Eric Killian is a Certified Public Accountant and the founder of The Fitness CPA, an accountancy firm specializing in finance for fitness businesses, based in Colorado.
Eric talks to us about taking stock of where your business is right now, explains the types of government assistance still available, and explores the difficult financial decisions you may have to make due to COVID-19.
Episode Link
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Transcript
Kevin: How is it going everyone and welcome to The Fitness Founders Podcast. I’m Kevin Mannion, VP Marketing here at Glofox. This week we talk to Eric Killian, a Certified Public Accountant and founder of The Fitness CPA, an accountancy firm specializing in finance for fitness businesses. Eric talks to us about taking stock of where your business is right now, explains the types of government assistance still available, and explores the difficult financial decisions you may have to make due to COVID-19. Let’s have a listen.
Eric Killian, welcome to the show.
Eric: Thank you for having. I really appreciate it.
Kevin: Well, great to have you on here I think especially now it’s important people with financial expertise in the fitness industry. I think it’s important that we hear from them now as times are being tough over last while and people are now starting to think about reopening. So it’s great to have you, and maybe just tell us a little bit about your business.
Eric: Sure. I’m the founder and owner of The Fitness CPA. We’re a team of CPAs across 5 different states in the US and we work nationally here with fitness businesses who generally brick and mortar locations, and we help them with accounting, bookkeeping, and our real favorite is working on the advisory role with them that outsource CFO to help them make the best decisions. Certainly, we have that compliance work, that initial framework that you have to make your financial and operating decisions from, but on top of that, we like to walk through them with these decisions and make sure that is having the right effect on their operations. There so much that financials and operations are tied in and we want to be careful. There’s a lot of folks out there advising on operations who are talking about conversions, and retention, and a little bit about that. But we really talk about how the numbers relate to those and tracking perhaps key performance indicators to make sure that they are making the right decisions for their business and moving in the right direction.
Kevin: Got it. Tell me when did you decide to focus your business on fitness businesses and where did you get the passion for that?
Eric: Sure. I think like everybody in fitness it’s been a long road. You know, growing up as a kid I used to lift weights, when I was in junior high school I was actually in a car accident and had really, really bad painful problems. I was on medications that took a little bit more than I ever wanted to, but when you’re in pain, you don’t really have a place to go. Eventually I started taking yoga classes, and within 3 weeks of taking the yoga classes, my pain was completely non-existent. It was incredible. I mean, I had seen surgeons, I had seen doctors, I had a pain management specialist, and the yoga cured me within just a couple of weeks. Being an accountant, I was a little bit sceptical so I stop going to the yoga classes and the pain came back. Back to the yoga classes and the pain run away. It was really great. So started a yoga practice in my 20s, and really nice to find my mat and kind of balance out a lot of that weight lifting and the gym participation that I had been in the past. Had my days on CrossFit, doing things like that as well.
As I progress I got an opportunity to work with a fitness franchise that was expanding across the US. They were really early start and I got on their Board as their CFO, and was able to help them grow to about 25 units across I think it was 13 states. It was a really great experience to be on the Board and help that group grow. And through working with that yoga group, it was nice to kind of say, hey look at… I always had this passion for fitness. It’s always something that’s been important and part of my life quite literally cured me and took me out of a really negative head space for awhile. Let’s mix that with my experience being a regional tax CPA and working with larger public accounting firms. It was the perfect blend of these two things coming together. About 4 years ago, we decided to go all-in on fitness and we’ve been working with fitness clients for over the last 10 years, and have been really kind of all-in in the last 4. It’s just a great community to be part of. It’s like a lot of people that join a gym and get to be members. They’re excited about it and I like that passion in my clients. They’re excited to help their members and we’re excited to help them.
