How to Buy a Gym (or Sell One)

Chris Cooper

Mike (00:02):

Looking to buy a gym? Chris Cooper will tell you exactly how to do it. And if you want to sell your gym, Coop’s got you covered, too. This is Two-Brain Radio. Hit subscribe and enjoy the show.

Chris (00:12):

Hey guys, it’s Chris Cooper. Your members are buying supplements somewhere, so they should buy them from the person who cares about them the most: You. And you should work with my friends at Driven Nutrition. Jason Rule and the Driven team put customers first, every time they’ve got a ton of products with high margins and they’ll even train you so your retail program adds revenue to your business. Kirk Hendrickson from Iron Jungle CrossFit says Driven Nutrition has some of the best support I have seen from any company we’ve partnered with. To make more money with supplements and retail sales, visit drivennutrition.net. Now back to the show.

Chris (00:45):

Hey everybody, it’s Chris Cooper. And today I’m going to tell you how to buy a gym. Over the last 18 months or so, government lockdowns have created a greater separation between the gyms who are doing really, really well and the gyms who really weren’t. Up until now,

Chris (01:01):

you could go along for three, even five years, just kind of breaking even, hanging on, you know, just kind of paying the rent, paying the government, not really paying yourself, but staying open. But when lockdowns happened, it kind of decimated that middle group of people who were just barely hanging in there, and the gyms who pivoted quickly and recovered quickly, they’re way ahead right now, they’re killing it. And a lot of those people are looking to buy gyms. On the other end of the spectrum are the gyms who were just barely hanging on. They didn’t pivot quickly, or they didn’t rebound fast enough. And now they’re looking to sell. At the surface level, this seems like a really sad state of affairs, but honestly it can work out for the best. The clients of the gym that’s failing. They can go to a more successful gym and that gym is probably successful for a reason.

Chris (01:50):

You know, they’re providing a better experience. They’re more professional. They have systems in place. They provide better value for the client’s money. The coaches at the failing gym also have an opportunity to make a better career if they can get a job at the new gym, and the owner of the failing gym doesn’t have to work for nothing anymore. They have a new opportunity. They can go get a job somewhere else, or they can maybe get a job for the new gym. You know, in many cases, it turns out that they just wanted to be a coach. They didn’t really want to or appreciate what they would have to do to be an owner. They didn’t understand it was a different job. So today I’m talking to the people who want to buy a gym, but I’m also talking to you if you are thinking about selling your gym or even if you’re just kind of sell curious, you’re wondering what your gym is worth if you were to sell it.

Chris (02:43):

So as you’re listening to this, if you’re buying, take notes and also go download our how to buy a gym guide from Two-Brain business.com, I’ll post the link below. It’ll walk you through this stuff step-by-step and it’ll also give you the tools that I mentioned, like a gym valuator, like our valuation calculator. If you’re thinking about selling, or you’re just kind of sell curious, you want to know what your gym is worth. Listening to these things will help you make your gym more profitable, because ultimately what determines the value of your gym is how profitable it really is. So we’re going to start with what’s the gym worth. And then we’re going to talk about things like what are you really buying, understanding that you’re buying the previous owner’s mistakes and liabilities, and also why that still might be worth it to buy the audience.

Chris (03:26):

So how to buy a gym? A gym is an amazing business opportunity, right? Everybody knows that. First, your service will directly change the lives of hundreds of people. Second, you have more flexibility in operations than almost any other business, right? Like nobody gets to tell their clients how to stir paint differently or carry the couch inside their house differently. Third, the barrier to entry for gym ownership is tiny. For 20,000 bucks in equipment and $5,000 in mentorship, you can have a brand new business that’s on par operationally with a franchise without paying $2 million to get a franchise. And this is true even if you’ve never owned a business before. And if you’re a CrossFit affiliate, you can leverage the most popular fitness brand in the world for three grand a year, which is peanuts. And you can use it any way that you want. You’ll have your brand on TV, around the world and in shoe stores around the corner.

