JF1183: How Relationships Are The Driving Force Behind Crunch Fitness’ Success With Founder And CEO Ben Midgley
Rather than have 400 owners and 800 franchises, Ben envisions having 40 owners and 800 franchises. He says that relationships are the key to any business, and the better your relationships are, the better you will do. Crunch fitness has a strong emphasis on building communities with owners, staff, and club members. Hear how Ben has been able to grow Crunch Fitness into the fastest growing gym chain in the country. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Ben Midgley Background:
-Founder and CEO of Crunch Fitness Franchise, the fastest growing gym chain in the country
-Crunch has recently reached over 1 million members and has more than 225 open locations
-2010 to started franchise arm of Crunch Fitness, then coming out of bankruptcy.
-Never graduated college, started cleaning machines at Gold’s Gym
-Still works out in his basement, treats his franchisees like family (he knows the names of all their kids) and loves to serve his community
-Began his journey to fitness entrepreneurship when he realized he wanted to get healthy
-Crunch clubs are growing at a 77% compound annual growth rate & member growth 42%
-Say hi to him at crunch.com
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ben Midgley. How are you doing, Ben?
Ben Midgley: I’m doing great. How are you, Joe?
Joe Fairless: I’m doing well, and nice to have you on the show. Best Ever listeners, Ben is the founder and CEO of the Crunch Fitness Franchise. Let’s talk a little bit about that and then he’ll elaborate more in detail. In 2010 he took that franchise from out of bankruptcy to now Crunch has been named the hottest new franchise by Entrepreneur Magazine, a top franchise to own, and the top global franchise… Just grown this thing tremendously. It has reached over one million members and has over 225 open locations.
We’re gonna be talking today — as real estate investors, clearly we’re entrepreneurs and I think it’d be beneficial to learn from someone who has taken a company that was past the point of failure and has grown it to where it is today, because as entrepreneurs, as real estate investors, that’s what we’re looking to do as well.
With that being said, Ben, do you wanna give the best ever listeners a little bit more about your background and your current focus?
Ben Midgley: Sure. I’m gonna put a little collar on that… So Crunch is a brand that’s actually been around for almost 30 years. I’m not the founder of Crunch on any level; that was founded by a gentleman by the name of Doug Levine – a very good innovator, a very unique marketer, and he kind of brought Crunch on the scene as what you’d consider probably the first ever boutique fitness studio.
I don’t know if you’re familiar with the term boutique fitness, but they’re the smaller-based fitness centers, about 2,000-3,000 square feet, very specialized on a certain type of exercise, whether that’s cross-fit or spinning studio, or something like that. Almost 30 years ago, those studios weren’t there.
Crunch started in a basement location in East Village in New York, and Doug was doing some really dynamic marketing in order to get people attracted to the brand. So the bran grew up to about 20-30 clubs, changed hands a couple of times, he sold out, and due to a little bit of mismanagement got into some financial troubles and then went into bankruptcy.
That was managed though through the ownership, which is a combination of New Evolution Ventures, which are fantastic operators. They’re a fitness management platform and the private equity investors in the space… Along with Angelo Gordon, who’s the current owner of the group.
So Crunch has been here the whole time, then Crunch was brought out of bankruptcy, and that’s when I was brought in, because I have a lot of relationships with the folks NEV, and I’d previously been with Planet Fitness at the president, executive vice-president level.
We looked at the industry and we said “If we’re gonna start a franchise with this great brand, where should we go?”, so we decided to go into the low price space, which is memberships that are $10-$20/month. Planet was really in charge of the market at that point, so we tried to go in with a better value for the consumer, where they’d get a lot more for those same dollars, and a better proposal for the franchise investor.
So we tried a bunch of different things, and we got it to the point that we now have (to your point) over a million members, we have the most competitive platform in the space for what members get and the franchisees get. Now we’re just consistently faced with “How do we innovate? How do we keep franchisees profitable?” and “How do we stay ahead of competition?”
