How to Buy a Gym Step by Step

Buying a gym can be one of the best business decisions you’ll ever make or one of the most expensive mistakes of your life.

In this episode of “Run a Profitable Gym,” Two-Brain Business CEO John Franklin and attorney Matthew Becker of Gym Lawyers PLLC walk you through exactly how to buy a gym without overpaying, buying a disaster or landing on legal landmines.

Matthew has handled over $50 million in gym transactions, and John has personally bought and sold five gyms in New York City.

In this step-by-step training, the pair break down:

• The formula for valuing a gym.
• Factors that impact the valuation.
• How to define and find the gym you’re looking for.
• The legal process for buying a gym.
• Options for financing a gym purchase.

Before you commit to a buy, check out this show and make sure you're setting yourself up for long-term success in the fitness industry.

Links

Free valuation calculator: "How to Buy a Gym"

"How to Value a Gym: SDE, Multiples and What a Gym Is Actually Worth"

Book a Call

Gym Lawyers Consultation

2:41 - How to value a gym

17:14 - Define your “buy box”

18:55 - The search

22:12 - Legal and financing

36:43 - The full playbook

Transcript

0:03

Buying a gym is either one of the best business decisions you'll ever make or one of the most expensive mistakes of your life. The gap between the two is what we're going to be covering today in our training, how to buy a gym step-by-step. I'm John Franklin, the CEO of Two Brain Business, the largest gym mentorship company on the planet. I've personally bought and sold five gyms in the New York City area. And with me today is my friend, Matt Becker, the head attorney at. Gym Lawyers. How are you doing, Matt? Thanks, John. I'm good. As you said, my name is Matthew Becker. I am the owner and lead attorney of Gym Lawyers PLLC. We are the leading legal compliance and transactional firm with a focus solely on the fitness business industry. At Gym Lawyers PLLC, we help gym owners with the legal compliance of their gyms. And also we help buyers and sellers of gyms get through the transactional process, which is why we're here today. And how much deal flow have you done? Oh, over the last four years, probably somewhere north of$50 million. Let's go. Oh, and the dream, why most people want to buy a gym, they see it as this path to riches, right? Maybe you're a gym owner, you want to buy that second location, your current location is doing like 10,000 a month, and you do the quick math. If you get a second location, you'll do 20,000 a month. Or maybe you're a owner operator, and you're tired of the owner making all the money. And you want to take over and make all the business decisions that you've wanted to do all along, but have been hamstrung. And it sounds so good on paper, but the reality is a lot of times you are buying headaches. And I'm sure you've seen that more than I have. Oh, 100%. People need to know what they're doing when they go in to buy a gym, especially the coach who thinks it looks really easy for the buyer or for the seller who's selling them the gym. And then they go from coach to owner, and it's a completely different ballgame. We're going to try and keep it tactical. I know we're going to talk about a lot of legal jargon, but we're going to show you how to value a gym. We're going to show you how to find off-market deals. We're going to show you how to finance a gym. And Matt is going to show you how to do it so you don't land on any legal landmines. So first, I want to talk about why buying is a great strategy if done well. With buying, you can go to the front of the line. You can skip the start, the five to 10 years of pain, going through the build-out process, finding the location, negotiating a lease with the landlord, scraping and clawing for those first 20, 30 members, hiring and training a good team. If someone did all that groundwork, you can have that from day one. The first thing you need to know as a buyer or a seller, and the most common question you probably get asked, and I get asked as well, is how do I value a gym? Yep. How do I know how much my gym is worth? And so the problem we see is there's usually a huge gap between what the seller wants and what the buyer wants. And a lot of sellers have this emotional attachment to their gym. And they want to get paid for the sweat equity they put in. They want to get paid for the awesome community. They want to get paid for the paint on the wall. But the sweat equity is worth nothing if that gym is not generating money for the owner. And so the basis of any good gym valuation is seller discretionary earnings or SDE. So Matt, walk us through what is SDE and how do you calculate it? So I guess from a broad perspective, SDE is every sort of financial benefit you receive from the business. So this may obviously be like your owner's salary or the additional profit that you take through a distribution or draw, but it's more than that because you might run yourself running through the business. You might run your car payment through the business. Your accountant might advise you to like hire your kids in order to reduce your taxable income. All of these are known as ad backs. You may run your medical insurance through the business as well. Somebody who comes in and buys your business, they may not run those expenses through the business. So that's going to be additional cash that gets added back. They're just going to go right into their pocket. And ad backs are more art than science. Yes. Okay. So what you paid yourself, that is a solid number. What the profit of the business is, we know that. The ad back thing is a negotiation. And if you are the buyer, you want that ad back number to be as small as possible. If you are the