Podcast

S1 E7: How to Turn Your Anytime Fitness Franchise Into a Family Business

Zac Pennington has turned franchise ownership into a family affair. Find out why Anytime Fitness might be the perfect pairing, and why eight gyms are just the start.

The fitness industry is highly competitive, but that level of competition is exactly what fuels Zac’s passion for providing health and well-being. From working in jobs that ultimately left him unsatisfied, diving into franchise ownership has given him a business model that fits perfectly with his core values.

The Wolf and Zac discuss how growing up in a family of entrepreneurs was key to running his own business, why his creative freedom is so important to him, and why he knows exactly how to dominate the fitness market.

You’ll hear how Zac jumped on an opportunity to take over a struggling Anytime Fitness business and turned it around, how this kickstarted his chain of ownership, and why he’s always looking for more.

Follow Zac:

LinkedIn: linkedin.com/in/zacari-pennington

Twitter: twitter.com/zacpennington

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Episode Transcription

Zac Pennington:

Often think of a franchise as a business in a box. These are your rules that you must follow, and if you stray, you’re going to get a slap on the wrist anytime. Fitness is really good in this regard in that they do allow you to explore shifts in kind of the services you offer and not necessarily the model. We’re not changing the brand, but what does training look like in your gym?

The Wolf of Franchises:

Welcome to Franchise Empires, where aspiring entrepreneurs learn exactly what it takes to become a successful franchise owner from one location to 10 and beyond. I’m the Wolfe of franchises. Hey everyone, it’s The Wolf here today on the show we have Zach Pennington. Zach owns eight Anytime Fitness locations with his family, and seven out of them were acquisitions. So Zach gives us great insight into why buying locations can be better than building locations. On top of that, through Zach’s pricing strategy and revenue streams, he shows what creative freedoms you still have as a franchise owner, which I think is a common discrepancy that many people don’t know of when they’re getting into franchise ownership. And on top of that, the fitness industry today is as competitive as ever between all the boutique fitness chains out there, as well as big box gyms. And Zack shows us how you can position your fitness brand to still dominate in your market. I hope you enjoyed

Narrator:

The Wolf of Franchises, is the CEO of Wolf Pack franchising as well as a creator at Workweek Media. All opinions expressed by the Wolf and podcast guests are solely their own opinions and do not reflect the opinion of Pack franchising or workweek. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The Wolf Workweek and Wolf Pack franchising may maintain positions in the franchises discussed on this podcast.

The Wolf of Franchises:

All right, so I think a good place to start, you know, own right now, eight anytime Fitnesses, right?

Zac Pennington:

Yeah, we own eight. Yep, exactly. Yeah.

The Wolf of Franchises:

Take us through before, you know, got to Anytime Fitness, what were you doing and when did the light bulb go off that you said, Hey, I want to start looking at franchises?

Zac Pennington:

It’s been a little journey, but when I graduated from college, I graduated with a degree in, well, two degrees really in marketing and commercial graphics like graphic design. Worked my entire way through school doing commercial graphics, loved it, a lot of self-taught stuff. After that, I jumped out of school and really tried to start my own consulting firm. It was great, but it was tough. What we did was it was a lot of client work. It was exchanging my time for money. It was highly dependent on me. It lasted for a little while. It was a good way to kind of get a feel for the entrepreneurial things that I wanted to pursue and what it meant to be who wholly reliant upon I could produce and didn’t last for too long. I ended up jumping from that started working at a startup actually in doing user experience design again in the creative realm.

I’ve consistently throughout my life, had that kind of creative bug and I think it’s suited me well in a bunch of different roles, but worked as a user experience designer, helped grow that company. Worked there for about a year still, it was still kind of the same thing. I was working for somebody else. I wanted to find my own path and jumped back into the consulting role, worked at an ad agency for a while, and at the ad agency, each step of this way, I learned different things that I wanted to pursue in my own entrepreneurial journey. So the creative side was one aspect. The next, when I worked at the ad agency, I did a lot of client work again, but I kind of got exposed to the retainer model and what it meant to have clients that were consistently paying and consistently utilizing services.

And I loved that. I just didn’t love the clients that I was working with. I was working for consulting for a big four accounting firm, and you could imagine mixing a creative personality and a creative desire with those of an accountant, a lawyer, and it’s tough. It’s tough. I mean, those services are needed, but they don’t always mesh well. And from there, hopped out of that. Around that time my father, who I’m in business with, my father and mother were a family owned operation today but he had the opportunity to sell his family business that his grandfather had started and around that time. And we started having kids and they moved down to where I was and we said, Hey, let’s find something together that we can do. So we began to explore a bunch of different ideas and jumped into what we are in today.