Joe Fairless: You all chose the low-price space versus the premium model where it’s more high end, but I’m guessing on the more high-end luxury the margins are better – at least traditionally – across different industries, so why did you choose the low price space?
Ben Midgley: Yeah, you’d actually be surprised that in most cases the margins are much better at the lower price space, only because you have to take a very specific focus on your main drivers of expense, which primarily is real estate – that’s your biggest expense in this model, so you have to be very aggressive on the types of leases you negotiate. I’m sure we’ll talk about that more in a little bit.
Your payroll is much less in these clubs, so that’s more of a fixed cost than in most traditional health clubs, and then you do drive large membership bases. Our average membership is about 6,500 members. So if you’re managing your expenses and your profit lines profitably, your margin could be upwards of 30%-40% in the box, which is really good. You’ve gotta run it right to do that, but that’s where it should play… So yeah, very solid in the low-price range.
Joe Fairless: How much does it cost to be a member?
Ben Midgley: It ranges now. We’ve found over the years that we’ve been able to modify our pricing. Originally we started at $9.95 and $19.95. Since then we’ve [unintelligible [00:05:43].20] a health club company in the low price can’t run on a $10 membership.
Joe Fairless: Right, that was my follow-up question.
Ben Midgley: So we’ve modified our prices to $9.95, we have $19.95, we have $24.95 and now we have $39.95 or $49.95. Now, the reason that’s good for us, as opposed to a competitor that maybe only has $10 and $20 is when we added the extra amenities that low price traditionally didn’t have – and this is the difference between low price versus high value low price… A low price club – for example I would just throw Planet out there, because they’re all over the place – basically has a [unintelligible [00:06:17].06] and amenities. No personal training, no group fitness classes, no small group training areas…
Then with us, when you add in this fantastic Crunch Fitness proprietary group fitness programming, it brings in a lot of female members; they love it, it’s great energy. We add in small group training sections like your own in-house cross-fit, with 100 feet of turf and specialized equipment with boxing bags, and [unintelligible [00:06:40].07] and tire flips and all that, and you have great personal trainers on to of all this additional equipment that we have, because we have a greater variety of equipment. Then you’re having different amenities you can place in different sections.
What we found is rather than just going $10 and $20, we can put certain amenities on your base level membership, then you can charge a little bit more for the group fitness; you wanna add in the small group and all those things, you can charge a little bit more… So on and so forth.
Of course, we have the amenities like guest privileges – you can bring a friend in at no cost if you’re on a higher level membership. You get reciprocity to all the other clubs in the country…
We give folks a free license to what’s called Crunch Live with the only company in the industry that gives people their own streaming video service with their membership. So if they’re out at a hotel or somewhere else, they can just plug in and get their Crunch classes right on their phone, on the internet. We’re the only company that throws that in. We give them an online license to a company called dotFit, which allows our members to track their nutrition and their programs online.
Those are the extra amenities that we throw in at different levels, but what that has done – without boring you to death there, and I’m sorry for going on too long – it’s driven our average membership very close to $20/month, which is the highest in our space for a low-priced player, which makes it much easier for our franchisees to be successful when you’re getting a higher average [unintelligible [00:07:54].07]
Joe Fairless: So you’ve got the baseline and then you’ve got incremental pricing based on offering different amenities, and by doing that, you start in at the low level but perhaps you upgrade them throughout the process by offering them these high-quality amenities. Obviously, that principle or that approach can be applied to any type of business, not just what you’re doing.
Ben Midgley: Yeah. We have four options. When somebody comes in, the menu is four options. We don’t get any more complicated than that. We probably have a 60% to 40% split from the higher offerings to the lower offerings. So more people tend to go up higher, which is great, and it works out well so far.
Joe Fairless: Let’s talk about a challenge. Can you tell us a story — within these seven years, what’s been a challenge that you’ve come across and how did you overcome it?
Ben Midgley: You know, I could probably give you 100 challenges.
