What is Your Gym Worth to a Buyer? with John Franklin

[00:00:00] Hello, my friend on today’s episode. I’m having back on the podcast, John Franklin, who is a co founder of Kilo. And he is here today to share all of his wisdom about selling your gym. So if you ever thought about the possibility of selling your gym and you’re not sure what the right timing is, or if you want to do it, or you already know you want to sell your gym, but you’re not exactly sure how to value your gym and get the most money from your transaction.

This is a great episode for you. I’ll also say that even if you plan to never sell your gym, you’re going to die as a gym owner. This is still a great episode for you because all the tips and advice John gives in this episode are really about strategically improving your gym’s operations. And so even if you don’t plan on selling your gym, this is a great episode for you.

Grab a pen and paper because he covers a lot of ground pretty quickly and let’s dive in.

Welcome to the business for unicorns podcast, where we help gym owners [00:01:00] unleash the full potential of their business. I’m your host, Michael Keeler. Join me each week for actionable advice, expert insights, and the inside scoop on what it really takes to level up your gym. Get ready to unlock your potential and become a real unicorn in the fitness industry.

Let’s begin.

Hello, fitness, business nerds. What’s up. Welcome to another episode of the business unicorns podcast. Before we jump into with today’s guests, which I’m very excited about. I just want to give a quick friend, a quick shout out to our friends at Kilo. Who are on today’s podcast because Kilo is a fantastic kind of all in one solution for your website, for marketing automation, uh, for your booking and billing platform.

They really do it all. And so many of our unicorn side members have switched to Kilo over the last year and are really loving their experience. So if you want a place that will build your website, integrate marketing innovations and everything you need to run a successful gym, Go over to our friends website link down below in the show notes, which is appropriate for today [00:02:00] because founder of Kilo is here.

Mr. John Franklin back on the podcast for, I don’t know, third or fourth time. Welcome back, my friend. Just can’t get enough. Just the fun. Listen, it’s not for nothing that you’ve been one of our most frequent podcast guests, just because you got a lot of wisdom out in the noggin of yours, my friend. And today is no exception because we’re going to be talking all about how and when to sell your gym.

How to know when that time is coming, how to strategically prepare for it, get the most for most money from that transaction. And so just thanks for being back on the podcast and being willing to share everything with us. It’s, it doesn’t, it’s so appreciated. And our listeners always really value your episodes.

XOXOXO man. I am. Happy to get into this topic. Where do you want to start? Yeah. We’ll just talk a little bit about some people who don’t maybe know your full backgrounds, a little bit about your personal experience with selling gyms, just like the 5, 000 foot two minute version of what do you know about this topic from personal experience?

Yeah. So I opened my first gym in 2013 [00:03:00] in Hoboken, New Jersey, and just happened to time the CrossFit trend perfectly. So if you are unfamiliar with CrossFit, this was a moment in time where you could just open your doors and people would be waving money at you, even if you had no clue what you’re doing, which I did not.

And so I opened my first gym with about 120 members and was at capacity two months later. If you operate in the New York city area, which a lot of your listeners do, you just can’t like knock a wall down and expand when you’re full. Yep. I use the cashflow from the first one to open a second one in New York at the time.

That was when you could get like leads on Facebook for 25 cents or something insane. Got 5, 000 people on a list and did a big pre sale and opened the door with 220 members. And I pre sold like six and 12 month memberships over two years. 225, 000 in cash collected before we, before we even opened, no one had set foot in the gym.

Insane luck. If you copied the exact same thing I did today, it would be nowhere [00:04:00] near those numbers. Ended up getting some more opportunities as time went on. Four gyms that were profitable and a dog gym, a fifth gym that we can talk about over beers one day. And, uh, So around the time Kilo was getting started, there was a bunch of new opportunities coming my way, had decided it was time to sell that process ended up taking 18 months.

And I learned a lot about gym valuations, mistakes to make things I would have done differently and created this framework for other gym owners in which I will share with them. I love it. Thank you for the story. I think it’s, even though I’ve heard your background before and knew you through some of it, it’s still amazing to go to remember what that wave was like, both for CrossFit and for lead gens on Facebook.

