.” Great. Except more and more gyms, we’re finding, have SBA loans and EIDL COVID loans that are clouding title on equipment.
Mike Warkentin (30:59):
So they might not even technically own their equipment. Is that what I’m hearing?
Matthew Becker (31:02):
Well they own it. They just can’t sell it. So, here’s how this works: OK, you go and during COVID you took out the one of the EIDL loans, or you needed more money in startup, and you took an SBA loan out. OK? In order to guarantee that they get their money back, they’re going to require you to collateralize your equipment, which just means in the event that you ever default, they can technically come after you, and they can take all the equipment in order to recoup the unpaid amount on the loan. When they do this, banks, SBA, all of the people who know what they’re doing in this realm, go and file what’s called a UCC lien under the Uniform Commercial Code, a lien on the equipment. It’s a document that sits with the state that renews. You have to renew it every five or so years depending on what state you’re in.
Matthew Becker (31:52):
And it basically says that as long as this lien, this document, sits out there saying that you collateralize the equipment, you technically can’t get rid of the equipment until you’ve paid off that loan. So now we’ve got a situation where he, the gym owner, pulled out a $24,000 EIDL loan, hasn’t paid a dime on it because the interest is so low I don’t have to worry about paying this thing off. The government isn’t currently in collections, but just right now they’re not coming after these things, so gym owners aren’t paying on them. Meanwhile it’s a cloud that’s sitting there on the equipment, and the gym owner technically can’t liquidate this equipment without either clearing off that lien or getting the SBA to compromise on their loan.
Mike Warkentin (32:39):
So, long story short, I can’t sell my kettlebells to pay off any of the people who are coming after me. Right?
Matthew Becker (32:45):
Exactly. Until we figure out what we can do with the SBA And there are things that we can do, but anybody who has tried to do this will know it takes a very long time to get the SBA to agree to do anything on this stuff.
Mike Warkentin (32:57):
Bureaucracy, we all love it.
Matthew Becker (32:59):
Yep. Yep. Alright. So, we’re two, three months into this crap, and now, all of a sudden, clients really realize they’re not going to get their money back, and they start hitting chargebacks, and so they go to your credit card processing company, and they start demanding their money back. Credit card company is going to your processing company, is going to give them their money back probably because it’s insured some way. They’re then going to go to try to pull it from the gym’s bank account. There’s going to be zero money there for them to pull from the gym’s bank account because there’s no money there. Right. Gym owner probably signed some sort of personal guarantee with that credit card processing company way back when, when he started processing credit cards.
Mike Warkentin (33:39):
When I read the agreement and checked the box that I understand, but I didn’t read it and understand.
Matthew Becker (33:44):
Yeah, right. That paragraph number 43 at the very bottom that says personal guarantee.
Mike Warkentin (33:49):
Didn’t read it, but I said I read it.
Matthew Becker (33:51):
Right. And so, guess who else is now going to be coming after the gym owner looking to get back all the money that they just had to give back to the clients?
Mike Warkentin (33:59):
This is horrible.
Matthew Becker (34:02):
And then the final step, last one, this is it for the muck. I mean there’s other things that could happen throughout this entire process, but these are the big ones is finally somebody decides to sue the LLC because they’re just like, “I’m done with this. I can’t do it anymore.” You know, perhaps the employees sue the LLC, the SBA comes after the LLC, maybe he has a private bank loan that also has a cloud on the title, so they’re going to come after the LLC, and in the end, the LLC is not going to be able to protect the gym owner because he’s rendered the company insolvent. This is something you and I have mentioned in the past, Mike, as “piercing the corporate veil,” “piercing the company veil,” whatever you want to call it. It’s a legal way of getting by that LLC in getting to the individual owners.
Matthew Becker (34:50):
And in this instance, there’s common ways to pierce—one of them is co-mingling funds. Like if you use company money for your personal gain, that kind of a thing. But another way is rendering the company insolvent. So pretty much anytime a gym owner does a paid in full membership and then takes that money and goes and uses it for something else and doesn’t keep enough money in the bank account in order to pay that back, if they demand a refund, they’ve just rendered to the company insolvent. And this is a big common problem just with the maintenance of LLCs and corporations because you have to have a nest egg in the account that’s going to cover the debts in the event that something comes up. If you make no money next month, can you cover your rent? If not your company’s insolvent.
