Ep 484 How to Know When It’s Time to Sell
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Hi there, and welcome back to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your company.

I'm the executive producer, Colin Morgan. And in today's show, we sit down with Christy Shifflett, who built a 13 location Orange Theory empire before selling to private equity. She started by personally guaranteeing leases, taking on SBA loans and bootstrapping her way

through a capital-intensive business. When it came time to sell, she played it smart, getting her acquirer to bump their offer by $1 million and maxing out her earn out, even though she didn't quite hit her targets. If you've ever wondered how to know when to sell, what the $10 million milestone means for buyers, or how to negotiate hard without scaring off an acquirer, this episode is for you. Without further ado, here is Jon and Christy. Enjoy.

Christy, welcome to Built to Sell Radio. Thank you so much, John. I'm pleased to be here. I saw Orange Theory for the first time. Gosh, it goes back a long time ago. And I'm like, that's kind of weird. Logo looked cool. And then it was one of those things where you learn a new word and then you can't stop seeing it. And then I just started seeing it everywhere. This was an incredible experience.

and you got in early. Walk me through, like, how did you start your first location? What did that look like? Yeah, so it was, it was, it was funny. Early days, people heard

saw or heard Orange Theory and they thought that it was like an ice cream shop or some frozen yogurt place. And so that was when I got involved and I started to question, is there any brand recognition? Is there any awareness? What exactly did I get into? But in terms of getting the first one going, it was a labor of love and it was one of the, probably the hardest thing professionally I've ever done in my life.

You know, the leading up to that first location was a lot of just introspection on what business did I want to get invested in and what did I want to do post my sort of corporate career. And but when I learned about Orange Theory, it was this serendipitous moment of all of the things

that I was looking for came together. So it was new to the market. I didn't want to start a business that had existed in the space and was just the third or fourth Massage Envy to be in the area.

I really wanted to own a region. And so when I signed on as an Orange Theory developer, area developer, I had the rights to a large swath of territory from, you know, central North Carolina all the way to the coast. So in North Carolina, there were two distinct regions. One was the Charlotte Metro, and then I had the rest of the state, essentially. Okay.

And when you do that, I've never owned a franchise. I've never even really thoroughly looked into it. When you become an area owner, like a master franchisee, I think they refer to it in some cases where you own an area, right?

Do you pay for that right? Or do you commit to a certain threshold of volume? How do you get ownership of something like that? Right. And so franchises do it in different ways. With Orange Theory, they had this area developer model where...

you are essentially kind of a liaison in between the franchisor and then the individual franchisees. And so when I signed on, yes, I had to pay an area developer fee. And I and I gosh, I don't even remember what that was. Let's say it was like 80 or 90 thousand dollars. And that included the license to open the first location.

And so normally you'd have to pay a franchise fee for each location that you want to do.

Let's say that back then they were like $35,000 for a franchise location. Now, as part of the trade-off, I was required to meet a certain development schedule. And I could either develop them myself, and I want to say it was five within 10 years. It was something totally reasonable. Or I could sort of sub-license them out to a franchisee, to some other owner who wanted to build something.

you know, a store in a different geography.

So you're, as an area developer, I mean, it sounds like your main goal is not to operate a successful Orange Theory franchise. It's to go find franchisees to kind of be under your area. Is that, am I getting that right? So, no. So actually, I think completely the opposite, especially in this business. Now, I think the benefit to Orange Theory is...

They have this sort of liaison who, if I were to license out to a different owner to take a territory 50 miles down the road that I didn't have any interest in, then I have some responsibility of assisting and supporting that franchisee. And that takes a burden off of the franchisor, right? I do get a little bit of royalty, but it's nominal. So it was like 2% or one third of the

royalty that the franchisee paid to the franchisor, that would come back to me. But when you look at the margins, the four wall margins of an individual store, the real value is in owning them yourself. And so I...

I wasn't clear when I started exactly what the strategy would be. My gut said, keep the kind of the triangle to yourself, that core market to yourself. And then if there are these sort of extremities that I don't really want to go to, or I don't feel like they're as strong of a market or demographics aren't as robust, then sure, then I can get that. I can license that out.

And so how many did you own yourself, end up owning yourself versus sort of license out? So I, um, the all said and done. So, so North Carolina was my core developed my core area, right? When we did acquisitions later, um, those came with some different, a different setup. So for me personally, early on, um, I only licensed out two locations, um,

And so you license out and then how many did you ultimately own? So we acquired one of those back. And so then there was only one. And, um, by the, so from the time we opened the first location, which was January of 2014 to when we sold, um, the majority of, you know, of our business, um, we had 13 locations plus one that was a franchisee. So,

Okay. Gosh, got it. So who's the we? Are there investors in this business? No, it was me. It was just me. There was a lot of moral support. My husband, he joined in after like around the sixth studio.

So, for the first bit, it was just my thing. He had a good job, a real job to keep the train going. We had two small kids, like age three and four when I got the first one open. But he played such a supportive role and came and helped with some of the pre-sales or some of the tough employee conversations and all the inevitable challenges of the business. So,

But really, it was my thing at the beginning. So no investors. The reason I ask about the we is because it just seems like to grow that quickly, you'd have to have outside investors to fund this. Maybe walk me through what are the costs to set up an Orange Theory? How did you finance this growth so quickly? Yeah, this is a good question. So the first one, I got an SBA loan.

Now, we had saved a lot personally, and so we were prepared to do a good chunk of getting it going and planning for future growth. But we got good advice to, you know, let's try to get some debt. And so we went through the SBA process. It was it was a really painful process, unfortunately.