It really was a time that no longer exists. That is, is fun to be nostalgic about. And also a little sad glory days. So obviously you, Your decision to sell came from just emerging opportunities in your life and your career. But for those listeners who are [00:05:00] not sure if it’s time to sell, what are some thoughts about how to, how and when to make that decision?

What are some things that you think would be helpful? So I always like to say the strategies I’ll give you will make your business more valuable and typically businesses that more. That are more valuable or ones that produce more cashflow and are easier to run. So even if you’re like a never sell, I’m going to die with my gym.

It’s still useful to want to implement some of these things because it’s going to make your business easier to run. And so I had talked to a group of gym owners earlier about this topic and a couple of people raised their hands like, yeah, this hit me at the right time. I’m never going to sell my gym, but if I get hit by a bus, like I want my family to know what to do.

I want my wife to be able to not have to deal with this. Some considerations. I will die with my gym. So in terms of when to sell, you want to, I have a framework because a lot of times when people think about selling their gym, it’s usually something terrible goes wrong and they’re like, burn it all to the ground and they end [00:06:00] up giving it away or worse, just shutting it down.

So if you’ve been working in your business for five, 10 years, the last thing you want to do is just hand the keys to someone and have nothing to show for it at the end, right? Because you put a lot of work into it. You should get some money out of it. So I am. Three steps that I like to say. So the first one is if you’re thinking about selling, the best thing you can do is remove yourself completely from the gym.

So meaning have a operator in place that starts acting like an owner. I went extreme. I literally moved to a different country. So I moved to Canada to get away from my gyms, to make sure they ran quote unquote by themselves. I know another person who’s running a bunch of metabolic franchises from the Cayman Islands.

He owns four or five of them now. That is step one. Step two is if you are selling because you want to pursue another opportunity, I always like to say your side project income should exceed your gym income. So I was doing, uh, marketing work on the side and that ended up growing past the point of what I was making from the gyms.

[00:07:00] So I de risked it. I’ve seen a lot of people sell, go chase the next thing, realize they hate the next thing or can’t make the next thing work. And then they lost their golden goose. Cause like I said, when I started, I got lucky if I opened the same gym in the same location, the same time, I don’t think I would be able to build up anywhere near as fast as I did.

Like sometimes gyms work. In certain locations. I know you as a multi location as a once multi location operator, know that you can have the same team in the same location, the same type of magic, but one will work gangbusters and one will just be an absolute dog and who knows why. Of course. Now, and then finally, this is for you, Michael.

It’s the third step. Which do you enjoy more? Like this new opportunity? Like it. Is it going to be more in line with your lifestyle? What you want, right? Like I work in a shed in my back office where I am now. There are things that I miss about owning a gym, that community, seeing people every day, like working in person with staff, making huge lifestyle changes for someone where you can get those.

You changed my life type situations where [00:08:00] you don’t necessarily get that with gym management software. Not a lot of gym owners come to you crying because, you know, they can now run around with their children or something like that. Totally. So they should, cause they are saving a lot of time, but I think there’s a great three steps.

Let’s just go back to the first one. So I want to make sure people really understand why the first one’s important. So the first one was get the gym running without you. And this really matters for a lot of reasons. You just want to peel back the onion here and say, why does the gym need to run without them before they sell it?

Let’s talk about the reality. And that’s that most gyms will sell to one to four times seller discretionary earnings, net owner benefit profit, plus owner ad backs, however you want to call it. It’s basically the money an owner can take out of the gym. And aside from profit, the number one determinant of.

Whether you’d be on the low side or the high side of that is if you have an operator in place, because someone buying a business doesn’t want to buy a job. Yep. Yeah. And I think it really also shows a potential buyer that you have systems in place that doesn’t require you and your like unique [00:09:00] magic, right?

I think that idea of like. Key man risk is so real in our business because so many times gyms are really powered by one charismatic, super connected person who has relationships with every client. And if that’s the case, that’s just, that’s unsellable to a buyer, right? If you have to stay with it for it to survive, that’s tough for someone else to want to take over.

But if you can put systems in place and people in place that have clear roles, responsibilities, and can deliver all the outcomes without you. Then it’s much more sellable. Yeah. And I think your second tip there, I think is really also really valuable, which is go start investing your time and energy in something else to see if you like it.