The Wolf of Franchises:

Beautiful. And I like that you took a lot of your time from working the consulting agency and just being a W2 employee to figure out what you like, maybe what you’re good at. I do think this is a podcast at the end of the day about people controlling their own destiny by owning businesses that are franchises. But jobs can be super helpful to inform what you’re good at and maybe what you don’t want to do. So was that intentional? Did you always say, Hey, I’m going to own a business eventually and just for now I’m seeing what I like and don’t like? Or did it kind of just turn out this way?

Zac Pennington:

Yeah, I was actually talking with my father about this about a couple months ago. It’s when I was growing up, that’s all I was exposed to. My dad was in a family business, my mom’s side of the family, they were in family businesses. I really didn’t have close family members that were actually W two employees, so I just thought it was a natural course to take. Yeah, so it was something that I always wanted to pursue, but you’re a hundred percent correct. You just kind of learn as you go. And there are phases too. When I started out leaving college, I thought, okay, well I can go do this and I can make it happen, and I certainly could have. It’s just a lot more difficult. You don’t have the base level of knowledge that you get by working a job and experiencing different facets of business that you would otherwise have or you don’t have the fortune to have if you start your own thing right out of the get go without having a job. So yeah, it was definitely something I always wanted to pursue. Jobs along the way kind of gave me a more well-rounded view of what is needed and required to make something successful.

The Wolf of Franchises:

And so when you decided you were done with the W2 life, you wanted to do something with your family can you take us through that process? Because part of what I’m trying to solve and help improve with the podcast, the newsletter, everything is the discovery process for franchises can be tough. So what was that researching franchises that you would be interested in actually buying and kind of how did you pick any time? Fitness? Out of the 4,000 plus franchises that are out there,

Zac Pennington:

You really have a lot of options to pick from and it’s kind of daunting. We looked at everything from franchising to starting our own thing in addition to business and real estate two things that are different as well. And we settled on franchising. We settled there because my father had spent his entire life building a brand for 20 plus years. He had great success in that, but that was a journey I had worked at an ad agency and in marketing and I had seen the dollars required, the effort required just to simply build a brand, let alone a business. And so we’ve began to look into the franchising model with established brands that already have that presence and authority in markets. And that took us from step one to step 10 in the business journey process right out of the gate. And so we began to look at a bunch of different ones.

We looked at everything from restaurants to fitness and a whole host of other franchising models. We had kind of our check boxes that we were looking for in terms of everything from what is the corporate support to what locations are available to, what is the business model here? Do I got to sell a hamburger to make a dollar or do I get to just build out a space and provide equipment and services and sell member recurring memberships? What is the business model? And so we had our boxes that we wanted to check, and we flew up to Minnesota. We got to the chance to meet with the corporate team at any time. Fitness, love the support, love the culture, firmly believe that it does trickle down from the top. If you have great leaders at the top, specifically in a franchising model who are guiding the brand forward in an innovative way and really care about their franchisees in guiding them in their business path, I think you have a successful brand to pursue. And that’s what we found at when we went and visited with the founders of Anytime Fitness in their corporate team. It’s just a great culture, a team that wants to support you, a team that wants to help you grow and is doing everything in their power to make that happen. And we really felt that and we decided to pursue Anytime Fitness, in addition to, it’s a great product to put into the marketplace.

I don’t want to knock a restaurant, but we’re providing in some essence a health and wellness additive to every community in which we serve. And the more people that we can help get to a healthier place, the better off our communities are going to be. And so it is kind of a one-two punch for us.

The Wolf of Franchises:

Yeah, no, I mean, I think you got to kind of believe in what you’re doing. Obviously with a franchise, it’s not technically, no one’s the creator of the brand if they’re a franchisee, but I mean, that’s just a commonality that people have to have some belief and enjoyment from the business they’re owning. So you mentioned your father who sold his own business. Did watching your father run his own business and seeing the time it took him to really hit its stride, did that impact your thinking of going franchise versus starting from scratch with a new business?

Zac Pennington:

I think that was certainly part of it. There’s a whole level of support that you can pull on with a franchise. I can go talk to others who are running this specific brand, who are running this specific play that I can’t necessarily do if I’m going to start my own thing. I mean my father mean their family business. It took till the second generation to really hit that stride. I mean, it took a long time. I mean, it was very successful, but it just took a while. And with this, I felt like we could step from, like I said, step one to step 10 pretty quick and have good support and guidance along the way. And that’s what we’ve found.