Chris (04:21):

And there are more and more brands coming up like this. You don’t have to be a CrossFit affiliate for this to work. You can build your own brand, or you can leverage other brands through licensing. Now buying an existing gym can give you a great headstart into entrepreneurship. And I’ve actually got a new book about this called “Start a Gym.” But you have to be careful. Most gyms aren’t money machines. Most gyms require a lot of time to operate. Most gyms aren’t currently very profitable. And the former CEO of CrossFit himself, Jeff Cain, told me that a CrossFit gym, isn’t an investment grade asset. So if you’re buying an existing gym, you are also buying the previous owner’s mistakes. But entrepreneurs don’t own gyms for logical reasons. Usually. They own gyms for emotional reasons. And I’m one of these. We start gyms out of passion, but we sell gyms out of frustration.

Chris (05:09):

There are some great opportunities out there, but it’s also pretty cheap to start a gym from scratch. And many gym owners share a fantasy of starting over from a blank slate because our early mistakes are causing long-term profitability problems down the line. So maybe an outsider can overcome those mistakes, but change will still be painful for any new owner, especially if they’re buying quote unquote, the community that was built on cheap prices or the owner’s personality. So let’s start with what the gym is actually worth. If you’re thinking about buying, ask the current owner to provide some numbers and plug them into our valuation tool, and you can link to these, of course, if you go to the Two-Brain Business dropdown free tools on our website and download how to buy a gym or click on the direct link in the show notes here. What you’re really trying to determine from these is year over year profit and the likeliness that that profit will continue without the current owner.

Chris (06:03):

So to be clear, in this valuation, when you’re assessing what a gym is worth, the head count doesn’t really matter. It doesn’t matter how many clients a gym has really. Gross revenue doesn’t really matter as much as you would think. Location doesn’t really matter unless you’re also buying the building. The gym’s potential definitely doesn’t matter. And your friendships with other members that doesn’t matter if you buy it because you won’t be their friend anymore, your relationship will become transactional and friendly, but you’re not buying friends. So what does matter? Predictable revenues into the future. How well can you forecast what this gym is going to be worth? So retention rates really matter because if a gym has amazing revenue, but really poor retention, then you can’t bank on that revenue in the future. Qhat else matters is the client’s willingness to stay on without the current ownership, you know, do they have contracts?

Chris (06:55):

Are you buying guaranteed revenue in the future? What also matters is outstanding liabilities like loans and commitments like leases and a lot of new gym buyers don’t look at this. So when you’re buying a gym and I’ll get into this more in a minute, if you’re taking over the lease with that gym, and there’s still $80,000 left on that lease, like, you know, four years at 20,000 a year or whatever that is, you are buying that liability. And you have to take that into account. In many cases, actually these liabilities make the gym worth nothing or less than nothing. And so if you’re taking on a debt or even if you’re buying out your partner, you have to weigh these liabilities into the overall valuation of the gym. Don’t just look at the revenue. And then you also have to look at equipment and assets, you know, a year ago we would say calculate the value of their equipment at about 30 cents on the dollar.

Chris (07:47):

But honestly now it’s really tough to buy fitness equipment. And so the value of the equipment that you’re buying is quite a bit higher. All right. So if you want to get a rough estimation really fast, and somebody calls me up and they’re like, I want to buy a gym. How do I assign like a value to it? And we’re just talking over the phone. Here’s what I tell them. Take your total profit for last year. OK. The profit, not the revenue. So this is the wages paid to the owner and the dividends, period. How much money did the owner take from the gym last year? OK. Now, if the gym isn’t profitable, you’re starting from zero. It’s really not worth anything in a way that you can measure, right? So I don’t know if you really even want to think about buying this gym, but there are still some reasons why you might acquire it.

Chris (08:36):

  1. Now take that profit and multiply it by three years. Assuming that last year was fairly typical or to be conservative, it was not as good as a typical year. You can multiply last year’s profit by three years. In most cases, though, what you would want to do to kind of get a handle on what a typical year looks like for the gym is take the profit from the last three years and add that up. And that’s basically like what the gym is worth. So if the gym is doing $400,000 a year and it’s profitable by a hundred grand a year, you would take the last three years kind of average them out and say, OK, this gym is worth $300,000. OK. And then you would multiply that again by your retention rate. So if the gym has 80% year over year retention, which is great, then you would multiply that three year profit projection by 0.8.

