Yes , my lawyer friend. That is a horrible, horrible story that's like trapped in a hot elevator on seafood delivery day. Bad listeners, this is worst case scenario. Week on run, a profitable gym lawyer, Matthew Becker just told me a business horror story that will make your toes curl. We're gonna share some of this stuff with you today, and Matthew's gonna help you avoid problems.
At the very least, you can feel better about your own bad days when you hear about the bad days that other gym owners have from time to time. Do me a favor before we get to that hit, like and subscribe wherever you're watching or listening. I really appreciate it. Now, Matthew Becker is the owner of Jim lawyers.com . He's the former er owner of a gym in Pittsburgh.
He's here to tell us about partnerships from hell and all the things that can go wrong and make your day a living nightmare. Before we do that, we're gonna note that the scenarios we're gonna talk about here have all been anonymized or even fictionalized, just to protect the identities of people involved. But you're going to find that the stuff that we're talking about is all too common.
You don't have to think very far before you can find something like this that happened in the real world. So, Matthew, welcome. How are you doing today? Are you ready to get dirty?
Hey, Mike. great. I'm fantastic. Yeah, that's, thanks for having me on again. It's always a pleasure to hop on here and talk to you guys. Yeah , I , I was quoted once on a different podcast to say I live in the worst case scenario. And literally they quoted that, like, they still quote it to this day that like, , that's what,
That's why you, that's why lawyers are around. What's the worst that can happen? How do we prepare for that? And that's kinda what we're gonna do today. And listeners, we're gonna give you some fun stuff to make you laugh and maybe even, you know , shiver a little bit. But then we're gonna give you some solutions and some ideas to how to stay out of the muck so you don't need to wade through it.
So Matthew, let's talk about some horror stories here. And you know, I'll go first. Like there's a classic one and it happens in partnerships all over the world, and it's one owner wants to members , the other one maybe thinks that's a bad idea. What else? What other stuff have you seen that causes major friction that gets legal very fast?
Oh, sure. Um, so, you know, maybe one partner wants to spin off and start their own supplement company. And, you know, this can go one of two ways. They would then put all of their time and effort into that supplement company and just don't go and do anything in the gym at all.
Or even worst cases , they start to siphon off gym company money in order to fund the startup of the supplement company , uh, without telling any of the other partners.
That sounds pretty, like, that could be very common, right? Like, I, I see that kind of stuff happening where you've got entrepreneurs and they just think of like, I have a business. I would like to chase that shiny object over there, but maybe I'll take a little from this and that and the other. And that's basically, I think , uh, you know, that that happens more often than you would, you would, you would think .
Mm-Hmm , . And like, here, I'll give you another one related to that. What if two partners start the gym company and one partner just doesn't feel like doing anything at all? Yeah. .
Oh , that is like the number one reason that partners call me, or one partner calls me to say like, how do I get my partner out of my, out of the, out of the , the business? Because, you know, we were in this and like a year in , they realized it's not all roses and , and , and cupcakes or whatever running a gym, you know, it's, it's very rewarding, but it's tough business sometimes.
And so they just like don't do anything. They , they go back to their corporate job, they stop coaching, they disappear. Um, that is also a really common one. Uh,
Unchained to a deadbeat.
Yeah. Right? Yeah. And then you're chained to 'em and like, you gotta share profits with them because they're partners.
Or how about this one, Matthew, worse than that, what if there's no profits, the gym is dying, needs additional cash, and one partner says to the other, Hey, we both gotta kick in 10 grand . And the other guy's like , uh, sorry. You're breaking up here, dude. .
Yeah, I don't know. For some reason my bank account's locked
Up . I never got your message .
What else you got? Yeah , well , you know, a common one that I'll use when I'm talking to partnerships and putting together operating agreements is, you know, one partner becomes like the nutrition guru in the gym and they start to build a nutrition practice in the gym, but they start to get a lot of traction.
And so they decide they're gonna go online and do a , you know, build a nutrition practice online and all of a sudden they start siphoning off the gym's nutrition clients. Well that's a loss of revenue for the gym company. And to gain a revenue for this individual partner who's over here now operating their completely independent business , uh, that can cause a lot of problems between partnerships.
'cause it's like you're now benefiting from what we did together in the gym.
Uhhuh, , what about this one? What about illegal activities? Mm-Hmm. one partner starts doing something that's, you know, clearly not legal. Yep .
Yep . Selling drugs , uh, smoking weed outside the gym if you're in a state where that's not legal , uh, between classes, during classes, dare I say . Yeah. And , and members start to get a little teed off and they , they start to leave. Yep .
Just selling, you know , I I actually, I never, he was never a business partner of mine, but he helped me get my gym started and thankfully we parted ways prior to this happening, but then he moved into another state and was eventually brought up on federal charges for dealing in steroids. And so things like that can happen.
Yeah. That's actually like, you know , sadly that is a gym funding plan that's part of a business plan for some gyms and it's not good. And there's other aspects of like illegal stuff. Like, I'm not paying these taxes, I'm not declaring this stuff. I'm not doing these things that should be man , that , that, you know, are required. I just refuse to do it .
One partner wants to check the boxes, the other one doesn't, and all of a sudden you've got gaping holes where all sorts of problems are gonna start to link in .