Partly because in large part, because the general contractor that I hired to do the first location was not very professional. And so at every turn when the SBA required certain documentation, it was like,

where's Charlie? What is he going to say? How am I going to get this done? And so it was a painstaking process, but it was a means to an end. So got the loan for the first one. To get it open, back in those earlier ones, it was probably like $600,000, $700,000, maybe $800,000 all in to get it open. $800,000. Yeah.

Wow. Okay. So to get one location, you got to come up with almost a million bucks. Yeah. Yes. And probably, yeah, maybe more like 700 back then. Yeah.

Now, all that being said, you get a nice, I was really keen on negotiating in my leases, getting a good portion of that construction allowance, that TI allowance. And that was really helpful at providing a little bit of cash cushion. So maybe it would be like $200,000 would come back to me for the upfit work that we did on the space.

So you would sign a, what, a five or 10 year lease on a space? Yes. Usually five year with a five year option. And then it sort of shifted to 10 years, 10 year leases.

Okay, so you're signing a five-year lease. As part of that, the landlord turns around and gives you $200,000 to fix it up. Right. So you're out $500,000. You've still got to go find $500,000. You still need, right. Yeah. Okay. Those leases, are you personally guaranteeing those? Yes. Yes. Oh my gosh. So you're personally, and this was just this blind...

that I had at that time. So I'm personally guaranteeing leases. I'm personally guaranteeing franchise agreements, personally guaranteeing the area developer agreement. Like, yeah, let's go, let's go sign some more leases. How many good ones can we get? I did not blink an eye. I don't know what was wrong with me, but I just, I was like, this thing is, is just, it's going to go and it makes sense. And none of that's ever going to happen. It'll be fine. Right now, that being said, I was, I was, um,

I did negotiate pretty hard on not having the guarantee for the entire term. It would either, you know, for the first maybe two, three years, and then it would be a rolling one year or it would sunset after a certain period of time. So it diminished drastically or it went away over a period of time.

Did you appreciate the risk you were taking on at the time? I don't think so. I don't... I think that I... So getting that first one open, it did... I...

I tended to... I was confident. I was confident. I knew I was going to make it work. I knew I was going to get done. But there were many moments when I was driving to that construction site and getting ready to open the pre-sales where I had to put classical music on and force myself not to get off at every single exit and just turn around and go home. I mean, it was...

It was, it was, I, I did have a few moments of like, wait, what, what did, what am I doing? I've never owned a business. And here I am now the head marketer, the head payroll person, the head finance person, the GC, you know, and I'm doing sales and I'm doing computers and technology. I mean, it was everything. And it was, um, it was a lot now. So getting that first one open though, one of the things that was

really great about the Orange Theory model. And I will say, my view going into it was, all right, I'm going to take advantage of the system, right? The whole benefit of a franchise, there are pros and cons I'm happy to get into if that would be helpful. But the benefit is there's a system in place. And if you follow the system...

then you should be in good shape. And so I decided early on, I'm not going to try to reinvent the wheel or think that, oh no, I'm unique and special. That doesn't apply to me. I'm going to do something different. I just said, I'm going to execute the shit out of this playbook and I'm going to do that perfectly. And that's going to make me successful.

So one of the parts of that playbook is a pre-sale prior. So while your construction is happening to build up the space, you do a 12-week pre-sale to sign up your members before the doors open so that on day one, you're running 300 credit cards, right? 400 credit cards, ideally. And so-

That process was very challenging because you're selling something that doesn't exist and people think it's a cell phone company or ice cream company, whatever. And you go through that process. But when you get past your first 30 days and you have a profitable business, I mean, it all started to make sense. And then you grow from there. So, yeah.

while that, while that pre-sales helped fuel the success in the early months, then it started to show, okay, this is, this is really profitable. I can use the proceeds to put towards the next location. Okay. So I was going there. So you, you got the first one up and running profitably and you could, it was profitable enough to, to basically finance the second location. Is that right? Almost. No, I, I, we were really fortunate. We have, um,

A great friend of ours who has been extremely successful as an entrepreneur and as a business person. And he said, you know, I just want all of my friends to be able to have the same success and experience that I did. I'm happy to give you. He gave us. Oh, gosh, I think it I think it was a five hundred thousand dollar loan.

And it might have been a little less than that. But something to that effect that helped get that second one because the second one was only eight or nine months later after the first one. So it got those two. And then once I had those two, I never needed to borrow another dollar. And we paid him back. You had enough cash coming in that you could finance the growth. I find this so interesting. And well, congratulations for it.

First of all, for all the success. And it kind of makes sense when you, you know, if you're going to buy a franchise, why not follow the system? Like that's what you're buying. Like it seems to be very thoughtful. But it does beg the question, how did you go from kind of owner operator of one location where, again, a lot of our listeners would be, you know, as long as they're in the company, things are fine.

But once you start to create two locations, three locations, they can't spread themselves personally out of across it. And that's when things start to break down. So how did you bridge the gap between being an owner operator there opening the door in the morning, closing the door at night, making sure everything's great to a second location? Like what was that second location struggle like? That was a big struggle. It was a big struggle because you're dependent on...

your employees. And I made a lot of bad hiring decisions. And I thought that I was kind of going through the right process and picking the right people. And I got burned a lot. And so that was really stressful because...

Because I couldn't be there at 5 a.m. to open the door and I couldn't be there until 830 at night. You know, I had two small kids and I lived 30 minutes away from this location. And so that it was it was it was tough getting to the second location, though, to be fair. I mean, I was in the store all the time. I mean, I was there every day. I was there all the time.

