Tuesday, August 29, 2006

Build Your Business to Sell: Element #2

Business Sale: Element #2

One last note about yesterday’s Element #1,


Energy, &

I had heard that before, and was listening to David Frey this morning and he used that acronym. If you won’t believe it because I say it, maybe you’ll believe David Frey.

Ok. Now we are on to the Second Element of Selling Your Business, which is your receivables base. This one is a little more black and white, so it won’t sound like I’m preaching quite as much.

You’ve read the phrase “selling for a premium” no telling how many times by now. Well that’s how I sell. If you want to cut someone a deal, go right ahead. But I/we work too hard for that. I want top dollar for my biz. And I’m putting our business in a position to justify that. I’ve got my systems in place, so I’ve really opened up our potential buyers market. I’ve shown that they can come in and make money. Now I’ve got to show them that they will have some immediate income and some security when they take over. That’s where our receivables base comes in.

You should probably put this on paper, and it may hurt a little.

If you cannot make one more sale of any type, how much money do you have coming in?

And if it’s not on a legal contract, don’t bother adding it. Cash deals, forget it. The only thing that counts here is what is on a binding contract.

This is where package size and duration come in. I’m going to go back to the studio owners from the other day. They sold packages of up to 20 session, all paid in full, up front. If they stop selling tomorrow, today was the last day they created revenue. On the other hand, I’ll use our company, FitSystems, again, we have 12 month legally binding agreements, automatic withdrawals, and our billing company reports to the credit bureaus and performs collections. If we stop selling personal training tomorrow, I can tell you how much revenue we are due up to 365 days from now. There is always a small delinquency (ours is around 3%), but that’s part of in house financing. We have methods of counteracting delinquency, but that’s for another day.

Back to my comparison. Let’s just say that both businesses gross 300K a year. They do all pre-payed packages, we do all 12 month agreements (we don’t but it makes a simpler comparison). Would you pay more for the business that does 300K with $0 receivable, or 300K with $180K receivable on the books over the next 12 months?

Pretty clear isn’t it?

The hairy part of the whole concept is how to put a price on the receivables. I’ll save that for another day, and try to tackle it from every angle. For now, look at it like this: You can get $.90 on the dollar or $.55 on the dollar for your receivables – either way, the more receivables you have the higher your sales price.

It doesn’t matter if you plan on retiring at 65 or 35 (yup), it is never too early to prepare your business to sell. Without that preparation, you are going to be disappointed with your sales price. And prepping a business to sell usually can’t be done overnight. You have to start now.

I will be putting more information on our website www.fitnessconsultinggroup.com this week.

Nick Berry

Saturday, August 26, 2006

Build Your Business to Sell: Element #1

There are a couple of things wrong with the sale I was referring to yesterday.

I have to look first at what this business will do when she walks out the door. I know right now that I’m not going to replace her myself. I may need someone to fill her role as a laborer, but her ownership role is gone, and her management role will never be completely filled. No one can replace the owner. She’s gone, her clients are going with her, her assessments are gone, her bookkeeping is gone, her management is gone. Take all of that out and what’s left? Her business was completely dependent upon her. Like I said yesterday, what am I going to do, hire her back?

In order to demand a premium sale price, you have to offer a business that will continue to make money when you are gone. It cannot rely on your presence, knowledge, or insight to make money. Otherwise, who is qualified to buy it? And of that tiny group, who still wants it? I’m one of the few people in our region qualified to purchase this particular studio, but I don’t want it because I’m not interested in buying a job. Let me give you a great example. Three months ago I met this internet wizard. He arguably has more talent with internet technology than anyone I’ve ever met in ANY field. Let’s call him the LeBron James of the internet. The guy is making some pretty good money with his website business, really kicking a$$. And I just started asking him one day if he wanted to sell his business to me. We went back and forth about what it might be worth, and I stumped him when I said “LeBron, what’s it worth to ME?” Think about it, LeBron might have been making 6 figures at that time, and I couldn’t have made $100 as an owner of his business. That’s drastic. Since then, LeBron and I have done some coaching, he has started to shore up his business model, and inside of six months, if he does what we’ve outlined, I foresee him being able to sell his business for a fat six figure check.

What’s equally as important, his list of perspective buyers will multiply 10 times over.