Yeah . Yeah . And a couple scenarios that, you know, are , are common but um, you know , maybe aren't quite so like as, as as you know , shocking as the member or one of the partners dating an influencer and now the influencer comes in and from Instagram and starts stealing services from the members. You know, like that's another one that, that we've seen.
But, you know, another common one is, you know , we , we start with one individual and a couple partners come in or we start with a , you know, a pack of three guys and the fourth comes in like five years in and finds out that he was not disclosed all of the tax problems because the company hasn't been paying their federal taxes for the last five years.
And all of a sudden the IRS comes knocking on the door and this partner's like, am I stuck? You know, that we've got $150,000 worth of tax debt. Um, I was never told about this before I bought in. You know, that's another problems that crop up when partners join that they weren't exposed to prior. That's another common one that we get. What do I do now ?
What about this one? What about substances, drugs, alcohol? We mentioned a little bit, but like massive personal problems. Like what two partners start a gym , one partner gets a very crippling addiction that kind of spirals outta control and all of a sudden everything is bad. And it could be like theft in the business, it could just be absenteeism, it could be, you know, anything else What happens there? Yeah . You see
That now that's Oh yeah, yeah. I've, I've seen that in my own personal experience, not as a, as a gym lawyer, but as a gym owner. Uh, where, you know, one of the, one of the gym owners does that, they develop an alcohol addiction. They show up hung over , uh, the next day , uh, to coach the 5:00 AM class. They disappear for a week on end only to find out that they're binge drinking in a hotel room somewhere.
And the gym is just like barely holding on , uh, because the coach who's supposed to be there is the operating coach isn't there. And the partner's having to then come in and try to operate the business, even though they were just supposed to be sort of like the backend business side of it, while the other coach was supposed to be the day-to-day operations.
And that is, you know, that that one, that one I'd forgotten about that one in my own personal life. But yeah, you know, that, that is a situation that happens.
How about this one, and this is interesting in the climate of our times where there's a lot of , uh, rage going on based on a whole bunch of different things. What if one partner decides, I wanna speak out on this political issue very broadly on all of our platforms, and the other partner thinks maybe that's a bad idea. Have you ever seen something like that?
Yep . Yep . That with, with coach , uh, with coaches as well. Um, especially, you know, it happened four years ago, it's probably gonna happen again. Gym owners get ready over the next couple of months.
There's an election coming down in the States, I hear.
Yep . And it's gonna be a hot one. Yeah .
to say the least.
And it's partners, whether it's coaches, sometimes it's even members, you know, that that's just a topic. And what is it? You never talk about money and politics. Right? And so, you know, politics is a big one. And when one, when one coach is very adamant about flying their flag and the other coach is trying to keep the peace , uh, you know, that also can cause some big problems.
Now with that one, we hope it really only comes up every four years. And so it's not like in the interim we really have to worry about that one too much. But it is a problem .
Yeah. I mean, I can think of off the top of my head about 10 issues right now that I would be terrified to post about, you know, . Yeah.
Oh
Yeah . Oh yeah . There's so much stuff going on right now and like it gets heated fast, you know, and I could see that becoming a partner issue
Or something. You know, I'll , I'll throw one last one out there. One partner, you know, you know something like , uh, the George Floyd situation that happened down here a number of years ago and Jims were scrambling for like, what do we do? What , how do we show support? Are we not gonna show support? Are we going to , uh, do this or that?
And then you end up with two partners who are butting heads about, they may agree politically, but they, one partner doesn't really want to get the gym quote unquote involved in that kind of a situation, while the other partner does want to go out and be a forward voice about that. And that also can cause some massive butting of heads between partners.
Is the gym a political platform for whatever, whatever issue, right? That becomes a huge one. And there are consequences to each decision. Let's do this.
Let's dial in now on a specific scenario with the idea that many of the things that we've talked about, listeners, things that you are dealing with in your partnerships or things that you see in the community, all of this is going to come down to some partnership issues that Matthew's gonna help you solve.
So lay out something, Matthew, a scenario that we can kind of hang our hat on here for the rest of this discussion. Tell us what is going on and then we'll get into how we prevent this, how we deal with it, that kind of stuff. Here's the scenario. Yeah.
Yeah. So this is just , we're just gonna kind of refer to this as like the triggering event. So everything we've talked up to about , to this point is sort of like various triggering events that are common in the gym space.
And the one thing that I want the gym owner who's listening to this to really hold onto throughout the entire conversation is as this snowballs and snowballs and snowballs preparation from the beginning is gonna be the name of the game. And so we can head off a lot of this stuff if we've prepared for it properly because somebody like me lives in this worst case scenario. Okay? All right .
So the fact pattern, if you will, the law school fact pattern. One guy, starts up a gym and he's got the, he's, he's the regular guy who became a CrossFit member, grew a passion for it, we'll just call it a CrossFit gym, I don't care. Call it a functional fitness gym, whatever it is . He became a member, he grew passionate about it.
He decided that he doesn't like his corporate job and he wants to go start his own gym. So he does. He goes and he opens up a gym one year in realizes you know what, this is a little bit more difficult to grow and grow and grow than I thought it was going to be. I need some help. I need some financial help. I
Need culture green business for mentorship. We'll just say that right now . That's right . Now he has not made that important decision. Keep going. Right?
Which is also always get mentorship. Okay? So he doesn't have a mentor, so he is gotta bring some people in. He needs some operations help, he needs some influx of money. So he brings in two other partners. So again, these were not partners of the gym originally. We're now buying them in, okay ,
This is his baby and he's getting help.
