Chris Cooper pulls the curtain back today on Two-Brain Radio. He’s generally against buying another gym, but he’d do it for just one reason. He’ll tell you what it is right after this.
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Hey everybody, Chris Cooper here. With the surge of new business combined with the lockdowns from COVID, which are still going on in a lot of places all over the world, we’re seeing a lot of gyms sell to other gyms. Now this is great. And I want to start with this message. This is what’s supposed to happen in a free economy, open market, kind of a libertarian approach to business. This is to be expected and it’s not necessarily a bad thing. So when I was working for CrossFit, I actually brought this question up to Greg and he said, Chris, it’s not a bad thing. My question was something like, are you concerned with the number of affiliates that don’t make it? And he said, this is what’s supposed to happen. So, a gym who has a passionate owner, they’re teaching fitness, they’re changing lives, three years in they’re broke. They can’t afford to go on. How is that a good thing? Well, if they close down, their clients are already in love with fitness. And so those clients won’t just quit doing fitness. They’ll go to another gym and that other gym will do better and become more profitable.
And the coaches who are passionate about changing lives and teaching fitness will go to that other gym too. The good ones will, and the owner can probably get a job coaching. And in that scenario, which of course, I’m seeing this through rose colored glasses, that scenario works out great for everybody. Now, sometimes it does work out that way. Most of the time it works out where a business closing is good for somebody, but it might not be good for everybody. And that’s OK too. No matter what the reason, a lot of gyms are getting purchased right now, a lot of gyms are getting sold. And so more than ever, people are asking us for our free guides, how to buy a gym and how to sell a gym. And you can get those for free on Two-Brain business.com. You just go to the free tools section.
You can download them. The most important part of that package is a business valuation tool that came from Rigquipment. Even if you’re thinking about selling, it’s worth doing this business valuation to figure out like what you could reasonably expect to get for your gym. Right now, gym valuations in general are a little bit higher than normal. And that’s really due to like the cost of equipment. You can’t buy used equipment for 10 cents on the dollar like you used to, there is a shortage. That’s going away, but for right now, you’re still paying a premium on used equipment. In a lot of cases, people are paying the same for used as they would for new because they can’t buy new. So we published this guide. The guide is full of warnings and red flags. And like, maybe you shouldn’t buy a gym. You know, why it’s easier to just start from scratch again.
And so after reading this guide, a lot of people have come back to me and say, Chris, you sound like really down on buying a gym. And it’s true. There are very few instances where you should buy another gym, but the questions were like, what would make you buy another gym? And so I thought about it and there’s really only one reason. And that is audience acquisition. My mentor, Todd Herman told me that once you know how to build an audience, you’re set for life. That’s a direct verbatim quote from him. And a lot of my friends actually do this with their business. So they’ll build their business big enough that they’ve got really good cashflow and then they’ll go buy it like a competitor or a smaller version of themselves. And they’ll just buy that audience. Now this works with a product or a service like websites because people are generally, you know, bought into some kind of contract with the website provider or changing websites is something that they only do every three to five years, it’s different in a fitness business.
So what would make me buy a fitness business? First off, I would want their clients to be on contracts. Now I know I’ve been teaching don’t have contracts since the dawn of time, but let’s face it. If you can buy a business that has clients on contracts, then you are buying guaranteed cashflow. Now maybe some of those people will bail when you take over, you know, and having the contracts can also be a catch 22, because if the contracts are too low, then you’re locked into servicing those contracts. And when the contracts are up, you might not be able to raise rates on people and they might go away. Anyway, if they’ve got contracts, though, you can at least be sure of some cashflow when you get going. So buying an audience that way is, you know, it’s a little bit helpful. There are some barriers to buying an audience though.
So for one thing is like location. You know, are you buying an audience across town? Number two is mistakes. Are you buying the wrong audience? Are you buying these people who are signed up for that gym because they’re attracted to the low prices that you don’t have at your primary gym? Another one is like the wrong flavor of audience. Are you buying a gym where everybody’s focused on competing at American Ninja Warrior and the rest of your clients are not, your high value clients at your gym are focused on like improving their lives and losing weight and all that stuff. So you have to be very careful with this. But another thing is like, what other mistakes are you buying? So maybe you’re buying an audience of a hundred clients, but to buy that audience, not only do you have to pay the current owner, but you also have to buy the lease, you know, maybe they’ve committed to another two years on the lease.
You also have to buy their other mistakes like that. The things that are losing them money. And so when you say holy crap, this business is actually worth less than $0. It would have been easier to just start from scratch. Now you’re committed to losing money for a while, and there’s no guarantee that you can bring your best practices to that gym without losing the audience anyway. So I want to give you a couple of examples of where I’ve seen audience acquisition really work in a fitness business. And the first one comes from the Boston area. I was very fortunate to be part of this negotiation. I flew down to Boston. We sat down with some gym owners and I was just kind of in the room as the conversation for buyout taking place. And the best one that worked, went like this, Gym A was doing really, really well.
Gym B was doing not so well. They had a lease renewal coming up and the owner was like, I’m done I’m out.
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So we did a gym valuation and gym B was worth let’s call it $50,000. I thought that was a very generous offer for what gym A would be getting, but they’re generous people.