The Wolf of Franchises:

Yeah, no, I mean I really think that folks have to think about, yes, there’s benefits of course to starting your own business and the things they get, the headlines are the I P O or a big acquisition where you get bought out, which is great, but I think I call it path dependence, meaning what does your journey look like? So if you are starting a business, what does the first five to 10 years of your life potentially look like while doing that? And a lot of times you have to live really scrappy. It’s stressful. Most profits get dumped back into the business. And when the business finally is cash flowing a lot and you are successful and regardless of the industry or if it’s tech or brick and mortar like we’re talking, then you could start to benefit from it. But I just think that’s an important aspect that sometimes it is worth trading a lower ceiling in your highest potential outcome for being able to just enjoy your life more <laugh> like while you’re building whatever your businesses are.

Zac Pennington:

Yeah, 100%. 100%. And you can certainly jump from step one to step 10 really fast. I mean, you have everything you that you need in a solid brand. If you pick a solid brand, you have what you need, your decisions, the level of decision making is just that much stronger. I mean, you have a full global real estate team that can work with you to help pick locations that have done thousands of deals just like this. You have thousands of other franchisees who have been anywhere from their first location to their hundred and 60th location that can step in and say, Hey, here’s how we grew it. Here was the path that we took. These things, you’re going to run into this roadblock. And a lot of times I did it when I tried to run my agency, I would run into roadblocks and it was difficult for me to see my way through and I didn’t have a good support system. And with this, you certainly do

The Wolf of Franchises:

Well when you’re the business owner and it’s not a franchise. You’re the one who has to figure it all out. So that’s just another kind of consideration that people should be making because it can be tough on your own. But yeah, I guess just from a diligence perspective, so sounds like when you were evaluating any time fitness that you had some good conversations with existing franchisees and the franchisor was impressive to you. But I guess from a numbers perspective, so there are F D D and for folks who are listening who may not know this franchise disclosure documents or where all the financial information on franchises are among some other information but they’re public facing documents required by the Federal Trade Commission. Anyway, to make a long story short, I’m looking at their current F D D and I see initial investment for a new location could cost up to just under 700 grand.

This is 2019, by the way, for their average revenue, which was so pre covid, it was average location and they have I think 4,000 plus locations worldwide. So it’s a big brand folks, but their average revenue is 440,000. So if I’m looking at that, I’m thinking, okay, if it does cost me on the high end, and there’s a lot of factors that come into that, the site selection, the market you’re in and all that. But if I’m looking at potentially up to 700 K in a new build cost and then the revenues 440, I’m thinking, all right, I mean this, I’m hoping this is a high margin business or else I could be paying off my investment for many years to come. How do you go into that from a buying perspective?

Zac Pennington:

Yeah, there was a number of diligence items that we went through when we started in this, and I would tell you that those numbers are accurate. A lot of times you may see discrepancies in an F D D and what is actual reality. I would tell you that’s what we have found that to be fairly true. When we started, we initially started with the idea of development. We wanted to buy up a territory an area territory, and begin to build out that location. Tennessee, I’m from the Nashville area was an under underdeveloped kind of Middle Tennessee was an underdeveloped area. We thought, hey, we’d go in and we would build out that area. Yeah, I mean we read through the entire F D D, we understood it backwards and forwards. It met kind of the things that we wanted in a business. It is a high, I mean you mentioned margin.

It is a high margin business. I don’t have to sell a ham, buy a hamburger to sell a hamburger. I’ve built out my space, I have my equipment. Most of the costs within Anytime Fitness are fixed. You just don’t have a lot of variable costs, which is great. And your membership base, it’s a membership model. And we’ve translated that same model within any time fitness to training to other things that we offer kind of that reoccurring model. So it’s just incrementally building upon that margin. But yeah, we wanted to build out an area. So we bought some territories and we bought about 10 territories from any time fitness that were undeveloped with the idea that we would spend roughly $700,000 at each location and build them out. That was our initial plan. As plans go, they don’t go very long. They don’t go very long, especially when you’re new you can have theories and ideas about what you want to do, but if you’re not learning along the way, something’s going to be wrong quick and you got to be able to move or else you’re not going to make it.

So we had a territory, a location, actually a two miles from a house. I’m available in any Anytime fitness location. Lady wanted out, she was getting out of the brand altogether. She was going through unfortunately a divorce. And so we bought her location before we even built one of our 10 territories out. That gave us an immediate leg up. I didn’t have to go through 12 months of six, well six to 12 months of building my first unit to see if what my theories and ideas around the business model would even work. I got to immediately get my hands dirty. Our team got to get in there and really kind of put our ideas to the test. And it was a great entry into any time fitness.