That's right. So these two other people come in and they are now a partnership of three. Okay? We'll just say they have a limited liability company. 'cause that's the easiest thing to talk about versus corporations and shareholders and everything else. They just have a , a run of the mill limited liability company.
They're now three partners and they move and, and they've brought in, you know, let's say $75,000 and, and they're influx and they're trying to get things going again. But the original owner is still the day-to-day operator. Okay ? They never did anything about an operating agreement.
They never did anything about , uh, designating roles about what needs to be done on a day-to-day basis and who's in charge of what and whatever the whole lease is in the original owner's name. Um, or the, you know , personal guarantee. All personal guarantees throughout the way that we're gonna talk about. Were all in line with the original owner.
The original owner didn't have any membership agreements, never talked to anybody about registering his, the gym with the state doesn't have any employment contracts, nothing like that. He was just shooting from the hip because that's the way the old gym owner did it. So this is the way he's doing it. Okay? Because he is there day to day , he starts to develop a little bit of a thing for one of the members and Yep .
And it starts innocent. It starts just with maybe a couple tactile cues here and there. Maybe they meet up out in the parking lot after the gym a little bit there . Maybe he need some waivers language about personal contact anyway. Sure enough, it starts to get out. 'cause they can't keep it quiet forever. Gym, social events, they're seen a little bit too close together. Alright ?
Some rumors start to crop up in the gym and suddenly some members start to have an issue with this. And because some of the members start to have an issue with this, they think the coach is giving favoritism. They just don't like the fact that it's, there's this co-mingling of the coach with the member because it's not very professional. So they start to back out.
Now all of a sudden the two partners catch wind of this and they're like, well , oh crap, we're not there on the day-to-Day operations and, and this is gonna go bad.
It feels bad already. They, they smell something going south. Yep .
So they start to really worry. Now coaches are starting to back out because they're feeling like, you know, or some , some of the other coaches because they're feeling like this coach, you know, he's not doing a good job. He's showing too much favoritism to the member. He's not treating other members properly,
Not treating , I'll pull this at you . Maybe this member suddenly has keys to the building and is showing up at weird times.
There you go. Yep . That stuff also happens a lot. Right? Okay. So we have this sort of, this triggering event that is now going to snowball into big problems . Okay ?
So suddenly, because all these members are backing out and the coaches are starting, the other employees are starting to have issues with this, the two members who came in and brought their money in, who really just wanted to be a part of this and help this guy out are really starting to get cold feet and they wanna run for the hills.
We didn't sign up for this level of risk.
That's right. We gotta get out, we gotta get outta here. Okay? I don't care about our investment money. Just get us out. Right? And that brings us to the first problem because what I said a few minutes ago was they just gave this guy money, walked in, were considered partners and never did anything formally about it. Legally, there's no purchase agreements, there's no operating agreement, there's nothing in play.
The problem becomes the default to most states when there's no operating agreement saying otherwise, is that the only way you can get in and out of an LLC is by consent of all other members.
And so we have a situation here where we've got two guys who won out and the third guy, the original gym owner who is perhaps also kind of panicking at the moment because he's realizing that he made some mistakes and he doesn't want to carry all this on his own. So there's a potential, he's not gonna agree to allow these two guys out. And so how do they get out? And that's a big problem.
And it's a problem that we don't have a , a really clear answer to other than should have had an operating agreement.
Yeah. And I'm gonna jump in Matthew, listeners, you can think of infinite variations of this scenario that happen all the time. Maybe it's not two or three people, maybe it's, or sorry, it's three people, maybe it's just two. Maybe it's not sleeping with a member. Maybe it's something else, maybe it's whatever.
But you see the pattern here is that something bad is happening, there's no documentation and someone wants out, all right , Matthew, take us forward here.
Yep . So we could have had buyout clauses that allow people to leave. We could have had , uh, you know, I've now used triggering events in two different situations, but we could have triggering events in that operating agreement. If this was a scenario where like, you know, we go back to some of the other common scenarios.
That third partner , um, is now doing something illegal that can be an automatic triggering event that allows us to actually kick that guy out of the LLC , get him out of the business so these two new partners can try to fix things. Okay? So that's kind of like problem number one is how do these two guys get out if they don't get the consent from the third member to, or the third partner to allow them out?
And really the only scenario there if he won't consent to let them out, is to basically sue him to get a court order to force these two partners out. So if you're the original gym owner, and this is what happens now, you're potentially looking at already a lawsuit coming from these two other partners that you're gonna have to deal with while all this other stuff is happening within the gym. Well ,
That sounds horrible. At the best, the best. You know, if it , if this is happening and there's no documentation, at the very least you've got a huge problem to try and figure out what's going on because you don't know, right? Like you've got, you just made some handshake deals with some napkins and so forth, and all of a sudden you've got partners. There's no agreements or anything like that.
And that's in a best case scenario. So at the best, in the best case scenario, you are confused as hell in a worst case scenario, it's getting legal and you're getting, like lawyers are getting involved, people are being sued and money is starting to go outta the bank account and in , into lawyers and judges and all that other stuff. What's go , what do we do? Like it's good for you Matthew.
You get paid because you get to sold . Yeah. That's great for out . That's right . Take us further.
Yeah. I mean the , the only thing you can really do in this situation is sit down now before any of this stuff happens, it's like, it's like going into a marriage when you go into a partnership, you're going into a marriage better or for worse, right?