seller, you want that ad back number to be huge. And in ad backs, you mentioned car payment, phone payment, health insurance, but that can also include one-off expenses. Let's say you went through like a lawsuit that cost you $10,000. You put that in the ad back category. Let's say you sponsored a bunch of t-ball leagues that you didn't need to sponsor. You can put that back in there. You're paying your kids. Those are all things, thrown back into the ad back. And as the buyer, you want to negotiate them down as little as possible. Yes. You also have to watch if you're doing it from a buyer's perspective. There are ones that like if the seller bought a whole bunch of equipment last year, they may try to sneak that in as an ad back, but that's not. That's a depreciable business expense that doesn't qualify as an ad back. So you got to be careful. And that's why it's an art to know what can and shouldn't be added back. So let's put pen to paper here. Let's say an owner paid themselves$50,000. Mm-hmm. And then there was$50,000 in profit. Yep. And then the ad backs were $30,000. So those were all the things we mentioned. Right. The total seller's discretionary earnings would be$130,000 in that case. Yes. Right. And that's the baseline number we're going to use for valuing a gym. Right. Now, what do gyms typically trade at? So if you have$130,000 of SDE and you are buying a gym, what can you expect to pay for that? So now we're going to add a multiple, which is going to vary. And we're going to talk about why that might vary from, say, 1 to 2.5. You're going to multiply that multiple against just the SDE. And then you're going to take that number and you're going to add on your reasonable value of equipment. Reasonable value of equipment. So the starting point for that equipment is what you paid for all the equipment new. So let's say a gym has $50,000 of Rogue equipment. So that's what you paid Rogue to outfit your gym. Yep. A gym owner, like someone who is selling is going to be like, it's worth 90%. It's Rogue equipment. Yeah, right. But the reality is that's not what it's worth. How do you typically value equipment? What's like the ballpark range percentage-wise? So to get a ballpark range, take your equipment for anything that's over three years old, automatically reduce it to a third of its value of original purchase price. Okay. Anything less than three, you know, go somewhere in there, but much lower than 90%. Because unfortunately the equipment and, you know, functional fitness gyms, it gets beat up. It just doesn't hold its value. Let's put pen to paper again. So you have your gym with $130,000 of SDE. If it's on the lower end of valuation, you're going to get like a one X multiple. So you're literally taking the SDE and multiplying by one. So in that case, it's $130,000 plus the equipment. Let's say in this case, the equipment's worth 50,000. The value of that gym is going to be somewhere in the neighborhood of 180,000. If it's a good gym, like a great business, you're going to be closer to two and a half times seller discretionary earnings. So you're going to take that 130,000 and you're going to multiply it by two and a half. That's literally the multiple. And then you're going to add that equipment value, which will give you a total value of 380,000. Yes. That's a, that's a pretty big range. So we have to talk about what separates a one X multiple versus a two and a half X multiple. Yep. And there's a ton of factors. So of course we made a slide. Let's go through it quickly. So people understand the different things that impact the gym. And put it towards the lower end versus the higher end. Yep. So growth and churn, uh, obviously a gym that is shrinking is worth less than one that is growing. That's right. And for churn, we want to know if we're buying this gym, are the members going to be there in six months for two brain business? The industry benchmark is under 4% is awesome. Awesome. Four to 8% is going to be that okay range. You know, you're looking two X multiple there. And then if you're losing more than 8% a month, you have a retention. Yep. And that is going to be a lower value gym. Yep. Then we have owner involvement and staff. So how does owner involvement and staff impact the valuation map? So we want staff that's been around for a while and his is there and is able to handle the majority of day-to-day operations. That'll increase the multiple. And we want to owner that's very little, if at all involved in the day-to-day operations. We call that an owner operated gym. The more heavily owner operated it is the lower the multiple, the less owner operated is. The higher we can justify the multiple. So if you're a guy who's coaching every single class and opens and closes the gym and working 70 hours a week, it's going to be a lot less valuable than somebody who, you know, coaches the noon class and has a full-time GM in place. That's right. Yep. Okay. And then here's the big one, big asterisk. This is really important. I've been burned so many times here and Matt will talk about it. Matt, I've been burned so many times. I'm going to tell you what happened to me. Yep. And then you can extrapolate that, um, to the rest of the world. Okay. Cause I, I have hundreds of thousands of dollars. Okay, so one lease, I had a buyer. So someone came in and said, Hey, I want to buy it. And so I was like, great. And then I went to the landlord and said, Hey, I want to sell my gym. And he's like, that's fantastic. But the way the lease is written, I'm going to require a new lease with the buyer. And the rent is going to be 50% more than you're paying now. And so that becomes my problem and substantially impacts the valuation. Yes. So explain assignment. Okay. So an assignment is essentially the ability to