Matthew Becker (35:39):
OK? If all of your members who you’ve pre-sold to demand refunds all at one time or give chargebacks, do you have the amount of money in your account to cover all those chargebacks? If not, you’re insolvent. Alright? And so, it pretty much then nullifies the protection, that limited liability protection, that we’re all trying to get from the company. And once again, as you said earlier, Mike, now exposes that gym owner’s personal bank account, their cars, their house, whatever personal wealth they’ve amassed is now gone—well exposed. I shouldn’t say it’s gone. It’s exposed
Mike Warkentin (36:10):
Soon to be gone.
Matthew Becker (36:12):
Yeah. Soon to be gone.
Mike Warkentin (36:14):
This is horrible. This reminds me of those situations that happen in in WWE where you get 15 wrestlers coming in the ring, and they’re all just stomping on one wrestler in the middle. Like that’s kind of what … right? That exactly, like that’s kind of the situation, right? The legal equivalent where everyone is taking their piece?
Matthew Becker (36:31):
Yeah. And we can talk about scenarios where this sort of snowballing effect happens that doesn’t involve something like this, but let’s say the Department of Justice shows up because your gym has a violation with the Americans of Disabilities Act, an ADA violation, and you bought into the gym, and you have a lease assignment, and what does that assignment say, and what’s the protections, and is the landlord liable, or does the lease say that the tenant agrees to cover any issues that come out of an ADA violation on behalf of the landlord? Like there are different types of scenarios like these. The ones that we are covering here are probably the most common because they involve partners. Partners always have issues, and it doesn’t have to be a partnership. That’s just where we see a lot of these triggering events come out that then end up snowballing into this stuff. But it can happen in a number of different scenarios that pop up during gym ownership.
Mike Warkentin (37:26):
So how do we, like this is just a bad spot. How do we solve this? What’s the quickest way to solve this? And then how do we prevent it? What can we give gym owners to take away here and keep them out of this mess?
Matthew Becker (37:36):
Yeah. Yeah. Unfortunately solving it is really just like trying to control the worst-case scenario.
Mike Warkentin (37:43):
And you need a lawyer, I’m guessing.
Matthew Becker (37:45):
You definitely need a lawyer. You need somebody like us to at the very least consult with you on how to do it to try to avoid a lot of these problems. For example, we work with gyms who come and say, “Hey, we want to close.” And we can say, “OK, hold on,” like I said earlier, “Pump the brakes for a second. Let’s get a full picture of the situation. How bad is it financially? How many presales do we have out there? What’s the lease situation look like? What kind of SBA loans do you have out there?” And then we can start to work in the background to kind of take care of some of these things to ease the pressure on the gym trying to shut down. So that’s about—like preparation is the name of the game. If you’re getting to this point that we’ve laid out, this scenario, it’s not that there’s nothing we can do, but it’s almost too late to provide the original owner or the owners a lot of protection. We’re just sort of mitigating damages at this point.
Mike Warkentin (38:39):
So listeners, if you’re at that stage right now, you’re going to need a lawyer. Call gymlawyers.com, figure this out. You’re going to be in a fight, but you can work with someone who can help you get out of it in the best shape possible. I wish you the best on that because it’s a tough spot. But there is light at the end of the tunnel. If you follow the right path, the better plan for everyone else who is not in this situation yet and you see how the slippery slope of hell happens is to prevent the situation from happening. So, Matthew, give us the simplest steps that gym owners can take right now. Easy steps just to stop this daisy chain of hell.
Matthew Becker (39:11):
Yeah, so I mean, we can just go back through the steps of muck that we walked through. So, starting out, whether you’re a sole owner of a business or you have partners, we need to audit the “legal entity.” OK? The LLC, the corporation. Let’s make sure it’s set up properly. Let’s make sure all the proper corporate documentation is in play and that you are managing it properly. And that goes into a play a lot with corporations. LLCs, they’re easy to manage. They’re informal; they’re fine. We can just follow up on a couple of steps. Corporations require ongoing compliance. So that’s sort of step number one because if that’s not set up properly, it’s like building a house on a shaky foundation. So, from there, the next thing we walked into was the client issues. OK, do we need to register with the state?