Joe Fairless: Whatever one is your best story…
Ben Midgley: In general, to summarize — I think I’m gonna talk on a little bit of a broader scale…
Joe Fairless: Do you have a specific story versus a broad scale? Is there a specific story we can get in there and just learn as you were learning in a certain circumstance?
Ben Midgley: Yeah, I’m just trying to think of sort of confidentiality…
Joe Fairless: Right, yeah. You can tell us everything, we won’t tell anyone; we promise. [laughs]
Ben Midgley: Let me start off this way…
Joe Fairless: Yeah, fair enough.
Ben Midgley: So when you work with franchisees — first of all, our philosophy has always been “Stay small to grow large.” It’s something that’s a lot different from other franchise companies. We’ve sold over 800 franchises and we only have about 65 ownership groups.
So we started with that philosophy because we wanted less people to own more units, so we could balance the culture. If you’re a franchise owner, I can know you, I can know your kids, you can know me… We get to know each other much better, therefore we end up over time being able to work through any challenges that we might have a little more effectively.
When you’re trying to manage 400 franchisees, 800 clubs, then you can’t get to know everybody; you just can’t. So we’ve spent extra time, painstaking time trying to develop the culture in the business… And sometimes it cuts both ways, because sometimes people can say “Hey, we know each other. How could you push me too hard on that?” The other side is if there is something that you’re at odds with each other on, you work through it.
Certain examples would be – for franchisees, they’re required to stay on a schedule. So if you come in and you buy 20 clubs, that’s the territory and the rights to buy 20 clubs… So I’m building up to a specific instant. You’re required to build two clubs a year, or sign two leases. The investment for each of these clubs is a million and a half to two million dollars, so this is a fairly significant commitment if you’re gonna do 20 of these. You’re gonna have to invest one way or another 40 million dollars over the course of the next ten years.
So you get out and you open the club, and usually the clubs take off as well as they should. They trend perfectly, they cashflow… It’s just great. In our industry you end up with a portfolio; generally a couple clubs that don’t perform anywhere near what you thought they should, and some that are incredible.
Joe Fairless: Our industry too, in real estate. It’s the same thing.
Ben Midgley: Yeah. And then you’ve got the middle ones that pretty much do what they want, right? But let’s say your first one, for whatever reason – whether it’s operator deficiency, or wrong location or what have you – doesn’t take off, and maybe it’s trending in the wrong direction, and this isn’t a normal case, but it can happen in any… Then that creates a lot of stress with the owner, but the owner is required to stay on schedule, they have to stay on schedule, so they’ve gotta reach in there and invest another couple million dollars to open another studio or health club to offset any potential challenges they’re having in that one.
That’s a real challenging thing to get someone through. “Well, I just invested this. How do you expect me to invest something more if this isn’t trending right?” “Well, you have to, and here’s how we’re gonna work through it”, and that can become a very contentious scenario, so you’ve gotta make sure you throw as much support as you can behind the operator to make sure if there’s something you’re not providing them as a franchiser, that you engage in that and you make sure they get that. You have to look for more creative ways to drive more revenue into their system. Maybe you have to dive in their P&L, they’re spending too much overhead and that’s the cause of that, or you’ve gotta get behind them 110% to get them through that.
The first level then becomes get them to breakeven so everything’s comfortable and there’s less stress, and then still you’ve gotta also apply the pressure on the other side to remind them of their obligations to continue, and if they decide not to, well then you’re at an impasse. “If you’re not gonna develop, then we have to default the relationship, resell to somebody else” and then you’ve got that person sitting there.
That’s a specific situation that we can work through and how skillfully and appropriately and respecting the respecting the relationship between the franchiser and the franchisee you work through that, and ideally you come out with the best outcome, where the franchisee is satisfied, understanding, feels supported and moves on to the next level.
Joe Fairless: Yeah, those have got to be some sticky conversations, at least initially, if it’s not performing, and you’re like “Well, you had a commitment. Let me help you get that thing to perform.” You mentioned some creative ways to drive more revenue; one of the things you said is too much overhead. What are some other ways that you help drive revenue for a franchisee at a particular location?