And then I had to move out of being in the store all the time to start the pre-sales for the next location. And so then I was doing that all the time because I realized that that's where the money is. It's getting that, having that really strong pre-sales and then you're like a rocket ship going up. So that was worth my time. I had to do that. So yeah,

Then as you're at now, you've got two open. You can't be in both places at once. But getting the third one is really when it broke. So the whole system really broke after three. And so I experimented and failed with a lot of different ways to manage that. So I had one store manager that was actually like a super manager over two locations, right?

And then I was spending more time in one location and had studio manager and that one as well. And so it was a lot of trial and error in it. I found that it really doesn't work unless you have a truly invested studio manager in each location. And so that's what had to happen. Now, then I was responding. Then it moved from me being in those stores to managing everything.

three different people, then continuing to develop. And that's when that it broke again. I couldn't be focused on developing more locations and managing three individuals who need attention. So then I had to add, I had to add a regional manager. Okay. I've got so many questions around that. How did you compensate the studio managers?

The studio managers, this is 10 years ago. You're testing my memory. But this is the gym industry. So people weren't doing this for the money. Probably about 30,000, call it 30,000, 35,000 base salary.

And then they had, I was very focused on everyone being aligned with incentives. And so we were all pulling in the same direction. And so I would have goals that were set for the net gain of net new members. So cancellations are out, new members are in that net number and total revenue.

And so they would have the opportunity to earn bonuses each month for hitting both or one or the other. For their location, not the group. Just for their location. What could they influence? And how much additional compensation would they get in a year? Like, would that be...

like 10% more or 50% more, 100% more? Like, was it a significant portion? Yeah, it was. I mean, I was a salesperson by background and I was just a big believer in pay for performance and performance-based comp. And so they could make, you know, 50 or even more

um total for the year so a good chunk i mean it could be almost a hundred percent if they were good and the studio did well um they could they had the upwards potential why wouldn't they just go buy their own orange theory franchise without sounding um

you know demeaning to this this type of of employee um that that that wasn't in their it wasn't in their wheelhouse it wasn't in their skill set they wouldn't be able to afford it um in the gym industry and granted this was a boutique fitness as upper you know upper end what have you but um

And I guess this is sort of a, you know, it's a little foreshadowing to the hardest part of this business was finding the right people. And so, you know, these managers, they didn't have money to go and open a store.

What did you learn about hiring entrepreneurial people? Like, was there a question that you came to love in the interview process that was revealing that you could share? Gosh, you know, it was always a conversation about

This is your studio. You are the owner of this studio. And I'm looking for somebody that takes full ownership. And my role is to be your advocate, to be your cheerleader, to help you find the resources to make you successful. This store is for you and the goal is for you to be successful with it.

And I would have a conversation. So I don't remember what the exact question was, but it was around that. And my what I would be listening for is, is this person, do they have autonomy? Do they have self? Are they self-motivated? Are they driven? Are they going to do the right thing that's hard even when no one's looking? Are they?

going to put in the extra time or the hours even when it's beyond. And that was the other thing. I was like, you got to be comfortable. This is not a 40-hour-a-week job. This is 50. It could be more. If you hire a great team and the store is doing well, then you might be able to work 40 hours. But

It's really, you know, it's kind of like the expectation is, you know, this isn't a nine to five business. I mean, we're, you know, we're opening at 5 a.m. and we're closing at sometimes nine o'clock. Did you ever think about not growing? I mean...

You got the first location up and running. It was profitable. Did you ever think, well, maybe this is good for me? No, I don't know. That never crossed my mind looking back. It was always where is the next great real estate spot? And for this brand, it was so important to...

have that prime location, um, where, you know, and, and we, the market that, that we were in in North Carolina was just a very tight retail market that, that classic, like kind of that, that, that great location where you have great accessibility, visibility, um,

you know, great daily use, all the different components that you're looking for, the right size, the right everything. And so I was always in that developer mindset. And I think it was probably around maybe the fifth or sixth store that I, we, I,

sat down with another friend of ours, a separate one from the other entrepreneur I mentioned earlier, who was so generous with a little bit of a loan. Another friend who had had some success in his business

said, let me bring my chief of staff. Let's look at the books. Let's see what you guys have got going on here. And I had just been so heads down in grow, build, find these things, hire the people, get the next pre-sales going, find the next real estate. And I...

I didn't I hadn't picked my head up to see where is this going? What is the plan with this? I just was following my gut of, all right, these are profitable. It's working. Let's just keep doing it. And so having this meeting with with our with our friend, it's like, you know.

This almost looks like there's money laundering going on. Like this thing is really profitable. Like you do not want to, no more franchisees. You don't want any partners. You don't want, like you need to get these things open as quickly as possible. And then we can, you can sell this business.

Where are you financially at this point to share as much as you can or revenue, how would you sort of describe it at six locations? Okay. So we had a couple really strong locations. In fact, one, the second one that I opened was in Chapel Hill. That's, that was our town, which I think gave us an advantage. Um, and after I think the third year, it was a $2 million revenue store. Um,

Wow. It was so we were doing really well, but they were not all that strong. So of the six, I would say on average, probably a little north of a million per year on average, probably well north of that. But.

Below 1.5. So, sometimes I'm averaging 1 and 1.5. And the margins were good. I mean, I think, say, on average, our margins were – the early ones were a little bit stronger than the later ones. But, I mean, at minimum, 40% for Wall-E. Wow. For Wall-E EBITDA. Wow. 40%.

Yep. That's incredible. And that's after you pay a franchise fee and all your expenses. After all the expenses and fees. It was a really good business when it was good. That's amazing. So you're at six locations. Is that when it first dawns on you that...