Chris (09:25):

So if you said, all right, the gym has profited $300,000 over the last three years. Then the actual valuation price is about 240,000 because without acquiring any new members, that’s about what you could expect maybe in total profit. Now, of course you’re gonna bring in new members. And of course, as total membership drops, the profitability decreases. But those two things at minimum should balance each other out. And so the gym valuation in my estimation would be about 240,000 plus the equipment. So next, you’ve got that 240. You add the value of the equipment. So if the equipment is more than three years old, it’s probably worth $0 in normal times. If it’s less than three years old, you would add up the purchase price and take about 30% of that. And that’s what it’s worth. That valuation comes from talking to equipment resellers who will buy equipment from gyms for about 10% of what it cost and then sell it for about 30%.

Chris (10:23):

OK? So that’s the value of your business. It’s your profit over three years multiplied by your retention rate and plus the value of your equipment. Then what you’ve got to do is you’ve got to subtract out the cost of your liabilities. So maybe you’ve got $20,000 left on an equipment loan. You got to subtract that. Maybe you’ve got 50 years left, five years left on your lease. I hope you haven’t signed a 50 year lease. You might want to subtract that out of the valuation too, because you’re buying that debt. OK. So here’s an example. Bill’s gym pays him 60,000 a year, and his P and L shows a profit of 5,000 last year, right? So the total that Bill received from his gym last year was 65,000 bucks. Now you could just multiply that by three years, if you think that’s going to continue.

Chris (11:08):

So you start with a value of $195,000 for the gym.

Chris (11:11):

We know that getting clients results isn’t enough to make a great business or a great career, but it is the foundation. If you’re not getting your clients results, none of the other stuff matters. Your marketing plan, your operations plan, your retention plan, your systems, how much you care about the clients. You need to get them results. What does it take to get a client results? Long-term behavior change, short-term habit change. It means learning skills like motivational interviewing, peer-to-peer programming. It means focusing on things like adherence and retention instead of novelty. And I built twobraincoaching.com with my partner, Josh Martin, to teach coaches how to do this. More than ever before it is critical to get results for your clients. You need to charge a premium fee. You need to provide high value to warrant that fee. And what is most valuable to the client? What do they care about the most? The results on the goal that they choose. Twobraincoaching.com has programs set up to help your clients achieve those goals. We will train you and your coaches to deliver personal training, group training, online training, nutrition coaching, and coming soon, mindset coaching, in a way that’s simple for you to adopt, it’s legal everywhere. And it’s super effective. These courses were built by experts with years of experience getting clients results. Twobraincoaching.com is a labor of love for me, and I know you’re going to love it too.

Chris (12:40):

Unfortunately, Bill’s retention rate is poor. So most of his clients are on these eight week challenges. And so he calculates that he only has 50% year over year retention rate. This brings the value down to 97,500, right? Half of 195.

Chris (12:58):

Now this is super important because if most of his revenue is coming from these eight week challenges, and he’s got a high churn rate, you can’t just keep doing that forever. So the value of the gym is actually decreasing over time as he just burns through his target audience in his town. So yeah, the value is down to 97 5. Now, if you’re Bill, I would hold off on selling my business, bring your retention rate up and increase the value of the company before you sell it. But that’s all right. So then he adds the value of his equipment, right? So we’re starting from 97, 5 based on the value of his revenues. And then the value of his equipment is maybe about seven grand. So if he spent, you know, 21,000 on his equipment three years ago, it’s worth about 30% of that.

Chris (13:42):

OK? So the total is, about 97, 5 plus 7,000 for equipment, 104,500, right? That’s not bad. And as a buyer, you can be reasonably sure that the business will operate at this while under your guidance. And you should be able to make at least 65,000 per year from the gym. So great. You budget for mentorship in the first year, you increase profit and you pay yourself back a lot further, right? But remember, it’s your responsibility to know these numbers. And if you buy the gym and you find out problems later, you will own those problems. You can assume that you don’t know everything about this gym, even if you’re a client there. All right. So here’s how it can go wrong. One of my favorite gyms in the Two-Brain family is owned by this young married couple. And they fell in love with CrossFit and a local gym asked them to buy, you know, they had over a hundred members, so they did some quick math.

