Short answer: probably not.
Entrepreneurs accept partners for three reasons:
- Complementary knowledge.
In some cases, partners can help a business launch and scale more rapidly. But in an owner/operator gym, there’s really not much room for two owners.
In this post, I’ll share why you might not want (or need) a partner and how to find a good partnership if you do. I’ll also give you the tools you need to make the partnership work.
Why We Take Partners
I started Catalyst with two partners. I couldn’t have started without them.
My first partners served two important functions: They removed the obstacle of choice by basically dragging me into a lease on some gym space. And they loaned me $16,000 to buy equipment.
In return, they wanted a recurring return on their investment: $1,000 per month forever, plus the loan payment. In hindsight, this seemed like a bad deal. But I wasn’t thinking logically at the time: I was thinking emotionally.
What I was really buying was a way around my fear. I thought, “These guys are my parachute.” Also, subconsciously: “If I screw up, it won’t be entirely my fault.”
But two years in and $24,000 paid, I started to resent their partnership. I was doing all the work; they were getting paid in good months and bad. Even when I missed a paycheck, they didn’t. The novelty and gratitude wore off, and I started to ask, “How do I get out of this?”
The truth is, it’s really hard to get out of a partnership. So before you enter one, here are some easy alternatives to the three benefits of partnerships that I mentioned earlier (knowledge, investment and fear):
In tech companies, it’s sometimes wise to have a partnership between a visionary and a technician. One person sets the course and the other puts in the hours programming.
But in a microgym, that’s not really necessary: The owner is always the first coach, and the gym was built to fulfill his or her vision.
Instead of giving up a share of your money forever, hire a mentor. You’ll get industry-specific knowledge, much higher ROI and step-by-step processes instead of just a sympathetic ear. And you won’t tie yourself into paying someone forever.
A partner who provides startup funding in return for equity might seem like an angel. But if someone has $20,000 to risk on a fitness business, he or she is probably not dumb: the investor expects a return. And every investment he or she makes should provide an outsized return. If it doesn’t, the investor can always put the money somewhere else.
That’s fair. But, like me, many first-time entrepreneurs don’t see the long-term payments they’ll be making and eventually get mad about the agreement.
“He’s made enough money off me!” they think, as they open the door in the dark at 5 a.m. But the investor just assumed the operational partner understood the agreement and provided the opportunity.
This is why you should borrow money from a bank instead of seeking an investor in your gym: The bank might charge some interest, but the bank eventually goes away. The bank doesn’t want to talk about your programming. The bank doesn’t want $500 per month until the end of time. The bank doesn’t want to treat you like an employee. It just wants its tiny fee for giving you the money.
I’ve worked with several gym owners who decided to “spread the risk around” by opening with multiple partners. This is almost always a catastrophe: four people become exhausted and impoverished instead of one.
A microgym isn’t an investment-grade asset. But the people in many of these partnerships just haven’t done the math to figure out how many clients they’ll need (at what rate) to pay everyone involved.
Worst of all: Everyone ends up hating one another. And broke, and tired.
Entrepreneurship is scary. But if you want to do it, hire a mentor. Instead of having four people guess and argue, talk to one person who has been there, done it successfully and will eventually go away until you need him or her again.
How to Get out of a Bad Partnership
OK, so you’ve determined that you’ve outgrown your partnership. The simple way out is to get a valuation and then purchase the partner or partners’ shares.
If the company isn’t doing well, this is great news: You can buy the shares for very little. Just use the Shotgun Exit term you’ll see in our Sample Shareholders’ Agreement.
But if you don’t have the money (or you don’t have a shareholders’ agreement that spells out the terms of your exit), you’ll have to leverage something else. What do they care about more than ownership?
In my case, I was facing a court battle with city hall over an occupancy permit. I couldn’t afford the HVAC upgrades they insisted we needed. I was ready to go to war because it was the only way to keep my box open.
But my partners did a lot of business with city hall and didn’t want to tarnish that relationship. I explained that I didn’t have much choice but was willing to buy out their shares and let them avoid trouble. They immediately and graciously agreed.
If all else fails, use your failure as leverage: “Look, Bill, we both had the best of intentions when we started this thing. I know we’re partners, but I feel responsible. The business isn’t doing well, and I don’t expect you to take a loss here. I would feel better if you’d let me take on your share of the debt and then try to figure it out from there.”
How to Set up a Great Partnership
Great partnerships aren’t born; they’re made.
Before you enter into a contract that’s more binding than marriage (no joke), you should talk about your relationship.
Who will do which roles in the new company?
How will each of you make money in the new business?
How will you make decisions?
How will one of you eventually exit?
Download our Sample Shareholders’ Agreement here.
Equality Versus Equity
Who gets paid? How much?
There’s a difference between owning 50 percent of a business and being paid 50 percent of the profit.
The operating partner (the one who’s in the gym every day) should be paid a wage before profit is calculated.
It’s also fair for the lending partner (that mythical “money guy”) to build a loan repayment structure into the business’ expenses before profit is calculated.
But the important part is this: You don’t have to get paid based on your equity stake. You should be paid based on your role in the company.
If both partners will be working in the business, that’s fine—break down your roles, assign a value to each, and pay yourself based on the value you bring. Just don’t say, “We’ll split it all 50-50!” because no two partners are ever 50-50 contributors.
It might sound like I’m down on partnerships, but I’m not: I love partnerships. I just hate unnecessary servitude and expensive mistakes. Listen to my podcast on the topic here:
Get a loan, get a mentor—make your debts short-term and grow your confidence forever!