I might be able to sell this thing one day. Yes. Yes. I had been so laser focused on getting them open that I had not planned for what an exit. I didn't really even know what was possible. And so once my eyes got open to that and had some really great conversations with some different investment bankers, and we went through that process of deciding to actually market the business,

And then it got to be really exciting about, OK, not only am I proud of what we've done, right, but it validated we're doing the right thing. We need to keep going. And then third, it got me really excited about what the future could look like when I could maybe play with some other people's money.

Got it. Okay. So let's get into that. So you're at six locations, very profitable. Did you get a sense of what it might be worth? Like did somebody, did your chief of staff guy say, yeah, you could get X multiple of EBITDA or did you start to get into those sorts of conversations? I started to understand what was possible. Yes. So-

And gosh, and I don't remember exactly, but let's just say, you know, five, six, seven times EBITDA was maybe what would be possible. And so...

As we're having this conversation, keep in mind, the developer part of me was already going. And so we were getting number seven, eight, nine, and 10 already. They were already signed in the works. So those four were getting open in 2017.

And then when at the end of 2017, we had, you know, we had at that point 10 locations. And that was when it felt the scale was big enough to be able to attract, you know, a good buyer that would, you know, be serious and have a nice liquidity event for us. What was it about 10 locations that you thought was the right time? I think it was just feedback from...

investment banker advisors who said, you know, this is really when it kind of, you know, it's still that low middle market, but now you're, and it might've even been an EBITDA number, maybe being, you know, I,

But it was having that scale will attract a larger multiple and a more serious buyer. We often hear about this $10 million mark for some reason when revenue exceeds $10 million. Some people seem to have that sense that that's when the whole world of private equity starts to sort of open up to you. I don't know if that was part of the equation. We do hear that from time to time.

Yeah. I mean, we were, yeah, we were definitely north of that. And so I think it started to, and as we saw like the, you know, the, not the ease, cause it wasn't nothing about this was easy, but as we started to see the formula and that with every additional location, we were, it was just incrementally. The idea was let's just get as many of these open and then you get a multiple on that.

And that's value that comes straight to us, right? And were you pocketing some of this EBIT at this point in time? Because again, I'm just doing the math here.

There's a lot of EBITDA, but we all know EBITDA is kind of, I don't want to say fictional. It doesn't mean it's cash in your jeans because if you're having to reinvest it to buy the next location and like, I'm assuming there isn't a lot of money coming into your jeans yet. No. And I think that was one of the reasons we got excited about the idea of selling the business. We, I...

Yes, they were all successful. And I everybody was like, oh, you know, you're what you're doing a great job with this business. I'm like, well, that's great. But I don't feel I mean, we're we I'm grinding it out. I'm working so hard. I am taking my accountant told me you better pay yourself something or it's going to look shady. So I think I was paying myself thirty thousand dollars a year.

And all the money was going back into the next ones that we were opening, right? And so that was one of the reasons we decided

Let's let's take some chips off the table. All of our eggs are in this one basket. We, you know, we're pregnant with our third baby. We've got three kids like this has been really good. Let's let's not be let's not get too greedy. Let's let's go ahead and look at a way to monetize this.

This is so interesting because I think, again, a lot of our listeners are at this exact moment you're describing, which is, you know, do I double down and go to the next tranche of growth and put off selling for five, 10 years? Or do I, in your vernacular, take some chips off the table? Because there's some value here.

And was there, so you mentioned there were, you had a third child on the way and that was a triggering event to say, let's get some security here. I don't think it was triggering. I think that it was, it was this, this was the natural progression.

Um, you know, it was really the turning point. The catalyst was that conversation we had with our entrepreneur friend and his chief of staff that was like, you guys need to get your shit together and get serious about what you have here because it's really no joke. Like, take this seriously, grow this thing, and you guys are going to be in really good shape. And I was like, okay, let's, you know, let's do that. And what does that look like? And so it was that...

that made it that, that was the, the, the turning point. And, and,

It was then the conversations we had with investment bankers where we started to get more clarity around what that could look like, not only from a monetization standpoint, but also what our roles and what a future business could look like. That was a whole new experience for me where my eyes got open to what could this business turn into. And then I got pretty excited. What made you excited about that?

The idea of, while I'm very confident, I don't necessarily look at, I don't,

feel like I'm doing anything that's exceptional or superior. Right. And so but when you're told you've got one of the best platforms from an operational standpoint, from margins, from just like tightly managing the business and your employee engagement, blah, blah, blah. Now, you you could be the acquirer of choice and you've got all these relationships in the Orange Theory ecosystem. Right.

Could you take advantage of that and be able to roll up some of these other operators into your platform? And you could be one of the biggest operators in the system. And I was like, I had never thought of that. And that sounds awesome because I like winning. So let's do it. Were you ever tempted to leave Orange Theory and do it yourself? I wasn't because...

That wasn't that wasn't a passion for me. You know, I I love I love fitness. I mean, the health and wellness space is absolutely my passion. But I was I I had other things that were satisfying in my life. I mean, I had young kids, a young family, and I didn't feel the need to do that.

Got it. Okay. So let's get into the M&A process itself. So you're, I think you said 10 or 13 locations at this point when you hired your banker. We hired our bank. So we interviewed several. We hired Fifth Third. Love those guys. We...

Well, when we signed them on, let's just say it was, I don't remember, January of 2018, let's say. We were number 11, 12 and 13 were underway. Got it. So 10 were open and three more on the way. And so what was the process like? I mean, did you first have to get permission from Orange Theory to sell the business? No. No.

Though that was always something I was unsure about. I didn't exactly know how that would work, what that dynamic would look like. And so all of that is accounted for in the agreements. And there are provisions that certainly allow you to sell your business.