Chris (14:35):

And they said, OK, a hundred members paying 150 bucks a month is $15,000, right? And that’s like way more money than we’ve ever made before in our lives. And the owner only wants 150,000 for it, man, in 10 months, we’re going to be paid off and just making this money. But what they didn’t actually calculate was that the business was actually losing money every month. And $150,000 loan would add even more stress to their bottom line. The only money that previous owner ever made was in the sale of the business. And without a profit margin, the young couple was dipping into their savings to run the business. So they got caught and of course that affected their marriage, right? So here’s another example that out of dozens. A business owner purchased a gym as a retirement project. He’d been an entrepreneur for decades. So he knew how to read a P and L statement.

Chris (15:24):

The gym he was purchasing was profitable on paper, but he didn’t realize that over 50% of the membership was on these recurring eight week challenges. And all the group revenue had been collected upfront. People had paid for like a year. So when that challenge ended, he lost half his membership and he was suddenly losing money. So, you know, he managed to right the ship, he was an experienced entrepreneur. He got a mentor, but a first time entrepreneur without cash reserves probably would have been bankrupted by that. Right? So you really have to be careful. The next step when you’re buying a gym is to interview the coaches. So you go through the process of buying the gym, you sign a non-disclosure with the owner, you’re in quiet talks. You don’t tell anybody about it, but as you get close to the sale, you should start taking the coaches out for coffee and say, Hey, what’s your perfect day.

Chris (16:13):

You need to get a sense of what they want and where they’re headed. Now you can do the career roadmap exercise that we teach and Two-Brain with them, if you want to, because that will motivate them and show them that you have a plan to get them there. But what you’re really trying to do is avoid the possibility of the coaches scuttling the deal. So they can do this one of two ways. First, when they see the changes coming, they leave, they go, oh, I don’t like this. You’re going to have to raise rates on everybody? Nope. Can’t support that. So this leaves the owner shorthanded and forces them to deliver the classes instead of actually making the changes that will make the gym profitable. The other thing that can happen is that the coaches leave and they take clients with them, right?

Chris (16:53):

So the true value, the thing that you’re buying, just walked straight out the door. Now both problems can be avoided by talking to the coaches upfront. If you get the sense that this might happen, then you can either curtail that by showing the coaches here’s how you make a career with me, or by saying, you know what? I’m really buying a high risk here. The next thing that you can do is to interview the best clients in the gym. OK? So when the sale looks imminent, but before you sign the final transfer of shares, ask for a client list, identify the best clients of the business using the seed exercise that we teach at Two-Brain, take those people for coffee, ask them what brought you to this gym in the first place. And then say like, what’s the one thing that the current owner does that drive you nuts.

Chris (17:38):

Now you’re not sending out a survey because you don’t want everybody piling their dream list on you, which you can never deliver. And you’ll just wind up pissing people off. But if you do this with three to five of the best clients and say, what is the worst thing this gym owner is currently doing, then you can address those concerns first. And these seed clients will usually lead the rest. So if the seed clients say, oh, the bathroom never has toilet paper in it, that is a very easy win. They can see a great leadership from you by taking action on that. And it sets you up by framing future conversations, which might be a little bit harder. OK? You can also foreshadow the changes that you plan to make and highlight that your primary objective is to form a more stable gym where they can continue to improve their health.

Chris (18:25):

OK? If these people say, I’m not sure about staying, or if they, the first thing they say is, are you going to raise your rates? Like they’re price sensitive. Then you might want to think about just going somewhere else and starting a new gym from scratch. OK. Now let’s say that you’re buying out a partner and this is just like buying a gym. So you’re going into a gym and one partner wants out, OK. Or maybe you own a gym right now and you’re trying to buy your partner out. So I’ve been through this. You have to understand like, what you’re buying here is like, you’re replacing a spouse in marriage almost. OK. They’re leaving today. Their bags are packed. You’re coming in tomorrow. There’s going to be some headaches here, especially if you don’t own the majority of shares, what can happen here is you become basically just an investor in the gym.