And if you are think yeah, I need a prenuptial agreement when I go into a marriage in the event that I ever get divorced, think of your operating agreement as the prenuptial agreement. This is, yes, this is what happens to like pay us and how we're gonna do taxes and where the company agrees to provide you the limited liability protection and that good stuff.
But it also talks about what happens when crap hits the fan.
So I'm gonna jump in and ask you this question right now. Can you through jim lawyers.com backfill operating agreements for partnerships right now that are already in existence but maybe not documented?
Yes, you can. Yep . Yep . Piece of cake. Easy thing to do and, and we can do it at any time .
Easy to do and it probably easy to do when there's not acrimony and fighting going on, right? Yes.
.
So if you're listening,
Do it now while everybody's happy.
Do not have something like this in place. It would be in your best interest to put it in place now. Be before the worst case scenario. So jim lawyers.com, that's where you can find Matthew. Check that out because it's, it's hard to unravel really tight knots. It's much easier to tie ropes together properly in the first place. Keep her going, Matthew . That's right.
Okay, so let's move the partnership off to the side now. 'cause we now know that that's gonna be a crap show and, and that's gonna blow up. So these two partners are trying to exit and they're leaving this operating guy with no, no backing whatsoever. Money is already tight because perhaps they pre-sold a bunch of memberships because remember this partner was, he was struggling for some money.
This the original owner operator, that's why he brought these two guys in. So he probably was also pre-selling memberships maybe six months a year paid in full so he could get a big influx of money in order to keep the gym going, meet rent payments, maybe try to do some marketing to try to build the gym a little bit more.
But the problem was now that he's pre-sold these, he's closing mid-year, what are we gonna do about it? Which I forgot to say. So now that we've got these problems with his partner leaving, this guy says, you know what? I can't do this on my own, I'm done. And
You know , they happens , but I take in much money.
, right? , it happens where for whatever reason, when gym owners get to this state, they just boom immediately and they just like, it's like, I don't wanna deal with this. I don't wanna have any fallout from this. We're closing right now.
And they've, they , we've had situations a couple of times where gym owners have called us with these sort of similar situations and wanting to close and they listen when we say pump the brakes, pump the brakes, pump the brakes, hold on , because of everything we're gonna talk about from this point forward, you can't just shut down right away.
Like I get that you got some financial hardships, but you can't just shut down right away. But occasionally they don't listen and they go, Nope, I'm done. Shut the doors.
And that's when some clients get upset. I'm imagining
Now we've got clients that are gonna get teed off . Okay, maybe he wasn't pre-selling or , or or paid in fulls and he only took money at the first of the month and it's the 15th of the month and people are just gonna be off 'cause they lost half their membership maybe. Okay? That's probably best case scenario in this
Instance. Yeah , it's still bad. Worst
Case scenario is he sold 12 months, paid in full, he sold six months, paid in full, he sold a package of 24 , uh, private training sessions at a hundred dollars per session. Okay? And he should be sitting on all this cash. But he isn't because he was paying for coaches, he was paying for marketing, he didn't have enough money to come in and pay for rent. So it's been going to rent.
And so the company now doesn't have the cash to cover its debts. And when that happens, the company is insolvent and we'll come back around to that at the very end. But the problem is now we got a bunch of members who are saying, I want my money back. I want my money , I'm out. Okay, I quit. I gave you 12 months in advance. Too bad. I want my money back.
And the gym owner has to say, like, I, I , I can't, I don't have it. Okay, well now we're gonna walk down a path of is this gym in a state where the gym has to register with the state and it's in a state where they have to register and they have to have a written membership agreement. And because they're paid in full pre-selling, they also have to post a surity bond.
And if they didn't do all of these different things, there's now potential criminal charges that could come from the state to this gym owner.
This is spiraling fast.
Yes, . It will .
And this is not uncommon, like listeners, you know, this is not uncommon.
No, no. It come , it and it , it spirals very quickly. And so, you know, the all it takes is one member who prepaid a membership who's now off, who calls the attorney general's office of the state reports to Jim. And there are only a few states where you can pre-sell without having to register with the state.
Most states, if you're selling anything beyond just like month to month, you're gonna have to, you have to register, you have to have a membership agreement that's very specific and you're gonna have to post a certy bond, which I think Mike is something that we've talked about in the past. But
I bet it basically still know this
, right? A certy bond is a very large monetary bond that you post with the state in the event that you close after pre-selling a bunch. And the members can go and request back their money back from that bond with the state.
How many gym owners off the top of your head, Matthew , do you think actually do this? What percentage is it low? Oh boy, it feels like it would be low .
It's not as low as it was two years ago before it started . Probably
New . Yeah .
, it's not as low, but it is very low.
Like less than 50%. Would that be accurate?
Yeah, I think that would be accurate. Yeah , I would say so . 50% Jim orders
Might be a risk, right?
And and the only reason that that number is going up is because we're catching more and more gym owners from the beginning, you know, with two Brain . They do a lot with starting gyms and we have a lot of the material in that starting the gym book and , and some of the modules and stuff.
And so we get those gym owners early enough that we can say, Hey, phase three of opening a gym for , from our perspective, phase three is now your gym contracts, your waivers, your membership agreements, your staff agreements, and we can then talk about state registration if they're in one of those states.
