1099 Deadline

Right now our priority is the second round of the PPP (again, please let me know if you’re having any trouble applying or if you have any questions about eligibility), but this is also the final week to file your business 1099s.

In general, a business owner must file and issue this form to any person you have paid at least $600 in rent, services, prizes, awards or any other income payment during the course of the year. Penalties are minimal ($30-$100 per missed form) and typically we don’t have many in this industry, but the fees increase significantly if you intentionally disregard the requirement.

The list of required vendors/sub-contractors does have some exceptions: you don’t have to send a 1099 to S or C-corps, or partnerships that are taxed as S or C-corps, unless they are a lawyer.

Another exception is if you pay these vendors with a credit card or Paypal- they can be excluded because the 3rd party payment processor will be responsible for issuing the 1099.

There may be times that we are not sure if the vendor is eligible for a 1099 so it is always best to request a W9 from individuals/vendors as soon as you start the relationship. The W9 will specify what type of entity the individual/company is and how they are taxed which will allow us to determine whether we should issue and file a 1099, and the simple act of requesting the W9 will show you’re not intentionally disregarding this requirement.  

PPP UPDATE

I have talked to a few bankers regarding the new PPP loans and it doesn’t appear they are going to be ready to issue funding until the new year. The stimulus plan was signed into law, but now the SBA needs to provide guidance to the banks on how to proceed.

However, be sure to keep an eye out for email updates from your bank (and be in close communication with your particular banker)- this second round will have some stipulations that we still need clarified. For example, borrows must demonstrate a 25% revenue decline in a 2020 quarter vs 2019, but Q4 may not be eligible (which could be very important for some clients)- these are the details we need confirmed.

 Borrowers will also receive 2.5x their monthly payroll costs, but we need to get confirmation of what dates will be incorporated in this calculation.

 The bill also made official the long-rumored simplified forgiveness application for loans under $150k so keep an eye out for your portals to be updated with this form.

 As always, I’ll be in touch as I start to see a pickup in bank communication, but please let me know if you have any questions in the meantime.

PPP – Round 2!

It appears there is finally some agreement in Congress and the second stimulus package should be passed tomorrow. Within this package is the second round of PPP loans that will be eligible to businesses that can show a -25% (or possibly -30%) loss of revenue in Q2-2020 vs Q2-2019. The threshold (-25%-30%) and comparison periods (Q2) are not finalized, so please keep an eye out for communication from your bank this week, detailing these requirements, and we can determine your eligibility.

The second item also included is clarification regarding the forgiveness tax aspect. It appears they will revert back to the original language that will not make the forgiveness of the loan a taxable event (and all expenses will be deductible) which is great news!

Obviously as more details become available, I’ll be in touch, but if you have any questions after receiving communication from your bank, please let me know.

Hope you all enjoy your Holiday! And we’ll be in touch soon!

Holding Pattern

Unfortunately, we’re still in the “wait and see” approach regarding the PPP forgiveness application. Most banks haven’t opened up their online portal, waiting for direction from Congress, but a few are beginning the process.

Again, 80% of the applications were for loans under $150k, so a blanket forgiveness would make a lot of sense for the SBA, who is not equipped to handle this kind of application volume… but obviously we never know when it comes to government agreeing on legislation.

We have up to 10 months to apply for forgiveness so the deadline isn’t approaching any time soon, but for those who have banks that have reached out and provided a schedule for repayment, please contact me and we’ll get the application process started. For those that have used 100% of the proceeds correctly, we’ll still stall a little (we don’t want to be the first to apply, there are sure to be many hiccups) but we’ll begin gathering the information. For those that didn’t use 100% of the proceeds, we’ll wait as long as possible to see how the government proceeds.

Either way, our goal will be to receive forgiveness by the end of the year. There has been zero talk about treating the forgiveness as it was originally written (tax free), so the entire proceeds will essentially hit your bottom line once the approval process occurs. We’ll be taking this into consideration when planning for our year-end tax liability and cash flow.

