SHRINKING YOUR BIZ TO SURVIVE THE STORM TOOLKIT

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DISCLAIMER

BFS is agnostic: our goal is to simply provide you with the best and most information possible, so this playbook may contain different points of view and information based on different experts’ experience and business models.

Table of Contents

INTRODUCTION

You have been working hard to keep your community engaged, your instructors motivated and your business surviving through reopening.  But as we stand, over 33% of clubs still remain closed, and of those that are open, less than 10% are at 100% capacity*. The COVID rollercoaster is now more than a ride: we are in it for a marathon of an industry recovery as we deal with the ramifications of COVID for the next 2-3 years. Our industry, as we knew it has completely changed. 

On average, studio owners feel ~50% confident about the state of their business.**  For our industry to survive, we need to restore owner’s confidence and provide guidance for success. Most studio owners don’t have the capacity or financial acumen to think through these tough business survival tactics because you’re focusing on the well-being of your community and staff, all while putting the business’s needs before yours. 

I get it – there is no playbook on how to deal with a pandemic. It’s like we’ve hit our 5k mark on the COVID marathon course, but we did not sign up to run this marathon, most of us are not even trained, but we’re motivated and inspired to keep our studio alive! I took my experiences from helping some of the biggest names in the industry (and the little guys too!), to provide a playbook on how to train for the marathon while you’re already in the race. In other words, I can help you navigate how to slow your pace and adjust your stride (“cash”) to make it through the finish line (“business longevity”) 

You have been working hard to keep your community engaged, your instructors motivated and your business surviving through reopening. But as we stand, over 33% of clubs still remain closed, and of those that are open, less than 10% are at 100% capacity*. The COVID rollercoaster is now more than a ride: we are in it for a marathon of an industry recovery as we deal with the ramifications of COVID for the next 2-3 years. Our industry, as we knew it has completely changed. 

On average, studio owners feel ~50% confident about the state of their business.**  For our industry to survive, we need to restore owner’s confidence and provide guidance for success. Most studio owners don’t have the capacity or financial acumen to think through these tough business survival tactics because you’re focusing on the well-being of your community and staff, all while putting the business’s needs before yours. 

I get it – there is no playbook on how to deal with a pandemic. It’s like we’ve hit our 5k mark on the COVID marathon course, but we did not sign up to run this marathon, most of us are not even trained, but we’re motivated and inspired to keep our studio alive! I took my experiences from helping some of the biggest names in the industry (and the little guys too!), to provide a playbook on how to train for the marathon while you’re already in the race. In other words, I can help you navigate how to slow your pace and adjust your stride (“cash”) to make it through the finish line (“business longevity”) 

Two Finance Decision Factors

THE TWO FINANCE-DRIVEN CONCEPTS FOR OWNERS TO BASE EVERY DECISION ON:

Forecast your cash flow through the end of 2021. Information is power, and knowing the rate you’re burning through your cash helps you to make the appropriate financial decisions. This is mission-critical. Get in the grit of your finances, critically evaluate each dollar spent, and its impact on cash flow. Business owners must preserve cash now to enable their business to recognize the pre-COVID potential and rise to what it will be by the end of this marathon.
 
Have a plan. Identify what expenses are minimally necessary to keep the business afloat (I call this going into “hibernation mode”). This way, if you have not reopened, or even if you have, you will have the tools and foundation to flip the switch to hibernation mode if your studio is forced to close again. Every operational decision cannot be made in a vacuum, so we need to analyze its impact on the overall business plan and cash forecast.
 
 
 

THE TWO HIGHEST EXPENSES

Rent

 

If studio is closed – this is not a revenue-generating activity; if open – most operate at 25-50% capacity. The studios that will survive are getting rent deals to preserve cash for longer-term working capital needs.  Of the 28.6% of landlords that waived rent within the NYC hospitality industry, 73.4% waived 50% or more of the rent.*** If you have not engaged with your landlord about rent concessions, do it now. Rent is trending downward, plus the cost of vacant real estate and renovation work for a new tenant are all tactics owners can use in rent relief conversations. Your landlord is likely to be getting concessions on their mortgage payments, which should be passed down to tenants. In the spirit of partnerships, the tenant and landlord need to work together as a team to share the short term burden for mutual success long term.**** If your landlord does not budge on rent, talk with legal counsel to understand what options you have. 

 

Having the tough but honest and transparent conversations with your landlords are imperative. “It’s all about context, storytelling, and giving the human approach when speaking with your landlord,” Cory Sterling, owner of Conscious Counsel, recommends. From the legal standpoint of rent negotiations, Sterling advises to ensure you are not in breach of contract before asking for rent forgiveness and understand what personal guarantees for leases that could have further ramifications. 

  • Full rent abatement during government-mandated shutdown – take an aggressive approach and ask for five to seven months of free rent (months studio/gym is shut down), knowing you have only planned for three months in your bottom-line projections.

     

  • The “blend and extend” option – defer rent while extending the lease, paying the additional rent on the back end. This gives Landlord confidence you’re a viable long-term tenant.****

     

  • Defer rent owed until 2021 by adding $1-2k to each month’s 2021 rent payment.