bring in the buyer as an additional tenant onto your lease. You maintain liability as the current tenant through the remainder of the current lease term, but you get a second tenant. And that tenant or the buyer then gets to look at all of your lease terms and determine whether or not they like those lease terms. Unfortunately, as you said, most leases are going to require the landlord to give you permission to assign the lease to that buyer. And that gives the landlord the opportunity to say, sorry, John, I'm cutting your lease. I'm going to start a whole new one with the buyer, which creates volatility for the buyer and what those, these terms are actually going to be. The second time I got burnt, I had a gym that was towards the top end of the SDE multiple range. This was a well-run gym with a manager in place and I was absentee, but I was located in an area with a ton of development and the building was going to be developed at some point in the future. Yep. So my landlord was only willing to sign a one-year lease and it had a 30-day cancellation term in the lease and they weren't willing to wiggle on that. Yeah. And so while I could have got two to three times, two and a half to three times SDE in that location, I ended up having to sell for closer to one because the buyer didn't have the assurance that they were going to be able to run the business and pay back what they were investing into the gym. Right. So how does a lease term impact, uh, like, like how should a buyer be looking at? Well, that's a lot of volatility in that lease and we see this because we think from a buyer's perspective, we're like, oh cool, we're going to get into this whole redeveloped area and they're going to bring all these new people in and maybe they're going to be higher income so I can like get a higher income clientele. The problem is that landlord wants to be able to get people out so they can get rid of that building really quickly. And so you have to be careful on that from a buyer's perspective because if you go in and you spend 150, 250, $300,000 on this gym and then all of a sudden 60 days later you get a 30-day notice from the landlord to get out. You have literally no repercussions. The third time I got burnt is I didn't have a permit for one of the gyms that I wanted to sell. And so, uh, the landlord required me to get that permit before I sold and this was in. New York city where certain permits can take up to six to 12 months and so I didn't have six to 12 months. The buyer wanted to buy the gym now, so I had to give my landlord$150,000 to hold onto. While the person who bought the gym went out and got that permit and I had to have the good faith that the buyer was actually going to go execute or the landlord got to hold onto that money. Yeah. Okay. COVID happened and so that added an extra year where the landlord was holding onto my money on top of the six to 12 months that, you know, the permit would have otherwise taken to get. Yeah. So, uh, permitting, that's another one to consider. Um, is that common or is that just kind of like a weird New York thing? No, it is. So zoning and permitting are two local ordinances that we have to be considering. Concerned about as well. Zoning is going to say whether or not you can even run a gym in that space. And so sometimes we'll find out the location isn't zoned for a gym, even though the seller's been running in there for five years, which means at any point, building inspection could show up and shut the gym down. Permitting says, often times it's a certificate of occupancy saying you have to have a permit from the city in order to run that gym in the space. And again, if you don't, you're technically operating an illegal business. So you can have an awesome gym with a bad lease and get a terrible multiple, even though you did everything right as a business owner, except for sign the lease, which is probably like an afterthought when you were starting a gym because nobody starts a gym thinking about, I'm going to sell this one day and I should have the right assignment clause in there. Yeah. But if you work with Matt, you will. The final piece is type of buyer. So the type of person buying your gym is going to impact the valuation. What are the types of buyers? Yep. There's usually three. There's sort of like the person who you already know, say a coach or a member who's in your gym. They're more of the emotional buyer because they want that gym. They love the community. They want to continue it on after you, but they're going to give you bottom dollar. The second person is somebody in your community who may know about you, but there's not that emotional connection. So we'll give you sort of like middle dollar for it. And then there are the investor people who we all want to sell to. It just depends on how involved we are in the value of our gym. And those people are going to give us top dollar because they see the real value in your gym as a business itself. So that may be like a competitor looking to expand into your market or something along those lines. Yep. Awesome. And so based off of those factors, we can kind of guesstimate where the multiple is. Obviously you have a more robust process, but you know, we want to keep this light for you too. So if you're looking at one X, you probably have a bad lease or the owner's still doing everything. The person's essentially buying a job and you're going to get bottom dollar for that. Yep. If the owner is still somewhat involved, the lease is okay. Uh, you got, uh, systems ish in place. You're going to be in that like one and a half to two times SDE. And then if it's a rock in business where the new buyer can come in and start making money from day one, have staff systems, all those things, lease long-term runway to