Matthew Becker (39:59):
Do we need to post bonds? Do we have a membership agreement? Are we pre-selling? Let’s talk about the pros and cons of that sort of a thing. OK? But let’s prepare for that by getting good documentation in so that we know that we’re compliant with law. We’re setting expectations with clients. We’re making sure that we’re not taking in a ton of money that we can’t then provide the service for leases. Don’t sign a lease unless an attorney has looked at it. If you’ve been in a lease for a couple of years, can we go in and negotiate with the landlord to get rid of the personal guarantee? These are like ongoing things. Don’t just set it and forget it. Have reach out to somebody like us on a yearly basis to say, “Let’s take a 10,000-foot view of the gym, and is there anything we can do now to kind of help prepare for this sort of worst case scenario?”
Matthew Becker (40:50):
We just launched a service that we’re calling Gym Counsel that is ongoing legal consulting on a monthly basis for gym owners to make sure that we’re getting that constant view of the gym. We’re getting that constant back and forth with: What do the contracts look like? What are you doing to maintain your LLC? Good, let’s take a look at that lease, and let’s see if there’s things that we can ask for changes. OK, employee issues. Let’s make sure you’ve got a good employee contract from the beginning that gives you the ability to terminate at will, right? Sets the expectation of: You’re not allowed to sleep with members. You, as a gym owner, you can control that. You’re not allowed to do drugs in the gym, which we laugh at, but I’m telling you I’ve witnessed this happen.
Mike Warkentin (41:34):
It gets weird out there.
Matthew Becker (41:35):
The coach says, “OK guys, ready, 3, 2, 1, go.” And they peace out, and they go out into the parking lot, and they vape and then they come back into the gym. It happens, right? And my spidey sense is like, “Oh my god, that is gross negligence to the extreme.” So, what can we do with an employment agreement to try to prevent this? What are the SBA loans out there, and can we compromise? Can we negotiate them now? Right now? Not when there’s a problem, but can we do things now to start to try to clean this title off? So that we have, in other realms of the law, we just call all this basically like asset protection. OK, what can we do here to protect our assets, our equipment. Let’s try to get those loans taken care of, right? And so, those are some of the steps that we can take that just kind of went along that path of the muck that we walked through that can help prevent a lot of that from happening.
Mike Warkentin (42:31):
It sounds a lot like planning.
Matthew Becker (42:33):
And get mentorship so that we don’t get to the situation where we have to close the gym to begin with.
Mike Warkentin (42:37):
Well, that’s just it. And again, we’re pitching for Two-Brain here, but reality is that a lot of the problems that are caused in that scenario that you talked about are problems that early gym owners made because there wasn’t a plan for them to open properly. We just made it up as we went. We made mistakes. Those mistakes spiraled, and they became very difficult to fix, and in the worst cases, they were fatal for the gym and for the business. And then the clients don’t get to train, and they don’t get to become healthy. And it’s horrible for everyone starting a gym. Not as hard as it sounds if you have help because all these bases are covered. How do I set my rates, and how do I charge? That discussion leads you to not have paid in full discounts, right? Like that’s just a simple example I’ll throw at that.
Mike Warkentin (43:18):
For your employment contracts, that’s another one. What does this person do, and how is it documented? Partnership agreements, all those things. Planning ahead is going to help you. If you’re out there listening and you’re thinking about starting a gym, work with Two-Brain to start that gym so that you do it properly and avoid all the mistakes. If you’re listening out there and you have a gym, and it’s going well, and you haven’t hit these problems, but maybe some of your spidey senses are tingling now, and you’re thinking, “I think some of these might be a problem,” look at working with a lawyer. Matthew is obviously our first choice for something like that to figure out, “How can I limit risk?” As your business grows and gets bigger, it’s going to be a really great idea for you to look into the legal aspects of things and make sure, “Am I protected as I move forward?” And Matthew, I love the idea of this. It was called Gym Council, is that what you said it was?
Matthew Becker (44:05):
Yep. Gym Counsel.
Mike Warkentin (44:06):
What a great idea. Think of it as the handyman who shows up at your house. Is it broken? Fix it. If it’s not broken, let’s make sure it doesn’t break. And maybe let’s do some preventative stuff. Because that pipe’s been there for 80 years, and we might want to swap it out. I love that idea. When did you launch the service?
Matthew Becker (44:21):
Literally last week.
