Dream It, Build It, Nuture It. But Sell It?

by Linda Melone on Jul 01, 2005

7 steps to successfully selling your in-home personal training business.

Selling any business is a challenge. Seventy percent don’t sell at all, according to Peter Siegel, MBA, founder and president of California Businesses For Sale (www.bizben.com), and selling an in-home business is even more daunting. But you can profitably sell your in-home personal fitness training business if you know what you’re doing. One trainer who did it herself explains how.

Three years ago I had an excellent opportunity that required relocation to the West Coast, which should have been an easy decision to make—except that I didn’t want to abandon my steady base of 27 loyal, long-term personal training clients, all located on the East Coast. Since creating this lucrative business had taken me 8 years, I decided I would sell it, make a profit and keep my clients happy. I thought it would be easy—until I tried it.

For starters, I couldn’t find any information on selling an in-home business, and everyone I spoke to said it would be impossible. “I’ll take your clients, but I’m not going to pay for them. How do I know they’ll stay?” was the typical response. This was true. I couldn’t guarantee my clients would stay with a new owner.

I knew there had to be a way to sell my business. Sure enough—through trial, error and a bit of luck—I was happily relocated in California within 2 months. The new owner had a ready-made profitable business, and my former clients were happy that I had found a competent, professional trainer to replace me. I successfully made the sale, and you can too. These seven steps will take you from preparation to closing the deal.

Step #1: Prepare Your Business (It’s Never Too Early to Start!)

Whether or not you have immediate plans to relocate or retire, you need to begin preparation today if you want to have a salable business in the future. Keep your books in good order from the start to obtain the best possible price when the time is right to sell. Potential buyers want to see how your business has been doing over time. Robert Wietzke, CPA, president of Valuation Professionals in Newport Beach, California, advises, “Two key factors that increase your chances of finding a buyer are an established client base and repetitive business.”

If yours is largely a cash business, take note of this counsel from Richard Flask of RJ Flask & Associates, a business brokerage and management consulting company in Laguna Niguel, California: “The offering price has to be based on documented performance that is provable and believable.You should have profit and loss statements, tax returns, invoice registers or copies, bank deposit statements and anything else that can support claimed revenues and cash flow.”

Step #2: Assemble a Professional Team

You may be tempted to try to sell your business on your own, but hiring professionals is much smarter and makes it much more likely you will get the money you want.

First, hire an attorney with experience selling personal-services businesses. “Ideally, find an attorney who is also a CPA,” advises Steve Thomson, a certified business intermediary with Sunbelt Business Brokers in Irvine, California. “This is one area where you do not want to cut corners.” If you are unable to find an attorney who is also a CPA, hire both professionals.

Find out in advance how much your legal fees will be. If your attorney charges an hourly rate, ask how many hours he or she anticipates the deal will take, and find out if there are ways you can save time and money. For example, is there paperwork you can do on your own?

You will need a good accountant who is familiar with business transactions. If you don’t already have one, ask for referrals to find someone who is reputable and fair. You may also want to work with a business broker and/or a valuation professional.

Many personal trainers have attorneys and other professionals as clients, which makes it easier to get expert help. Personal trainer Tom Perkins, president and CEO of the Personal Trainer Success Center in Portsmouth, New Hampshire, assembled a team of professionals to help him sell his client list. Perkins had the advantage of an accounting background, but he still hired an attorney and a CPA for the sale of his business.

Step #3: Determine the Correct Value of Your Business

You need to know how much your business is worth before you can start looking for buyers. To assess the financial state of your business, you might use a valuation professional. However, although no minimum business size is required, valuations are usually performed for larger businesses, according to Wietzke. (Valuation professionals may also be used in cases involving divorce, bankruptcy or corporate dissolution.) In the case of a small personal training business, an accountant usually decides the value, using a rule-of-thumb technique based on a percentage of a number such as annual sales or number of clients. For example, I used 25% of my average annual gross income as the price for my business, and Perkins used 35% of his gross sales as a starting price for his.

Flask recommends determining value by working with a business broker because brokers are familiar with the market. “It’s best to set the offering price using a median multiplier of cash flow for [similar] businesses on the market. . . . It’s cash flow, not revenue, that pays the bills,” he says.

Should You Use a Business Broker?

Selling a business is an emotional experience. You’ve grown and nurtured something that you’re now going to sell. A business broker understands the process and can make this transition easier on many fronts—and help you get the most for your business. Broker fees vary; some charge up to 15% of the selling price of the business, so ask around for referrals.