You see, the simpler the takeover, the more you qualify potential buyers. Here’s the flip side of the coin. The personal training company Pat and I own (FitSystems), is as automated as a service business can get. If I don’t show up for work, the show goes on. If Pat doesn’t show up, the show goes on. And so on down the line. We do not depend upon any role or individual. Of course, if we disappear the business doesn’t operate at 100% efficiency. That’s just the nature of the beast. If our systems and personnel will continue to operate at 90%+, then I can afford to spread myself out and work on more businesses that I can have at that level. (Let’s see…… 1 FitSystems @ 98% efficiency (w/ Pat and I onsite)……………. or 5 FitSystems @ 90%? (no Pat no Nick onsite))

If Pat and I don’t go to work, our numbers will drop slightly, but we will make money. It’s a perpetual machine. No one person’s absence breaks our back. What that means is that basically anyone who can handle business basics is qualified to buy us out. You DON’T have to be able to sell, you DON’T have to be able to train, you DON’T have to be at work to make sure the business goes on and money is made. Our systems are ironclad. You could buy our business, and with a couple of adaptations, be an offsite owner. And FitSystems would make you money.

I will say that you can never be 100% hands off. Let’s not be foolish. Even in a silent partner/investor type situation. You have to check in on everything regularly. I would prefer to check in on 20 businesses once a month than to micromanage one business everyday.

But that’s just me, right?

This was much longer than I intended, (I wasn’t planning on talking about LeBron Hill Jr.). I’m going to hit on the other integral element of selling your business – your receivables base – in the next post.

Friday, August 25, 2006


I have spent the last hour trying to recover my blog entries from the blogspot beta site, and I've had to move everything from there to blogger.com. Big hassle, but for some reason the beta site decided to take Friday off, maybe it needed a 3-day weekend, I don't know. Anyway, that's why all of my posts say they were put up in the last 5 minutes.

What Are You Working For?

Pat and I recently had a meeting with a couple of studio owners who are attempting to sell their business that apparently does very well. Three room studio, upwards of a dozen independent contractors who stay very busy and are compensated well. The wife runs the business, she has been training for close to thirty years, and is ready to retire. (Hey, me too.) She has a very affluent clientele, has very clean books, plenty of contacts, and even has some systems in place. So far so good.

We go to the books, and everything looks as expected. The business shows a very small profit over the last couple of years. Of course it doesn’t show a large profit, that would mean large taxes. I’m not going to disclose any of the numbers, including the asking price, because it’s irrelevant. Read on and you’ll understand.

Then we started to dig in deeper. And I want you to analyze the next paragraph and see just how similar you are to them.

She does every assessment for each new client, then trains many of them for a short period, then gives them to another trainer.

She trains over 20% of the clients herself. All of the big name big money clients are in her stable.

Every client pays in full up front and the largest package is 20 sessions.

80% of the sessions are hour long, the rest are ½ hour.

All sessions are one-on-one.

That’s all great for her and them. The biz paid for her Lexus, cell phone, clothes, and she was STILL taking home 2K a month, without any expenses. And it was all legit, no cooking of the books, so to speak. They could show us making a pretty lucrative profit each month after taking out her salary and ‘benefits’. But here’s the deal breaker that they didn’t see, and I don’t think fitness professionals are recognizing:

Her business was feeble without her providing service. She had molded an infrastructure that was completely dependant on her presence. What was that going to be worth to me? Did they want us to hire her after we bought her out? Think about this with me.

A) No client enters a program without her assessment and program design. That’s fixable, but it’s certainly not ideal for a purchase.
B) None of the trainers have ever done an assessment or any of the sales. Again, fixable, but they are killing their sales price if I have to implement all new systems.
C) She is training 20% of the clients herself, with the high end clientele primarily with her. Let’s be honest here – who’s going to stay and who’s going to go? I’m counting on 40% of the clients and 50% of the gross revenues following her out the door. You may keep more than that, but you are foolish to depend on it.
D) Clients pay up front, in full, for <20 package sessions. No receivables base, but plenty of sessions to service. Ideal for them to run a giant renewal promo the day before closing on the deal, cleaning everyone out and leaving me with a bunch of clients with a BUNCH of sessions to service. (Quite illegal, but it happens, I promise). It could be worse, they could have all paid her for 100 sessions that I would have to service. *There are ways to secure yourself in this scenario. DO NOT put yourself in this situation.*
E) 80% of the sessions are hour long. That’s cool if that is your thing, but I don’t think it’s necessary, and it’s tying up my trainers schedules. Half hour sessions mean more clients in less time, my trainers make more, the business makes more, and we get the same results.
F) One-on-one training. That’s fine too, but on a limited basis. I want groups and team training because we get more out of our time and our programs still get the same results. (Thanks Alywn Cosgrove.)

The lesson here is this:
You have got to PREPARE a business to sell. Because of their bookkeeping, not showing a profit worth speaking of, and the business’ dependence on her workload – what do they have to justify any kind of price? I don’t know about everyone else, but I want to sell my businesses at a premium. They were doing well for themselves, and that’s great, but THAT particular business will NOT MAKE ME MONEY without me taking her place. And that’s not an option.

Here are the two principles I want anyone who is reading to think about, and I’m going to elaborate tomorrow.

1) You have to be able to sell your systems.
2) You have got to have a receivables base.

