Gym business

[nitrotech]

Hello everyone!
I and my friends own a gym. We are currently renting but we want to transfer to one with lower rent. I know someone who owns a building (let's say his name is Mark), and he is interested but he wants to be a part owner. How do I quantify Mark's capital to the company? I don't think it would be fair to put the value of his building as his capital since if the business will be dissolved or closed down, he'll still be the owner of the building.

Also, under this arrangement do we pay him rent? The gym as a company must do some renovations for the interiors of the building.

[MyITGuy]

Hello everyone!
I and my friends own a gym. We are currently renting but we want to transfer to one with lower rent. I know someone who owns a building (let's say his name is Mark), and he is interested but he wants to be a part owner. How do I quantify Mark's capital to the company? I don't think it would be fair to put the value of his building as his capital since if the business will be dissolved or closed down, he'll still be the owner of the building.

Also, under this arrangement do we pay him rent? The gym as a company must do some renovations for the interiors of the building.

Personally, I would say find another building/space for lease. I wouldn't trade any stake in my business for what would amount to free rent.

Something to ask yourself, if your business outgrows the space that 'Mark' is providing, what happens then? Does 'Mark' still remain a partner?

[vangogh]

My first thought is to ask what other than the building would "Mark" be contributing to the business. The way you've described the situation it sounds like the building is it. If that's the case I'm not sure why he should get a % of the business while keeping the building. At the very least the business should end up owning a % of the building in the exchange.

Unless you think "Mark" offers a partnership worthy asset besides the building I wouldn't give him a % of the business. I'd just sign a lease if you want the building. Jeff's point about what happens if the business moves again is a good one. Would he still remain a partner at that point while contributing nothing.

I suppose one possibility would be to trade a small % of the business for free use of the space. Instead of rent "Mark" gets part of the business. In that case though I'd tie his % to the length of your lease. If the space stops being free then "Mark" no longer has any part of the business. I might also make sure it was a long term lease under the "free" condition and you'd have the option to get out of the lease on your terms should the "free" change for any reason, including a sale of the building.

[nitrotech]

To: Vangogh
Btw, the building has 3 floors. One floor would be for the gym, the 2nd to be leased out (no takers yet atm) and the 3rd floor to be his private residence. So under these conditions, I think it would be difficult for the building to be owned by the company.
Aside from the building, Mark's contribution would be promotion. Overall management of the gym would be under me and my friend (the original owners). We actually prefer it this way. As for the space, it is actually currently more than enough. So even if the business grows, I think there's still room. We don't plan on or see the need for transferring anymore if we can negotiate this.

"I suppose one possibility would be to trade a small % of the business for free use of the space. Instead of rent "Mark" gets part of the business. In that case though I'd tie his % to the length of your lease. If the space stops being free then "Mark" no longer has any part of the business. I might also make sure it was a long term lease under the "free" condition and you'd have the option to get out of the lease on your terms should the "free" change for any reason, including a sale of the building. "

--That was what I was thinking exactly though I'm having a hard time quantifying how to computer his percentage in return for free rent

[Business Attorney]

Computing percentages of ownership is always tricky unless everyone is putting in exactly the same thing (usually that would be money, which is fungible). In this case, what would make the most sense is to translate the value of the free or reduced rent over some finite term into present value. For example, if the fair rental value is $2,500 per month and he is going to rent it to you for $1,000 a month, you are getting $30,000 worth of rent for $12,000. He is essentially contributing $18,000 a year. If the lease is for 3 years, he is contributing $54,000, but the present value of the future rent saving is perhaps more like $48,000. What ownership percentage would you give someone who invests $48,000 in cash?

Unlike vangogh, though, in most cases I don't think it is reasonable to expect that Mark's ownership interest would disappear if the free rent stopped. He essentially invested (in my example) $48,000 in cash and should be entitled to whatever percentage his $48K would buy. Now, if the business was profitable from day one and his percentage of profits was set at a level to immediately compensate him more or less monthly in the same or greater amount than his foregone rent, there might be an argument in that case that when the free rent stopped, his percentage of the profits also went away. But that would probably mean that during the time of the free or discounted rent, you would be giving him a much larger chunk of the profits.

You also mention in your second post that he will provide promotional services. Unless he is separately compensated for those services, the value of that contribution should also be considered in determining a fair ownership split. Just be careful in what you decide, so that if he never provides the agreed services, you have the right to adjust his ownership percentage to reflect the fact that the services were not actually provided.

[vangogh]

the building has 3 floors.

Oh yeah. I can see the difficulty of owning the building. However, maybe owning a % of the building equivalent to the space the gym would use is something that could be workable.


in most cases I don't think it is reasonable to expect that Mark's ownership interest would disappear if the free rent stopped.

Good points about how he'd be contributing even while charging rent. I also hadn't seen the part about "Mark" promoting the business when I made my comment above. Taking both into account it's a different situation than what I was thinking. It does sound like "Mark" would be making more of a contribution to the business longer term than just the use of the space.

I guess my general thought is to consider what he'll be contributing short term and what he'll be contributing long term and work something out with him based on that. My concern would be his contribution ends up being all in the short term and that's exchanged for a lomg term part of the business. Even then though, it depends on how much that short term contribution meant to the business and how much of a % he owns down the road.

[huggytree]

skip the partner...you dont need him....why give part of your business for something you dont need

[vangogh]

I think the need is the building this potential partner owns. Plus it seems like this person can contribute to the business. Partnerships aren't automatically bad. Sometimes the person you take on can contribute to your business and help it grow more than you can alone.

[Paul]

Equity for free rent is not that unusual. The trick is to make the equity for ONLY that location. If you open other locations he is not included. If that location closes, you lost nothing, if it succeeds hallelujah!

It can be a very mutually beneficial deal.

Just make sure that provisions for use of the space are defined in the event of a sale of the business.

[vangogh]

The trick is to make the equity for ONLY that location

Good idea. There should definitely be something limiting the partnership if the only contribution is the rent at the one location. It does sound like this person will be contributing to the promotion of the business though.

[Harold Mansfield]

I've read stories about this sort of thing back during the dotcom boom of the 90's. Office space was at such a premium that property managers were asking to see business plans. This sounds like kind of a leach arrangement to me, and I wonder if he is willing to also assume the risk? Both financial and in terms of any liabilities.

[glostef]

skip the partner...you dont need him....why give part of your business for something you dont need

I agree, find another place for your gym.