According to Thomson, a broker helps you in three main ways:

1. leveraging your time so you can continue working

2. providing confidentiality, and prequalifying buyers

3. seeing that you get the best deal

A broker plays referee between buyer and seller and can become the “bad guy” when negotiations get tough. The broker acts as your agent and does the marketing for you so you can continue running your business. If you advertise on your own, you can expect to get a lot of unqualified inquiries, according to Thomson, and you could waste valuable time “schmoozing” someone who is not qualified to take over your business. As Thomson explains, “Eighty percent of inquiries are bogus and a waste of time. They may even be [from] competitors. We ask for [buyers’] financials before we take them seriously.”

An acquaintance of mine who owned a successful marketing company found this out the hard way. Anxious to get out of his business, he didn’t check the financials of his buyer before “selling” (the transaction was never completed). When the new “owner” didn’t have the financial ability to operate the business, the seller, who had no formal agreement to protect himself, had to take the business back. He lost his entire staff and all his clients, and had to start over completely. The lesson? Desperation can cloud your judgment and make you take unnecessary risks, which is a good reason to plan ahead.

Thomson cites an example of a small business that benefited from using his brokerage services: “We charge a $10,000 minimum or 10% of the sale. A client with a milk truck and a route tried to sell his business for $20,000 on his own without success. We sold the truck and the route for him for $40,000—he made $30,000 and we took our $10,000. He made more than he could have on his own and we did the work for him.”

Thomson advises that you leave your ego at the door when talking to potential buyers about your business. “The worst thing you can do when you talk to buyers is to tell them how good you are,” he says. “This convinces them that there is no way they can succeed with your clients.” You need to encourage buyers and convince them that they, too, can run the business.

Step #4: Get a Letter of Intent— and Protect Yourself

Once the buyer agrees to a price and before you release any client information, your attorney will write up a letter of intent. According to Peter Freeman, JD, a business attorney in Irvine, California, a letter of intent is “an agreement to agree.” The letter may include the following:

  • an agreed-upon price
  • an outline of the procedure for introducing the buyer to your clients
  • a down payment to be paid at the closing
  • the closing date
  • an employment agreement describing your future role in the business, if any (e.g., as a consultant), and noting how long you will play that role

“Letters of intent don’t always hold up in court, and sometimes give the seller a false sense of security,” Freeman says. “However, if the letter contains enough material terms (i.e., amount of money, time for performance, etc.), it may be enforceable.”

Other options include a confidentiality and nondisclosure agreement. This agreement may be part of the letter of intent or a separate entity. The loyalty of your clients could play a significant role in keeping you attuned to any attempts by the buyer to go behind your back and contact them before the deal is complete. If you have a good working relationship with your clients, they should be happy to alert you of any sabotage attempts.

Freeman suggests another alternative: blacking out or coding the names and addresses on any contracts or payments before the buyer or the buyer’s attorney verifies income information from your business. “This enables you to confirm your stated income without revealing any identities. Any party interested in selling a business should learn all the adverse possibilities that could occur and find out the cost of eliminating the risks in order to decide which are acceptable and which aren’t.”

Your buyer will also want a noncompete agreement to keep you from moving back into town and taking back your clients. This clause is a legal promise by the seller not to compete with the buyer within a certain geographical area for a predetermined number of years. My buyer wanted a noncompete agreement for 5 years in the state of Connecticut, but we settled on 3 years in Fairfield County.

Step #5: Write the Right Agreement

When writing the agreement, Flask advises, follow these guidelines:

  • Ask for a large down payment from the buyer if you are going to hold the note, as in an earn-out agreement (covered in the next section). This assures you that the buyer is serious and not just testing the waters with your business. Asking for one-third down is not unreasonable.
  • Ask the buyer to secure the note against collateral to be sure you get paid in the end.
  • If your business has good employees, have them stay on, at least in the beginning, to help smooth the transition to the new owner.
  • Get everything in writing.

All About Earn-Out Agreements

An earn-out agreement is common among service businesses for which the future income depends largely on client retention, as with a personal training business. A down payment is given, and the remainder of the agreed price is divided into payments to be made over a specified amount of time, usually 1 year or more. The down payment may or may not be part of the total price of the business.