Ben Midgley: Sure. We have a fantastic marketing department, we really do; we’ve got a great team. But we have essentially an in-house agency within Crunch. You’ve got all your creative, all your media buyers, your social media workers, all the support at the coordinator level and manager level that will help the franchisees analyze their sales and the average due…
You can do things as simple as modifying your pricing, so your average price point starts to tick up, and then that will compound as you move along. You can do things with the interior element of the club. In certain regions of the country you have to sort of approach the community a little bit differently. I’m sure you’ve seen different franchises that had different looks in different areas, so you may have to adapt a little more to give it a little cooler feel, or a little more comfortable feel, or help it appeal to a broader audience than perhaps your standard design does.
You can change elements like music, lighting, inside promotions where you’re going to the member base to promote different activities, help them successfully facilitate community outreach… In our industry, as a health club offer, you’ve got to be outside of your club. People have to know you’re there, and you’ve gotta be shaking hands and kissing babies; you’ve gotta go to the hospitals and the schools and the municipalities, and you’ve gotta set up your corporate agreements and making sure everybody feels welcome at your club.
So you’ve gotta execute on all these things, in addition to just marketing. So you have to go in there and almost forensically get involved in that, and then guide them through the process. It’s not gonna be the same for everybody, but it’s generally gonna fall into one of those buckets, so we have to get in there with our team and we support them from the marketing standpoint, the operations standpoint, the personal training standpoint… And that’s another revenue line that I didn’t even mention – personal training. There’s a fairly significant amount of models, so if they’re not running that effectively, you’ve gotta give more training there.
Essentially, a practice any other successful franchise would follow – just diagnose, review and see where you can fill the gaps and add value.
Joe Fairless: I like the philosophy of staying small to grow large. If you weren’t in the industry that you’re in, and I know you’ve been in this industry for a very long time, but just taking a step back and applying it to — it doesn’t have to be real estate, but let’s do a hypothetical… Let’s say you were just hired as a CEO, or maybe you’ve managed to duplicate yourself; you’re the first person in the world, you can duplicate yourself, so you’re still at your job, but then your other you is a CEO for another company. How would you implement the “stay small to grow large” approach? What does that look like?
Ben Midgley: Well, it’s very applicable to franchising, because it’s based — first of all, for me, in my career, everything I’ve learned is based off of “the more successful your relationship is with the party on the other side, whether it’s just one-on-one sales, where I get to know you on a more genuine matter”, it takes down a lot of barriers when you’re trying to sell something. You don’t come across as a salesperson; you get interested in the person first and legitimately respect person, and ideally you get a good relationship, so you become friends, and then the sales happen much easier, the referrals flow… It all works together.
So in franchising we apply the same principle just because everything’s based on the relationships. I think if we were to look at specific industries, I could give better examples, but to me almost any business is based on relationships and how the business conducts themselves, how they interact with people.
If you’re in a retail type format and you’ve just gotta move product, I don’t know if it applies the same way because staying small is only gonna give you so many locations or so many outlets to move your product, unless you’re an online company. But I think it comes down to compounding the positive experience that you get with your customers over time. Because if we sell you something at one point in time, we haven’t really proved ourselves yet; we’ve gained enough trust to get you to make the transaction, but we haven’t gained your trust enough that you’re gonna continue to do transactions with us and tell other people about it… So making a sale is just the first step, and then I think the “Stay small” approach on a different level just relates to consistently repeating that sort of track record of trust you have until it just gets deeper and deeper and deeper, and that’s the stickiness of the customers of your business.
Joe Fairless: I love the quote “the more successful a relationship is, the more successful you will be together”, and it’s clear that you’ve taken that approach throughout to build this thing… What is a way that if you were speaking to some franchise owners and they’re like “Hey, Ben, how can I build a better relationship with the customers that come in the door?”, what are the top two or three things that you tell them?