The Wolf of Franchises:

I think it’s a great strategy what you were doing, which is to build up your own locations, have your own kind of exclusive territory. And I’ve seen tons of franchisees do well with that, especially it’s usually on a newer brand where they’re able to negotiate for a massive territory because the brand’s looking to grow. And if that brand does turn into something special, you usually would’ve gotten that territory at a steep discount compared to when the cat’s out of the bag and everyone wants in on an Orange Theory or something like that. But how did this inform your thinking after seeing, okay, versus doing new builds, we just bought this location from the woman down the road and you’re essentially paying for cashflow to acquire that. What did that change in you and your family’s thinking going forward and what was the next step after this realization?

Zac Pennington:

You’re a hundred percent correct. You can find a deal with a franchisor if you’re looking to develop an area, but that’s going to be typical on a newer brand at this point. Anytime Fitness had been around for 17 years, it was not a new brand. People knew what it was. I think there was 3,500 locations already established across the globe, so it was larger, but we were able to get in there and what we saw was, one, we could buy the location with current revenue in place, current member base there in great shape for a third less about 25, 20 5% of what we could build a new location for. And it was kind of a no-brainer. So yeah, we bought that. And with an established brand like this, our internal model and thought process began to change. We began to find value in this strategy of acquiring locations because we could acquire them at a third of the price, and the revenue numbers were already what the F D D was stating, and the light bulbs kind of started to go off, wait, are there other opportunities out here like this?

And so we began to just continue to move forward with that in the back of our mind, Hey, okay, when we got 10 territories, we got to develop here. So within six months after that acquisition, we began construction on our first build out. And right along with the F D D, I think we spent around $650,000 to build that location out. It’s a great location for us today, and it was a hit right from the start. So it hit projections and it did well for us. But there was some hiccups along the way in terms of construction took about six months longer than what we wanted. So our capital was sitting out there longer without a return. There was a lot of learning in the process. I had never built anything before. I had never, I did not actually physically build this location, but I hadn’t managed a construction team before. So that was an entire learning curve for myself and that’s a challenge. So yeah, it was great. It was great. But yeah kind of get back to your original question. We saw value in an acquisition a third, the cost of building out a new unit after we built out and completed our first ground up development location, the light bulbs were just ringing hot. I mean, it was, okay, let’s go out and let’s find other locations just like the first one we bought and pursue acquisition. So that’s really what we did after that.

The Wolf of Franchises:

And what you hit on, I mean just the general theme, and this is you John, everyone on Twitter’s always asking the question, buy or build. And it seems like you kind of found an arbitrage opportunity of sorts in the Anytime fitness system. So I mean if you’re essentially buying these existing locations at a third of the cost, it would take you to do a new build, which as we said earlier, is 600 to 700 grand per new build. Are these locations, if they’re hitting the average revenue as you said still, I mean they should be going at a two to three X multiple of ebitda. So is that what pretty much happened across the board or is it unprofitable or struggling locations that you were kind of going in and having to turn around?

Zac Pennington:

Here’s where I feel like our team really fell into it. Stride within any time fitness and within this particular franchise, which don’t, not really familiar with other franchise brands, but I wouldn’t be surprised if this is an opportunity elsewhere as well. But just because it’s a franchise doesn’t mean there are not opportunities outside of the typical business box go idea. And we found it in acquisitions and that was right after we had bought this first one, built the second one, and then we started looking for other ones. You would think yes, that these are two to three x multiple on ebitda. And that is true, except you got to understand the environment of, and if any time Fitness at this time, like I said, it isn’t a new brand. I mean yes, they want to sell territories and explode growth, and that really happened for about the first 15 years of the brand.

Now it’s just steady growth. And there has also been a shift in the market for fitness in the last 20 years. It used to be Y M C A, your county rec center, big box type setup. And that was ultimately what pushed any Anytime Fitness to form as a brand. They became a convenience gym. They’re in strip centers, easy in and out, 24 hour access, and it sold hot cakes. Those new territories did when in the early two thousands, because they were selling into 24 hour model that owners franchisees could come in, they could open the doors, hand out key fobs, and they wouldn’t have to staff. It would just be come and go fairly hands off. Well, the entire fitness industry has shifted since then. I mean that is still a concept, it’s a dying concept and that is not any time fitness anymore.

But you still do. You have franchisees who bought in that time period who have continued to hold on. And unfortunately as the market has shifted, they have not shifted with it. And so they continue to hold on with this model in mind, this legacy model in mind. And they’ve gotten themselves to today where they’ve fallen behind the curve and now there’s opportunities for operators who are more in tune with the market and in tune with where the brand is now today to come in and say, Hey, let me help. And so that’s what we’ve found. There’s certainly struggling locations that we are buying. That is what we are buying is struggling locations and we are turning them around and there’s an arbitrage, just like you mentioned, I can go build a new one for $650,000, $700,000 on what is good and if not great due diligence and believe that my projections will come true and work to make them come true. Or I can go out there and say, Hey, there’s clubs out here with the same member base, the same amount of members in these gyms, they’re just under, they could be undercharging, the service could be out date, the equipment could be out of date, the facility could be out of date. And with some relatively low CapX and increased staff really, because a lot of these gyms don’t have staff you can come in and you can create really great returns.