operate, they're going to be more towards the top in that two and a half plus times SDE. That's right. Yep. Awesome. Now we didn't mention what happens if a gym isn't profitable. You get it for free. That's awesome. Free gym. Actually you don't want a free gym. Uh, so, so what happens if a gym doesn't have a ton of SDE? In some sense, it kind of depends on who the buyer is, but in the other sense, it's basically a liquidation sale. Um, because there is still some value to that equipment. We just don't have any SDE to do a multiple of to add to the equipment. Yeah. So, uh, the SDE is multiplied by zero or zero multiplied by one is still zero. Yes. So zero profit, zero value. Your gym's location value of the equipment. And sometimes it's worth even less than that. Right. So there have been situations where I was approached by a franchise or who wanted me to assume locations that struggling franchisees were in. And these franchisees had put in like half a million dollars in build out and they were just like, take the keys. And I called this the lease liability trap. Yep. Why is it a trap? And why would someone give me a gym that has like $500,000 of build out for free? Because that lease most likely has what's called a personal guarantee. And that means that even though the seller had an LLC or a corporation that they use to sign on as the tenant, the landlord savvy to that. And they're going to go to the individual and say, you're going to sign a personal guarantee that says if your gym defaults on the lease in any capacity, I don't even have to sue your legal entity. I can just come straight after you directly. And so in this instance, they've got a failing gym and yet they're still stuck to this lease for who knows how many more years at how much per month as a personal debt. And if they can convince you to come in and I'll give you all of my equipment, I will give you all of this$500,000 worth of build out. All you have to do is assume the lease you take on the debt. I get to walk away, Scott free. I'm like, that's for cost benefit analysis that that lease probably would have cost me more than what I put into the gym to get it started for these higher end gyms. We're talking numbers like 300,$400,000. These are not amounts of money that gym owners have in their checking accounts. And so we're going to do a whole section on financing later in the training, but I do want to make a note here that premium gyms are easier to finance and that matters. Yep. Now some people like scrappy work. They like doing turnarounds. They want to get their hands dirty and you can make awesome money doing that. Right. But some people just want something that they can go into. They're willing to pay a higher multiple and just operate with less headache. Right now, which one is right for you matters on your specific situation, how much money you have, et cetera. So that's why it's important to set up what we call a buy box. And a buy box is just a set of criteria that says, Hey, for a gym to work for me, it has to check these boxes. And let's go through like two quick examples. Okay. So example number one would be like the premium gym. You know, if I was looking for a gym today, I'd want something, you know, 3000 square feet, 60 plus percent of the revenue comes from small group personal training. I want it close to my house. I want a long-term lease because I don't want to worry about moving and renegotiating and doing all these things. I want an awesome manager, an awesome coaches and awesome systems in place. Right. So that way I can just show up on day one and start making little operational changes. Now I want to see three years of consistent profit as well. I want to know that the gym has been profitable for a while. Right. I know I'm going to pay more for that, but that is my buy box. So when I go out to look, these are the things I want. But let's say like example two, maybe you're someone who wants to get your hands a little dirty. You know, you want to hit a home run. Maybe you're someone who wants to buy a struggling CrossFit in your area. Something like I want a CrossFit affiliate, 5,000 square feet. The SDE is under$50,000 because we talked about low SDE, low value. So maybe you're buying this for like equipment costs, maybe a little over equipment costs. Yep. And that way you can just show up, start operating, turn around the gym day one. Yeah. Another thing, maybe like a poor online presence, you know, bad Google reviews, bad staff, whatever. Um, something that's going to be a lot more work, but a lot cheaper, a lot of low hanging fruit to flip around. Yeah. And that is your buy box, but it's just important to identify that at the beginning. So you know what you are looking for. Exactly. So once we have our buy box set up, we move to phase two of the process, the actual search. Yep. How do we find a gym? And so most people will just go to biz, buy, sell and type gym for sale and look at the stuff there. And the reality is that stuff is really picked over or they'll go to like a Facebook group and try and find something in their market. But the reality is 80 to 90% of these deals happen off market. That's right. Why is that? Well, for one thing, the gym owner oftentimes doesn't want to say that they're selling because they know that once they do that, they risk losing coaches and they risk losing members. And all of their value is, or majority of their value is based on the membership. And they don't want to scare their members away when all of a sudden they're trying to sell their gym or their gym just isn't worth enough to put on the market because they're too involved as the owner operators and an investor who's going to be on those biz, buy, sell websites. They don't want to buy the job. They want to buy a