This inflated tax liability and cash flow requirement is why we continuously need to strive towards breakeven, so we don’t burn the cushion that the PPP provided earlier this year.

There will be an option to push this forgiveness into 2021, pushing our cash flow liability out to 2022. However, the government has just spent trillions of dollars on stimulus programs, so no matter who is president next year, taxes will have to increase to pay for this debt. Because of this, it will be more beneficial to recognize the forgiveness income in 2020.

There are obviously still a lot of moving parts (potentially another round of PPP proceeds!), but I’ll keep you posted with developments, and we’ll plan accordingly.

As always, please let me know if you have any questions!

PPP Loan Update

The SBA announced that they would be accepting loan forgiveness applications on August 10th, creating many questions on what to do next. However, most banks have been quick to delay the process of accepting these applications because there are many changes that could occur if the HEALS Act finally gets passed by the Senate.

The new legislation is expected to provide more flexible covered periods, additional forgivable expenses, and potentially no documentation requirements for loans under $150k, so the strategy today is to hold tight, and not worry about juggling the complex application process, and wait for the evolving set of rules to finalize.

There are currently 3.7mm PPP loans outstanding that were less than $150k each (accounting for over 85% of the outstanding loans) but the dollar amount from these applications only accounted for ~20% of the total PPP $$ outstanding- from an administrative standpoint, it makes sense to pass a blanket forgiveness for these loans so the SBA can focus on the larger companies that took most of the loans.  We’ll see if the Senate feels the same, but there is plenty of time to submit an application (you have up to 10 months after the covered period ends) and we have up to the end of the year to satisfy the FTE covenants, so the plan is to wait and see…

The Senate is back in session on September 7th so we hope to learn more soon. Perhaps there will be additional stimulus programs as well, with the economy clearly not back on its feet just yet. Will keep you posted as events evolve!

Recession

QUESTION: Are we in a recession or headed there?

ANSWER: It’s been a rollercoaster in the stock market, but we had a
nice bounce back day to finish the week! Stocks have been priced for perfection
for a while so a pullback was inevitable (and necessary), which unfortunately
uncovers inefficiencies and risks that weren’t apparent during the bull market.

These things always have the potential to cause location specific recessions.
For example, the lower gas prices will put a lot of energy companies (that hold
a lot of debt!) out of business, which may cause potential location specific
recessions (in PA, TX…). NJ/NY/CT is always vulnerable to a banking crisis where so
many families are tied to NYC and the financial industry (losing jobs/bonuses,
etc)- we never know what a pullback in the market can expose (dot.com bubble, real
estate, etc.) but so far there is nothing pointing towards a country wide,
long-term recession.

The wildcard is obviously the coronavirus. Generally (and
historically), pandemics and hysteria like this don’t last too long (testing
will hopefully be prevalent soon, we’ll begin to gain more knowledge, and life
will go back to normal despite the virus continuing to be around...).
Unfortunately, we don’t know when this hysteria will end, so during this time
we need to pull down on our discretionary spending (obviously cut out the meals
and entertainment, travel, product purchases etc.). If you’re getting hit hard,
speak to your landlord and try get to forgiveness with rent (it’s in their best
interest for you to stay in business), and if this continues longer than
expected, obviously you’ll have to look at the team structure and payroll- your
largest expense allocation (which we can potentially also find relief from the gov’t- so much is still outstanding).

This time is a great reminder of our #1 goal- cash cushion!
This is when we use it, to bridge any gap a disruption may cause. If you
don’t have a cash cushion, liquidity is a must- the federal government is trying to help through the SBA (although, you typically have to jump through hoops to get a loan…).
However, banks have opened up, especially local banks in the community. I’ve seen many looking to help the small business owner with liquidity at low
interest rates- definitely a time to contact your local banker and see how they
can help.