Yeah. And I'm gonna jump in and just say Two Brain is all solving problems before they happen. We've all made too many mistakes. It's all documented. You can avoid these potholes. Eight in full discounts, kill gyms. Chris Cooper's written about this in detail. They're the worst idea you can possibly do, do not offer them. And that relates to what Matthew's talking about.
Other, in addition to that, paying trainers in advance for services also probably not a good idea. You jumping
Ahead on me, Mike. Sorry.
No , I just, I got, I you started like my alarm bells went off here. 'cause I'm thinking stuff . Yeah , I won't go further on that, but let me just say this . Is that the stuff that Matthew is laying out these problems with the help of a mentor become, they're not, they don't appear because you took the right steps at the beginning. So de you on your train
Now you didn't derail, you didn't derail was just next to my list was employee issues. Okay, go , go anyway . So , all right , so we've got these problems now with the members, right? Like they're, they want their money back and the gym owner, the other partners are gone, right? And he's like, I don't have any money. You know, what am I, what am I supposed to do ? I can't give you guys your money back.
Lawsuits are gonna come, we're talk about chargebacks in a few minutes. Those are gonna come, all right , but now you've got the other staff, the the employees, right ? Maybe they're independent contractors, it doesn't matter in this instance if they're independent contractor versus employees, can you fire the employees? Do you have, you know, if , let's, let's change the scenario for a second.
Let's assume that it was one of the other gym , one of the other coaches who was sleeping with the member. Okay? That also happens a lot. Just as likely as one of the owners sleeping with
Them . Member . Very common.
Can you fire that coach? Do you have an employment agreement that says that this coach is at will and you can terminate them at any time for any reason as long as it doesn't violate the law.
Um, we've run into scenarios in these situations where the gym turns over their employment agreement to us and we look at it and it literally says in the employment agreement, the gym has to give the employee 30 day notice and a right to cure before they can terminate them. Like that's terrible language . Like never give your employee a right to cure under these circumstances because these
Are really bad. Now you gotta like just try and fix them ,
Right? It's gonna come back to bite you. Uh, so we just want employment agreements that say these employees are at will . We want , um, independent contractor agreements that say we can terminate at any time for any reason. Um, because of these situations, we don't want to give them a right to essentially cure the problem or notice requirement before we can terminate them.
And so the next problem for this gym owner is everybody who's worked up to this point has to be paid. If, if, you know, if we're shutting down in the middle of the month and they've worked the first half of the month and you always pay them at the end of the month or you know, every two weeks or something, you still have to pay them.
But Matthew , I spent spent the money on a vacation to Hawaii with the member that he was dating
, he already doesn't have any money, right? It's gone . So he, he, you know, now he's got issues, he's gonna have wrongful termination issues, he is gonna have claims , uh, we , you know , wage payment collection, law issues that are gonna come back at him because he can't pay. And then you brought up Michael, what do we do about the fact that we've prepaid these coaches for private training?
You know, I saw this pop up, I think it was actually in the two brain Facebook group , uh, earlier , uh, I think , I think it was just on Monday I saw this where one of the, one of the members in there said, you know, do you have any other way to do this? Because the system, I think it was like what , or push press or something like that.
They do their payroll through that system and they have to pay the coach in advance or what they're supposed to be training that client. And then ultimately, you know, that's commonary that comes up here, is that client quits and the coach has already been paid to service that client. What do you do? Well, same thing here.
The gym shuts down, the client wants their money back, the coach has already been paid to service that client. They can't service the client 'cause the gym's closed . The gym owner doesn't have the money to give the, the the client their money back and what are they supposed to do? Go to the employee and say, Hey, give me the money back so I can give the the the client the money back.
It's just not a good situation.
It's so bad. And this again, this spirals just from these small little things at the very beginning. And all of a sudden if you look at the scenario and follow what we've talked about dating a member has equaled a partnership blowup that has litigation attached to it. You've got staff members who are potentially litigating over wages and so forth and wrongful termination or whatever you wanna say.
We have clients who are potentially litigating over eight in full memberships that I haven't got a gym to workout at and I gave you a thousand dollars. All of this like it's terrifying. Like this is worst case scenario. Uh, have you got , uh, can you take us any further into the muck or do we start solving it now?
Oh no we're not. We're we got like three more steps into the muck here, . So
I feel like a tray in the swamps of sadness where my horse is just like going underneath the mud and never ending story. If you can remember that reference ?
Yep , yep , yep . Um , and you know, again, this triggering event is one we picked. It could be any of the ones that we ran with anything just at the beginning. Yeah. So the next problem is what are we gonna do about the lease? Right? Okay , we gotta close the gym. You got a giant contractual relationship with your landlord here in order to pay on a lease.
But I spent money, Matt
, you can't just close and walk away from the lease and you've likely got a personal guarantee. So in that instance it's not even like, oh I can just bankrupt the LLC and walk away. No, you're personally tied to this lease, this original gym . I
Forgot about that part. Yep .
Now this original gym owner before these other two partners came on, probably signed a personal guarantee on this lease. Now the landlord's gonna be coming after him . Okay,
That means like house and car personal assets are now in play.
Yeah, exactly. Yep . House, car, bank accounts, you know, all that stuff are, are now potentially in play beyond that. Okay? So the gym owner goes, okay, so here's my saving grace. I've got like 50,000, $80,000 worth of equipment in this space.