Those are the only aspects in a service business that will allow you to command a premium selling price.

Saturday I will make another post and explain in further detail what I’m talking about.

What are you doing to prepare your business to sell?
What is it worth without you?
What is it doing to prepare you to retire?
What is your exit strategy?

And I’m going to explain why one (1) of my personal training locations, which grosses less and probably nets less each month than the business above, and has only been around for 2 years, will sell for 4-5 times more.

Amusing Sidestory:

This gentleman is sitting across from us, and we’ve basically given him our resume as to what type of businesses we own and for how long. Bear in mind that this guy owns “a couple of businesses that do 20-30 times what this studio does.” Here’s the dialogue:

“So how often are you at your health club?”

Nick: “We spend a day each month in the club.”

“So does anyone run the club?”

Pat: “We have a staff there.”

“OK. So you guys run a 2 man personal training company”

Pat: “No, we don’t train any clients.”

“Who does the training and sales?”

Pat: “We have a staff.”

“So do you have jobs?”

Unison: “We work on our businesses.”

What I would do to have had a camera. His face was the definition of disbelief – almost like he had just learned (in his late 50’s) the secret of life. Maybe he had. And he said,

“You guys figured it out.”

Damn right.

The Power of Retail II

Ok. I feel like I let you down with the Retail blog. I went back and read it and just feel like I didn’t convey what issues were most important. I’m going to go back and retouch a couple of ideas I feel I shorted you.

1) Understand LV and what goes into it.
A) How long does your average client stay with you? 36 months
B) How much do they pay for your service over that time? 36 x 200 = $7200
C) What else do they buy? 12 - $1 H2O’s/month * 36 months = $432
1 – 5 lb MRP/month @ $40 * 36 = $1440

Very basic example, but I’m sure you understand. By adding 1 water 3x/week, and 1 jug of meal replacement/month, you increased your clients LV by 26% (and helped them with their program). If you don’t appreciate that, imagine increasing your margins 26% on everything you do. Yeah, incredibly rich.

2) I don’t think I relayed the potential options you have to offer retail.
A) EVERYONE can at least offer autoship supplements to their clients. EVERYONE. There is no excuse to not offer supplements. Clients are going to buy them somewhere, why not from you? Is GNC going to cut you a profit sharing check?
B) It is a good idea to have some products on hand, because some people just need to see, touch, smell, and they just don’t want to order online. We don’t want to lose them just because we don’t want to keep any inventory on hand. My concern with inventory is turnover. Don’t let money just sit on your shelves. Be proactive and get it moved. Promotions, specials, sales, etc., just keep it moving, but don’t compromise your Net over it. If you have to ‘slash’ prices to move something, maybe you shouldn’t reorder it.
C) A blend of onsite retail and autoship can be extremely profitable. You may have to experiment with your products and how you market and tie them into your services, (or you could just ask, and we’ll save you the trouble), but that mix has proven work under most any circumstances.

I’ll be getting back on retail very soon. I wasn’t planning on making this 2 entries, but I wasn’t overly happy with my first one.

Nick Berry

The Power of Retail

One of the concepts that I will be discussing on a regular basis is retail and how important it is to your bottom line. You’ll find it all over our website, www.fitnessconsultinggroup.com, and Pat Rigsby goes in detail on www.personal-training-money-machine.com, but the key to profitable business lifespan is the lifetime value of the client. And you cannot ever achieve that peak lifetime value without a backend retail strategy. And it is definitely strategy. You will never see the maximum LV by accident, I assure you.

First things first, understand that offering retail does not mean having shelves stocked with a ton of inventory that sit idly by while you sell training. You MAY have inventory and a retail sales area, but it’s not absolutely necessary in order to offer retail goods. Retail as we discuss it is making tangible goods available to clients at a profit to you. So you may sell products from a shelf in your facility, you may have an autoship program, you may do all special orders for clients, or you may keep your inventory at your home and deliver upon order. No matter how you choose, there is money to be made. The amount of money depends on how well you control certain variables.

1) Cost of Goods – Cost of goods sold is important for your accounting purposes, to determine your actual net profit from each sale, and how much to expense on taxes. The actual cost of goods is important to monitor because you need to get the best price on each product you can find. The better your price, the more money you can make. Very simple. And don’t be scared to negotiate discounts.
2) Inventory/Turnover – How much inventory you keep on hand, if any, will directly affect your bottom line. High inventory with a fast turnover = $$$$. Any inventory with slow turnover = losing money. If you keep inventory, age it and make sure it moves. If you don’t want the hassle, autoship. Either way can be equally effective, depending on what type of systems you want to monitor.
3) Margins – Most products, when bought at wholesale, have an MSRP. Manufacturer’s Suggested Retail Price. So the margins are predetermined for you. Supplements tend to stay around the 100% markup range. We price ours slightly higher. Hey, it’s only worth our time if we’re making good money. Some products, like HR monitors, pedometers, it’s closer to 45%. T-shirts, if you get a good price, can go to as high as 400%.

