Capitalisation

[Tom McAdam]

Hey guys,

I am thinking of going all out and opening an affiliate to run full time (in North London). I am going to run some classes in the park for a few months first, to generate demand and make sure there is enough interest, but after that I think I'm going all in.

My question is this: let's say you have start up costs covered. You have equipment, you've registered a company, paid the rent deposit, certified etc. If X is your monthly costs, what minimum reserve capital would you start with?

As I read old posts on this forum, it seems that under-capitalisation is one of the greatest problems for affiliates.

For those of you who have affiliates and run them full time, how much capital did you start with? If you were to do it again, would you start with more or less?

Thanks for your help,

Tom

[Brian Strump]

If you don't have another reliable source of income, I'd say X time 6-12.

If you do, then alittle less than that, maybe 3x.

Originally Posted by Tom McAdam

Hey guys,

I am thinking of going all out and opening an affiliate to run full time (in North London). I am going to run some classes in the park for a few months first, to generate demand and make sure there is enough interest, but after that I think I'm going all in.

My question is this: let's say you have start up costs covered. You have equipment, you've registered a company, paid the rent deposit, certified etc. If X is your monthly costs, what minimum reserve capital would you start with?

As I read old posts on this forum, it seems that under-capitalisation is one of the greatest problems for affiliates.

For those of you who have affiliates and run them full time, how much capital did you start with? If you were to do it again, would you start with more or less?

Thanks for your help,

Tom

[Brendan McNamar]

Originally Posted by Tom McAdam

My question is this: let's say you have start up costs covered. You have equipment, you've registered a company, paid the rent deposit, certified etc. If X is your monthly costs, what minimum reserve capital would you start with?

Your missing part of the formula. How many memberships does monthly cost X equal? This will effect how long it takes to slow then stop burning through cash.

Gym A expects to charge $100 a month. Monthly cost are $3,000. It takes 30 memberships to cover cost. Starting with $12,000 (4 months) this gym will probably be OK.

Gym B expects to charge $100 a month. Monthly expenses are $7,000. It takes 70 members to cover cost. This gym will need more times X to be safe. Say $42,000 (6 months).

Gym B will burn cash longer then Gym A.

This is why starting small increases the odds of first staying in business and second recovering your investment and turning a profit in a reasonable amount of time.

Also don't forget the owner's personal bills if they will need to be paid out of the same funds. Got a big mortgage, high rent or a big car payment? It still needs to get paid. The higher the owners personal bills the more cash it will take.

A second source of income, a working spouse and so on can help lower the amount of cash required. It is why myself and many others worked other jobs during the first year or two.

[Tom McAdam]

Thanks a lot for the replies.

I had in mind a figure of somewhere between 6 and 12 months.

Originally Posted by Brendan McNamar

Your missing part of the formula. How many memberships does monthly cost X equal? This will effect how long it takes to slow then stop burning through cash.

Gym A expects to charge $100 a month. Monthly cost are $3,000. It takes 30 memberships to cover cost. Starting with $12,000 (4 months) this gym will probably be OK.

Gym B expects to charge $100 a month. Monthly expenses are $7,000. It takes 70 members to cover cost. This gym will need more times X to be safe. Say $42,000 (6 months).

Gym B will burn cash longer then Gym A.

This is why starting small increases the odds of first staying in business and second recovering your investment and turning a profit in a reasonable amount of time.

Also don't forget the owner's personal bills if they will need to be paid out of the same funds. Got a big mortgage, high rent or a big car payment? It still needs to get paid. The higher the owners personal bills the more cash it will take.

A second source of income, a working spouse and so on can help lower the amount of cash required. It is why myself and many others worked other jobs during the first year or two.

This is interesting. When you say gym B will burn cash longer than gym A is that simply because it will generally take longer to sign up 70 members than 30? Or is there something else I'm missing?

I'm planning to start in the park for a few months and as a free-lance web designer I can normally find part time work to generate some secondary income, so this should reduce the risk some.

Tom

[Brendan McNamar]

Originally Posted by Tom McAdam

This is interesting. When you say gym B will burn cash longer than gym A is that simply because it will generally take longer to sign up 70 members than 30? Or is there something else I'm missing?

You got it. Easier to get to 30 then 70. There are exceptions where a location might be so good it is worth the extra overhead. Think high income, expensive, high real estate cost, densely populated area with really bad traffic issues. These areas it might be better to open on the bigger side but there are not a lot of these left that don't have CrossFit gyms already.

Big is big.
Profitable is profitable.

They are not the same thing.

[Brian Strump]

And if you don't know the difference, don't get started until you do.

Originally Posted by Brendan McNamar

Big is big.
Profitable is profitable.

They are not the same thing.

[Mauricio Leal]

I started with $20k for everything, rent is ~$1150/mo. (1400 sq. ft warehouse), total monthly expenses around $1500. About $12k gone in a flash for affiliation, insurance, security deposit, and equipment (I only bought essentials, made equipment with home depot supplies, and already had a decent amount of weights, rings, etc. to start). That left me about $8k and at $1500/mo, I had at most 5 months (5*$1500 = $7500) to break even. I am 2 months in now and just broke even (~10 clients).

This is my only income (I live with my GF who has a real job that pays her/our rent and part time with my parents nearby), it is a wild ride, it wasn't the original business plan (had a biz partner with whom I separated), and I would not recommend it to anyone who is not ready to risk it all. If I was in a better place financially I think $40-$50k would be a safer investment to start with, but now is a boom time for CrossFit so I'm sure there are lots of people taking a leap, keeping the pedal to the metal, and crossing their fingers.

Further, despite my best pavement pounding marketing efforts, almost all of our clients have found us on their own, which speaks well to the value of affiliating sooner rather than later, but to be honest if I had known that would be the case from the get go, may have been more hesitant to take the risk (thought I could go door to door, "make it happen" as they say). CrossFit and gym membership in general is a tough sell because you are asking people to essentially make a transformation for themselves, consciously or not, and I think most aren't ready for that unless they are already looking. Also, the model is based on hard work and not amenity-centric (to say the least), so your average gym goer is going to be in for a bit of a shock at best. It takes a certain type of person to like what we do. Not a rare person necessarily, but not especially common either.

That said, many of the foundational things give comfort, such as being the best coach you can be, and doing all the little things outside of class to create great experiences and foster community: stewardship. Leave no stone unturned. Take great pictures of people in action, post them on facebook, blog, etc. Keep track of attendance from day 1 and nicely encourage people to come to class if they miss a day or two. Scale the workouts well, don't get caught up in the breathing of fire and do less better rather than more haphazardly. Be ready to evolve and have systems in place to deal with growth, offer referral incentives, have free community days for new prospects to try it out. It's hard to convince people that $150+/mo. is worth it for a gym membership, so we're doing a $99 unlimited first month promo, which seems to be resonating well.

Keep your fixed monthly costs as low as possible to give yourself time to make some mistakes (you will), and don't buy stuff you don't absolutely need. Eat lunch at the taco truck often . Good luck.

[Adam Locker]

6 months running capital which needs to include the owner's salary. Memberships in a box alone don't always go very far to cover expenses. Selling merchandise helps. What we've found to be most beneficial to our members and our trainers is we sell Spamcrap products. It's awesome quality supplements, our members love it. Our trainers make $2000-3000 per month extra. We make that much and more ourselves as owners. Such a win/win for everyone involved. www.spamcrap.com I'd be more than happy to help walk you through how it works.