Ben Midgley: That’s pretty simple, actually. When I was a lot younger – I’ll just give you a personal example without trying to focus it on myself, but… I won this award which was called the URSA salesperson of the year award, so our industry trade associates; I was the top salesperson for the fitness industry. This was back in 1995. But the way that happened was, first, looking at a health club – this is what we tell owners… The health clubs are a community; Starbucks has done an amazing job of calling themselves as the third place – there’s home, there’s work, there’s Starbucks… But you’re just going in there to quickly grab a latte and move, right? So the goal is to have all the baristas know your name and talk to you, and you have a little chit-chat, and they know your drinks, and then you sit down and all that. I love Starbucks, I’m a huge fan of everything [unintelligible [00:18:11].13] but no barista knows my name, because my interaction with them is quick.
In a health club you’re there for an hour, an hour and a half, multiple times a week, so if you’re the owner of that facility and you take that community aspect seriously, first you’re gonna lead from the front, you’re gonna establish that within your employees, that “Look, everytime Joe comes in, say Hi, Joe.” Know something about Joe, get to know him, and the same with every single member that comes in. Sometimes you’re gonna have members that don’t wanna see you at all. They just wanna walk past, they wanna go do their thing, and that’s fine, that’s their business, but you still say hi to them, you still work with them, and then you’ll be surprised that one day you don’t say hi to that person, and even if they never say hi back, they’re gonna notice… You know what I mean? “They didn’t say hi to me? What’s going on?” Then you know you’ve kind of cracked through that outer shell, because there is some interest in interacting with the staff, even though they’re not interacting back and it’s just you going one way.
But what works great for the owner is to quiz your team on knowing names. When I was younger I’d go into the center of a club and I would practice naming every member in the club at any given time, whether it’s six in the morning, 12 in the afternoon, 3 or 7 o’clock at night. Different people come at different times, different people hang out with different groups within the clubs, but the more you know everyone’s name and everyone’s social circles and then you sort of integrate yourself into that… If I see you in the club six times and I ask the front desk and they don’t know who you are, and the training staff doesn’t know who you are, because you will check with them first to get your name, then you go down and introduce yourself. “Hey, my name’s Ben. I’ve worked here for a long time; I see you’re working out all the time, I just wanted to introduce myself.” “I’m Joe.” “Great, Joe. Thanks. Anything you need from me?” “Great. Alright, we’ll see you tomorrow.”
You just have to get that process going, and sometimes people are uncomfortable with it, sometimes they’re not, but at the end of the day even though it may seem like unproductive time, because you’re not on the phone trying to close another deal, or this, that or the other thing, you can never underestimate the value of those relationships, because then you create this aura about yourself that drives people to you, and if you can create a team of people like that within your club, all 20 of your employees, [unintelligible [00:20:12].06] the community aspect of it thrives. I’m sorry if I went on…
Joe Fairless: No, it’s helpful.
Ben Midgley: That is the key in our industry – get a community going within your club.
Joe Fairless: What’s another way that you all build a community within your club, other than making sure that all team members know the names and acknowledge and have relationships with the individuals?
Ben Midgley: I think building relationships – there’s not a textbook to it, right? A part of you has to be a genuine person that’s interested in having a relationship… Look, we’re dealing with people, and not everybody’s the same; everybody’s got a different personality. If you just get that process going where – let’s take out the using the names – the employers care enough to interact with the customers and they have a genuine type of personality where they’re interested in people, it happens by osmosis, it happens organically. It just becomes this good feeling, enjoyable place to go.
Everybody’s been to businesses — I remember this one market that’s actually closed right now; it was in our hometown. Every time I went in there, I’d get a certain bean salad which was delicious, and I was like “What’s in this?” “We don’t share our recipes.” “Okay… Cool, sorry. I just thought this was great.” I wasn’t gonna steal your recipe and open a store right next to it, you know what I mean?
Joe Fairless: Yeah…
Ben Midgley: But that’s completely the opposite of it. So do I stop shopping there? Yeah, I stop shopping there. But if it’s totally different… “Oh, the bean salad? We use vinegar, we use this, we use that. It’s fantastic. By the way [unintelligible [00:21:34].03]” “Oh, this is amazing. Thanks, great job!” I’m going back. So there’s no science to it.