The final payments are tied into the actual future performance of the business. Considered a creative “loan,” the income earned from the business after the new owner takes over is used for the acquisition of the business. Earn-outs are useful when seller and buyer have different perceptions of current value and expected profits.

The following are the key points of an earn-out:

  • The specifics must be clearly understood.
  • The seller must retain the rights to audit the buyer’s books. (In my case, I could not audit the buyer’s books since I was 3,000 miles away, so I had my attorney on the East Coast hold the buyer accountable by submitting her accounting details each month.)
  • If the seller is to remain involved with the business through the earn-out, the details of that role must be clearly specified. There are many advantages to having the seller remain involved with the business for a while after the transfer to the new owner. I did this in a limited capacity by checking in with my former clients periodically to be sure they were happy with the new trainer. Perkins coached his former clients via telephone on a weekly basis, so he could keep up-to-date on how many times they were training with the new owner. “I had it written into the contract that I would have access to the books for the year of the transition and that I could continue coaching my clients on the phone and they would continue to pay me,” he says.
  • There must be mutual respect and a degree of good faith between the seller and buyer to ensure success. “The biggest problem with earn-outs is keeping them honest,” says Thomson. This is especially true if the seller is moving out of town, as in my situation. I was fortunate to have found an honest buyer, but this is not always the case. A carefully written contract can help prevent problems. Although an earn-out can save an otherwise dead deal, it can easily fall through if both parties don’t come into the agreement with a win-win attitude, according to Flask.

Step #6: Make the Transition a Smooth One for Clients

A private personal training center recently changed ownership, but neither the clients nor the employees were told about the sale. One day the well-liked owner/manager was gone and two strangers were running the studio. Needless to say, this did not create much goodwill among the remaining clients, and the outside trainers (I was one) were told to take their clients elsewhere, as subcontractors would no longer be allowed to use the facility.

If you stopped showing up at your clients’ homes and a new, unknown trainer took your place without any warning, what are the chances your clients would stick with the new trainer? Probably not good—and understandably so. Be up-front and talk to your clients as soon as you know you’re selling the business. They will probably not be happy, but you can familiarize them with the new owner/trainer and reassure them that you will be available during the transition (if you will be).

After I had a letter of intent and a signed confidentiality agreement, I brought my buyer with me for a couple of sessions with each client. This enabled her to meet them and see how I worked with each individual. I told her in advance of any idiosyncrasies and how each person liked to train. For the client this eliminated the “shock” of having a new trainer and a new program all at once. The buyer also agreed not to raise prices for at least 1 year, eliminating cost as an excuse for clients to quit.

A few clients were resistant to the change and some told me they didn’t want to continue with someone else. But when I asked clients to try the new owner for a month, they all agreed and stayed on far longer than expected. I made periodic phone calls to check clients’ progress and appease them if they had any issues. This careful transition played a major role in a high retention rate; almost all my clients are still with the buyer 3 years after the sale.

Step #7: Close the Deal

As you reach the home stretch, you need to be wary of deal breakers. “There are many reasons why deals fall through,” says Flask. “Deals die three times before the sale is consummated, according to a saying in the field.” The deal breaker could be something that means little to the seller but everything to the buyer. “It’s the broker’s role to serve as mediator in this case, since selling a business is an emotional roller coaster for both parties involved,” he says.

Flask adds, “A deal may not get off the ground at all if the seller prices his business too high, and many people want to see how much they can get by outpricing themselves at the start.” This strategy seldom, if ever, works.

A business generally sells in 4 months, according to Thomson, “but 2 of those months are typically the time it takes for the seller to become realistic about the selling price.”

After debates are settled and your clients have accepted the new owner, it’s time to close the sale. This can take place at the buyer’s attorney’s office or an independent third-party location, such as an escrow company. My closing took place in my apartment with a down payment by the buyer and an exchange of all client information.

Selling an in-home personal training business is not easy. It takes diligence, research and perseverance to pull together a successful transaction. Start planning today to create a business that will reap rewards when your turn comes to move on.

IDEA Fitness Journal , Volume 2, Issue 7

© 2005 by IDEA Health & Fitness Inc. All rights reserved. Reproduction without permission is strictly prohibited.

About the Author

Linda Melone

Linda Melone IDEA Author/Presenter

Linda Melone is the owner of LifeBeat Fitness Consulting and Training in Mission Viejo, California. She conducts corporate wellness workshops in addition to in-home personal training. She is certified...

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