Cause I think you’re right. I’ve heard so many stories of folks who leather gym and sold it. And in part, because maybe they’re a little frustrated or burnt out, but then they go and try and do this next thing that I thought was going to be much more relaxing or fun or lucrative. And they’re like, Oh, Fuck like that’s, this is actually worse.

So I think going to invest in your next chapter before you sell, I think is [00:10:00] really critical. I love that one. And you and Mark are perfect examples, right? Like you guys had an extremely profitable gym and you tried another gym. You did some stuff online. I believe you guys were real estate moguls or still are real estate moguls.

And then you started doing the time consulting and then you finally landed on business for unicorns and it seems like that’s going incredibly well now. 100%. Yeah. And we’ve been doing, we’ve been following your steps before we knew them, which is testing other things and I’m not sure if we’ll sell or not, but the idea that MFF can really run pretty well without us has been proven now for a few years, which is fantastic.

It just gives us more options in our life. All right. So now we’ve covered a little bit about how people make the decision, what the process is, which I think is incredibly useful. Let’s talk a little bit about valuation because people get hung up here. There’s a lot of models people can find online. If they Google how to value a gym, but I think you’ve already always take an approach to this, which to me is very simple, very accessible and effective because it’s worked for you and others many times.

So just walk through what’s my gym [00:11:00] worth. Your gym’s worth whatever someone will pay for. And I will say having sold five of them now, valuation is a lot more art than science. Sure. But the best thing you can do as someone selling a business is have a compelling narrative To justify the valuation of your business.

Now I’m going to oversimplify here just to get you guys in the right headspace. I said, the gym is worth one to four times. We’ll call it net owner benefit, which is the money you take out of the business. Now. Jim sell for one to four times that one to four times that number. So if you take out a hundred thousand, your gym’s worth somewhere in the neighborhood of one to 400, 000.

And I say there’s four drivers of whether you’re on the low end or the high end of that. The first one’s. Profitability, the second one’s predictability, the [00:12:00] third one is staff, and the fourth one is systems. And we can go into each of those really quickly if you want to, or I can give you the benchmarks for each one.

And yeah, let’s dive in. Let’s save time. Okay. So profitability is the number one thing that dictates value. Yeah. Like we said, we want, buyers want to buy a business, not a job. And so I think the goal for everyone listening to this is to get to a hundred thousand in net owner benefit with professional management in place.

That is really critical. Yeah, that means because me as an owner, I don’t have to come in and have a job, right? I’m not, you said this before, but people don’t want to buy a job. They want to buy a business. So if you are already generating enough profit to put in my pockets, that’s exciting. And I don’t have to go and work every day because you already have staff, which we’re going to talk about in a second.

Then it’s become so much more of a sexy narrative for someone that they’re really buying profit on day one instead of buying a job. So I think that profitability is crucial. [00:13:00] And I will say something that I see. Very commonly in super profitable gyms with the owner’s name on the door, something like that.

Don’t treat your gym like a piggy bank. So we’re getting towards the end of the year. A lot of people like to quote unquote, spend money to save on taxes. And while I’m all about mitigating your tax load, like I moved to Florida for family and tax reasons, don’t buy stupid shit. To save don’t spend a dollar to save 35 cents, because when you go to sell, let’s say you spend 10, 000 on something you don’t need to quote unquote, save on taxes.

There’s an extra 6, 500 out of your bank account once you’ve paid taxes. So you’re down 6, 500. And then again, we said businesses trade at one to four times net owner benefit. So that 10, 000 missing from the bottom line means that your business is worth 10, 000 to 40, 000 less than otherwise would have been.

Yeah. Great point. Great point. So you and I love that Greg Crabtree book, simple numbers, right? Or Mark does. I don’t know if you like [00:14:00] it too, but he says the number one business KPI is how big of a check did you write to the IRS this year? And there’s a sub quote saying you can’t build legitimate wealth from an operating business unless you pay taxes.

We’ll leave it there. Sure. Great. So that was the first pillar profit. The All right. So the, I got absolutely destroyed on some of these predictability ones. And these are things that you probably gloss over. Let’s listen guys. So the first one’s consistent top and bottom line. So over the previous three years, you want to show a consistent top line, even better if it’s growing, same with the bottom line, if your revenue numbers look like three years ago was a million, and then it was 700, 000.