The Wolf of Franchises:

And so what you’ve done is you’ve recognized the shift and the legacy franchisees I guess just haven’t. And so they’re willing to bow out because you’re taking off what for them is a struggle off their hands.

Zac Pennington:

Exactly.

The Wolf of Franchises:

It’s awesome.

Zac Pennington:

So we’re able to come in and do that and really create great value and really bring something back to the community that was once there that kind of faded and kind of reinvent these locations. And a lot of the locations that we are buying to, we found there’s arbitrage and location as well. Anytime Fitness is not, it’s not an urban play in this franchise model, one of the greatest expenses you’ll have outside of equipment and staff is your rent. And there’s a huge arbitrage to be had in secondary and tertiary markets that we find. And so we are finding locations like that have some real low costs because most of these costs, like I was mentioning, most of these costs are fixed. They have low cost, but they carry the same amount of members. And it’s interesting, once you get into these secondary and tertiary markets, is that the gym, if you think about it, I grew up in a town of 2000 people, so I can speak to this. There’s no place for community. We’re not going to the movie theater. We’re not going to literally, it is Friday night lights, we’re going to the high school football game and that is the community. There’s no country club. And so what happens is the gym becomes that place of community in the secondary and tertiary markets and we’re able to step in and that even makes the product more sticky and continues to help with retention. And just growing with the community has been an arbitrage in and of itself.

The Wolf of Franchises:

And you mentioned too that the trends are changing. So to me that means, right, as someone who looks into a lot of different franchises, boutique fitness has taken off, group workouts are kind of all the rage, whether it’s hit high intensity training or other forms of group fitness, and there’s technology driven results where you know, can see how many calories you’ve burned. You can compare yourselves to other class members. So what did you see at any time fitness that was kind of in line with that, and do you see yourself as, of course you aren’t competing with any boutique fitness firm, but how did the value prop differ?

Zac Pennington:

Yeah, so Anytime Fitness, like I was mentioning, started as this legacy fitness kind of convenience model, 24 hour model. It was a place that had all the equipment you can come in, you could use a treadmill, you could use the bicep curl machine and get after it. Well, the fitness industry has shifted. People are realizing more and more how important coaching is. I mean, our top level athletes have coaches. It’s not a bad thing to have a coach in. They’re realizing how important that is, but also how important this 360 view of health and wellness is. So the gym is just one component of a way to live a healthy life. I think it’s a vital component. And so what Anytime Fitness has, as they begin to shift, they begin to shift in towards more of a coaching model that happened to have a full service convenience gym with it.

So we’re not just saying, here’s a key card, go figure it out. Now we’re saying, Hey, let’s sit down. You’re excited, you want to achieve some sort of result, let’s sit down, let’s partner together, let’s figure out what that is, and let’s come up with a customized plan that is going to help you here at the gym, but also outside the gym. So now we don’t just have a treadmill and a bicep curl machine. Now we have a body composition scanner that tells you where you are at and the progress you’re making. Now we have a mobile app that, hey, if you can’t make it into the gym today, my trainer can get on there and they can train you at home. We have the ability to create workouts and send workouts to anybody and everybody we want that is needing help and is help and guidance.

And then tying in the nutrition component is huge as well. So we’re able to have these touch points that are inside and outside of the gym that really help move our communities towards a healthier place in a more holistic way, rather than saying, Hey, just come in for 30 minutes three times a week and you’ll get where you need to be. This is not fitness anymore. And you know, certainly have other brands out there you mentioned, you know, have your boutique studios, right? They’re great. I think rowing is great. I think hit is great. They’re highly targeted towards a certain set of the population, so you better really know who your community is and who you’re serving in a secondary market. The amount of people who are interested in rowing, it’s not going to be there. So you see those in more of suburban and urban markets, you know, have your big box gyms, your low-cost gyms as well each have their place. And we love this 360 model of what health and wellness looks like. And I would say anytime Fitness kind of plays right in the middle of the market.

The Wolf of Franchises:

Yeah, no, I think that’s really important too to know is just, you know, clearly have a great understanding of your market as you mentioned, like a rowing focused studio probably wouldn’t work versus any time fitness, you know, give people flexibility. Members can get different things out of it. So if someone does, myself, former athlete, I do see the value in a coach, but I’m very budget conscious. So I go to the gym, I work out on my own. I like to think I know what I’m doing. But someone else, if they want to really ramp up the intensity or maybe they need some guidance on their workouts, anytime fitness is able to provide that as well. So I do see the value in a 360 model, regardless of the market that you’re in.