So they offered $50,000. But here’s how it worked. First. They would offer, they would honor gym B’s rates, but only in gym A’s location. So the people in gym B’s audience couldn’t go back to that same gym. Obviously they didn’t want to take on the new lease either. So they had to go a few blocks down the road to gym A, OK. And they got the same rate for the length of whatever term they were on. OK. Then gym A paid the owner of gym B half of the $50,000 upfront. So 25 grand, here you go. The rest was contingent on retention. So after three months they audited retention. And if retention of gym B’s clients at gym A was 50%, then they would pay 50% of the balance. And if the retention was at a hundred percent, then they would pay a hundred percent of the balance.
And to give the old owner of gym B every opportunity to improve that retention and maximize his payout, they gave him a job as a coach. And so all he had to do was like show up at this new gym and coach the clients in classes and stuff, keep them around and he would get maximum payout. And I thought this was a really great way to do it. I thought it benefited everybody. So that’s one way to do it another way to do it. And I’ve seen this actually in Canada is that I will just basically pay you per client of yours that shows up. So let’s say that I’m buying your gym. So, I’m going pay you the value of that client’s membership for up to three months, if they join my gym. So basically you just shut your gym down.
You heavily recommend that your clients come to me and maybe I even give you a job coaching at my gym. For the next month, every one of your clients that comes to my gym, you get their membership. Now you have no expenses. So you’re actually collecting like a hundred percent of the value of their membership yourself. And maybe that continues for two months or three months, and then that’s it. So first you’ve got an incentive to bring clients to my gym, which might be a better experience, you know, and maybe that’s why I’m still in business. Second, you’ve got an incentive to keep them at my gym because that’s going to maximize your payout. And third, you’ve got a great job coaching, which is probably what you wanted when you opened a gym anyway. So those are two great ways to do a buyout without putting a bunch of upfront cash in that will probably keep everybody happier.
The third way is if you’re already in Two-Brain. So if you’re a Two-Brain client and you want to sell your gym, I would be the first buyer because I know that you’ve already got systems and policies in place that are very similar to mine. But even if they’re not exact, you’ve already got pricing that’s probably within 10 or 15% of mine. So if I have to make a correction there, it’s not going to cause like everybody to quit. You’ve probably got high quality coaches instead of 12 very part-time people working for like trades against their membership. You’ve probably got like a couple of real standouts and you’ve probably got somebody handling like your social media for you. If you’re selling and you’re in Two-Brain, it’s probably just because you had another business and you didn’t have time to grow your gym. Or, you know, after 10 years, you’re just going to do something else or, you know, whatever.
But generally I only have to fix one thing if I acquire your gym and that’s probably new client acquisition, or maybe it’s sales, or maybe it’s like onboarding, but it’s not 20 things. A lot of us make the mistake of buying another gym and we wind up buying the other people’s problems. So we take over this gym, OK. There’s a hundred clients in ZenPlanner. Whoops. Only 85 of those are actually paying us a membership. Oh, whoops. A lot of those have discounts. Oh, whoops. There’s no systems. So I wind up just buying myself a worse job for less money when I acquire your gym. What we’ve seen though is in one or two cases in the last few months, one Two-Brain gym owner will actually acquire a gym from another Two-Brain owner. And that gym’s valuation is much higher because it runs without the original owner.
They can be pretty confident that the clients are going to stick around. They’re already high value clients working with high value staff on great systems. Just maybe we need to help them with marketing, or maybe we need to improve our sales process, whatever it is like one thing. OK. So those are the three ways that I would potentially buy a gym. The key though, is you gotta know what you’re buying. Yes. Maybe you’re buying their used equipment. OK. You know, you can buy used equipment almost anywhere online. Just Google it. Yes. Maybe you’re buying their clients. OK. But that doesn’t always work out. Quite often, the clients will leave when a new owner comes in or quite often you’ll have a tough time enforcing a non-compete against the original owner. And he just goes down the road and opens another gym. Maybe you’re buying like an established brand, but I don’t think so.
Like, especially, this is true for bootcamp and yoga, but it’s especially true for CrossFit because you don’t really own your brand. Right? CrossFit HQ could take your name away from you whenever they want to. You have to be careful about that. But if you want to buy an audience, the best way is to not just think about like, what is the value of the audience today, but what is the value of the audience a month from now and three months from now. Will they still be around? Will I get a good return on this? Maybe they’ve got contracts. OK. Maybe, you know, it’s another Two-Brain gym, or maybe you wind up hiring the owner. Maybe you wind up structuring the deal so that the owner gets paid for client retention, whatever it is, these are the only ways that I would ever buy another gym.
And let’s face it. For the cost to start a new gym being less than $20,000, if I’m going to take on the risk of signing a lease, which is the major risk, the major expense, I would probably be better in most cases to just start myself. And unfortunately, this is something that you’ve got to think about. If the gym down the street is closing, there’s a great chance that you’re going to get their clients anyway even if you do nothing, if you want to reward the owner by offering them like a three month buyout for recommending that their clients come to you or whatever, that’s totally fine, but you have to ask yourself like, what am I actually paying for? Hope it helps.
That was Chris Cooper on Two-Brain Radio. Don’t forget to subscribe for more episodes. And now here’s a special note from Coop.
Thanks for listening to Two-Brain Radio. If you aren’t in the Gym Owners United group on Facebook, this is my personal invitation to join. It’s the only public Facebook group that I participate in. And I’m there all the time with tips, tactics, and free resources. I’d love to network with you and help you grow your business. Join Gym Owners United on Facebook.