But they have to approve, but cannot unreasonably withhold approval to a qualified buyer. And they can certainly put terms on what makes a qualified buyer. But once I think I just sent over the franchise agreement to the bankers, I'm like, you tell me. And they're like, no, this is totally fine. The buyer universe that we're talking about absolutely would be...

you know, a qualified buyer. And furthermore, that's sort of a natural life cycle of a franchise system. You know, first, it's a bunch of mom and pop operators getting that thing going. Then, you know, kind of some multi-unit operators like what I did. And then when private equity comes into the system, that can really help

spur growth. Because now you've got all this new capital and we can open up new locations, we can do the refreshes on the existing locations and do some capital improvements. We can do some rolling up, right? Some acquisitions of these onesie-twosie operators who maybe aren't taking it quite as seriously and we can professionalize. So there is a benefit to the franchisor and having private equity in the system and that sort of

comes at that second phase of their life cycle. So when you're talking to the fifth, third, these are your M&A bankers, the acquisition professionals that you hired, were they...

focused on private equity acquirers or were they looking at all types of acquirers? It's a good question. So at that stage, I mean, so basically it was either going to be a strategic buyer or a private equity buyer, maybe like a family office, right? But mostly an institutional buyer or a strategic being, you know, another either Orange Theory group or, you know,

Another fitness concept, something like that. And so the thought was it would because there there weren't many big transactions that had happened. I was maybe the third, maybe the second or third big operator in the Orange Theory ecosystem to to go to private equity.

And so when we did, you know, we the process really involved putting out the teaser, putting out the sim, and then you get those indications of interest and you go from there to see, all right, who's serious? And and then from that point, it's management presentations and then letters of intent. And so.

In the very first stage, you're looking at what is the landscape of the buyer universe. And it really was mostly larger and mid-market private equity.

Okay. And so how many sort of IOIs, indications of interest did you receive? Like how many folks did you kind of start to engage with? Yeah. So it was so much fun. It was fun to feel like you were being courted, right? So we had, I want to say 15 to 20 indications of interest. Okay.

And that got whittled down. And the bankers do a great job with this. You know, they are that like filter. Right. And so they test and have conversations and who's really serious and in the range that we're targeting. And so maybe that got down to, you know, 10 or 12, something like that. And then from that group, we picked seven to that we invited to do management presentations.

Okay. And what were they like, the management presentations? Oh my gosh. This is, I think the, it was over a two week period and they were long. So it was, you know, they got, they were sometimes four or five hours with some form of breaking bread or some social element. And this is the part that got me really excited about what the future would look like, because I will say just to back up for a moment,

When I went when Matt and I, my husband, when we made the decision to sell and we we were like, all right, we've got a number that we'll be happy with. And, you know, it's fine. We'll we'll be happy. We're not going to get too greedy. And furthermore, if they look at us and say, thanks, but no, thanks. We don't want you guys part of the go forward company. No hard feelings like I'm proud of what we did.

This doesn't, you know, if we're if we get a great exit and part of the value is us leaving, then that's OK. So I preface I say that because then when we're doing management meetings, it became not only clear that.

we were a large part of the value proposition. And at this point we have, so, you know, I'm, I'm running it. Matt is, is my, like our, my number two, it really were a T a great team. And then we had another guy that was kind of an operator and really a kind of a strategic guy. And then some of our regional regional staff, as we're going through these management meetings,

You're selling your story. You're selling your passion. You're selling your vision for what the future could be. And you're doing it in a way that shows them that these potential buyers, right? You've got all these suitors.

And you're like, I don't really need you. I've got a lot of great options. I've got plenty of excellent alternatives. I could keep running this thing. I mean, it's look what it's doing. I mean, we don't. But this is why we want to sell. And we have lots of great ideas for what could happen in the future. We think we could grow by.

by continuing our same store sales. I mean, that's continuing to grow every year. We could grow by opening up more in the white space in our current areas, but we also could grow by acquiring other individual, also other areas. And now when we acquire another area, we now have white space in that area as well. And that's worth something. So we can continue to grow and open these things. And then before you know it,

you know, you have,

I don't know, a $20 million EBITDA business. And now you're at the next level of private equity. So we started to get excited about what the future could look like, not using our own money to invest anymore, putting some in my jeans, like you said, and just having a lot of fun with what that growth could look like. And that future bite of the apple too started to become very clear at how tasty that could be.

So you're selling this big vision and kind of playing coy, like I don't really need you, but like if you want to, like there's, you're trying to find that. It sounds like a little bit like walking a tightrope where you're trying to paint a vision and sell what's possible at the same time, not look too desperate. Right. You're trying to do this kind of dance, so to speak. Interesting. Yeah.

It was a lot about just trying to show confidence. It wasn't hard, though, because we were having fun and we were confident, right? But it was making sure we could relay that in a way that was crisp and...

articulate. And that I think what I learned is that a buyer wants to see that what you did, the success you had and how you got to this point was intentional and was is repeatable.

And not like, oh, I don't know what happened. It just happened. It's very like, this is what we did. Here's how we grew the business. Here's how we extracted value and how we juiced our revenue and amped up our pre-sales and followed the playbook or whatever, how we negotiated leases and how we built relationship, blah, blah, blah. And so as you're telling the story, you realize like,

If we can if we can come across as like we are the best option in the orange theory space, then, you know, then we're doing a good job. Yeah.

But if you're too bold and too confident, it does beg the question, well, like, hey, if you guys are so hot to try, like, why do you need us? Like, why don't you just go off and do your thing? Like, why are we having this meeting? Yeah. Is there like a...

