5 fatal gym partnership mistakes

What’s up Gym World?

Partnership mistakes are some of the most expensive mistakes gym owners make.

Here’s how you can avoid some very expensive mistakes:

Hire a good lawyer

A good lawyer representing YOUR interests will pay for themselves many times over.

Establish a “Partnership Charter”

A Partnership Charter is a document created by psychologist and business mediation expert David Gage, that defines the softer parts of a business like goals, expectations, responsibilities, and relationships within a partnership. It ensures each partner clearly knows what’s expected of them and what they can expect from the business in return, including:

• Voting rights

• Compensation - The person running the gym must get a fair, market-rate salary. If anyone works for less than the market rate with a promise of future upside, set clear terms for what happens if that upside doesn’t materialize.

• Day-to-day duties

• Performance expectations

• Meeting requirements

Have a money plan

It’s important to understand how to handle your business’s money. You and your partner need to agree on when to:

• Borrow money: Do you believe in borrowing money? If so, what are the valid reasons for borrowing money? Are your views aligned on this?

• Repay loans: How much of your earnings will go towards paying off loans? Do you have a clear plan to manage future debt?

• Distribute or reinvest profit: Do you want to open more gyms if this one is successful? Or will you milk the gym’s cash flow and reinvest outside the business?

• Handle non-core income: If your partner has a side project, like personal training or teaching seminars, where does that revenue go? Is it a part of the business or separate? What happens if that project takes off?

💬 John’s note: Small side hustles can turn into big ones. It’s important to lay out clear terms in your operating agreement for managing them.

Set a plan for handling disputes

There may come a time when one partner wants to buy out the other. Emmy’s experience was complex and frustrating because of the one-sidedness.

For 50/50 partnerships, a buy-sell agreement is a good mechanism that avoids this complexity. Including it in your operating agreement ensures both partners understand the buyout process if and when it happens.

Here’s how it works:

1. Either partner can exercise the buy-sell agreement at any time.

2. The partner that exercises the agreement sets the valuation.

3. Then, the other partner gets to choose whether they:

   a. Buy the exercising partner’s share

   b. Sell their shares

This incentivizes the partner that exercises the agreement to set a fair price.

Get a professional business valuation

To avoid being forced to sell at a price you don’t control, especially in a minority partnership like Emmy’s, put a protective clause in your operating agreement that outlines how the business is valued and who the business will be valued by in the event of a sale. This way, everything is agreed upon in advance so that:

• You get a fair price for your share if you’re forced to sell.

• You pay a reasonable price if you’re buying more of the business.

TL;DR

Bad partnerships kill good businesses. Protect yourself.

stay safe,

j