Then it was eight 50, a buyer’s going to look at that and be like, this is unpredictable, like I don’t know what I’m getting. So that’s the easy one. The next one is low churn. So churn dictates basically how good a service is and how sticky it is. And so that’s why SAS companies trade for such high multiples.

The churn is typically pretty low. [00:15:00] If you are a mind body customer, you know that it’s like they can keep raising the prices and not necessarily release the most new features and you stay because it’s just a pain in the butt to switch. And with a gym, it’s a little tougher. It’s a little tougher to keep those people that sticky.

And that’s something that any savvy buyer is going to look at. Next piece contracts. It does offer. Reliability, but if you have low churn, that’s going to trump your contracts. The next is a long term lease with options to renew. So I got dinged on this pretty hard because I had a relatively short term lease.

The landlord didn’t want to sign a long term lease because they wanted to develop the building. And the buyer didn’t have confidence that they could operate out of that space for the next 10 years. So you’re going to get really kicked in the shin on the valuation there. I. Highly recommend you get like at least three to four or five year options on the end of a lease if your plan is ever to sell.

And then make sure your lease has changing control language, meaning that [00:16:00] you can sell your gym and your landlord can’t veto it essentially. And you want to have an assignment clause, meaning you can assign the lease to a new buyer. So the buyer doesn’t have to go and negotiate a new lease with the landlord.

So double check those. Yeah. Those are huge because you know, if you don’t have that. You can really blow up a deal, right? If the landlord decides, Oh no, I’m going to treat this new person that you’re selling your gym to a brand new person. I want to start negotiating with them and get your rate up to market rate.

I can really just harpoon a deal. So I think that’s really crucial. Yeah. Sorry. Keep on going. I interrupted. No. And another one, especially for tier one cities, make sure you have your certificate of occupancy and all your permits are closed out. So, as a, uh, fellow New York City gym owner, Michael, you’ve probably gotten a PCE before.

I have. Which is. This, I don’t know if it’s even still required. I know they were getting rid of it. They changed the laws a few years ago, but I’m not sure what the current state is, but I hope it’s gone. It used to take, it’s this obscure [00:17:00] permit that shows that your gym is not a brothel. And it takes somewhere in the neighborhood of six to 12 months to get it.

And anywhere between 75 to 150, 000 to get it. Most gyms just start operating without it. And then some never get it. And some actually go through with it. I went through a couple of phases and then the gym got busy. I never got it. Then when it became time to sell came up, that didn’t have a PCE. So the buyer had to spend 50, 000 to get a PCE.

There was issues with the landlord and the lease transaction. And I ended up having to put, I think, 85, 000 of the sale in escrow. And I didn’t get that money for almost a year afterwards until the gym got its operating certificate of occupancy. So if you’re someone who maybe cut some corners to save a little money to not get a clean certificate of occupancy, or you have some outstanding, some open permits, like close that down now, because it will cost you way more on the back end and that was.

Definitely something I wasn’t like, yeah, for sure. Yeah. And while some of this [00:18:00] might be, is very specific to New York, I think every area has its own quirks, right? Every, every market has its own quirks about what you’re allowed to do and not allowed to do with your physical establishment. So I think make sure you know your local laws and even if it’s not a PC where you live.

Make sure you don’t, you have what actually does apply to your space. So I think this category is really all encompassing when it comes to consistency about revenue and contracts. I think it’s really critical because it does show that you’re, that you have a process in place. So you have an operating system that actually works in a business model that’s been proven consistently over time.

So I think this is a really important driver. This is your driver number two, right? Yep. Love it. Anything else for that one? Staff is number three. Those are, if you do all, those are like the little ones. Those are the, that’s the one you’re most likely to skip over in your mind. Totally. But. That’s the one that’s very easy the churn not necessarily But some of those things are pretty easy to fix if you think about it a little ahead of time Those are all my landmines that you want.[00:19:00]

I love it. It’s a great list I hope our listeners have been taking notes. That’s a lot of good shit on number three The driver number three is staff what matters here The main one, which we already talked about is your operator, right? Because if you have a good operator, everything downstream takes care of itself.

And the tip I give is think like a prospective buyer. So I run a podcast called gym world worldwide, where we talk to a lot of people who have sold a lot of multifacility owners, a lot of the most successful unicorns. And so whenever we talk to someone running a multi location play, um, And we asked them, what is the most difficult part of it?