Kevin: Yeah, okay. So you’ve seen these businesses from the inside out. Yeah, that’s a great background to have when you are your coming to these clients and having that specialty is very important. That’s pretty cool. Okay, so we are where we are here in the middle of COVID-19 and probably a lot of us have gotten over the initial shock and certain businesses are starting to adapt, and then, certain parts of the world businesses are starting to open up. Maybe from your perspective, from a financial perspective, what should people be thinking about financially now that they are in the middle of this.
Eric: Sure. I think that’s a great question. A lot of people are concerned about the financials but maybe haven’t taken action and that’s the part that always scares me about business owners. I think a lot of fitness owners, they made it to where they are, often we call it by the seat of their pants. They know they’ve got cash coming in, they know that they can pay their expenses, and they’re making it work. Now, when times are critical, they’re actually stepping back and they’re thinking, “Oh, is this going to work? Can I make it work?” And rather than hope and pray that might things work out, it’s really important that they step back and they work with an accountant or a certified public account, or if you’ve got a bookkeeper or someone really great in your team, and actually model out and cast out what do my current financial situation look like.
You know, we can use the word budget. I think budget is scary. People think of budget has to be really detailed and minute and long Excel sheets. It’s really a matter of just saying, “What are my revenues? What am I currently bringing in? Are some members still paying me? Do I have some virtual options? Are there some revenue streams that are still coming in? What are my current expenses?” And really just starting at a baseline of zero and quite literally saying, “I don’t have to pay anything if I don’t want to.” I know that’s a weird thing to think about. But stepping back and saying, “Okay, now, let’s add back on the essential expenses, the things that I have to pay for.” And so you take the revenues, you subtract out the core essential expenses, and you figure out are your cash flow positive or are your cash flow negative? And if you’re negative, as a lot of people are right now. Don’t get me wrong, we have clients who are profitable right now. It’s actually incredible. They have continued memberships. They’re using strategies and they’re profitable through this which was a great realization. They did that modelling with our team and they went, “Wait a minute, we’re making money during COVID? How is this even possible?” But for the large majority of people they were a little cash flow negative. And so if you’re $-5,000 a month, and you’ve got $25,000 in the bank account, you know that you have probably about enough cash to last you about a 5-month time period. And then if you have other lines of credit available, you can lean on credit cards, you can lean on debt. Maybe you’ve got a home equity line of credit. You know that you can extend past that time frame.
We don’t know what the future would hold so it’s very important doing modelling these things out and thinking about, what is your burn rate, what is your cash flow burn rate over the next couple of months. I can’t tell you how many owners are going to sleep so much better at night just to actually figure out, “Am I going to be okay?” Because many of them don’t know and they’re just doing the best they can day to day. We get that. But I’d encourage them to invest a little bit of time and figure out, what does your cash flow look like in the future. That way you know that the next actions that you need to take. Do you need to get more funding? Do you have enough money? For so many people they went. “Wow! We’re going to be okay. We’re going to make it through this. This is really comforting.” And before they did the modelling, they had no idea. So get some certainty on your financial situation.
Kevin: What’s your operational hat on there, the gyms and fitness businesses you’re working with that are surviving better than others. What is it about them that’s enabled them to do that?
Eric: Yeah. That’s a really interesting point and it’s something that I see through and through in the fitness industry. The point there that always everybody says, what is the defining factor of why this location is better than another? Why does this franchise he does better than the other? They’ve got the same branding, they’ve got the same equipment, perhaps sometimes they are even in the same town, a couple of miles apart from each other, maybe very similar demographics and psychographics, and everybody wants to know what the difference is. I hate to be the bearer of this news, but the difference in almost every situations is not the location, it’s not the demographics, it’s not branding, it’s the individual owner. They have the power within them. They have the ability to make this work. And the people who were thriving and doing well before this, they’re adapting, and they’re being successful, and they’re changing their model to have success in this difficult times. And the ones who are struggling before are struggling even more now. Unfortunately, the common denominator is the fitness owner.
Kevin: Yeah. It is where kind of business that all the different factors and big towns and small towns and everything else and different types of fitness that a lot of time it does come down to the founder of the business. How well they are running it, how much vision they have, how well they are aligned around that.