Zac Pennington:

Yeah, you have to know your market, you have to know your location, you have to know your demographic. That’s the important part. We have Stan, Jan, and Nancy, we’ve given him profiles. We can name ’em. We know exactly who they are, we know exactly what they, Stan needs a plan. So each one of my salespeople, they can identify Stan as soon as he walks in the door. He’s the former football player who used to be the quarterback who’s now 45. He hasn’t picked up weights in 25 years. He thinks he can come in and deadlift 400 pounds and he’s going to throw his back out the very first time he tries that he needs a different plant. So you got to know your market, you have to know your demographic and who your brand is attracting even more

The Wolf of Franchises:

Now, customer profiles, that’s the level of granular detail that you need to get into. So we, we’d love to see that. I want to talk about, you know, have a Twitter thread that talks about one of the acquisitions you made of any time fitness location. And it ends, the thread ends with you saying that the location rule will return a hundred percent of its acquisition cost in 18 months. And so between the beginning of that thread and the bottom, you talk about increasing the membership fee, adding a few fees as well as completing a renovation. Can you walk us through broadly what you did with that location, how you improved it in such a short amount of time?

Zac Pennington:

We actually were under contract on this deal set to close five days before the entire state of Tennessee shut down for Covid. And we’re in the fitness industry, let’s just be real. We got hit hard. Our family kind of came around. We sat around my kitchen table and we said, look like, here’s the deal, here’s what we’re set to do. These are the trends right now in the market. What do you feel? And we ran around the table and not one of us felt good about it. And so we went and we discussed with the owner, the prior owner, and he understood he was bumped, but he understood. And so we put a pause on the deal. He said, we’re not going to be able to close. We need to feel this out. Can you give us 60 days? So he gave us 60 days.

In 60 days. We came back, we renegotiate, or we did a little bit of renegotiating the deal. We didn’t beat ’em up too bad. We kind of felt bad for him. But the deal, yeah, so it was roughly $190,000 deal is what we bought that location for. It was in a tertiary market, a town of about 14,000 people. And this gym, unlike some of the others, it was not a legacy gym. This gym was fairly new. It was built in 2016. And so man, the shape of it was really good. There was some tweaks that when he built it that I wouldn’t have done. So there were some physical tweaks that we made after it. We definitely did some renovations, knocked down some walls, open up space for team train, we call it team training is in the market, probably called it group training hit style training, added about a thousand to 1200 square foot of turf in there with a bunch of functional equipment.

And we brought a lot of value. He was running the location all by himself with two high schoolers. They were working hard, give it credit, but he had the historic mindset that legacy owners had and that was, I can sell cheap memberships, I can let people come in and just utilize this 24 facility and go, that’s not the play. We run a coaching play and we run a high value play. So in instances you have these older owners who that’s more of a volume play. How many can I go out and sell 10,000 memberships at $5, $10, $15 a piece, and let them come in and utilize that? He would never be able to service that to the level we service them. We have a higher focus on the lifetime value of a member, so how much can we help them and what does that total revenue for us look like over their lifetime? And we’ve really focused in on that. So we came in, we did some CapEx improvements. We hired four staff. We brought in a training team and we took a look at the membership rate. So we immediately changed the street rates as soon as our CapEx improvements were made. So where he was charging 20 to $25 a month, we made a shift and we started charging 25 anywhere from 25 to $35 every two weeks. We sell memberships based on a bi-weekly model. There’s a whole thought behind that, but it’s a biweekly membership every two

The Wolf of Franchises:

Weeks. So youd

Zac Pennington:

The rates, we doubled street rates and that’s what the market is, what we felt the market could actually support. But in order to get people there, your facility has to be there, the value it has to be there and your team has to be able to support that value that wasn’t there prior. We had that. And so at this point we had had three other locations and we kind of knew where we could end up.

The Wolf of Franchises:

Do you see a correlation between price and customer perception? Meaning if people are scouting gyms to sign up with and you’re the lowest priced membership, my natural thought is, okay, it’s probably the cheapest gym, it’s probably not the best quality, but hey, they’re budget gym. It was that part of the mindset in the price changes to communicate what you’re trying to deliver through a higher price.

Zac Pennington:

A hundred percent. Yeah, absolutely. Price does give a sense of value in what you’re going to receive. So we did that and we improved that. And so that immediately took the street rate. So every new member that we brought on was at that rate and we began to t trudge forward from there.

The Wolf of Franchises:

Did you have to then to bump up existing members or was this just existing members were kind of grandfathered in and it was a new customer only policy?