When I was younger and someone interviewed me about how we sold so many memberships, after talking to them, that person said “Well, you basically told me nothing.” [laughter] That was one of the first interviews I did. They said “There’s no system there.” I’m like, “Well, there’s not a system. It’s people.” Just getting to know people, and it works.
Joe Fairless: I think the key there is hiring the right people, because as you said, everyone’s got their own strengths and weaknesses, and some people just genuinely connect with others and generally are curious, and others aren’t.
Ben Midgley: And nowadays you’ve got these, right? So you’ve gotta just stop the kids from looking down… The worse thing to do is come into a health club and see somebody looking down to their phone… Or any business. “Excuse me, can I put that down so I get a coffee?” Or you’ve got eight people behind the desk and nobody’s looking at you and you’re just wondering what they’re all doing…
Joe Fairless: Oh, yeah.
Ben Midgley: Maybe they’re all good and busy, but the customer is there… Or the customer on the phone is more important than the customer right in front of you… And we can go on for days.
Joe Fairless: Yeah. I ask this question to all guests, and since you’re an entrepreneur and a successful professional, it will be a slightly different slant than real estate investors, so I’ll change up the question a little bit… What is your best advice ever for entrepreneurs and business professionals?
Ben Midgley: Well, the cliché is “Don’t give up.” I tell my kids that every morning when they go to school. Make good decisions and then never give up. But one of the things that served me well is not rushing the judgment on anything. Taking the time to take in information and understand the whole scenario that you’re dealing with. Sometimes when you’re growing a business or your business has got momentum, you’re very caught up in the pace of things. “What can I do to move faster, make more money, get better, expand?” or what have you, and then sometimes decisions are done quickly. Now, you are forced to work quickly, but you’re not really forced to move quicker than you should to make an appropriate decision.
It’s been hard for me at least personally to slow myself down and not react to things as much as you would want to and then tell yourself “Get more information, get a clearer picture of what’s going on, make sure you talk to all parties, make sure you look at things from all the different angles, then proceed to make the right decision.” I know it’s not specific best advice lesson ever, but you can apply it to pretty much anything, whether you’re signing a lease… Do you know how many people will sign a lease just because they like the site, and they think it’s gonna be a great site, but the lease is 50 pages long? How many things can screw you in that lease if you didn’t really go through it?
Did you sit in the parking lot at the front of that store and watched the traffic, as opposed to just looking at the demo reports? Did you talk to the owners of the stores next door? When was the last vacancy? Did you talk to the manager to say “Are you one of the top stores or one of the poor stores in the network?” People will tell you a surprising amount of information, but that’s just information gathering. If you’re prone to making decisions quickly without all the information, you’re probably gonna be prone to make some mistakes.
Joe Fairless: That’s a good segue into some of the real estate stuff… You said on the expense front you’ve got to be aggressive on the types of leases that you get, and make sure you’ve got the proper payroll etc. Let’s talk about the types of leases… I wrote down three, you might have said four; you gave three examples of what you look at whenever you’re evaluating an opportunity for where you’re gonna be. One is to talk to people next door, two is to sit in the parking lot and watch traffic, and three is to actually read through all 50 pages, and then more importantly, also have an attorney read through it.
What are some other things that you’d like to mention as it relates to the real estate front of your business?
Ben Midgley: Well, real estate, as you know, is changing dramatically. There were I think 8,000 retail closures just over the last year, in all different segments, so for our industry it’s becoming very positive for us to go out and negotiate with the landlords, because we’re taking anywhere from 20,000 to 50,000 square feet, and there’s not a ton of those tenants running around looking for those spaces.
For us, you’ve got three elements that you have to look for. One is your gross rent per square foot. And we only talk on gross terms, because in some municipalities the triple nets are — it’s unbelievable. In some places they’re $12, in some places they’re $3, so we just talk in terms of gross, because you’re still paying that money one way or another.