Tell us like a few of the common mistakes you see people making around now saying new business that you walk into and what sort of financial mistakes could they possibly making right now if they are not talking to an expert?
Eric: Sure. I want to answer that question but I just want to go back and make sure that people know that fitness is really hard industry to be a part of. There’s a lot of saturation we’re seeing right now. There’s a lot of neat brands out there. There is a lot of niching within concepts. If someone hears that the owner is the trigger, they make it a little down on themselves. They may say, “Well great, so you’re saying this is my fault? This is not something that I can change.” I don’t agree with that. I’ve seen some really awesome owners get the right coaching. I’ve seen them work with consultants. I’ve seen them get their finances in order. I’ve seen them work with their franchise. I’ve seen them partner with other fitness concepts in their community and turn their brands around, and you can do this. And so, I think a lot of folks, I don’t want to be discourage because you absolutely can make a difference. And if you have to, now is the time. Now is the time to say, “I’m committed to making this work.”
And for some folks, it may be the time to say, “Hey, this isn’t maybe the best business for me. Let’s look for a smart exit strategy”, and I respect that. It’s a really hard decision to make. But for a lot of people this has been a really good fire under their butts to make change, to make a difference. Maybe get reactive into the business or maybe hire the people to run it operationally. So it’s possible to become that owner that is always successful or that is the one that’s doing better than all your other colleagues in the area.
Kevin: Yeah, I mean, that’s really valid and that’s really good take away. Okay, so we move back to the mistakes. I’m sure you see a lot of them, but what are the things some people could check today and mistakes they are may be making on the business right now?
Eric: Sure. I think the first one is, again going back to that cash flow, you got to figure out where your budget is going to be and where your income and expenses are. You know that’s the grand level. Are your books up-to-date? How are you managing your loan payments? How are you managing rent? Have you talked to your landlord? A lot of people think, “Well, I don’t have money to pay rent. I’m not just going to pay it.” That’s a terrible decision. You need to be working with your landlord. You don’t want to default on your loans. And so taking action with somebody’s financial. But sure, one of the ones we see quite a bit are folks attending webinars and educational information and then not taking action. It’s a lot like, reading books or going to that $10,000 seminar or conference and not applying the knowledge. We can sit down all the webinars all day we want. If we don’t actually take action with those items, then we’re not going to be better for having receive that information.
Kevin: Yeah. That’s a good one. Specifically, what kind of things might they not be taking action of?
Eric: Well, there are certain retention strategies or other strategies that they’re going to have on how they can operate their business. There’s a lot of cleaning protocols. I’m trying to think of all the webinars that I’ve attended. Again, we go back to the same thing I’ve mentioned the financing and I’ve mentioned the budgeting. And so, did you actually do that? Did you make a difference? Did you go and record your income, record your expenses? If you didn’t create the budget, and you said, “Oh, Eric had a great idea. He recommended that I track my cash flow.” And you didn’t go and track your cash flow. Well, then, all the things that I’ve shared with you in the last 15 minutes they don’t amount to whole lot if you didn’t do something with them.
Kevin: Yeah, okay, that’s a good one. Now tell us, one of the things that you probably talked to a lot of people about are government loans and government assistance. Let’s keep it to the US. I’m sure there’s a lot of awareness around what schemes are available right now. But for the pure beginner or for somebody who hasn’t done taking the action of going and researching what help is available for them. Give us a summary of what kind of schemes are out there and what people should be getting on top of.
Eric: Right. First off, everybody has this eye on the free government programs. I do want to talk about those but I would be remiss if I didn’t say that there are a lot of other places that you can get the capital needed to carry your business through a difficult time. Everybody has credit cards. You can always not pay your credit card in full, though not always recommended, it has high interest rate but it is an option. Do you have a line of credit in your business? Do you have personal line of credit, perhaps through your home equity line? Is there a local bank that you can get a loan through? There are other normal loans that you can get through the SBA, called an SBA Express Loan or an SBA 7A Loan. You can borrow from a retirement account. I don’t like that option but it is a very real option. There are certain tax flexibilities with that right now in this climate where you can pay back those funds to your retirement account over 3 years and kind of mitigate the tax effects of withdrawing that money out. And so there’s a lot of other options that people can have to get money where they really have their eye on this prize.