Then of course, the #1 variable is:
How well you market your products within your service.
Your best customers are already using your services, they are prime to buy your retail products, if you can intertwine them with their needs. All you have to do is market your selected retail products to your client base! Then watch the snowball effect and see your bottom line climb month after month.

The Credit Fiasco

The first thing I want to address is credit, and this is 100% a result of something I just dealt with myself. IF YOU DO NOT GET YOUR CREDIT REPORT YEARLY AND CHECK IT OUT YOU ARE GOING TO RUN INTO PROBLEMS!! It’s nearly a certainty. Creditors are quite simply carefree when reporting to the bureaus. For anyone who doesn’t know, there are three credit bureaus, Equifax, TransUnion, and Experian. Basically any lender will report your payment status and history to one or more of the bureaus. That’s typical, and fair enough. But there isn’t much rhyme or reason to their reporting, sometimes they do, sometimes they don’t. And at some point a mistake may be made in posting payments or balances to your account, dates, addresses, there are a number of things they can screw up. But the kicker is that you don’t find out until you are about to close a refinance at the bank on a couple of 6 figure loans, unless you monitor your own credit. Do I sound upset? I should be, it happened to me just like that, and I should know better. I have studied credit, how to score it, improve, dispute, when to check it, how to use it, everything…….but I got careless, and didn’t get my yearly report. And it almost cost me. What’s +2% yearly on 300K? Yeah. To make a long story short, basically my bank had applied a couple of payments to a different account of mine so I showed up as delinquent for each one on my credit report, which I hadn’t checked until PAT AND I WERE SITTING AT THE BANK READY TO CLOSE AND THEY PULLED MY CREDIT.

Now, we are by no means made of money, so when the bank sees your credit score has dropped recently due to some derogatories, they are going to rethink their lending position. And rightfully so!! They changed their tune by almost 2% APR. I had to go back and contact the creditors who had made the mistake, explain to them how to correct the problem (I know how because we report clients to the bureaus), then go and dispute each one on ALL THREE REPORTS. This all took some time. And I had to wait 30 days for the corrections to show up on my credit reports before I could close my original refinance. An enormous hassle.

I had known for 6 months I would be refinancing these notes. Had I done what I knew I should be doing, I would have been pulling my credit reports and reviewing them. My problems would have been averted before I ever encountered them. If you haven’t checked your credit, go to www.annualcreditreport.com and you can pull one free copy from each bureau per 12 months. It is not very user friendly, but you can probably manage. If you have problems contact me. If you have pulled your credit, but expect a major transaction in the future, it is worth your $15 to check it again 4-6 months ahead of time, trust me. And everywhere you turn you will find someone wanting to monitor or ‘fix’ your credit. Beware. They cannot ‘fix’ or monitor your credit anymore than you can, and often they will do neither one for quite a fee.

Your credit is a serious deal, and it will control the future of your business. If you come from a situation like I do, your credit is the only way you can go from ‘poor’ to being able to borrow some serious money. You must monitor and take care of your credit. Get your credit report, and do it regularly. If you don’t know what you are looking at, drop me a line and I’ll help you out. But don’t screw up your business future by being ignorant.

Let the Blogging Commence

I’m finally going to break down and start a blog. Pat has been on me for quite a while and I can’t hold him off any longer. (Just kidding). So now I have a blog, welcome to it. I will cover a variety of topics, from finance, to retail, negotiations, sales, a little bit of marketing, startups, and my absolute favorite thing to talk about is developing an exit strategy and selling your business. (I just turned 28, I want to retire, I won’t apologize for that.) If you agree, or disagree, please post your comments. I am eager to hear various perspectives.

If you are smart, and I’d like to think you are, you are also staying on top of Pat Rigsby’s blog @ www.patrigsby.blogspot.com. After reading his work, and then reading some of my own, you will notice we share a lot of opinions in regards to aspects of business. We’ve learned from most of the same teachers, and we both have learned a lot from each other (I like to think he’s learned from me). On occasion, however, we disagree, which can get pretty interesting. My point is this, and Pat will agree: There is more than one way to skin a cat. I’m not sure where that analogy originated, but it means that there is more than one right answer to most of the issues we deal with in our business. No one has all of the right answers to every problem, but we can minimize the mistakes and the learning curve by studying those who have been there done that. That’s why I have this blog – I don’t want anyone to deal with the growing pains that I went through if we can avoid them. If you have questions, post them. If you have ideas, I would love to hear them.
Thanks for reading, I’m looking forward to this.

(First blog entry, and I use an analogy about skinning a cat. You might want to stick around. This could get really interesting.)