book of business. So they're just not going to be interested in that gym. And the reality is around 50% of gym owners are just amenable to a sale, right? If someone just asks them, they'd say like, yeah, they don't want to go through the process of listing it and finding a buyer and getting ready for purchase. And some of the businesses are just too small to go through like traditional channels. We create this publication every year called the state of the industry, where we get data from large gym management software providers, along with our own two brain data set. And we asked them like, Hey, would you be open to selling your gym? And I think 46.9% of gym owners, 50% would consider selling. So, um, that's why it's important to establish that buy box and just search yourself like, Hey, this one looks good. This one looks good. And just make a list of things that, um, you know, this gym would fit my criteria. And once you do that, it's just as simple as like sending the owner an email. This is the one I use for every one of my deals. I would just do the headline interested in selling. And then I'd say, Hey Matt, I'm John. I'm buying gyms in the Philadelphia area. Your gym looks like it meets my criteria. Would you be interested in selling? Yeah. And most of the time they're going to say yes. And some people are going to say like, Hey, I don't want to reach out to my competitors to see if they're interested in selling. That feels a little weird. Can't feel weird. What, what can I do in a situation like that? We actually do this for individuals and gym owners, um, who may just, it's kind of like brokering, um, who may just want us to reach out to those gyms and say, if you're ever interested in selling, let me know. I have an interested buyer and it does work. And so at that point, you know, you're going to send 10 emails. Five people are going to say yes. And we're going to move on to the dating phase. That's right. So we're going to get them on a call. And on that first call, we just have two objectives. The first one is to make sure the owner likes you. Yep. Right. Cause you're going to be working together. You're going be negotiating. It's a drawn out process, right? From this point to the close, we're looking three, four months, maybe at least. Yep. And you're going to go to battle. Lawyer's going to lawyer. All right. And so building rapport is that first step. The second step is just making sure the gym actually fits your buy box. So just asking these high level questions. Hey, how many members do you have? How much of your revenue comes from this thing? What does your top line look like? What does your churn look like? Yeah. And most of the time, the gym owner isn't going to know the exact numbers. Right. Um, and so once we have our, um, you know, punch list, right. Maybe two or three meet the criteria and we want to move to the next phase. That's right. We get Matt involved and we want to look at the actual data, right? Because you can tell me you have 200 members and you make$20,000 a month in profit, but most of the time that that may or may not be true. It's not that they're lying to you. They may just not know their numbers. Sure. And so we need a legal document at this phase. So what is the first legal document in this journey called? So now we want to look at some of the information from the gym to see, to start to get some of the financials in order to do that. We're going to have to tell the seller, like, look, we want to see some personal information, but we won't tell anybody. And in order to do that legally, we present them with a non-disclosure agreement. And that's essentially just the agreement that I say, Hey, John, I need to see tax returns and you see PNLs, whatever, whatever, whatever. Um, and I can tell you exactly, here we go. We want to see three years of tax returns. I want to see three years of PNLs, a trailing 12 months, some balance sheets, some churn rates, a copy of your lease. I promised you this legal document. I will not share this with anybody other than my professionals, your, maybe your CPA and your, your legal counsel. So once you look at that, you get a rough idea of what's actually happening under the hood, and then it becomes time for another legal document. This is called the letter of intent or the LOI. And so what goes into this? So a couple of primary things. This is where we put all of our cards out on the table in the beginning to say, this is the purchase price I think I want to give you. Maybe this is how I'm going to pay for it. Maybe this is the type of sale, which we'll talk about in a little bit. And these are all the conditions that we have to meet in order to get from where we are now to me actually buying your gym. And we put it out on the table. And if the seller won't sign it, then we know this thing's dead in the water. There's not even a point to go on to the next phase, but if they will sell it, cool. Or if they'll sign it, then great. We now at least have a commitment to move on to the next phase. And when you say commitment, that doesn't mean it's binding. That's right. If you're the buyer and you sign an LOI, it doesn't mean you have to buy it. Usually you can walk away, right? Because during this time, we move to the next phase, which is due diligence. So you are confirming the confirmation of the confirmation during this due diligence phase. And we need more professionals for that. So what are we doing here? Yeah. So this is the buyer's opportunity to look under the hood and in the closets of everything for the seller. We can look at deeper dive into the financials. We can start to ask for more churn reports, other reports from like their client management software. We can start to look at permits like you had with your issues, liens, which