Like, how did you handle that sort of question? Totally. And again, I give our bankers a lot of credit, but we had to be prepared for that. And it was just the, you know, it was just the story of we're a young family and we need, we have everything that is invested in this. And we need,

we have done, we're really proud of what we've done and we're really excited about the future, but we need to do this for our, it's the right thing for our family right now. And it had the added benefit of being the truth. It wasn't just a story. And so it, it, and it was, you know, we really think that this thing can grow more than what we could do with it on our own. And so we need some, you know, some more sophisticated capital kind of stroke the egos a little bit. We know that you can add value to the business.

Not, you know, some of that's it's it's there is value to to be had. But, you know, it and it's so it's a little bit of that dance. You're right. It is striking that balance.

Yeah. Yeah. You mentioned you and Matt sat down and sort of said, if we could get X out of the business, we'd be happy and we're not going to be greedy. You know, a lot of our listeners are going through like, what's my number conversations, either in their own head or with their spouse or whatever. They're struggling with that decision. How did you come to the number conversation?

Yeah. So I got really good advice at one point from somebody that said, you know, once you pick your number and you're comfortable with it,

then no, just go forward. Don't hem and haw. Don't look back. Don't try to change your mind or wonder, oh, maybe I'm not asking for enough because things will just play out. Right. And so I think how we got to, and I don't think we had a specific exact, like this is the number, but it was like, once we, you know, when you go through the whole process with your bankers, you're, you get a range for what they think the business is worth. And we were like,

Great. That looks great. We'll be really happy with that. We were really fortunate and we got above even the top end of the range that was in these engagement letters that we looked at from the bankers. So we ended up even better than what our number was in this case. Okay.

I guess I'd just be curious to know the psychology of picking the number. Like what, so it sounds like the bankers kind of proposed, like this is kind of the range and you looked and thought, yeah, great. I guess I'm questioning though, like I've seen people pick their number based on what they think is fair. Like they've done the research five to seven times, even as the number, as long as it's in that range, we're good. That's one way to think about it. Another is, you know,

We want to go travel. We want to pay off our house. We want to have enough income to like, it's a very kind of clinical financial decision. Other people are like,

You know, there's some dream number they've had in their mind since they were 12 years old. They're like, this is the number has no bearing on reality. It's just like, that's the number. Right. How did you and Matt figure it out? Like, what was was there any of those? No, it really wasn't any of those, John. And I think part of it was, you know, back to my story earlier of just so heads down, just going with my gut, not even acknowledging the risk that I was taking on for my life.

not just myself, but my family, these personal guarantees and all this money going in. We're just doing it and doing it. And we didn't know what was going to come of it. We just knew something good is going to come. Not sure what it's going to look like, but let's just keep doing it. And so when we sat down with professionals who said, here's what you guys have built and here's what this could be worth.

We were, we were blown away. It was just, it was more than, than we ever thought what was, was reachable really. And so, um,

We just became very quickly excited and content with that. And then, you know, as you're going through the process, of course, I mean, there's I'm a bit I'm a negotiator. I'm a salesperson. My husband is, too. And so then there's this part of you that's like, well, wait a second. Look at the story that I'm selling. It's really actually good. And so I think it's worth more. And you kind of you know, we were able to get it up from there, but we we would have been happy.

Um, I think one thing I would have done differently looking back, I know we didn't really get into the, um, kind of the COVID, the COVID period. Um, but looking back, um, the, I, I, I would have, we kept about a third of the business and I, I, I probably, I wish we kept a little less than that, maybe closer to 20%. Um,

But we were offered to keep up to 40% of the business, para-pursue equity with the buyer, with key investors. What does that mean, para-pursue? I've heard it, but I don't know. I can't remember what it means. It's essentially, there's different in the waterfall, in the cap table, there's different classes of equity and they can be treated differently. Some can have preferences and para-pursue means different.

On the same even. We're equal. Got it. So it's not like the investors have preferred shares and you have common shares. It's like, no, no, we're being treated there. We're all the same. I want to get into the transaction, but before, just talk about the debt. So you've got leases that are in your name, and I'm assuming you've still got some debt on the business at this point when you're going through these conversations? Yes.

There was no, because really it was just that one friend's debt. I mean, we did have the SBA loan, but that was like immaterial at this point. Okay. So SBA loans basically paid down, but you have these personal guarantees on these leases. Did you at this point, when you're getting the indications of interest, you're having the management meetings, did

Did you get some sense from the buyers how they would be treated, those personal guarantees on the leases that you'd sign personally? So we created an indemnification where the company would indemnify us personally if there were any issues that came up with those guarantees.

Got it. And this was done before taking the business to market or as part of the process? That was part of the process. So it was part of the purchase agreement or just in negotiating that. It was an asset deal, an asset purchase agreement. And so we just wanted to be completely protected personally. For sure. And then going forward...

We said we are not going to sign the personal guarantees that it should be a company at that point, a corporate guarantee.

Yeah, that makes sense. Again, knowing why you're going through this process is to sort of take some chips off the table. I want to understand sort of how you're making sure you did that. Right. That obligations. Okay. That makes total sense. So you're doing the management meetings. They're all going swimmingly. How many offers did you get? What was the, how many yellow eyes did you get in the end? We got maybe, I think,

I think we got one from every everyone that went through the management meeting. Now, there were a couple meetings where we were we were like, that doesn't feel like a good fit now because the whole, you know, part of this is like this is who you're going to be doing business with. Like you really need chemistry. You need to you need to really like the group. Right. And so I think there were maybe one or two were like, yeah,

doesn't don't not really vibing with them, but like for the right number, maybe we could get over that. Um, and then, um, you know, then there were a few who, who, uh,

were more maybe like one, I think there was one that was like a strategic. So it was, they were trying to roll us into an existing kind of fitness platform. It just didn't feel quite right. Right. But, but otherwise, yeah, we, I mean, we got, we got LOIs from, from everybody and the range was probably, I don't know, maybe like seven or $8 million from like the lower one to the,

the top one. And we didn't, we actually didn't end up, we, we ruled out the, the, the highest bidder because of other elements of the deal that just felt wrong. What elements?