Chris (19:14):

You put your money in and you spin the roulette wheel. And you’re basically counting on the gy, continuing the way it’s always been. Maybe the partner that’s remaining is the better business person. And maybe the partner that’s leaving was stopping them. But were they really? You know, if you’re buying a 30% share of the gym and the gym is not really doing well, will the other partner, who still owns 70%, suddenly miraculously change what they’re doing and make the gym profitable. You know, in these cases, what you might want to do is just offer to make a loan to the existing partner, to buy out the minority shareholder, you know, ask for 5% return on your loan and make your money back that way, support the owner of the gym, but don’t tie yourself into the ride for the long term. OK. So that’s another one.

Chris (20:01):

Another one is, let’s say that you do go ahead with the purchase and you say, OK, well, the value of this is so great. You want to have a non-competition, so I’ve seen this go wrong. One person buys out a gym from another person, right? And let’s say that Billy owns the gym. You buy the gym from Billy. Billy immediately rents a space down the block and opens up his new gym. What happens? You lose the thing that you’re buying, which is your audience. All the clients go down to Billy’s gym. Gym starts over from a blank slate down the street under Billy’s new, you know, rule. He doesn’t make the same mistakes. The clients have no ties to you. And suddenly you just created a mountain of debt and a massive competitor for yourself in one day.

Chris (20:47):

All right. So it might sound like I’m down on buying a gym. And this is kind of a unique situation because in other industries, it usually pays to buy out an existing business. I just bought out a storage facility and the storage facility was full. The owner was making money. It was profitable, but he was fed up with chasing people for payments. And I said, you know, I can come in. I can automate this whole thing. I know how to auto bill people. I know how to have conversations about raising rates. I know how to kick bad tenants out. I’m comfortable doing all of those things. This business makes sense for me and what I’m really buying there is the audience. If I wanted to start from scratch, I could probably put up a storage facility like this for about 500,000, which is less than I’m paying, but it would take me two to three years to figure out how to fill it up.

Chris (21:38):

And I’d make lots of mistakes. I’m paying more because I want to buy a full facility and make a few minor improvements, not start from scratch and learn how to run this. Now, the question that you need to ask yourself when you’re buying a gym, is, would it be easier to start from scratch the cost to start from scratch in a self storage facility is half a million to 3 million. The cost to start from scratch in a gym is like $20,000. So in many cases it is easier to start from scratch. The other reason is the other question you need to ask yourself is if I just started from scratch and I opened, would I get most of this gym’s clients anyway, like, do I have to buy anything? Can I provide a better service or better value to the same people? Now, fitness is not a zero sum game.

Chris (22:26):

You shouldn’t open a gym with the intent to just steal clients from the other gym, because that’s probably not going to happen. But if you’re providing a better service and better value, you will naturally attract people from other gyms. OK? Think of that as like 10% of your startup audience. And if you’re providing the best value and the best service, you’re going to get the best 10% from those other gyms. So you need to ask yourself, Hey, do I need to buy this gym out? Or am I likely to get some other clients anyway? And this is true, especially when gyms are absolutely failing. So, you know, you open a gym, it’s going well, three years in the guy down the road says, I’m going out of business. What will you pay me for my clientele? The first question I’d ask myself is, do I need to pay this person anything?

Chris (23:13):

Or am I still in business because I’m offering better value and they’re failing because they’re not. And those clients are mostly gonna just come to me anyway. OK. Buying a gym could give you a multi year headstart into business. I don’t want to sound pessimistic. I’m one of the largest promoters of entrepreneurship that I know. My mission is to help a million entrepreneurs become wealthy, but sometimes starting over from a blanks late is the best move. And sometimes it’s not. You could be buying a headstart, but you could also be buying somebody mistakes. So you can get lots of help on our website. You can download our free, how to buy a gym ebook. You can also download our how to sell a gym ebook. You should do evaluation. You should know what you’re actually buying before you get into it. And you should always ask:

Chris (23:59):

Would I be further ahead if I started from scratch?

Mike (24:02):

Two-Brain Radio comes out twice a week and features all the info you need to run a successful fitness business. Subscribe ao you don’t miss a show. Now here’s Coop one more time.

Chris (24:13):

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.

 

Thanks for listening!

On Monday, Two-Brain Radio presents marketing tips and success stories. Chris Cooper delivers the best of the business world on Two-Brain Radio every Thursday. 

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