I can discuss a little bit more in a minute. We can start to look at lawsuits that might be pending out there. All of these problems. The number one problem for buyers is they try to truncate this or could skip it completely because it's so it's like onerous at times. And that's where, you know, these bombshells or landmines pop up after closings because we didn't do our due diligence. Trust, but verify is the name of the game here, right? Because it, you know, it's another gym owner. Like you're going to have rapport. You're going to like them. Hey, Hey, I trust Steve, you know, of course he's got, you know, 200 members. It says it in a kilo that he's got 200 members, but 50 of those may not be paying, you know, you don't know. So, you know, on the flip side, you want to be walking the actual space. This is a time where you may want to be talking to staff if the owner feels comfortable with that. And you just want to be looking at all the different parts of the business that you as a gym owner want you on the lawyer side. Well, you want a CPA to look at all the financials and then on the lawyer side, talk through liens and how that might hold up a deal. Sure. So these are big deals right now because we're still kind of coming out of COVID when people had EIDL loans and PPP loans and SBA loans, and you may have an equipment loan or something else. And whenever you have that creditor, that creditor can then file a piece of paper with your state that says, John owes me money. And in order to make sure that John pays me, I'm going to put a lien on all of John's gym equipment and memberships and accounts receivable, accounts payable, and everything of value. And if John, if you ever want to get rid of all that, sell it in an asset sale, you have to pay me first. And so from the buyer's perspective, if we never check this and the buyer goes and gives you$200,000 for your gym and you default on that SBA loan or the other loan, they can come and they can take all of the equipment back from the buyer, all of the memberships and everything, all those assets back from the buyer and the buyer can't do anything about it. And this is super common because of all the COVID loans that happened. Yep. Right. And a lot of gym owners may not know that they probably don't even have a lien out there. They may know they have a loan, but they don't know they have a lien. And that's why it's important to work with a lawyer who has experience in the gym space. Like don't hire your cousin who's a divorce attorney. Like these are where the skeletons in the closet are hiding. You want someone who knows where to look. Now, while you're doing all this legal diligence, you got to figure out how you're going to pay for this thing. Right. And so, um, for these gyms that are struggling, right. Uh, I think 500,000 is kind of the benchmark, the cheaper gyms, right? Most of the time, it's going to be some form of seller financing, maybe a line of credit from your existing business. Are you personally, if you don't have a business or you're going to get money from the three F's friends, family, and fools. Fools. Now let's talk about seller financing, that's such a huge part in some of these smaller deals. Explain what seller financing is and how these terms work. And if you're a buyer or if you're a seller, what you should expect here. Okay. So seller financing is basically saying that the seller is going to allow the buyer to pay out installments over a period of time. It's kind of like a loan without getting the actual money from the loan. So I agree where I'm going to buy your gym for $200,000. I only have$50,000 cash. I give you that 50,000 and you agree to allow me to pay the other 150 out over, say, five years, 60 months, monthly installment payments with some kind of an interest rate. It's very risky on the part of the seller. But unfortunately, like you said, for those gyms that are sub $500,000, they're typically selling to somebody who doesn't have a lot of cash, probably doesn't have a lot of credit, can't get a loan. And so that's oftentimes the only option for that seller. And what percentage of the deals that you do have some form of seller financing? I'd say easily 60% of those deals that are under$500,000. And what percent of the purchase price is usually seller financed? Probably, again, somewhere upwards of around 60% to 70%. Now, this is where the premium comes in, talking about a good gym, because there's an organization called the SBA in the US, and their job is to help people buy small businesses. They exist for stuff like this. And you can get what's called a 7A loan that is going to allow you to finance the purchase of a larger gym that has stable cashflow over a longer period of time. To qualify for this, you need a 650 credit score. The gym needs two years of strong operating profit. You need industry expertise and you have to personally guarantee it, which means you're on the hook if you don't pay this, right? So you just can't shut your business down. They're going to go, the SBA is going to go. They'll come after you eventually. Okay. And so what this might look like is let's say I'm going to buy your gym mat for $300,000. The SBA is going to want 10 to 20% down. So 30 to 60,000, 10 to 20% of that purchase price. And then they're going to finance the remaining portion. Okay. And let's talk about why this is useful. And there are all types of calculators to do this. You can Google SBA loan calculator to figure out the specifics of your deal. But, uh, let's say I have 20% to put down in this deal. Let's say I have 60,000 in my pocket. I'm going to pay you that 60,000. The SBA is going to loan me the other 200, and 40,000. Uh, I was off by 10,000. So, uh, 50 to 50. Now they're going to do that over 10 years at