I can just liquidate my equipment and that's gonna give me the money that I can pay off the coaches, I can pay off the, the , the , the clients and maybe I can still have a little bit left over to give the the landlord a lump sum payment in order to get out from under the lease. Great. Except more and more gyms we're finding have SBA loans and EIDL covid loans that are clouding title on equipment.
So they might not even technically own their equipment. Is that what I'm hearing?
Well they own it. They just can't sell it. So here's how this works, , okay , you go and during covid you took in the one of the EIDL loans or you needed more money in startup and you took an SBA loan out. Okay?
In order to guarantee that they get their money back, they're going to require you to collateralize your equipment, which just means in the event that you ever default, they can technically come after you and they can take all the equipment and order recoup the unpaid amount on the loan. When they do this.
Banks SBA, all of the people who know what they're doing in this realm go and file what's called a UCC lien under the Uniform Commercial Code, a lien on the equipment. It's a document that sits with the state that renews. You have to renew it every five or so years depending on what state you're in.
And it basically says that as long as this lien, this document sits out there saying that you collateralize the equipment, you technically can't get rid of the equipment until you've paid off that loan. So now we've got a situation where he , the gym owner pulled out a a $24,000 EIDL loan hasn't paid a dime on it because the interest L is so low I don't have to worry about paying this thing off.
The government isn't currently in collections, but you know, just right now they're not coming after these things so gym owners aren't paying on them. Meanwhile it's a clean , it's a , it's a cloud that's sitting there on the equipment and the gym owner technically can't liquidate this equipment without either clearing off that lien or getting the SBA to compromise on their loan.
So long story short , I can't sell my kettlebells to pay off any of the people that are coming after me. Right?
Exactly. Until we figure out what we can do with the SBA And there are things that we can do, but anybody who has tried to do this will know it takes a very long time to get the SBA to agree to do anything on this stuff .
Bureaucracy, we all love it.
Yep . Yep . All right . So we're two, three months into this crap and now all of a sudden clients really realize they're not gonna get their money back and they start hitting chargebacks and so they go to your credit card processing company and they start demanding their money back. Credit card company is going to your , your processing company is gonna give 'em their money back probably 'cause it's insured some way .
They're then gonna go to try to pull it from the Jim's bank account. There's gonna be zero money there for them to pull from the Jim's bank account 'cause there's no money there. Right. Jim owner probably signed some sort of personal guarantee with that credit card processing company way back when, when he started processing credit cards
When I read the agreement and checked the box That I understand but I didn't read it and understand. Yeah,
Right That that paragraph number 43 at the very bottom that says personal guarantee didn't
Read it but I said I read it. Right,
Right. And so guess who else is now gonna be coming after the gym owner looking to get back all the money that they just had to give back to the clients.
This is horrible.
Um, and then the final step, last one, this is the , this is it for the muck. I mean there's other things that could happen throughout this entire process but these are the big ones is finally somebody decides to sue the LLC 'cause they're just like, I'm done with this, I can't, I can't do it anymore.
You know, perhaps the employees sue the LLC , uh, the SBA comes after the LLC, maybe he has a private bank loan, okay. That also has a cloud on the title. So they're gonna come after the LLC and in the end the LLC is not gonna be able to protect the gym owner because he's rendered the company insolvent.
Is , this is something you and I have mentioned in the past, Mike as a piercing the corporate veil piercing the company veil, whatever you wanna call it. It's a legal way of getting by that LLC in getting to the individual owners. And in this instance, there's common ways to pierce one of 'em is co-mingling funds. Like if you use company money for your personal gain, that kind of a thing.
But another way is rendering the company insolvent. So pretty much anytime a gym owner does a paid in full membership and then takes that money and goes and uses it for something else and doesn't keep enough money in the bank account in order to pay that back, if they demand a refund, they've just rendered to the company insolvent.
And this is a big common problem just with the maintenance of LLCs and corporations because you have to have a nest egg in the account that's going to cover the debts in the event that something comes up. If you go, if you make no money next month, can you cover your rent? If not your company's insolvent. Okay?
If all of your members who you've pre-sold to demand refunds all at one time or give chargebacks, do you have the amount of money in your account to cover all those chargebacks? If not, you're insolvent. Alright ? And so it pretty much then nullifies the protection that limited liability protection that we're all trying to get from the company.
And once again, as you said earlier, Mike now exposes that gym owner's personal bank account, their cars, their house, you know, whatever personal wealth they've amassed is now gone well exposed. I shouldn't say it's gone. It's exposed
Soon to be gone.
Yeah. Soon to be gone. ,
This is horrible. This reminds me of like those situations that happen in in WWE e where you get like 15 wrestlers coming in the ring , they're all just stomping on one wrestler in the middle. Like that's kind of what right ? That exactly , like that's kind of the situation, right? The legal equivalent where everyone is taking their piece . Yeah.
Yeah. Um, and you know, we can, we can talk about scenarios where this sort of snowballing effect happens that doesn't involve something like this, but you know , uh, let's say the Department of Justice shows up because your gym has a violation with the Americans of Disabilities Act, an a DA violation and you know, you bought , you , you bought into the gym and, and you know, you have a a lease assignment and what
does that assignment say and what's the protections and is the landlord liable or does the lease say that the tenant agrees to cover any issues that come out of an a DA violation on behalf of the landlord? Like there are different types of scenarios like these.
