Originally Posted: 08/05/09
Sometimes the clients bring me back to the simple issues that help drive success in a fitness business.
This week I was talking to a guy who is trying to buy an existing fitness business. The club he wants is in a southern state and has been in business for a number of years.
The client does not have fitness business experience but is an experienced businessperson who also has some real estate. He surprised me with his thought process in that he had already figured out many of the cash flow questions, understood debt, calculated the free cash he would have after the current owner stopped running everything through the business, including payments for the dog house in his yard, and in general was able to analyze the business that you can only do when you have real life business experience.
The big thing he missed, however, was the receivable base. The current owner is collecting his own receivables, which for most owners is a foolish choice. Collecting your own memberships means that you now have to create a separate business within your business to manage, but most fitness owners don't have the skill set to manage a full blown and effective payment servicing /collection department.
There is also the issue of waste when you collect your own memberships. Most in-house collection situations usually cream their own memberships, which means you easily collect the money from the good people but take a higher level of loss from people that you should have collected from over time.
There are three classes of clients that affect how much you really get from the memberships you sell. I think they group like this:
• The top 60 percent, who pay no matter what you do because they are good, honest people, who keep their word and pay their bills on time. These are the ones that are easy to collect and are also the ones where low-end third party financial service companies make their money. These are easy and if you don't want to work hard you collect these memberships first and then send everything else back to the club to handle
• The next 30 percent are the members who have to be taught to pay. This group can go either way, test you when they can, and will pay you less often if they can get away with it. This is also where a high-end third-party financial service company, such as ASF out of Denver, the largest company of its kind in the world, earns it money.
The members in this category can be taught to be good payers if they are approached aggressively early if they have issues. In other words, some young knucklehead doesn't pay on time, gets called immediately and he has now learned that he can't get away with that. This is the group where a good service company can make your club but it is also the group where the do-it-yourself guys at the club level get beaten so badly because they aren't aggressive enough or timely enough to get the job done. Collecting from this group take advanced systems and one old lady sitting in an office pounding your members just can't get it done.
• The bottom 10 percent is the chronic never pays and need to be beaten just for principle. If you use 12-month contracts, coupled with a third-party service company that is good, you can keep these loses in this category to 10 percent or less of your total outstanding, or less than a point per month of loss. This is a good number you can live with, but keep in mind that if you are driven to do it yourself, this number will be higher because people from the category above will drift down because they have never been taught to be good payers from the start. Remember, it's like getting a dog. If you teach the dog right from the beginning you end up with a good, well-trained member of the family. Wait too long and it is hard to correct mistakes, such as eating your shoes or peeing on your carpet. Start early and train correctly and you will get more money from the same amount of sales.
Collecting your own memberships also raises the question at time of sale of the club as to how good is this paper and how much will I collect if I take over the business? I have only seen a hand full of embezzlements over the years in this business but every single one was from a person who collected the club's membership payments. Collecting a large number of payments and running a large amount of cash through the business daily is just an invitation to take the money and run, especially when you are totally dependent on just one person collecting your money rather than a specialist that has many safeguards in place.
We usually coach new owners to expect at least 20 percent less per month than they think they will receive when they take over. Most existing owners just turn out to be wrong in what they think they are collecting from their membership and the new owner will be the one to take the beating. Another factor is most sellers sabotage the new owner by cashing out a lot of members on the way out the door to increase portable cash, which will drop the monthly return from the receivable base.
Another interesting question from the new buyer was, "How can you help me?”
This sort of goes back to the point in the last blog of using a business coach, but the issue here is that most owners don't know what they don't know.
I was sitting in a doctor's exam room recently for a routine visit and the doctor asked me what I do for a living. I told him that I am a business consultant. He kind of laughed and asked me what that really meant. I answered that I tell people things they don't want to hear about the businesses they own.
His response was, "Well, what do you see here?” It was just too easy. First of all, the exam rooms are painted a yucky yellow including all the walls and even the counters and cabinets. This makes the room feel really claustrophobic and I guessed that his older patients would fee really uncomfortable in this room.
I also pointed out the open wastebasket (low-end and unprofessional and actually disgusting too) and how he could fix his entry area to service more people, dress his staff better to give the image of professionals, and that his customer service sucked since no one on his staff of 50 or so ever acknowledged you as you passed room-to-room. It's what I have done for a living for 30 years and sometimes you just can't turn it off.
Good coaches find the flaws in your business but most owners don't want to really hear it. It's sort of answering the questions, "Does this dress make my butt look fat?” If you are married, and want to stay that way, you always answer, "No, I really love that color honey.” If you are a consultant by trade, however, you answer, "No, that dress doesn't make your butt look fat, it's your fat butt that makes your butt look fat.” This is also probably why most consultants are single and drink a lot alone.
Coaches find the flaws and show you how to fix them appropriately for your business, location, time of your career and competition. There is never one answer that can apply to every club. There are rules to start with, many of which I might have wrote, but even these might have to be broken depending on the situation. There are exceptions, but always remember that good business is good business no matter where you live and work.
Next stop-Chicago: Come see us this month in Chicago (the regular NFBA workshop) or in Nashville next month. Get you butts moving and be aggressive in the fall. Now is the time to make some money.