And the prizes in the US right now are the PPP loan and the EIDL loan. It’s been very frustrating, these programs have been run out very quickly, and they aren’t perfect, and there’s a lot of glitches in each program. Certain people weren’t able to get money. Certain people didn’t receive the amount that they wanted, or had some documentation headaches to get it together. But as of this recording, May 21st, there’s still quite a bit of money in the US PPP program. So if you were dissuaded and you thought, “Well, maybe it’s not for me. Everybody else had trouble getting it.” I would say go and see if those funds are still available by the time you’re listening to this. Make the application. Last I heard roughly 30% of the $300 billion was available, so that would have been $30 billion are still there. The large majority of people that have received the funds were already the larger companies, so I think this 30 billion is going to last at least a couple more days, maybe few weeks before it runs out. But definitely check that PPP program. The Paycheck Protection Program does need to be use 75% for payroll but it’s a really great option for small businesses.
The other one will be the EIDL, the Economic Injury Disaster Loan. And that’s run by the SBA. You actually make the application through the SBA. A lot of folks have already apply to this and overwhelmed the program so that you can’t currently apply. But those who have applied, they may have received a small grant portion which is supposed to help them bridge the gap. Now, we’re just starting to hear back. It’s been 7 weeks, and people are just starting reach back from that government program to say, “Hey, we can loan you some money.” We’ve also heard of some people being declined and not able to be approved on that. I would encourage folks that are listening to appeal that decision and reach back out and say, “We have had economic harm. We would like to receive that.” And that Economic Injury Disaster Loan, that’s a loan at 3.75%, very what we call cheap money that can help you run your business. But it’s not going to arrive very fast. That money is going to take a while. You’re going to have to go through the lending process. It can be too good to be true, and so the downside on this program is the funding will take awhile so you need to take other steps between now and then to make sure that your business has the funds that it needs. And for people who are listening who didn’t get to apply for EIDL, the website for it is sba.org. They are currently not accepting applications there as of this May 21st. But I wake up every morning and I refresh and I look at it and we see if they’re accepting again. They’re currently accepting for agricultural businesses as they work through the back log. We do expect them to reopen the applications up again, so refresh that page. I know you’ve got 20 browser tabs probably in your window, have one of them be the SBA page, refresh it every morning, see if you can get that application in. The answer is probably going to be no for another week or two but keep checking. Keep checking back, and like I said earlier, those owners that are persistent, that stay agile, flexible, that are making all the hard choices every day, those are the ones who are going to make it to the other side of this and be successful.
Kevin: I think part of my takeaway here is that with some of these programs a little bit of perseverance is required to make the most of them. And maybe if you give a couple of weeks go it’s probably worth revisiting what you might actually be able to get.
Eric: I think that’s exactly spot on and that’s what we’ve been preaching to our clients and people who follow our blog is I think a lot of people are going, “Oh, why bother at these programs. They didn’t roll out. I’m not going to get this money or I’m not going to get the help I need.” And the people who have been persistent… I mean, look, as a fitness owner, as any entrepreneur, you’ve been told no how many times in your life until now. You’ve had how many barriers put up in front of you and you’ve jumped over those hurdles. You’ve pushed through those barriers time and time again and said, “No, I’m going to make this business work. I’m going to accomplish what I want to.” And so here’s another instance where you’re going to face some adversity, and are you going to push through or are you going to say, “No, I guess I’m alright.” I would say push through. Just like you are saying, it’s required in order to take advantage of these programs and just to make your business successful as a whole.
