Looking to build a sustainable business that can support you, your staff, and your members for decades to come? Simply build your business with the intention of selling it. While this does seem backwards, I'm going to explain in this post why it's the only way to build a small business like your gym or studio - and how it'll transform you into a true entrepreneur, by simply saying to yourself, “I want to sell my gym.”
Why Would I Want To Sell My Gym?
To be honest, the answer today might be that you don't. And that's ok.
But life has its twists and turns, and the one thing that's for sure is we all won't be doing the same thing forever. In the end, even death will take us away from our passions.
In between here and that inevitable moment, you might also have extenuating life circumstances - a death, medical conditions, a child going to college, a divorce or a marriage.
You might fall out of love with coaching. You might also find a way to coach more people in a larger format way than in your gym.
Even If You Don't Sell - It's Better To Build It To Sell
In short, there's a million reasons why you might not own your gym forever. So while you might not be interested in selling your gym today - you most certainly will be tomorrow.
And even if you never do - I’ll explain why building your gym to sell will maximize everything in your business for you, your staff and your members.
How Do I Sell My Gym?
Aside from the obvious (you find someone who's willing to buy it), you can intentionally start to build a sellable gym today.
Intentionality is critical, because without building the business with the intent to sell it one day, you will almost certainly build an un-sellable business.
Once you build a sellable business (see below) you can easily attract buyers or brokers if and when the time comes to sell.
Why Would Someone Buy My Gym?
Whenever I try to think of outcomes I want, I start with questions like this.
If the goal is to build a gym you can sell - why would someone buy?
There's generally two reasons why someone will buy a gym:
- They Don't Want To See Your Failing Gym Collapse
This scenario plays out when someone either hasn't intentionally built their gym to sell or when external circumstances put enough strain on the business that it can't sustain.
Obviously, this is not a good time to sell your gym and you will not be paid much (if anything) for it.
So my advice is to try to steer clear of this scenario.
- They Want To Buy Predictable Positive Cash Flow
In this scenario you're selling to a savvy business person who understands that buying predictable free cash flow is buying an asset.
Something that can generate money for them with or without their involvement.
If you can demonstrate that the business is able to run itself - without you or any other person who cannot be replaced, you can sell your gym for a decent multiplier over your net profit.
What Is Free Cash Flow? Net Profit?
In your world as a gym owner, net profit and free cash flow are the same.
It essentially means how much profit or free cash a business can generate annually.
How do I Calculate Net Profit?
There's two steps in calculating your net profit at your gym.
First, take your overall annual expenses and subtract out all salary, draw or owner benefit you or any other founders take.
This can include things like car payments, cell phones, lunches or other perks the company pays for.
We do this because the assumption is when you sell the gym, all those expenses will go away.
This will give you an adjusted annual expense number.
Then take your gross revenue (all the money you made in a year) and subtract out the adjusted annual expenses.
This will give you an adjusted net profit. Which you can use as the basis for your business valuation.
How Much is My Gym Worth?
Generally speaking - anything someone will pay for it. But if you want to maximize this number, you need to be able to justify it.
In the car world, this is something like Kelly's Blue Book or CarFax.
Selling a business is similar to selling a house - you can often use comparable sales with other houses or businesses that have sold in your area with similar characteristics.
That's easy in the housing world. It's also easy in the publicly traded world of the stock exchange.
However in the small business market, it's very tough - there's just not enough data out there to really create a clear picture.
Discounted Value of Future Cash
To start let's understand the concept of discounted future value of cash.
If I told you I'll give you $100 a month for the next 5 years - there's a certain value you would pay me for that today.
At the most, you'd pay $6,000, because that's the exact number of money you'll receive for it.
But intuition would tell you to pay me less. Because we all know that $6,000 today is worth more than $100 per month over 5 years.
You could invest that $6,000 or you could do other things with it today that have more value to you now.
Further, there's some risk involved. Maybe I stop paying you the $100 a month. Maybe $100 a month becomes worthless due to inflation.
This concept is called discounted cash flow. Money in hand today is worth more than money in the future.
Multiplier of Net Revenue
This is the easiest way for everyone to understand what your small business can be worth.
This is because it's normalizing your business for the one thing it's creating that is easily understood for value - money.
We know that our business is worth something because it can generate net profit every month in perpetuity.
However taking the discounted future cash value concept into play, we know it's not worth $1 for $1 forever.
A simple way to value a business while taking the discounted future value of cash into play is to simply pay a multiple over your annual net revenue.
Small Business Net Revenue Multipliers
This is a simplistic example assuming all of your revenue is based on recurring membership dues. If you have revenue from non-recurring sources like product/pro shop or private training, you might need to break out your earnings into categories and assign different multipliers on each category.
In small businesses like your gym, a typical multiplier is 2 to 3 times your annual net profit.
One reason why we can get decent valuations (2-3x is pretty decent for a small business) is because we have a concept called Recurring Revenue baked into our businesses. Recurring membership dues are valuable because they’re more guaranteed to be paid in the future than gym services you have to sell every time they are used.
If your gym does not sell memberships that auto recur, your multipliers would be different (likely much less like 0.5 - 1.0x revenue)
So if you determine your net profit (removing all owner pay, draw and benefit) is $100,000 per year - your business might be reasonably worth $200,000 to $300,000.
How does this make sense?
The buyer is basically saying "I'll pay you for this future value of money now and my breakeven point is year 2 or 3".
If they can preserve or grow the business past that point, they are profitable.
What If I Never Sell?
Even better. Why? Because you have now built a business around the concept of profitability.
And remember - to calculate your adjusted net profit, you will remove all benefit you pay yourself.
So if you can build a business where you’re taking home $6,000 a month, but also paying for your car lease and insurance as well as your cell phone bills other business expenses - you not only are building a business that’s sellable, but that’s taking care of your life needs along the way.
The number one reason I see gym owners fold it up and walk away (usually with next to nothing but memories) is because they didn’t build a business that was focused around paying them a living wage. It just takes one life event (unexpected baby, anyone?) to throw your whole world upside down.
Building a profitable business is a win-win for you and your clients at each step. Focus on doing that and you and your community will be rewarded for years to come.
Setting Your Intention Is The Key
To summarize, it’s not hard to build a gym worth selling. However, I don’t see many gym owners building a business with the intention of selling.
Start by analyzing your current situation and find ways to build in either owner benefit or profit into your business model.
As you grow your client base and your revenue build systems that automatically continue to stack profit into your business.
Start putting a focus and pride on your owner benefit and profit - it’s really the only metric that matters at the end of the day.