     

  • Long term lease amendments – low minimum base plus revenue or profit share (percentage of revenue or profits that goes to the Landlord). This will help drive savings when business is down, but also gives your Landlord the upside when operating in favorable margins.
Other studio utility costs

Gas/Electric/Water/Wi-Fi/Telephone – put a temporary hold on the account. Check your lease first, as there may be possible requirements to keep minimum utilities. If not, these are not essential business expenses while your studio is closed. Even if only $50-200/mo., be in a hibernation mode mindset. 

 

Payroll

 

Total monthly payroll costs (including taxes) cannot be higher than the associated revenue stream.  Temporary payroll reductions need to be seriously considered. Every business I have worked with has implemented cuts. Returning payroll to “pre-COVID” rates is important but is an individual decision based on the profitability of each studio. Just like we had honest, transparent conversations about the state of the business with our landlords, we need to do the same with our staff. I’d suggest providing metrics (revenue targets or profitability) to hold everyone accountable for when the business is in a stable position, rates will return to pre-COVID levels. 

Optimize your live virtual class schedule to one to two classes per day and take advantage of the 4+ months of recorded classes to drive members to the on-demand platform. Recorded classes do not deteriorate margin. The on-demand portal is your value-add to sell unlimited packages. For all others, “rent” the class on demand (consider giving 30-40% of revenue to instructors to offset reduced class rate) and use them as a lead generator for new members. Ensure all instructors have signed a media release. 

When determining payroll rates, it’s important to use a breakeven calculation to see how this will impact the number of bikes/mats/reformers, etc. If the breakeven point is higher than the number of spots government restrictions allow, there are a few considerations: (1) reduce costs; and (2) plan for this loss with other revenue streams. I do not recommend solely relying on government loan assistance to make up for this the loss.

Government Loan Program Highlights

Loan Financing Options – to be updated after Heroes/HEALS stimulus package is finalized (TBD).

PPP Highlights

Most businesses have used most if not all their funding. Full forgiveness requires minimum 60% payroll (independent contractors not included) and remaining <40% rent/utilities. The $10k EIDL Grant (free money, not owned under SBA EIDL loan), is deducted from the amount of PPP forgiveness. Unforgiveable loan amounts are charged interest of 1% APR. Another important call out, the IRS has ruled that if you’re given forgiveness, those expenses that are covered are NOT tax-deductible for federal taxes. There are also additional state-specific tax implications. Please consult a CPA, specializing in tax planning, for further analysis of your business’s position.  

 

SBA EIDL Highlights 

Loans up to $150k are eligible through 12/31/2020. The loan is a 30-year term, 3.75% APR, with a 12-month payment deferral from the date of funds. If loan ask is above $25k, business collateral is required (if you’re applying as a sole proprietor – personal assets and business are the same, so be careful).

If you still have not applied for any government assistance, have funds left to spend, or are unsure if your business expenses meet the PPP forgiveness allocation, contact a finance professional to assist. Owners cannot afford to miss the government assistance provided, especially the PPP forgiveness opportunity.

The ultimate question I know many owners are asking: is it better to stay partially open or completely shut down until we can reopen at full capacity? Everyone’s business situation is so unique; there is not a black and white answer I can provide, other than if you continue to spend more money than you’re bringing in, you will run out of cash and you won’t have a choice to stay open or closed. Let’s take the guesswork out of this together: I’m here as a resource. We will come out of this stronger.  

LIVE Q&A WITH THE AUTHOR

LIVE Q&A_ Shrinking Your Business to Survive a Storm

 

It’s August 2020 and we just hit the 5k mark of a marathon you didn’t know you would be running. You’re now waking up to that fact and realizing that you didn’t train for this. We need to slow down your pace to make it through the 26.2 miles by conserving what is left of your energy (CASH!)…

It is time to mitigate your cash burn and STOP funneling money to areas where your business is not (1) operating (ie studio costs when your studio is not open) and (2) generating revenue.

Tune in to this live Q&A to get all of your questions answered on topics like:

  • Handling rent
  • Payroll
  • How to use your PPP
  • Operating costs

and so much more. It’s your time to get your specific questions answered!

THE AUTHOR

Lauren Schoenfeld

Lauren Schoenfeld

Finance Operations and Strategy, Active Core Consulting

I want your studio not only to thrive, but be positioned to focus on what's most important to you - your members and staff. I'd love to learn more about your studio and help address your #1 concern or pain point about your business plan or finances. Feel free to email me at lauren@activecoreconsulting.com or book a complimentary 30-minute call directly on my calendar.

 

 

RESOURCES

*Club OS and ASF   July 2020 State of the Industry Report

**Boutique Fitness Solutions – July State of the Industry survey

***NYC Hospital Alliance’s July 2020 Rent Report

****Director of Asset Management at Domio, Rachel Roth’s advice from negotiating over 350 leases since COVID.

 

THIS TOOLKIT IS MADE POSSIBLE DUE TO THE SUPPORT OF OUR PARTNERS