Kevin: Hopefully, that’s a good takeaway Yeah. Well let’s go to- I think I hope we – a good take away for people listening if all they do is try again a couple of those fronts, we might have help a couple of people out. Okay, I think, one of the main things we want to cover today was the topic of tough decisions and how to think about tough decisions that you might have to make in the hard times. The one that’s maybe you touched on a little bit area that’s fascinating for me is around loans and financing, and around taking out more credit card debts. How do you usually help people make those decisions, they have a business that can afford to take on debts or rather this is just getting them in more of a hole and they shouldn’t be doing it. How do you make that call?
Eric: Well, I mean that’s a really great question because that really is what’s in front of a lot of people, they’re deciding. Do I double down? Do I take on more risk in order to make this work? Usually we want to take every other option first. We want to make sure that we reduce our expenses. We want to make sure that we’ve increased revenues or maintained revenues where we can. We also want to make sure that there is a light at the end of the tunnel. If you’ve done your modelling out on that cash flow projection that I mentioned earlier and you go, “Gosh, I’m going to be losing…” Let’s just say, we do have clients right now losing $20,000 a month because they are completely shut. They are looking out and going, “We don’t know how we are going to fund this, or 3, 6, 9 months what it is going to look like. Even if we do reopen we’re not confident we’re going to have the members.” And so for those people they are looking at what the total cash requirement is. And if that cash requirement is too big, if the road is too long, if you’ve already been beat up, for those people, it may not be the right decision to take on more debt. But for people who are looking at this and saying, “Look, we have some money coming in.” We are able to make this work. We are able to say, “Okay, we have plan. We just need $30,000 that will help us pay rent, that will help us pay for our operating cost, and we know that we can get to the opening date of say June.” Or maybe your opening date is July. Or maybe you are looking at a potential road of six months where maybe you’re not going to have as many members coming in. I think it’s very probable in this climate that we’re in now.
But can you combine that risk with other revenue streams? Can you lean on virtual streaming? Can you shift your business? And this is going to be hard for a lot of people who are making these tough decisions. Before you go out and just say borrow, borrow, borrow, what are all the difficult things that you’re deciding. If you are a big box gym and you are used to having a lot of people in, or if you are a large group fitness class and you are used to having 20, 30, or 50 people in a classroom, your business model may need to change and it may need to change fast. So rather than just borrowing money to try and pay for things, what are you doing to change what the future looks like? For these two concepts in particular, I would say small group training is where we may need to lean towards. Can you have a higher price point and do smaller groups, 3-on-1s, 2-on-1s, maybe 1-on-1 training with people. And that’s going to make individuals feel safer. You’re going to be able to maintain that social distancing. That means if you don’t have the high volume that you are used to, you may be converting to a higher price point. These are difficult decisions. It is really uncomfortable to say, “Hey, I’m going to charge my members more money.” This is a model that I was into before. But these are the things that you need to figure out. How are you going to make this work with social distancing?
Kevin: Yeah, and there’s so many other businesses out there that are going have to run literally fewer customers and prices of a lot of things could go up. It’s going to be challenging and interesting to see how fitness businesses approach that.
Eric: Prices may go up but I think it is important to know that the value is going to go up too. You might have that 1-on-1 accountability. You might be working or having your trainers work very closely with these individuals. You might pick up something like text message campaigns to really check in with someone and see how they are doing. You had Alex Hormozi on earlier on your podcast. I would encourage people to listen to Alex and listen to what he is saying. It’s your job to deliver value to these people. They may be used to paying $60 a month for their membership, but if you are helping them keep their weight healthy, feel good about themselves, that they are able to keep their strength and fitness so that when they do return to sports or activities they can bounce back. What would that be worth to some people.
In the U.S. we’ve seen 20-30% unemployment rate now, but that means 70% of people are still working. They still have income and they are not spending as much money on these not necessary items, so they actually have more disposable cash to double down on their fitness and stay healthy through this difficult time.