I think it was just more aggressive to the buyer's benefit. Equity treated differently, more of like a contractual obligation for a longer period of time. And they were more vague. It was almost like they hadn't really put in the work and they were just going to throw a number and then maybe start the process. Whereas...

The two that we narrowed it down to had been very thoughtful, very good bedside manner, just very communicative, asked smart and thoughtful questions. Like they did the work to get to the LOI. So the high bidder was just like, yeah, we're going to wing it. Here it goes. We're going to send it over. Just very not the right, just not the right feel.

Yeah. Yeah. Yeah. I mean, this is your life's work and it sounds like they were just trying to throw in a high number out that would have retrained it on the back end. Exactly. That's, that's what we were worried about. Yeah. And so, so we're, we're, again, I know we can't talk about actual numbers, but were they coming in in that range that you and at the sixth location, the five to seven times where they kind of roughly in that range? Yeah. Yeah, they were. And, um,

And even higher than we had initially thought. So we were happy with the range. And then at that point, it was like, okay, now let's just figure out

who's the right fit for what the future would look like working together. And so what made you decide to go with beyond the cultural fit, which sounds like it was there, you ultimately went with, I've written it down here. Keyen. Keyen, yeah. Keyen Capital. With the private equity group. What was it about their deal in particular around how they structured the kind of equity role and your role going forward? Like, what was it about that that

caught your attention or made it seem like a good fit? So it was, there were two finalists that we really liked both. The, it was partly what we liked about Kian and partly what we didn't like about the other, which was a family office. And it was just a little bit, a little bit different. It was, it felt a little bit more like buy and hold it for the family office. And

So it didn't I didn't know whether there would be enough of an aggressive view towards growth or as innovative and and then and we we tested Kian by going back to them and saying we want one one million more.

And it was partly more than just the money. It was really like, what's going to happen when we're at the finish line and trying to do some of these acquisitions in the future that we keep talking about and we need to get a deal done? Are they going to be flexible? What is this going to look like? It was a little test. And the way that they handled that was...

It was appealing. They also gave us, they were very proactive in giving us references, like call some of these other... How did they handle the million dollar bump question? Well, they were, they were, they didn't love it. But we said, you know, like, we want to go with you guys. And, but you got to meet this other offer. And we want another million. Were you bluffing? What's that? Were you bluffing?

It's a really good question because that's something I would do. I think it actually was true. I think that we did the the other group had come in just a little bit higher. And so we're like that to make us feel really good about going for it. Like we feel really good with the cultural fit. So we kind of, you know, we like it was true, but we felt good about them. We told them as much.

And we just need to see that we can match that offer. And so they like, okay, let us do a little more work on it and get in their spreadsheets and what they do and come back. And so I think it was in the form of an earn out. And normally this was like off the table, but the terms of it were reasonable. And so we agreed to it.

And just to put an end to that story, we did agree to it. And it ended up that we actually missed it by the technical definition of it. Because the technical definition was it had to be a growth on the same store sales.

But we very quickly pursued two pretty transformative acquisitions. And so that's where my focus was. And I was growing value for the equity holders. And so I said, I just don't feel right about this. I know that on a technicality, we missed it by just a sliver. But look at the value of the business. That's what this is for. And...

So I got it, but they weren't happy about paying it to me, but we did get it. Well, that's interesting. So if they're not happy, I mean, they're the 70% shareholder. How did you convince them?

Just, you know, I said, I said, I understand that this is what was in the agreement. So I'm not arguing what is in the document. But part of the point of an earn out is to keep the seller on the hook for delivering value and growing the business the way that we said we would. Now, we've far exceeded that. Now, granted, it wasn't on these 10 stores.

But the value of the business isn't predicated on those 10 stores. I mean, we got really darn close and you're in a way better position as an equity holder today than if I'd only done that on those 10 stores. So it sounds like, you know, I'm not meaning this in a pejorative way, but it sounds like you were sort of like, look,

I'm a big part of us, the big vision going forward, the next tranche, the next bite of the apple. You want me to be happy and motivated and feel good about the deal, right? I don't feel good about this. So like...

Am I owed this legally? Of course not. I can read the agreement as well as you can. But I think you want me happy. You want me excited about our relationship. So let's find a way to get this done. That is exactly right. Those were probably the exact words that came out of my mouth. Okay. Yeah. Okay. And they were like, all right, fine. Yeah. We're not happy, but fine. We don't want her unhappy. Yeah. Yeah. And nor should they. You built an incredible business and you're going...

uh, to build it again. I feel, I feel terrible because I know there's more to the story, but I know our time is precious. So, um, yeah,

We can take a few more minutes. Okay. I would love to, because I think I'd love to just ask you about the time. So you sold, as I understand it, you sold a business at a really good valuation. You took 70%.

The acquirer bought 70% and you rolled 30% of your proceeds into the new entity. Right. Okay. Got it. And that's 70%. That's yours, right? That's not growth capital to build it up again. It's like that's- In our bank account. You're getting paid. Yeah. Got it.

