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FitLife
06-02-2013, 01:02 PM
New to the forum, but have found some great posts!

Here is our history and questions:

We currently own a fitness training studio in Arizona (two of us 50/50) The place is doing very well, people really like what we do, and it is very well branded in our area, and we have a great product and great customer service. We have been in business for close to 5 years. We have two people really interested in investing with us (a client, and a trainer) to open a second location in our area (7-9 miles distance in a different city). We would only like to choose one of them since the investment isn't much ($75,000). My first question is what % should we offer to them in return if they are interested in becoming a partner? What would be the smarter way to pay them? Or should we just ask for a loan? But what if it is too much in bills and everything if we ask for a loan from them? What would be best for us too?

Our current business currently generates close to $600,000 per year with our current business model (very easily to duplicate with our systems). We are confident that we can generate $500,000 by implementing our model and systems in new locations. We are at about 15% profit after paying ourselves as trainers per hour on the job and trying to improve those margins.

Like I said we have been going for almost 5 years in our business, but this finding an investor or lender gig is a whole different lion. I can really use your help.

Thank you ALL in advance!

MyITGuy
06-02-2013, 02:42 PM
You have 15% profit on 600K per year which is 90K...so why do you need an investor who is only going to be covering a part of, or full amount of 75K start up costs for another location?

As an alternative, have you considered franchising your business name/model/support?

FitLife
06-02-2013, 03:09 PM
You have 15% profit on 600K per year which is 90K...so why do you need an investor who is only going to be covering a part of, or full amount of 75K start up costs for another location?

As an alternative, have you considered franchising your business name/model/support?

Thank you for your quick reply, part of that 15% profit is our salary. About 70K split 50/50. Therefore we don't have the cash to do it ourselves.

We have thought about the possibility of franchising, just don't know enough about the subject.

Harold Mansfield
06-03-2013, 09:26 AM
As an alternative, have you considered franchising your business name/model/support?

I was thinking this also.

Look at it this way, between taking a partner, taking a loan or franchising the business...you are still going to have to learn something new, do some reading, and possibly consult an attorney to execute either one. May as well roll up your sleeves and consider all of the options.

MyITGuy
06-03-2013, 02:30 PM
Thank you for your quick reply, part of that 15% profit is our salary. About 70K split 50/50. Therefore we don't have the cash to do it ourselves.
My apologies, I interpreted "We are at about 15% profit after paying ourselves" meaning 15% remaining after ALL expenses (including your own salaries).

Personally, I would suggest you find ways to reduce your operating expenses to maximize your revenue/margins before opening another location with the involvement of a partner/franchisee or investing your own money. A 35-70K salary on a 500K+ gross business income just doesn't seem right. A 15% profit isn't bad per se, if it was after you paid yourselves a reasonable salary...but considering this amount is your salary then you need to improve this amount before expanding IMO, otherwise the inefficiencies or bad spending/management habits will follow.

FitLife
06-03-2013, 11:46 PM
My apologies, I interpreted "We are at about 15% profit after paying ourselves" meaning 15% remaining after ALL expenses (including your own salaries).

Personally, I would suggest you find ways to reduce your operating expenses to maximize your revenue/margins before opening another location with the involvement of a partner/franchisee or investing your own money. A 35-70K salary on a 500K+ gross business income just doesn't seem right. A 15% profit isn't bad per se, if it was after you paid yourselves a reasonable salary...but considering this amount is your salary then you need to improve this amount before expanding IMO, otherwise the inefficiencies or bad spending/management habits will follow.

Great advice! It does not seem right I know. We have gotten more creative within our business and margins on 2013...the 15%is from 2012. We are definetly doing better this year. I agree with you to make that a priority. I will keep you guys updated on it. Thanks again to both of you!

Business magnate
06-04-2013, 04:33 PM
Well, I don't know much about fitness business. So take my words with a grain of salt. In your place I would consider (as already mentioned) franchising. If you found a successful business model, you could get many partners for that kind of operation.

Some of the biggest food chains and many other businesses are franchises. Also, it is by far, the fastest way to earn a lot of money. Look at Ray Kroc, for example. In the period from 1955 to 1960, he had 228 restaurants in operation.

Paul
06-06-2013, 11:39 PM
I agree.

I’ve “franchised” businesses myself and have helped others. So here are a few comments. Don’t be afraid to franchise. Many, many small businesses have followed that path.

Assuming all the “business” aspects are in place, successful model, etc. the actual steps to becoming a franchise are very standard and not nearly as difficult as you may think. I won’t bore you with all the details but its all very boilerplate. The process may seem complicated, but in reality it’s a standard format that is just tedious.

Becoming a franchisor is NOT that hard. The hard part is marketing the franchise opportunity if it’s just a run of the mill kind of business. But, if you have a successful model, which it sounds like you do, the marketing can be fairly easy.

You will need around $ 25,000 for the legal part to become a franchise. Depending on how many states you want to franchise in the cost can be more or less. You'll also need some marketing money.

The nice parts of franchising are that the initial franchise fee can support your marketing efforts and the residual royalties obviously become a nice income stream.

You’ll need one person who can close the franchise sales. That can be either an employee or contracted sales person.

One bit of advice! Don’t contract with any of the national franchising companies. They charge you about 4 or 5 times what it should cost and never actually sell anything for you.

phanio
06-08-2013, 08:18 AM
Right - exactly the questions I would have! Why do you need an investor in the first place or why not franchise?
Regarding the percentage of the investment. It is all about pre- and post-money. If your business is worth $500,000 and after the investment it is worth $575,000 - then that percentage is about 15%. You just have to negotiate with the investor on the pre-value of the business as well as if they are going to get a piece of the first location or just invest in the second location.

FitLife
06-10-2013, 09:25 AM
Thanks everyone, we will give you an update on what is going on in the next few days. We are definitely including franchising into our vision and future.

Business Attorney
06-10-2013, 02:56 PM
You have received a number of good Suggestions. I would just add that you should consider all your alternatives carefully before going down any particular path.

First, I agree strongly with MyITGuy when he says you need to get your expenses in line before you think about expanding. Do both of you work in the business full-time? What is a reasonable salary for the work the two of you do? How much of the $600,000 is really "profit" after you pay yourselves a reasonable salary? You cannot even start think about taking on investor or franchising your business until your numbers are firm.

With respect to franchising, it is an excellent way for some businesses to grow. In some circumstances, however, there are better solutions. One question is the degree of control you want to maintain over the other location or locations. While you can build a lot of restrictions and requirements into the franchise agreement (and believe me, franchise owners such as McDonald's do just that), the bottom line is that the franchisee owns that business and can make decisions that you don't agree with. You do not have absolute control.

Another issue with franchises is that your percentage of the revenues of the franchisee's business is typically a fairly low number. Although your total revenue goes up as the revenues of the franchisee go up, if the franchisee is phenomenally successful, you will participate only marginally in that success.

Finally, there is a fairly substantial cost, both in your time and in legal and accounting fees, to create a franchise system that complies with the applicable laws. If you plan on expanding to a number of new locations, the cost of creating a franchise system can be amortized over the entire network you are creating. If you are only considering a single additional location, the cost of franchising may not be justified.

Another alternative in your situation may be to set up the new location as a separate entity in which your investor would participate with you and your partner. The new entity would receive a license to use the name and system from your current business but would not have any rights to the profit of the first location, nor to any rights in any subsequent locations or in any franchise arrangement.

In any event, your choices present a number of legal and tax complications, so you really need the involvement of good professional advisors including your lawyer and your accountant.