When it comes to protecting your business, leave it to the professionals. As the old saying goes, it’s better to be safe than sorry. And seasoned gym owners will tell you to never rely on friends or general advice for gym legal tips.
“We’re best friends and have known each other for twenty years. We don’t need anything formal in place.”
Matt Becker disagrees. Becker is a lawyer, and gym owner of CrossFit Alloy and Industrial Athletics in Pittsburg, PA. He’s also the owner of GymLawyers.com. His company offers education and legal consultation for fitness business owners. Whether new or established, or looking to buy or sell, GymLawyers.com handles it all.
Becker says one of the most common mistakes new gym owners make is neglecting to sign a clear partnership agreement. This includes the cost of getting out of the agreement, should that need arise.
“Even if you’re opening the gym with your best friend, you need a formal partnership agreement,” Becker said. “Because as soon as money is involved, things change.”
He’s helped many owners draft unique partnership agreements like this over the years. Gym Lawyers also offers help in signing commercial leases, or understanding the differences between LLC, LLP and sole proprietorship. The company offers consultations and provides general education via webinars, blogs and newsletters.
Today, Becker is sharing some gym legal tips to help you protect your fitness business:
Three Common Legal Mistakes Gym Owners Make:
1. Before Signing, Read The Fine Print.
Becker says one of his most frustrating moments is when clients call him right after signing a commercial lease. He says he often finds out that a gym owner skimmed the agreement and signed it. Then they call him asking to look it over.
His advice is to have your lawyer read anything you intend to sign ahead of time.
“Make sure you understand all the various contracts you’re signing,” he said. “And make sure you’re being advised on the content of the contracts. The commercial lease is one of the primary ones here.”
2. Don’t Use Templates.
Another one of the common legal mistakes gym owners make is using online templates for important documents. This can include a variety of contracts like membership and employment. It can also include things like a gym operations manual or liability waivers.
“The gym industry is a very unique industry, and the micro-gym industry is even more unique,” Becker said. “As a result, many templates you find online simply don’t apply to your business.”
For example, a gym waiver might include something like a “touch clause.” This clause indicates to the client that they might receive tactile cueing from coaches. Preparing the client for what to expect helps reduce the chance of legal action.
As another example, gyms that offer 24/7 access will most likely have a camera monitoring system. Becker explained that this information should be included in the waiver, simply to make clients aware.
When clauses and important information like this aren’t included in gym documents, gym owners put themselves at risk. And Becker said it’s not uncommon, years down the road, for gym owners to have to go back and fix all of their contracts. This is where his company comes in.
“We provide one-hundred percent customized legal contracts,” Becker said.
Pro Tip: Include places on your waivers for the client to initial, especially for clauses you want to ensure they read.
3. Don’t Stop At Filing An LLC.
While most gym owners understand they need to file to become an LLC, often the formalities stop there.
“With gym owners there’s often a lack of formality when starting a business,” Becker said. “They file the LLC, but then they don’t do any of the steps after that.”
For example, after filing the LLC, it’s important to make sure all of your contracts and operating agreements are done in the name of your corporation.
“Even if you’re a sole proprietor or a partner, you still need written agreements within your corporation,” he explained.
So how do you avoid making common legal mistakes like these? The best way to know exactly what to do is to hire a professional that you trust.
Tips For Buying And Selling A Gym:
Next, we asked Becker for some tips for buying or selling a fitness business.
He started with the basics. The first step is for both parties to understand the difference between an asset purchase and a stock purchase.
An asset purchase is when you buy the business’ assets. This includes things like equipment, location, brand and affiliate name. It does not include the LLC, which means you’re not taking on the business’ debts or liabilities.
For example, what would happen if a client sued the business for an injury sustained prior to you purchasing the gym? If you did an asset purchase, you would not be liable for this injury. However, you could potentially be liable if you chose to do a stock purchase.
With that in mind, why would you ever consider a stock purchase? Becker says there are quite a few reasons why a gym owner would choose a stock purchase. One example is if the city where the gym is located is no longer handing out permits to operate a gym. In that case, the only way to get into that location would be to buy the entire LLC.
1. Buyers, Ask To See Tax Returns.
If you’re looking to buy a gym, Becker recommends requesting three things. First, the gym’s last five years of tax returns. Second, the last six to 12 months of revenue. And third, a list of current clients and recurring payments.
He noted that if the gym owner won’t show you these numbers, it’s a red flag.
Becker explained that gym owners can make infamous claims. For example, someone might claim to have 155 active members, when in reality it’s 140 paying clients. This is why it’s crucial for potential buyers to do their due diligence and demand evidence.
2. Sellers, Maximize Your Valuation.
On the other hand, if you’re looking to sell a gym, you’ll want to maximize your business value.
Becker first recommends having all your legal contracts in place. This includes membership contracts that are compliant with state laws and complete with proper renewing terms.
Further, it’s important to consider - and ideally fulfill - outstanding memberships. Punch cards and personal training sessions should be included as well, as they can reduce the value of your gym.
Ultimately, Becker advises gym owners to know all your business metrics. That way, you can present everything cleanly to the prospective buyer.
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3. For Buying And Selling, Hire A Professional.
Regardless of whether you’re buying or selling, Becker recommends hiring a professional to do the business valuation. The cost is generally in the neighborhood of $3k-$5k and well worth the investment.
He offered this idea as well: There’s nothing stopping the buyer and seller from going in together to cover the cost of a valuation. Since it will provide an objective, fair look at what the business is really worth, it’s a win-win for both sides.
4. Don’t Let The Lease Stand In The Way.
Becker says the number one factor that stops a sale is the lease agreement.
If a gym owner has a multi-year lease and wants to sell their business, the landlord’s approval will be required to break the lease. The reality is, landlords can sometimes be hesitant to take a gamble on a new owner. Especially if the current one has been a good tenant who pays their rent on time each month.
To mitigate the chances of this happening, Becker recommends reaching out to your landlord “the moment you start to think about selling your gym.” Laying the groundwork can prove helpful throughout the rest of the process.
In Summary: Legal Is Not A DIY Project.
At the onset, it can seem simple to handle legal projects like contracts or buying/selling. You may think it’s unnecessary to invest in help or hire a professional.
Statistically speaking, it’s always better to ask for help. From formalizing important documents to protecting yourself from liability, the value is in the peace of mind.
Becker reminds gym owners that in running a business, it’s more than worth it to have your legal ducks in a row, right from the start. Save yourself the headache down the road and find a professional you trust to help you every step of the way.