The ones that we are covering here are probably like the most common because you know, it , it involves partners, partners always have issues and it doesn't have to be a partnership. Um, that's just where we see a lot of these triggering events come out that then end up snowballing into this stuff. But it can happen in a number of different scenarios that pop up during gym ownership.
So how do we, like this is just a bad spot. How do we solve this? What's the quickest way to solve this? And then how do we prevent it? What can we give Jim Morris to take away here and keep them out of this mess?
Yeah. Yeah. Unfortunately solving it is really just like trying to control the worst case scenario.
And you need a lawyer, I'm guessing
You def you definitely need a lawyer. You need somebody like us to at the very least consult with you on how to do it to try to avoid a lot of these problems. Um, for example, we work with gyms who come and say, Hey, we wanna close. And we can say, okay, hold on, like I said earlier, pump the brakes for a second. Let's get a full picture of the situation. How bad is it financially?
How many presales do we have out there? What's the lease situation look like? What kind of SBA loans do you have out there? And then we can start to work in the background to kind of take care of some of these things to ease the pressure on the gym trying to shut down. So that's about like preparation is, is the name of the game.
If you, if you're getting to this point that we've laid out this scenario, it's not that there's nothing we can do, but it's, it's almost too late to provide the original owner or the owners a lot of protection. We're just sort of mitigating damages at this point.
So listeners, if you're at that stage right now, you're gonna need a lawyer call managing lawyers.com, figure this out. You're gonna be in a fight, but you can work with someone who can help you get out of it in the best shape possible. I wish you the best on that 'cause it's a tough spot. But there is light at the end of the tunnel.
If you follow the right path, the better plan for everyone else who is not in this situation yet. And you see how the, you know, the slippery slope of hell happens is to prevent the situation from happening. So Matthew, give us the simplest steps that Jim Morris can take right now. Easy steps just to stop this daisy chain of hell. Yeah.
Yeah, so I mean, we can just go back through the steps of muck that we walked through. So starting out, whether you're a sole owner of a, of a business or you have partners, we need to audit the, the quote unquote the legal entity. Okay? The LLC, the corporation. Let's make sure it's set up properly. Let's make sure all the proper corporate documentation is in play and that you are managing it properly.
And that goes into a play a lot with corporations, LLCs, they're easy to manage, they're informal, they're fine. Um , we can just follow up on a couple of steps. Corporations require ongoing compliance. So that's sort of like step number one because if, if that's not set up properly, it's like building a house on a, a shaky foundation. So from there, next thing we walked into was , uh, the client issues.
Okay, do we need to register with the state ? Do we need to post bonds? Do we have a membership agreement? Are we pre-selling? Let's talk about the pros and cons of that sort of a thing. Okay? But let's prepare for that by getting good documentation in so that we know that we're compliant with law. We're setting expectations with clients.
We're making sure that we're not taking in a ton of money that we can't then provide the service for leases. Don't sign a lease unless a land , unless an attorney has looked at it. If you've been in a lease for a couple of years, can we go in and negotiate with the landlord to get rid of the personal guarantee? These are like ongoing things. Don't just set it and forget it.
Have reach out to somebody like us on a yearly basis to say like, let's take a a a 10,000 foot view of the gym and is there anything we can do now to kind of help prepare for this sort of worst case scenario? Uh, we just launched a service that we're calling Gym Counsel that is ongoing legal consulting on a monthly basis for gym owners to make sure that we're getting that constant view of the gym.
We're getting that constant back and forth with what do the contracts look like? What are you doing to maintain your LLC? Good, let's take a look at that lease and let's see if there's things that we can ask for changes. Okay, employee issues. Let's make sure you got a good employee contract from the beginning that gives you the ability to d terminate at will, right ?
Sets the expectation of like you're not allowed to sleep with members. You as a gym owner, you can control that. You're not allowed to do drugs in the gym, which we laugh at, but I'm telling you I've witnessed this happen.
It gets weird out there. The
Coach says, okay guys ready, 3, 2, 1, go. And they piece out and they go out into the parking lot and they vape and then they come back into the gym. It happens, right? And, and my spidey sense is like, oh my god, that is gross negligence to the extreme. So what can we do with an employment agreement to try to prevent this? What are the SBA loans out there and can we compromise? Can we negotiate them now?
Right now? Not when there's a problem, but can we do things now to start to try to clean this title off? Uh , so that we have, you know, in , in other realms of the law we just call all this uh , basically like asset protection. Okay, what can we do here to protect our assets, our equipment, let's try to get those loans taken care of, right?
And so those are some of the steps that we can take that just kind of went along that path of the muck that we walked through that can help prevent a lot of that from happening.
It sounds a lot like planning
And get mentorship so that we don't get to the situation where we have to close the gym to begin with.
Well , well that's just it. And like again, we're, we're pitching for two brain here, but reality is that a lot of the problems that are caused in that scenario that you talked about are problems that early gym owners made because there wasn't a plan for them to open properly. We just made it up as we went. We made mistakes.
Those mistakes spiraled and they became very difficult to fix and in the worst cases they were fatal for the gym and for the business. And then the clients don't get to train and they don't get to become healthy. And it's horrible for everyone starting a gym. Not as hard as it sounds if you have help because all these bases are covered.
How do I set my rates and how do I charge that discussion leads you to not have paid in full discounts, right? Like that's just a simple example I'll throw at that. Uh , for you employment contracts, that's another one . What does this person do and how is it documented? Partnership agreements, all those things.