Kevin: Yeah. It’s funny we’re on a podcast we are taking about finance but it comes down to a lot of things Alex says, you know, how can you create more value for the customers and that is your ticket to success no matter what else is happening. But let’s talk about a couple of more tough ones. I think the next one is trainers and staff. I’m sure there’s a lot of businesses out there that have had to make difficult decisions. Again, maybe, how do you coach these businesses when they do start talking about whether they have to lay people off or have them to work?
Eric: Nobody wants to lay someone off. It’s a very difficult decision to make. I think many businesses have been forced to make that decision without really deciding anything. When you have a shelter in place and there’s no work to be done, then these individuals… There’s no work, so they can’t pay them. They ended up in a point where they were furloughed and couldn’t work through this time. The decision was made for you. Now, as businesses start to reopen, either partially or completely, now we have new decisions we have to make which is, “Who do we bring back on?” What is the staff member that we bring on? If you’re in a really tight cash flow positon, I would again encourage you to kind of look at your budget and say, “Who can I afford?”
For some gyms they had a general manager, and that general manager maybe had a salary of 40, 50, 60 thousand dollars a year. Now, when you are reopening, you are looking at that general manager… Maybe you work in the business too as the owner and you’re thinking, “I can do this job. I don’t need my manager.” That really needs to be weighed carefully. Your manager brings a lot to the table. I always try to discourage owners from working in the business. They really need to be working on the business. I think as a short term goal you can say, “Well, I can reduce my cash flow. I cannot bring back my manager. I can do this job. I can check people in. I can manage my team. I can manage a studio.” But is that really the best use of your efforts if the funding is there? I understand for many it may not be. But if the funds are there you may be better to bring that general manager back, the assistant manager to help make your business even better. They are going to know the staff better. They are going to have their eyes on what the studio needs to be running fluidly through this times. I worry about gyms who are going to be trying to run so lean that, let’s say, if you didn’t have enough staff on maybe your cleaning protocols aren’t good enough. We have to make these difficult decisions that maybe for cash flow reasons we don’t bring some of these people back but it is a balancing act with how good our operations are going to be.
I do want to talk a little bit more about this because I think the real elephant in the room in the U.S. right now is people are on unemployment and they are collecting a really nice unemployment check, and owners want them to come back to work or need them to come back to work. They say, “Hey look, we are ready to reopen. We need you here. We need the help.” And the employees are at home and they are collecting this nice unemployment check and they are not interested or maybe they have a health concern. They have high risk family members or maybe they are high risk themselves and they don’t feel safe coming into that environment. First off, you need to let them know about everything that you are doing to make that environment safe. But if that person really doesn’t want to come back then it’s your job to decide what to do next and you’ve got a couple of choices. You can allow them to continue collecting unemployment by terminating them. You can say, “Hey, we offered you a job but you declined so now we are going to terminate you.” That allows them to continue collecting unemployment. That may be the nicest thing for them because they truly didn’t want to come back. For those employees who are maybe making this, you know, they are milking the system. They are just trying to collect those unemployment benefits. You do have the option to tell your state and say, “Look, I offer this person a job. They declined”, and that will stop their unemployment benefits. I don’t know that that’s the right decision to make. I think that’s a really hard road to go down because I think a lot of people don’t want to come back to work for very valid reasons. But for those people who don’t want to come back you really have a choice to make and you can let them stay at home and collect that unemployment or you can tell the state that you offered them a job, then they won’t be able to collect that unemployment anymore.
Those are really tough decisions. I think you need to make those on a case by case basis. And the large majority of circumstances I believe in the goodness of people and I believe that the people who are staying home, even if they can articulate it in a really good way, they are probably home because they are concerned or they are uncertain about the future. I would hope that business owners would allow them to stay home and just terminate them. Just say, “Hey, we offered you a job, it’s not here. You stay home.” But then you need to move on. You need to go and you need to find the staff that is going to help you move into this next phase of opening back up again.