Zac Pennington:

So this location we eventually did, we eventually did change prior members or they’re still current, but current members rates. We did, however, this was our fourth location, this was the first location that we attempted this and we’ve done it, we’ve done it now, we’ve been successful at it. But at that time it was a question mark in the back of our mind whether or not this would be doable, whether it or not, whether or not it would scare people away or not. And so we gave it about six months of selling at the street rate, the new street rate, continuing to push the new value and demonstrating what we could offer members in hopes that, hey, those members who are already in the system who are already visiting the club, they’ll see this when they’re in here. They’ll get a feel, Hey, I get this.

And we experience that. One of the things that is interesting, and I really started this from a real estate perspective, when we consider increasing member rates with for instance, real estate, really it’s constrained by its capacity. So if my apartment building only has five units and everybody is a hundred dollars under market, well I can either increase them and they can leave and I can replace them with higher rate members or I can keep them at the lower rate. Well, with the gym business, it’s not really capacity constrained. And so you really have to tow that line between, okay, are you just going into increase rates because Joe’s gym down the street has increased rates and that’s his street rate and that’s where the market is now? Or are you going in and providing additional value and sending a signal to your current member base that, hey, we are worth this and here’s why. And it’s not just because Joe’s gym is that way, so it does not necessarily have a capacity constraint. So it does make it a little tricky and you really do have to focus on the value you’re going to provide for the new amount that you’re going to ask.

The Wolf of Franchises:

Definitely. It’s never a good idea just to I’ve actually heard of some people doing this with SAS businesses that especially tiny ones that folks, that’s just the things I read on Twitter. Someone acquires a SaaS business and they just immediately double the monthly cost to customers which sometimes apparently that works. But in this case, we’re a gym and it’s a specific service that could cause issues if you’re not actually doing anything to earn the increase in rates. And I know you also added, because it says this in the Twitter thread, just back to that specific acquisition where you added a security activation fee and a club enhancement fee. So I kind of want to, just to conclude the acquisition here, you have the freedom as a franchisee to really add certain things in. Whereas I do think a lot of people might be surprised by that and that they would think that the franchisor is controlling pricing optionality and any added fees. But it appears to be that that’s within your control.

Zac Pennington:

Anytime fitness is pretty good, and this is what I think I may have mentioned either in that threat or another, but you often think of a franchise as a business in a box. These are your rules that you must follow, and if you stray, you’re going to get a slap on the wrist anytime. Fitness is really good in this regard in that they do allow you to explore shifts in the services you offer and not necessarily the model. We’re not changing the brand, but what does training look like in your gym? What do the fees look like? Whereas a McDonald’s, right, the dollar menu is always probably going to be the dollar menu and you got to sell it at a dollar. With us, you’re going to see membership rates at any time. Fitness run the entire gamut globally, but it’s also market dependent, which makes it great.

So we found a good pairing between what we charge and the value that we offer. And it’s worked well for us. The franchise does have a minimum that every location must charge. So I think it’s like $29 or something. So the minimum of our monthly rate, which is, and I’ll tell you that’s going up, but if you are not at that minimum, you’re getting a call from the franchiser and you’re likely getting it fine. So when we’re looking for acquisition targets, can I, going back to that, that’s in our due diligence checklist. Let’s find the average rate of the member in here and where does it lie? And you would be surprised how many of ’em are below the minimum. And we immediately go money on the table. We know the play to run here. And so security activation fees, those are things that are actually encouraged by the franchisor.

We have to do, because we are a 24 hour facility, we’re consistently having to do upgrades to our security systems and training for staff. And so those types of fees go towards that. Nobody wants to be in the gym at 2:00 AM and have to be concerned about their safety. So that’s something that you’ll find that owners don’t charge. And then they get two years down the road and they get a big bill from the security system that they have to upgrade everything and then they’re stuck. And so it’s similar to that club enhancement fee that we charge. The second biggest item, I really believe the second biggest expense within kind of fitness is going to be your equipment. And that stuff wears out, it gets hard use, and the guys who are out there that get stuck is they end up in this cycle where they don’t properly plan for equipment upgrades and refreshes.

They get equipment into bad shape after about five years. And then it just becomes a vicious cycle where people come in, they see bad equipment, they go, Nope, I’m not using that. I’m not paying for a membership here. Current members start to leave and then revenues decrease. They even have less money to even invest in their business and pretty soon they go out. I mean, these types of fees go towards consistently upgrading equipment, maintaining the facility, and also training staff on bettering their professional ability to service members. So we added both of those at this particular location in addition to the rates and the CapEx. And yeah, after 18 months we returned a hundred percent of the capital.