an interest rate. Um, at the time of filming, it's going to be somewhere in the neighborhood of, you know, seven to let's say eight and a half somewhere in there. Yeah. And so what that might look like is on your$240,000 loan, uh, you're going to make a monthly payment of just over $2,800. So let's say, you know, in the case of a gym that you're buying for 300,000, you can expect profit to be somewhere in the neighborhood of, you know, a hundred to 150,000, right? That's not unreasonable here. So if you have that a hundred to 150,000, you're going to pay your 2,800 a month to the SBA to fulfill your loan requirement and you get a pocket, the rest, right? I'll get the rest. Yeah. And that's awesome. And that's why we talk about if you do this, right, this can be an incredible strategy because you get to skip the line. You can be in a position where you're just paying off that loan, but everything else goes in your pocket. If you're someone who's buying, right, you can make six figures as a gym owner out of the gate, right out of the gate. And you're also going to pay this off over 10 years versus seller financing. I've never had a seller agree to financing anything over seven years and seven years as a unicorn. They usually want their money in somewhere between four to five years. So while you're taking a little more risk, you're buying a more stable business and you're making a smaller loan payment. So it's actually leading to a better lifestyle if you do it right. Now, we know how to pay for the gym. We got the gym we want. We have it under LOI. I'm getting excited. Now we're moving to the most fun phase, which is legal execution. All right. So this is going to be where now what we call the definitive purchase paperwork comes into place. We're getting toward the end of that due diligence. And now we're going to say all the attorneys are going to get excited and we're going to come to the table and we're going to, the buyer typically presents the asset purchase agreement or the stock purchase agreement and a couple of other ancillary documents that go along with it. We would have decided back at the LOI phase, whether this is a stock sale or an asset sale. So you're selling me the gym and you're selling me the gym through your corporation or your LLC. If I buy your corporation or LLC, that's a stock sale. I'm literally buying the stock of your legal entity. In the fitness industry, we don't typically do that. I just buy the assets of your gym with my own LLC, which is going to be the equipment, the memberships, and if I want it, your branding. So typically in the fitness industry, we do an asset purchase and there's only rare instances in which we would do a stock purchase, but that's going to dictate what type of purchase agreement we all negotiate over. And what would be a reason why as a seller, you would want to sell your LLC versus, you know, just the carcass? Yep. So the, from a seller's perspective, if it is going to be a very heavily seller financed transaction, and the seller is really nervous about seller financing, we would almost push the buyer to make this a stock purchase because then it becomes super turnkey. If there's a problem and the buyer starts to default on the payments, the seller just goes in and takes back the LLC. We didn't change the bank account. We didn't, you know, change over who owns the equipment. We didn't change the client management software, who got paid. We didn't have to do a lot with changing any of the contracts for the membership agreements, the liability waivers, and everything else. I just, I took you out of the. LLC. You put me in, and it's much easier for the seller to take that back. And it's also faster for the buyer, right? Because he doesn't have to make all these new legal entities and register with all the government agencies, et cetera. Like they're just rocking and rolling. Yep. That would be the only reason really a seller would, one of the only reasons a buyer would consider a stock purchase. We're making it sound good, but it's really rare. What percentage of your purchases are asset purchases? Oh my God. Oh, asset purchases. Let's say 98%. Okay. So, so just to be clear, it's way more common. The reason for that is there's, you know, there's always a catch, right? And that is liability. So if you are taking over the stock, you are responsible for the liability. So give me an example of how this could go back. Yep. So, um, I'm a member of your gym and I come in today and I hurt myself. I didn't tell anybody. I just hurt myself, fell off a box, jump, wrenched my back on a deadlift, something like that. And then three months later, you sell your gym to somebody. And then a month later, I finished rehab. You stock sold to somebody and I sue the gym. The new buyer just absorbed that lawsuit that took place prior to them even owning the gym because they, through the stock sale, they bought all of the liabilities as well. It's called the tale of liability. And it's going to last for somewhere between two to three years post-closing, depending on your state's statute of limitations for personal injury. So I could be fighting a lawsuit for something that happened when I didn't own the gym. Yep. Wasn't even your fault. And that's why it's almost always asset purchases versus stock purchases. Correct. Purchase. And so again, that's usually decided in the LOI phase. We just want to talk about it here because it's a little dense and legal. What else is happening during this process as we're figuring out the definitive purchase agreement, like as we're trying to get this deal to the finish line? Yep. So these are the agreements. Remember we talked about the LOI was all non-binding. Well, now we're going to solidify all those terms in the purchase agreement. So