Got it. What was it like for you as a minority shareholder? This can sometimes be hard for a lot of our listeners. Growing a business you no longer control. It was tough in a way. On the one hand, I was having a lot of fun because...

I knew it was in my bank account and was proud of that. I mean, Matt and I together felt really, really good about what we had done. We tried to focus on the positives. So what we had shown our kids, the power of hard work and the value of what it is to start a business and grow a business, that was really important to us. And so that along with the...

The fact that I got to spend a lot of time doing really fun stuff like M&A and made it really fun. The tough part was as an entrepreneur, I could make decisions that were risky and I knew I'd deal with the consequences and I was fine with that.

When you are constantly in these consensus decisions, meetings and calls and board meetings and and.

I'm like, just let me do it. Like, just trust me. It's fine. You know, I don't want to talk about it anymore. I don't want to have any more back and forth or we'll circle back on. I can't. I just got to go. And so that was hard. And so... And, you know, it is different. Like, private equity by design has a different risk box and risk tolerance than an entrepreneur does. And, you know, they are the majority owners of the company. And so we were at peace with that, right? Like, we had...

Like I just mentioned, we were comfortable and happy with the positives to get us past the annoying kind of ankle biter type of frustrations. And so on the whole, it was like, I know what I'm getting into. I don't quite know how challenging it will be to navigate, but trying to keep the big picture in mind. What made you ultimately leave the role of CEO? So...

We closed our deal November 8th, 2018. 2019. Is it a tattoo? You can remember the actual date? Yes, because it was like six months after my kid was born and the day we moved into our new house, despite trying to not have them all line up. So we...

2019 was the most fun that I've had. I mean, apart from management meetings and going through that process, which I enjoyed, really growing the business and having these...

conversations with other operators and trying to convince them to let us buy their business and the whole idea of what scale would mean for us. We got to a point, we had a conversation in January of 2020. So what, 13, 14 months after we'd closed our deal. And we had Fifth Third back in the room and they had put a presentation deck together and

And we were going to start marketing our business because we had gotten the scale that would get to that, you know, that $20 million EBITDA number. And we were the plan was to bring it to market in February, March and then close before the election.

And so unfortunately, when March 2020 happened, it just completely, you know, side, everything went sideways. And so what was a really fun, enjoyable, professional experience that I felt very passionate about and also just very convicted in that this was the right thing to be doing, you

It just complete, like the floor got taken right out from under me. Right. And so you're talking about the pandemic happening in March. Right. Yes. All gyms had to close. And I mean, that must've been, well, it was awful. It was, it was awful. And the, the fact that it dragged on as long as it did in certain States and not others, it just, that got me, it made me insane. Like just the picking and choosing and the blue States and the red States. I mean, it was,

It was awful. And North Carolina was one of the worst, like up there with New York and California in terms of restrictiveness on businesses, which, you know, that was the bulk of our business. Half of it was in North Carolina. We at that point had Indiana, Iowa and Wisconsin as well. And so...

I felt that I had lost all control. Like nothing. I mean, first of all, I'm in a franchise, right? So I don't even... I can't even pivot and create some new product. And there's no pivoting. I have no control. The government is telling me what to do, which makes me insane. And everybody's mad. Customers are mad. Employees are mad. It's no one...

And no one has any clarity or visibility in what's going to go on, right? And so after about a year of this post-COVID world, I really started to question whether my skills and interests were aligned with what the company needed. I was an entrepreneur. I was a grower. I was a strategic thinker. I was a visionary. And now the company needed something different. We weren't growing. There was no strategy. It was so...

like just blocking and tackling and like trying to stay afloat. And it became clear that's not, that's not where my, that's not, I'm not a good fit for that. And so we, in 2022, we,

We found a CEO to replace me. And Matt and I decided that to reward ourselves for the pain and suffering of the last two years of COVID, we would take our kids out of school for six months and travel the world. And so we this was a little post close gift to ourselves, a little post COVID like

Like you suffered through it. Like now, you know, go do something, enjoy it. And the thing that started to really become clear for me in terms of a purpose or a passion was I want to share experiences with the people I love the most. And Orange Theory is making me a really grouchy, miserable person that's not serving me or my family very well. So let's let's figure out what will.

And you did a world tour. Yes. That's awesome. It really was. It was an experience of a lifetime. So lucky and fortunate. And we just had such a great, a great experience. Yeah. Treasure those memories and those pictures because those are, uh,

Those are going to be with you for life. I am so grateful for you sharing this story. I know we've gone over time, but I think it was well worth it. And I really appreciate you and the candor you brought to the conversation. I think you're

I have a feeling there's another chapter two in your journey for another business. If folks wanted to reach out to you, is there a way to do that? What's the best channel to say hi on? I think LinkedIn is the best for now. And hopefully when chapter two comes, there'll be some other resources as well.

Awesome. Okay. So we'll link up to your LinkedIn profile in the show notes at Built to Sell. And again, I really do appreciate it. Congratulations on the success. It's an amazing story and you deserve everything you got out of it. It's amazing. Well, thank you so much, John. It was such a joy to connect with you today. Thanks for having me on.

And there you have it for today's episode between John and Christy. If you enjoyed today's podcast, be sure to hit that subscribe button wherever you're listening to today's show. If you haven't already, be sure to follow our YouTube channel at Built to Sell, where you'll be able to see the full video interview from today's conversation between John and Christy. For show notes, including links to everything referenced in today's podcast, you can visit Christy's episode page online.

which you're going to be able to find over at builttosell.com. Special thanks to Dennis Labataglia for handling today's audio engineering. And thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, head over to valuebuilder.com. I'm Colin Morgan, and I look forward to talking to you again next week.