Kevin: Yeah. Okay, well, let’s go and highlight that it’s maybe going to be an issue for people to be prepared. Again, there are some difficult decisions associated with that, but also you may have to think about doing more recruitment outside of who you had before. It maybe that comes to that.
Okay, what about your landlord and your rent? How do you suggest people approach those conversations? Do they stop paying? Do they try to renegotiate their rent? What should they be doing right now?
Eric: We’ve written a whole long blog about this, and we have a downloadable resource about how to work with your landlord on rent abatement or rent deferral. Again, we kind of go back to that cash flow. If you do have money coming in and you can afford to pay rent, then I believe the honest thing to do is to pay your rent. I think you signed a contract, you should pay it. But for the large majority of people you’re going to be in a tight spot. You probably don’t have that money to pay the rent. And so in those instances we don’t recommend you default on your lease. Default means you don’t pay, and you don’t notify, and you don’t reach an agreement with your landlord. If you do that, when your lease comes up for renewal… Because this economy is going to bounce back. We are very strong. The world is doing okay. This is a health crisis not an economic crisis. When we do bounce back and that center comes up for renewal, your space comes up for renewal, and say 2-3 years, maybe even 5, maybe even 10 years from now, when your lease comes up your landlord will have the ability, the legal right, to look back at your terms and he’ll say, “You defaulted on your rent back in 2020 and you didn’t pay your rent. You didn’t pay your lease. Even though we figured it out eventually and you’ve been here for years. We are going to make a different choice.” And they have the option, they could kick you out because it’s the end of your lease term and get someone else new or they can renegotiate the terms.
For many of my clients they’ve locked in option terms of 5 years to 10 years. I have a client that has a 20-year option term, and it is really great terms. I mean, really low in increases and that landlord will have the legal right to say that agreement null and void. You now have to pay us our new market rates which could cost you tens of thousands of dollars. What you do need to do is negotiate with your landlord. You know, negotiate is hard. Negotiate I think has an adversary over relationship. And for many fitness owners their relationship with their landlord may be adversarial, but we need to work passed that. We are all in this together. Your landlord does need you. They do want you in the space. They don’t want to have an empty center, but they also want to get paid as well. I think we’ve got tons of resources like I can talk for an hour just rental loan. But you need to work with your landlord. You need to talk to them about how difficult it is and what your plan is to make them whole. You maybe want to tack on these current months that you are not able to pay to end of the lease term. So rather than agreeing to pay them later in 2020, because things are going to be hard in 2020. Things might even be hard in 2021. But agree, if you have a 40-month lease remaining, tack it on at the end of that lease term. Now say, “Hey look, I’m willing to go out 41, 42, 43 months on this thing and pay on the back end.”
The other things that we see people doing is agreeing to pay the, we call them triple-Net expenses – the taxes, insurance, and the common area maintenance. These are three expenses that your landlord has to pay whether or not you are in the space. The only money your landlord actually receives from you is called your base rent. So you may be able to negotiate on the base rent but don’t expect to get more than the base rent as a deferral or discount. Because if you are asking for the triple-Net expenses as well that means your landlord literally has to pay those to someone else when you are not paying for them. I advise negotiate on the base rent and if you can agree to pay those triple-Net expenses.
Kevin: Okay. I think those are some good tips. For people it’s a good takeaway and a bit of a warning light as well, so thanks for that. Okay, so maybe I’ll wrap up on a more positive question. When should people start to think about reinvesting in marketing and acquisition? How do they know it’s time to start growing their customer base again?