Your tenant improvement allowance – if you’re a sophisticated investor, you don’t like to take a tenant improvement, because it’ll drive up your monthly rent, but most folks in the franchise industry like to do things on a lever basis, where they’ll finance it rather than just putting 100% equity… So generally the TI makes a lot of sense, because it’s reducing your cash out of pocket.
And then third, what is your free rent periods? Those are the three main factors in negotiating a good health club lease. And then of course, your landlord work letter. What’s the condition of the space? How much work do you have to do? What is your HVAC? How much electrical is running into that? What’s the condition of the facade? Where is your plumbing stubbed in?
There’s so many different things you have to consider when doing it, again, because you’re looking at a million-and-a-half to two million dollar investment just to get out the door, not counting what your overall operating expenses are gonna be and your cashflow needs once you get it going, because you know how much your [unintelligible [00:26:31].21]
We encourage people to look at all those aspects very closely, protect themselves on the guarantee… The guarantee is a tricky spot. You’re gonna have a ten-year, a five-year, a rolling, something that just runs out after the TI expires… So you obviously know all those inside and out, but we go through each of those scenarios with each franchisee, and they’re always different based on the type of landlord you’re dealing with. Are you dealing with a REIT? Are you dealing with a big shopping center? Are you dealing with a mom-and-pop that have owned that building for 50 years and there’s no debt on it? Are you dealing with a small real estate owning group?
It’s very unique, and that’s why you’ve gotta have people behind the scenes looking over the franchisee’s shoulders to make sure that someone who’s never done a commercial lease before can get through it without being damaged, really.
Joe Fairless: You mentioned free rent periods. Can you elaborate on that?
Ben Midgley: In the health club industry most folks pay on a monthly billing system; they’re paying through their checking account, or a credit card that’s recurring, and then you have a certain period to cancel. That’s why a lot of investors like the fitness industry, because it’s just recurring, repetitive monthly dues, no problem. It’s not like a lot of people do it… If you’re doing storage on the iCloud, or Google or something, they’re just debiting you $3/month or $5/month every month for your extra storage in the cloud, or what have you… That may not be a great example, but the same principle applies. But when you open a health club, it takes a while to ramp up to your mature membership base, so what you want is a free rent period from your CO (certificate of occupancy) so you have an opportunity to get more and more people on the monthly membership system, so when your full rent kicks in, or you actually get a deferral on your equipment lease, then you’re meeting your monthly cashflow requirements, as opposed to running in some deficit for a few months until you reach that level.
Then when you’re in the negotiation, we look at it as having three different levers – you’ve got your gross rent, your tenant improvements and your free rent periods. So if your gross rent is higher, then your TI either has to be higher, and it equals out in the equation. If you’re not gonna get any TI at all, I’ll see if we can get three years free rent, if you believe it. So then you’ve gotta figure out how to cover the build-out costs, maybe through a finance or something like that, so you don’t really come out of pocket too much and leave yourself short.
I won’t bore you with any of the real estate scenarios we run through because you know them all obviously, but those are the ways we have to look at each and every situation with our franchisees and assess the space on whether or not it’s gonna be a worthwhile move for them.
Joe Fairless: We’re gonna do a lightning round where some listeners have come up with some questions… I’ve handpicked some of the questions. Your answers don’t necessarily need to be lightning quick, but I just like calling it the Lightning Round. Are you ready for the Best Ever Lightning Round?
Alright, perfect. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, Ben… This one is from Jaymes in Pittsburgh.
Ben Midgley: Real questions from listeners? I thought you were just pulling my leg there…
Joe Fairless: Oh, no, no. He spells his name Jaymes, and he asked this pretty generic, macro-level question, “How big is your vision for Crunch?”
