Friday, August 25, 2006

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.


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