now we can't back away. If you're going to offer$300,000 and we put that in the purchase agreement and you sign it, it's $300,000. This brings everything to literally a closing. There are sections within the purchase agreement that are going to protect the buyer post-closing. They're called representations and warranties for the legal jargon, but it's basically you as the seller. These are all the guarantees that you made me while I was going through due diligence or while you were convincing me to buy your gym that I don't want to find out post-closing. You were either lying or you didn't fully give me the truth. Maybe you didn't know. Okay. I know it's the same thing, lying, but maybe you just didn't know. Okay. And so that we cover that in the purchase agreement so that there's no surprises or if there is a surprise, I have a fraudulent misrepresentation lawsuit against you, which is a really bad lawsuit as a seller you don't want to handle. The other thing we do is through what are called indemnifications is let's talk about that situation again, where the guy gets hurt in your gym. Even if I buy just the assets of your gym, the person who got hurt doesn't know that. All they see is such and such gym name that I just absorbed, bought the assets for, they're still going to sue me. And I'm going to absorb a whole bunch of costs defending against that lawsuit. That's not my issue. So I'm going to be able to pull you in to indemnify or hold me harmless from all the financial issues that come for defending that lawsuit. And to give the listeners an idea of the sheer amount of lawyering going on in this phase. So NDA is usually like one page, right? Sure. Okay. And then the LOI is usually how many pages? Let's say three to five. Three to five pages. Okay. And then the asset purchase agreement. So this is the binding one. How many pages is this? If we're lucky, only 20. Okay. But if we're not lucky? Oh gosh. 50, 60, a hundred. This is where Matt makes his money. This is Matt's favorite phase of the process. It will be your least favorite phase, gym owner. Okay. So the name of this training is how to buy a gym step-by-step. So let's review. So we want to build our buy box. We need to understand how to value a gym as well. From there, we're going to start the search based off of what's in our buy box. And we're going to identify locations that may potentially meet the buy box. Then we're going to date. We're going to do that first call and make sure that it's actually in our buy box and this is a location we want to pursue. Then it's time for the heavy lawyering. We got the LOI. That's where you come in. It's usually LOI to start of drafting purchase agreement. How long does that usually take? Say 45 to 60 days. 45 to 60 days. Then once that's done, and usually due diligence is happening in that period. That's right. That's when you're peeking under the hood, doing all that stuff. Then from there to when you actually sign the purchase agreement, how long does that usually take? Let's say two weeks to four weeks. You're looking around four months end to end here, right? Even if things are going well, maybe three? Sure. Yeah, sure. This is where we get to lawyers like, it depends because there are so many factors that come into play during this. It's really hard to give anybody estimates, but those are as much of estimates as I could give. Then phase five, the clean and close. Once you sign that agreement, it's done. You own the gym? Yes, that is it. Technically speaking, you own the gym. You're now making payments to the salary, making payments to the SBA, or you paid cash. Now it's just your job to make sure that this gym continues on and supports you and makes you tons and tons of money. That's when you talk to Two Brain. You get yourself a mentor because we just talked about a ton of landmines that can happen during this process, but there's a whole new set of landmines that happen once you actually start operating the business. You need a professional to tell you how to do it through mentorship. Yeah. We said this in the beginning of the training. I'm going to say it at the end. The most expensive mistakes happen during this process. The most expensive mistakes are ones you do not see coming. Some little slip up here can be 100 times more expensive than what it would cost to just get professional help. If this was helpful for you and you are ready to buy a gym, or if you are ready to sell a gym, what I want you to do is take out your phone and take a picture of that QR code on the right. It's going to take you to Matt's website. From there, you're just going to fill out a form. You'll see his calendar and you can book a consultation with him. Are you charging for that thing? Nope. It's a free consultation. And then when they sign, Matt, where are you sending them? And so right as we get close to signing the documents, I'm going to send you back over to scan the QR code on the left, and you're going to talk to a member of John's team, and they're going to set you up with a to make sure that you do everything that you can to make that gym as profitable as it can be for the longterm. Guys, thanks for watching. And Matt, thank you for giving everybody a free consultation and putting money in their pocket and helping people avoid expensive mistakes. I cannot stress this enough. Do not use chat GPT during this process. This is not where you want to save a little bit of money. If you are going to buy a gym, you want to do it the right way. And as we showed, This can be one of the most rewarding financial decisions you make in your career, or this can cause absolute financial destruction. So make the right move, book a call with Matt's team. And if you want to help grow in your gym, talk to somebody at Two Break.