The Wolf of Franchises:

Incredible. Yeah. Mean, well, it’s great to hear from, you know, being in the business, just kind of the nitty gritty details on why those fees are charged. But I think the takeaways that a lot of people might just see that as a extra price and other barrier to convert a member whereas why they’re in place and why they’re needed. And you position your whole brand around being able to earn that where it’s worth it. You are providing value you do have a good security system, the equipment’s going to stay fresh, you’re going to have trainers who are doing a good job versus if you skip out and like you said, you can find yourself in a tough situation. Especially I think it’s unique to a little, unique to the gym business in that recurring revenue model. If the members do start leaving, it gets harder and harder to make it back up. Cause you just have way less cash coming through the door.

Zac Pennington:

Yeah,

The Wolf of Franchises:

Yeah, man. So I guess just today you have eight stores bright, and I’m sure there’s obviously a lot of detail that goes into getting into eight. But to wrap up mean, what would you say or how have you structured, I guess this organization, and I know your wife, your father at a minimum are involved, but a lot of people might feel overwhelmed by hearing that. How does one operate that many locations? Is it just eight times the work of one location? So if you could just give some guidance on how you guys really bring efficiencies out of that scale so that you’re not working a hundred hour weeks.

Zac Pennington:

We’re very fortunate. I think a family business is, it can be tough for a lot of folks, but if you can make it work, it can be the best thing ever. Your family, you’re invested in one another and you’re invested in one another’s success if you do it. And we have a lot of help. So yeah, like I said, like you said, my mother’s involved, man, she is a process person through and through. I can go to her and say, Hey, here’s what we’re struggling with. Can you put something together that will help us achieve this result? Give me two hours, Zach, I’ll be right back. Boom, here we go. My father’s a strong leader, he’s kind of the calm in the storm and people love working for my father. And so he’s been the guy to come along and provide that steady leadership that has had a ton of experience running and operating a business way larger than this one.

And then my wife is technical, she’s a trainer, she’s certified, she can kind of speak from the point of view of the customer. She gets it and she understands, hey, these are the things that will really help our communities thrive and grow. And I tend to be more the visionary. So I come in and spout off my vision and everybody goes, wait a second, the reality and then we find a happy middle. So yeah, it’s been a process by which we’ve defined roles and responsibilities, but we’ve also built a great team around us. We have awesome club managers and fitness managers that work with us at each location. We have just an amazing team that works super hard and are intelligent. We have never been a ownership team that has said, Hey, we know it all. We never ran a gym before, but we’re going to go find the best that can help us. And so we go out and we find the best oftentimes better than us in some areas, a lot of areas, and can come alongside and help lead the organization. So as we continue to grow, I mean we’re just continuing to look for those pieces of the puzzle they can come alongside and pick up where we’re short and really help us continue to move the next phase.

The Wolf of Franchises:

That’s great. Yeah, it seems like a very team oriented approach and also almost a humble approach in that you guys recognize maybe that you don’t know everything and you want to bring in other folks who can contribute. So that, that’s awesome to see. And since you’re the vision guy, we can end with this question. What do you see as over the next five to 10 years? What are your goals? Is it more anytime Fitness, do you plan on expanding to other brands? What’s kind of the grand Master plan for you?

Zac Pennington:

We found our stride. We found our stride here in any Anytime Fitness, and we’re definitely acquiring more. So that is the target. We’re going to continue to look for more. We expect to have a great portfolio full of Anytime fitness clubs and continue to help the communities which we serve. And I think for us as we move forward, it’s a process of keeping focused on what we do really well and not allowing ourselves to get pulled one way or the other. Running our play consistently will produce the returns that we’re after. And as long as do that, it’s just about time. Can we continue to move forward and continue to receive these types of returns and do it in a consistent manner and continue to run everything from the big things to the small things we know how. And if we do that well, we’ll we’ll just continue to grow.

The Wolf of Franchises:

That’s fantastic. It’s the beauty of the franchise model, just rinse and repeat and I mean, it does take time. It does take work, but you have the playbook and you can just keep running it. So we’ll have to have you back on maybe in a few years when you’re at a hundred plus locations or something like that. But this was a great conversation, man. Yeah. So thanks for coming on and if people want to follow your journey, is there anywhere, LinkedIn, Twitter, where you’re particularly active that they can follow along?

Zac Pennington:

Yeah, absolutely. Follow me on Twitter at Zach Pennington, so Z a c Pennington, and yeah, check out that thread that we talked about and more to come on those.

The Wolf of Franchises:

Beautiful. All right, well thanks again for coming on Zach, and we’ll talk soon. Okay.

Zac Pennington:

All right, thank you.

The Wolf of Franchises:

Thanks for listening to Franchise Empires. We’re coming to you soon with actionable insights to take the next step on your franchise journey. So make sure to subscribe on Apple, Spotify, Google, or wherever you listen.