Everything, almost unanimously, they say, getting a good operator in place. And so get bought by a strategic buyer, which is someone who’s expanding locations, having a good operator in place just really removes the biggest domino. For them and makes everything so much easier. And so if you’re thinking like a prospective buyer, the things you want to ask yourself is like, what [00:20:00] if I was buying Mark Fisher fitness, there’s the Mark Fisher risk, but the next thing I want to find out who’s running the place, I’m going to find out, are they making a fair above market wage?

Are they tied to the upside of the business? Or are they just going to leave and take all the members with them? Do they require little oversight or am I going to have to fly up to New York and deal with toilets and then. Other personnel, can they hire, fire, manage people, right? Which is the worst part of operating a business in my opinion.

Yeah. And no one wants to buy a headache. And so having someone there and feeling confident that they will continue to be there over the course of time, they run, they plan to run the business. It makes life so much easier. Yeah, I think having the people in place is really key at the end of the day, we are a people business.

That’s what people are buying is their relationships and experiences they have with our staff. And if you have people in place that are competent and committed to staying through the transition of ownership and are incentivized to stay and continue making it work. And I think I love that you added there that also have the power and ability to [00:21:00] hire and fire and manage people without needing ownership intervention.

I think those are all really pretty key because no one wants to buy a place and have to do any of that shit. Yeah. Which is amazing. If they do, they’re, if they do, they’re running what’s called like a turnaround and if your gym is a turnaround, you’re not going to get anything for your business. If someone’s buying your business because they think you’re an idiot and can run your business better, that’s going to be reflected in the price.

100%. Yeah. So that staff was a third driver. I think you had one more. There was four drivers. Yeah. Yes, systems and all the unicorns probably have impeccable systems written down and operated audiences the same way every single time. Yeah. And good businesses have good systems, right? And good businesses sell more than bad businesses.

And there’s really four that I think you should really have nailed down. And so it’s getting nurturing leads. Selling an on ramping your new members, hiring, firing, managing staff, and then internal and external [00:22:00] comms. And internal comms is how you talk to staff and how you talk to existing customers, external is just your marketing out into the world.

I think it’s a really smart list, John. Honestly, I mean, not surprised, but it’s really smart list to, to think about like the major systems you have to have in place if you’re going to sell. And I think you’re right. You need to study flow of leads. And way to sell them and track them and convert them need a steady process for you’re creating your client experience and onboarding them, especially the first 90 days is what we often talk about.

And then obviously communication internally is huge. How you talk to them, the pulse that you talk to your people internally and externally really helps drive those other two things. So I think that’s a, yeah. And it’s not only written down, it’s executed like it’s written down. So I’m sure you guys make people write down their standard operating procedures, but they’ve been in the group two, three years and you go back and look at them.

Probably doesn’t reflect the way the business is being operated now. So don’t let those get like old and crusty. It’s easy enough to spend a couple hours [00:23:00] every three months, making sure that the, all the procedures are reflect what’s actually happening in the gym. And it goes a long way to making your life easier, much less than.

Perspective buyers. Yeah, that’s exactly it. John. And we always talk about SOPs that every SOP has to be a loop, right? It has to circle back and improve itself. Once you’re thinking and action improve, it also has to maintain its own quality control, right? If your SOP is about how to deliver a badass training session in your gym, then who’s making sure that everyone is actually doing that on a regular basis.

So SOPs have to always be a loop and circle back and be able to improve themselves, which people often miss. They think just writing down expectations once and training people once is enough. But if I’m going to go buy a gym, I want to make sure that those systems are in place and continuously being used and those standards are being met on a regular basis.

Not just that there’s some dusty folder sitting somewhere in a file cabinet. I don’t think people use file cabinets anymore. Just not help anyone. Dating yourself, Michael. I know, I do it, but it’s okay. I have a file cabinet next to my desk. There’s papers in there. Okay, we covered a lot of ground already.

I’ll start [00:24:00] to wrap this up, but one last question. So we’ve covered. When to buy a gym, what the process is, you gave a three step process, which I think was fantastic. We talked about the four drivers that drive valuation and your formula for net odor and benefit. The thing I, I think my, my final question for you is what about communicating this process?