Ben Midgley: I love that one. I told you I’m a Starbucks fan, and Starbucks has almost gotten to the point where they’re synonymous with coffee… Maybe not if you’re on the East Coast, and you’re probably thinking Dunkin’ Doughnuts, but it any case, my vision for Crunch as it’s shared by everyone else on the board, and we also have another great CEO on the own side – his name is Keith Worts – is that Crunch is going to become in time the default definition of a fitness club. So “I’m going to Crunch” rather than “I’m going to the health club”, that’s our goal.
Long-term, we’re gonna be in just about every community we can, and people will associate what we do just with it. That’s the long-term goal.
Joe Fairless: This is from David in Nashville – “Was there one person who was the most influential in your life, either from afar, like an idol, or someone you knew personally?”
Ben Midgley: That’s a funny question… A close friend of mine just passed away, and their service is actually on 26th November. And I think for me anyways, in my life, I’ve had many different people that have been exceptionally influential to me, especially at different stages in my life.
This particular person – I’ll just say his name; his name was Peter Bennett. He was the kind of guy that when I was a kid he gave me a job, and they took me in, kind of toughened me up from maybe being a little too soft of a younger kid, not even more than 13 at that time… So it was somebody who felt like he could take on the world and take care of himself.
And as you go through different levels of your life, you find mentors in different aspects. I think people are drawn to the type of mentors they need based on where they are in their life, and I could give you five or ten different people from business that have affected me in that way, people who have affected me in my personal life… But I think for me it’s been in stages.
Joe Fairless: Makes sense. This is from Jason in [unintelligible [00:32:12].11], we’ll go with this one. It’s worded a little weirdly; I’ll just read it and then we can try and decipher it. “What is more important to do what you do? Either business skills or workout skills?”
Ben Midgley: Workout skills?
Joe Fairless: Yeah.
Ben Midgley: [laughs] Well, I’m 48 now, so my workout skills are still there, but they’re not what they used to be, let’s put it that way. I think you take care of yourself to take care of everything else in your life, let’s put it that way. I’m in the fitness industry, so you’ve gotta exercise, eat right, in my opinion. You’ve gotta take care of yourself, and if you’re working right, then it helps everything around you work better. It doesn’t mean it’s gonna work perfect, but take care of your health, and then the business skills — look, you’ve gotta hone those all the time. Nobody knows everything in business.
I think I’ve just talked to someone else on this point – I think once you are an accomplished CEO (and obviously I’m not nearly as accomplished as thousands of others) and you feel like you’ve got it all sown up, then that’s when your business is already on the downtrend [unintelligible [00:33:06].12]
Joe Fairless: I love that. How can the Best Ever listeners get in touch with your or learn more about Crunch?
Ben Midgley: The best way to learn more about Crunch is Crunch.com. We’ve got a tremendous new website, we’ve just revamped it; it’s been a great investment for the franchisees. For me personally not a tremendous amount to learn there; I’m happy to reach out and get in touch with me if you like. You can reach me through the website as well, and I’m happy to do what I can to support people who are growing up through their business career.
Joe Fairless: Awesome. Well, Ben, thank you for being on the show. Some of the takeaways I got from it is — I mean, surprisingly, margins can be better in the lower price space, and one of the ways to do that is through incremental pricing. That can be applied not only to your industry, but any industry really. So that’s one thing.
Two is the expenses are really something that you all need to get a good handle of, and one of the things, real estate… Specifically, some of the things you mentioned, more peripheral level – the sit in the parking lot and watch traffic, talk to people next door and read through the leases… These are principles that can be applied not only to someone who’s signing a lease, but also someone who’s looking to buy a commercial real estate property. So getting in there and doing some of the softer things that we might not think about, but that you mentioned.
And then the three things you look for in a lease, the primary things – one, the gross rent per square foot; two, the tenant improvement allowance (TI), and three, the free rent periods, and you talked through the approach there.
And then lastly, the overarching theme here, and that is when you said the more successful your relationship is, the more successful you’ll be together with that individual… And that truly is. I mean, it’s clear that’s the foundation of your approach and the approach that you’ve taken to scale the business.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Ben Midgley: Yeah, thanks very much, Joe. Thanks for having me.