At The Fitness CPA, we have seen many successful fitness studios. We have also seen mediocre and bankrupt fitness studios. In fact, you’ve probably seen examples of each as well.
So, what are the risks and perceived rewards of owning a fitness studio?
Risks come in all shapes and sizes.
If you’ve invested all of your own money and have not taken on debt, your risk is everything you’ve invested (likely a couple to a few hundred thousand or even more than a million dollars).
But that’s not all. Here are a few of the potential risks:
1. In all commercial leases, there is a personal lease guarantee.
(Okay, In 12 years I did see one lease without a guarantee and it was a clerical oversight.)
A lease guarantee is where you, the tenant, are contractually and legally obligated to pay the landlord rent every month. If the business has a cash shortage, guess who pays the rent? You do – from your own personal bank account or savings. If the business closes, guess who is on the hook for the rent for the entire term of the lease? You are.
As you can imagine, this could amount to several hundred thousand dollars. And just like it sounds, a personal guarantee puts your personal assets on the table to satisfy the landlord. This includes your car, home, and they can even garnish your future earnings.
2. If you’ve only put down a portion of the money required to open your fitness business, as many owners do, you’ve likely leveraged debt.
Debt comes in many forms, but, regardless of the type of debt, it also comes with a personal guarantee. Just like the personal guarantee, you, the borrower, have pledged all of your personal assets to make the monthly loan payments.
3. Your business is just mediocre (perhaps one of the most painful risks).
If your business can pay its bills, pay rent and shuffle along each month, you now have a large capital investment that isn’t producing a return on investment.It’s great to pay your bills, but you can’t just close your business since you are on the hook for the lease guarantee mentioned above.
And the business also requires your continued involvement, which stinks, because you’re continuing to invest your efforts without any return on your investment. But, at least you don’t have to file for bankruptcy. Mediocrity typically goes on until the end of the lease term or, if you’re lucky, you can find a buyer who will purchase the business from you because they believe they can do better at the business than you.
4. Your business is costing you opportunities (an often uncalculated risk).
What else could you be pursuing with your time, energy and efforts? Did you leave a well- paying job? Do you have other businesses that will receive less of your time? Did you miss the uptick of the real estate or stock market while your funds were invested in the fitness business? What about your family?
You might find yourself working late nights and early mornings while your spouse asks what time you’ll be home for dinner and your children ask if you’ll be home in time to read a bedtime story.
5. Your business failed ( the intangible risk that weighs heavily on the conscience).
We are only human and faltering, or perhaps even outright failing at something, is a burden to carry. Sure lessons learned carry great value, but have you ever made a bad investment before? How did you feel after and do you still think about it?
Rewards come in two flavors: money and meaning.
1. Money is easy.
Money is the profit a business produces for its owners. Sometimes the profits are enough to pay you, the business owner, a decent salary. Sometimes the profits are significant. While not typical, I’ve seen fitness studio owners make up to $50,000/month – that’s more money than many people make in a year! More typically fitness studios will generate $50,000-300,000/year for its owners and investors.
2. Meaning is less quantifiable but immensely important to most business owners.
Meaning is strongly rooted in the core of the entrepreneur (see our post on The Fitness Entrepreneur). Meaning comes from providing a service to your community that solves a problem that keeps you up at night and your members love that you solve.
It’s the mindfulness of a members yoga practice that reduces anxiety, the healthy image the fit parent can carry into middle age, the functional aging of an octogenarian, the comradery and fellowship among members that your business brings to the community around you. Meaning also, the recognition you have at the coffee shop or at church as an admirably purposeful business owner – your identity is rooted in your business and your members. You are respected, trusted and sought after. You are your fitness business.
No one ever said owning a business was easy. In fact, it’s really hard. But it’s also incredibly amazing.
If you’re interested in taking the risk and the rewards that come with it and would like to partner with a Fitness CPA who can help you make good decisions from the start, talk with us.