Eric: I think it depends on what you’re selling. For certain clients right now, they are moving into the virtual footprint quite a bit and they are able to market and sell. I also think that if you… There is a hesitation to want to market to new clients and think that people won’t join up and sign up for my gym because they can’t come in. That’s possibly true. And I would maybe say what about marketing to your existing clients. Are you offering your existing clients 1-on-1 training? Are you offering them nutrition coaching? Can you turn those marketing dollars into opportunities for already existing customers – people that you work with, people that you have worked in the past. Rather than trying to cold call people or do Facebook ads, and those strategies may still be good ones. I’ve got to be careful I don’t get into that area as much. But I know that your existing client base does want to work with you right now. And so can you hire a team to work with your existing members. As we mentioned earlier, get more value out of them because they already know and love you. So what are they willing to pay you for nutrition consulting, helping through at home workouts, or maybe meeting them outside in a park socially distant and talking through how their fitness is going right now.
Kevin: Okay. I suppose maybe what we are saying then is there is a lot to maybe reactivate your existing client base is maybe the first step before you go back in to acquisition mode.
Eric: It would be the first step but they may need to move in tandem. I think any business who stops marketing, that’s usually could be the nail in the coffin for a lot of people. You need to put some money… I’m not saying spend all your cash. Again, it comes down to budgeting. How much do you have in funding available and always working with your marketer. This is something I see time and time again in fitness. From an accounting perspective, I’m mindful of expenses and where we invest our dollars. I ask people all the time and you wouldn’t believe that amount of people who can’t tell me is, “Do you know your return on investment for your marketing dollars?” If your marketer can’t tell you, “You are spending $2,000 a month and you’re receiving $2,500 a month in benefit”, then there maybe something wrong with that marketing relationship or you maybe need to push that marketer to give you more information. We can just throw ad dollars out in the public. We can’t just put more money into marketing and canvassing. We need to know is that canvassing working out and you need to adjust that marketing as you’re getting that feedback for return on investment.
Kevin: Yeah, that’s true. It’s probably a whole podcast to be dedicated to that. Okay, Eric, I think this has been a really good high level but yet educational walkthrough of some of the financial decisions and areas people should focus at the moment. Before we wrap up, maybe just tell me the biggest lesson that you’ve learned in the past six weeks.
Eric: Yeah. The crisis has been really difficult on a lot of people and it’s challenging anytime we go through a difficult period. I think the key here for us is what we’ve learned is you’re not going to get through this alone. You need someone to lean on. You shouldn’t be afraid whether it’s just someone to listen to you or talk to you. But everybody that’s getting through this is leaning on different people. We often see a couple of different groups of people and so this is the time when you need to reach out and talk through the issues you’re going through. A spouse or loved one is a really great place to start. They are going to be someone to lean on and talk through this difficult times. I will say an accountant has to be on this list, specifically a certified public accountant is going to be someone to talk you through these financial matters. An attorney is also going to be able to help you through these difficult decisions. And then there is one group that people don’t think about enough and that’s other fitness business owners. I like to include three fitness owners or any entrepreneur. Talk to three owners and one is going to be 2-3 years where you see yourself and where you want to be. One fitness business owner that you to talk to is going to be what you are doing and where you are right now. And then, you can’t get in this world without giving. And so one of the fitness owners needs to be behind where you were and you need to talk to them about where they are and where they want to go. I think you’ll be surprised, the one who is not where you are today is going to have a lot of good ideas for what you are currently doing as well.
Kevin: Yeah. I think that’s a good one. Again, another podcast will be dedicated, yeah like, great tips there for building a network of people you can help and can help you from various angles. That’s a great takeaway. Okay, Eric, this has been really good. A great education for me and hopefully for everyone listening. Before you go, maybe just remind people who you are and how they can get in touch.
Eric: Absolutely. Well, I’m Eric Killian, I am The Fitness CPA. You can find us at thefitnesscpa.com. We post a lot of content on our blog and on our YouTube channel and we don’t put up behind a pay wall. It’s all there for you to use for free. A lot of helpful, downloadable guides and tips. And if you need help implementing those ideas or want to talk through any of these matters, just send us an email or message us through our website and we’ll be glad to answer your question, and schedule a consult free of charge.
Kevin: Lovely. Okay, Eric, thank you very much for coming on the show.
Eric: Thank you very much. Have a good one.
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