To stakeholders. What do you, what are your thoughts on communicating how and when you communicate to your team about a transaction like this and how when you communicate to your clients about a transition transaction like this. So if you follow the three step process on the front end. You’ve already had a conversation with your operator, right?

Because you should be away from your gym. You shouldn’t be going in there. It’s not a surprise to your team. They have, they’ve already seen that in action. So if you’ve done this correctly, you’ve been missing already. So nobody’s quote unquote. Missing you. And so the third piece that we’ve talked about, how to [00:25:00] think about value, how to get ready for a sale, the third piece is who’s actually buying it.

Right. And so there’s three types of buyers. There’s a staff member, there’s a rich member, and there’s a strategic buyer. So most likely like another gym owner. And so how you approach that conversation really depends on. You and who you plan to sell to. So I recommend everyone engineers, an exit plan in their mind, what a perfect exit would look like.

Who’s buying it. What’s the price. What is the business run by? What’s important. Do you want to get the highest dollar amount, or do you want to make sure that your staff is taken care of and the culture is maintained and the members don’t get 30 price increases or something along those lines. And what the result of that exercise looks like will determine the conversation you have with.

for a lot of people, they want to sell to a staff member. And so if that is the case, when you disappear to build your side hustle, that’s a conversation you [00:26:00] have. You plant those little Easter eggs that maybe one day you will own this gym, if you want to be, if that’s not, if you want to sell to a strategic or you plan to sell to a strategic, I think the most important thing at the The operator level is making them feel like they are a critical part of the deal.

Hey, you’re it, you’re a lot of the value. And that’s why when we’re going back to the think like an owner section, you want to make sure that they’re paid fair above market wage and have some type of tie to the upside of the business. So they feel important and they want to stick around. They don’t feel like they’re getting the raw end of the deal here.

Yeah. And my general. I wouldn’t talk to all your coaches or front desk people until the money was in the bank account. I would probably be a lot more inclined to just have it be on a more need to know basis until you’re a little closer to the finish line. Sure. And then there’s plenty of ways to just be Yeah.

As you’re talking, John. Again, if you’re missing. Yeah. If you’re missing. Yeah, exactly. Then people already know [00:27:00] that. No one’s missing. Right? I think the thing that’s running through my head as you share all these strategies is all of these are intended to have people avoid being surprised. So I think that’s the thing that puts people off the most, is that I had no idea this was coming, there were no signs, I was out of the loop, I felt.

But all these things are planting seeds, you not being there, you starting to talk to employees in advance about possibly buying, and all of these things mean when the news finally comes, most people shouldn’t be shocked. There should be some, some breadcrumbs along that trail. They could have noticed before.

I think it’s really useful because I think people are feeling, especially team members, less for clients, but team members feeling like, wait, all this was happening behind my back. What else are people talking about that? I don’t know. And that’s not a seed we want to plant. So anything you can do to grease the grease, the wheels.

So when the transaction finally happens, people aren’t really taken aback. I think that’s really critical. I think it’s really critical. Yeah. And I’m of the steps. That’s probably where I’m weakest and you are the [00:28:00] human expert. So I would defer to you on creating the communication plan. I’d probably call you and figure it out.

So if you’re a unicorn, just call Michael and just call me. I have him tell you what to say. Yeah. All right. Let’s wrap it up. This has been incredibly helpful, John. I so appreciate it. I appreciate it. You’re going to give a hundred and twenty. Percent value. And you certainly did on today’s episode. I think for anyone out there thinking about maybe even selling someday or even not selling, just want to tighten up the reins of their business.

I think everything you offer today, I think is such a value add for them. So thank you. Thank you. Anything going on in Kilo land or anything you want our listeners to know about what’s happening in Kilo right now? Hey, if you need more leads, give us a call. And if you want a easier gym management solution, we’re happy to run you through a demo.

We’re building features specifically. For unicorns, I don’t want to talk about them publicly yet because Cleto will get very mad at me. CEO of Kilo. We’re thinking about the small group training space, [00:29:00] semi private training space a lot, and I think you guys are going to like some of the things we’re building for you.

Yeah, I’m excited. I’m excited. Thanks as always, as being on the podcast and listeners, if you want more John or Kilo in your life, go click the links down below in the show notes. And I’m sure I’ll have you back again soon, my friend. Thanks so much. Yeah, thank you.