Planning ahead is going to help you if you're out there, listen and you're thinking about starting a gym, work with Two Brain to start that gym so that you do it properly and avoid all the mistakes.
If you're listening out there and you have a gym and it's going well and you haven't hit these problems, but maybe some of your spidey sense is tling now and you're thinking, I think some of these might be a problem, look at working with a lawyer. Matthew is obviously our first choice for something like that to figure out how can I limit risk?
As your business grows and gets bigger, it's going to be a really great idea for you to look into the legal aspects of things and make sure am I protected as I move forward? And Matthew, I love the idea of this, it was called Gym Council , is that what you said it was? Yeah .
Yep . Yep . Jim Council , what
A great idea. Think of it as the handyman who shows up at your house. Is it broken? Fix it. If it's not broken, let's make sure it doesn't break. And maybe let's do some preventative stuff. 'cause that pipe's been there for 80 years and we might wanna swap it out. I love that idea. Have you , when did you launch the service?
Literally last week? . We just very ,
Okay, I'm gonna , I know the answer, but like why did you, why did you come up with this one? Were you just seeing like too much stuff there where it's like, wow, we can, an ongoing service would solve these problems?
Yes. That, that was a , a large part of it. But there was also, there was always this question that comes up like let's say we, let's go through opening a gym real fast. Okay, there's three phases. We create the legal entity, we look at the commercial lease, we draft the, the contracts like waivers, membership agreements , staff agreements.
The gym is open and then the gym owner would say, well what do we do with gym lawyers ongoing? And previously it was just like, well when there's a problem, reach out to us. And that was starting to conflict with our message like we're doing here today , which is you need to prepare for this stuff before it's a problem.
And gym owners, they , you know, for better or for worse, they don't understand like my standard operating procedure, which I worked with Two Brain , you know, how can I adjust that standard operating procedure not only to be fantastic because Two Brain is now allowing me to step back from the business, but can I rewrite that a little bit so I can protect myself legally as well?
Okay. And I can go into samples for that. But you know, it just kind of came to me that gym, gym owners, like they need monthly mentorship really should have somebody like an in-house counsel that they can go to to just say things like, Hey, you know what, Alabama just changed their overtime laws. What do I need to know about this?
Okay. And we do that ongoing research and allows us to set up, we just have a , a standing 30 minute phone call every month with the gym owner and you know, it allows us to go through like, okay, let's walk through those SOPs. Let's figure out, let, okay, great Two Brain helps you set up that you're gonna do quarterly reviews with your coaches.
Let's adjust that a little bit to make sure that if we then need to terminate that coach another topic that was popular this week for two brand on Instagram and you know , uh, have we set up our SOPs to really support when you get to that point that you want to terminate your, your coach or you just need to terminate them, come and consult with us to make sure you're doing it legally.
You need to fire a client, come consult with us to make sure that you're doing it legally. Okay. Priority access to me is another big part of Jim Counsel, which is something that you get as in-house counsel, but you don't get with the attorney down the road. So you go to the attorney down the road to try to get you to help. He'll get to you when he gets outta court. Okay?
We're giving 24 hour turnaround priority access to me to get those sorts of questions answered. Uh , you need a new contract, we already know and we're there and , and ready to go in order to draft that contract.
So, you know, it just kind of has snowballed over the last two and a half years to the point that like we think gyms just need somebody an in-house counsel in their corner so that we help them identify the problems versus waiting for them to identify the problems in coming to us. We're, we're trying to be more and more and more proactive with the gym owners to avoid situations like this happening.
And that's the reason because if you aren't proactive, you could end up in the WWE battle Royal where you're getting stomped on by 10 different people at the same time. Matthew, let's , uh, we'll wrap it up there. Tell people exactly where they can get ahold of you if they wanna find out more about your services and being proactive. So these things don't happen.
Yeah. Yeah. Thanks. So the easiest way is just go to jim lawyers.com . We've got a bunch of calls to action all over the website. If you go to the contact page, my cell phone number's there, the email address addresses there. Honestly, the easiest thing is just to submit the contact form. As soon as you do that, you're gonna automatically be forwarded to my scheduling calendar and it's a free 45 minute consultation.
Uh, we can do a legal audit. If you have specific questions, we can address those specific questions. Uh, but that's the easiest way is just grab time on the calendar and we'll meet on Zoom.
You should do that, and if you wanna talk about working with a business mentor on every other aspect of your gym, that's not the legal stuff to bring business.com.
You can book a call and there's a link in the show notes where you can do that as well, because like Matthew and I have both said, these problems are solvable, and if you take the right steps at the beginning, you don't have to unravel the knot at the end. Matthew, thank , thank you so much for being here today. I really appreciate your insight and the horror stories.
Always a pleasure. Mike , thanks.
This is Run a Profitable, Jim , I'm your host, Mike Bork . On your way out, please hit subscribe. I'd love it if you did that. And now here's two Brain founder Chris Cooper with a final note.
Hey, it's two Brain founder Chris Cooper. With a quick note, we created the Gym Owners United Facebook group to help you run a profitable gym. Thousands of gym owners, just like you have already joined in the group. We share sound advice about the business of fitness. Every day I answer questions, I run free webinars, and I give away all kinds of great resources to help you grow your gym.
I'd love to have you in that group. It's Gym Owners United on Facebook, or go to gym owners united.com to join. Do it today.