Mike Warkentin (44:23):
OK, I’m going to—I know the answer, but like why did you come up with this one? Were you just seeing too much stuff there where it’s like, “Wow, an ongoing service would solve these problems”?
Matthew Becker (44:34):
Yes. That was a large part of it. But there was also, there was always this question that comes up. Like let’s say we—let’s go through opening a gym real fast. OK, there’s three phases. We create the legal entity. We look at the commercial lease. We draft the contracts like waivers, membership agreements, staff agreements. The gym is open, and then the gym owner would say, “Well what do we do with Gym Lawyers ongoing?” And previously, it was just like, “Well when there’s a problem, reach out to us.” And that was starting to conflict with our message, like we’re doing here today, which is you need to prepare for this stuff before it’s a problem. And gym owners, for better or for worse, they don’t understand—like my standard operating procedure, which I worked with Two-Brain—how can I adjust that standard operating procedure not only to be fantastic because Two-Brain is now allowing me to step back from the business, but can I rewrite that a little bit so I can protect myself legally as well?
Matthew Becker (45:27):
OK. And I can go into examples for that. But it just kind of came to me that gym owners, like they need monthly mentorship, really should have somebody like an in-house counsel that they can go to just say things like, “Hey, you know what? Alabama just changed their overtime laws. What do I need to know about this?” OK. And we do that ongoing research and allows us to set up, we just have a standing 30-minute phone call every month with the gym owner, and it allows us to go through like, “OK, let’s walk through those SOPs. Let’s figure out—OK, great. Two-Brain helps you set up that you’re going to do quarterly reviews with your coaches. Let’s adjust that a little bit to make sure that if we then need to terminate that coach.” Another topic that was popular this week for Two-Brain on Instagram—have we set up our SOPs to really support when you get to that point that you want to terminate your coach, or you just need to terminate them? Come and consult with us to make sure you’re doing it legally.
Matthew Becker (46:26):
You need to fire a client, come consult with us to make sure that you’re doing it legally. OK. Priority access to me is another big part of Gym Counsel, which is something that you get as in-house counsel, but you don’t get with the attorney down the road. So, you go to the attorney down the road to try to get you to help. He’ll get to you when he gets out of court. OK? We’re giving 24-hour turnaround priority access to me to get those sorts of questions answered. You need a new contract, we already know, and we’re there and ready to go in order to draft that contract. So, it just kind of has snowballed over the last two and a half years to the point that we think gyms just need somebody, an in-house counsel, in their corner so that we help them identify the problems versus waiting for them to identify the problems and coming to us. We’re trying to be more and more and more proactive with the gym owners to avoid situations like this happening.
Mike Warkentin (47:20):
And that’s the reason because if you aren’t proactive, you could end up in the WWE battle royal where you’re getting stomped on by 10 different people at the same time. Matthew, we’ll wrap it up there. Tell people exactly where they can get ahold of you if they want to find out more about your services and being proactive, so these things don’t happen.
Matthew Becker (47:37):
Yeah. Yeah. Thanks. So, the easiest way is just go to gymlawyers.com. We’ve got a bunch of calls to action all over the website. If you go to the contact page, my cell phone number’s there, the email address is there. Honestly, the easiest thing is just to submit the contact form. As soon as you do that, you’re going to automatically be forwarded to my scheduling calendar, and it’s a free 45-minute consultation. We can do a legal audit. If you have specific questions, we can address those specific questions, but that’s the easiest way is just grab time on the calendar, and we’ll meet on Zoom.
Mike Warkentin (48:08):
You should do that, and if you want to talk about working with a business mentor on every other aspect of your gym that’s not the legal stuff, twobrainbusiness.com. You can book a call, and there’s a link in the show notes where you can do that as well, because like Matthew and I have both said, these problems are solvable, and if you take the right steps at the beginning, you don’t have to unravel the knot at the end. Matthew, thank you so much for being here today. I really appreciate your insight and the horror stories.
Matthew Becker (48:31):
Always a pleasure, Mike. Thanks.
Mike Warkentin (48:33):
This is “Run a Profitable Gym.” I’m your host, Mike Warkentin. On your way out, please hit “subscribe.” I’d love it if you did that. And now here’s Two-Brain founder Chris Cooper with a final note.
Chris Cooper (48:40):
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.