During any crisis, leadership within and retention of current clients is the number one goal, with communication by phone to all clients, reassuring them that they have a safe
and clean place to focus on their health. Continue to market- the fitness
industry should come out on top as health will now be a number one focus for all
individuals!

I’ve seen a lot of community support for small businesses, attendance down, but clients keeping their memberships… but no matter where you live, today is about weathering the storm, keeping as much revenue as possible coming in, and when the dust settles, we’ll reassess any damage and create a new roadmap to secure that cash cushion once again!

Form 1099

QUESTION: When are 1099 forms due?

ANSWER: The filing due date is JANUARY 31st- be sure to contact your tax accountant to ensure they have prepared and are submitting prior to the deadline!

As a reminder: a business owner must issue this form to any person you have paid at least $600 in rent, services, prizes, awards or any other income payment during the course of the year. Penalties are minimal ($30-$100 per missed form) and typically we don’t have many in this industry, but the fees increase if you intentionally disregard the requirement.

The list of required vendors/sub-contractors does have some exceptions: you don’t have to send a 1099 to S or C-corps, or partnerships that are taxed as S or C-corps, unless they are a lawyer.

Another exception is if you pay these vendors with a credit card or Paypal- they can be excluded because the 3rd party payment processor will be responsible for issuing the 1099.

There may be times that you or your tax accountant are not sure if the vendor is eligible for a 1099 so it is always best to request a W9 from individuals as soon as you start the relationship. The W9 will specify what type of entity the individual/company is and how they are taxed which will allow your tax accountant to determine whether we should issue and file a 1099.

Portfolio Line of Credit

QUESTION: I have an investment portfolio with my broker and they’re offering me a line of credit based off the account value- should I use this for upgrades in my gym?

ANSWER: Typically, a portfolio loan is only used for short-term investments (a bridge for a couple months where you wait for a sale of a house or liquidation of an investment…), not a long-term investment. It’s essentially a margin loan, where they will give you 30% of your current portfolio as a loan (which is nice to access when the portfolio is a retirement account, without having the tax consequences), however if the portfolio value falls (markets take a turn for the worse), the bank will make you maintain that 30% ratio and you’ll receive a ‘margin call’ (the bank will make you come up with cash to make up for the losses in the investment portfolio- cash is already tight so coming up with a margin call will be difficult). It’s the type of product individuals got hurt with during the last recession in 2008, when the markets crashed and banks came calling… Better to go with a traditional loan where your rates and payments are known and fixed.

Employee Turnover

QUESTION: I’m having trouble with my team and am experiencing some turnover. What have you seen work well with your clients?

ANSWER:  The most important thing with any team- COMMUNICATION! Having your employees understand the pay limits and Levels is necessary, but it’s your job to really find out what’s important to each person and what drives them (and this changes constantly so it’s a consistent conversation). What motivates some doesn’t always motivate everyone so it’s impossible to build that exact pay/level structure for everyone… For example, some like the comfort of salaries while others rather be paid for exactly the time they put in. Some just want a side gig and are happy with flexibility, while others want to open their own gym. You’ll want to meet with your team to see where they stand in life because our values constantly change, and at the end of the day it’s all about helping them reach their individual goal. If they want to own their own gym, get them involved on the business side, have them attend all meetings, and maybe partner with them to open a facility (or at least nurture the relationship so they don’t open next door!)… Also, I’ve noticed the guys that consistently have interns feel more confident and comfortable with the inevitable turnover (because they consistently see talent that they don’t necessarily hire). The guys that don’t have an intern program are always scrambling to hire and feel the pressure because they’re in desperate need at the time. It’s so important to have that bullpen!

High Attrition

QUESTION: I’ve noticed my 3-month attrition average way over our stated goal, any advice on things I can do?

ANSWER: Generally I’ve seen attrition be a factor of culture, which starts with your trainers (making sure you have the right people in place!). Cleanliness is also a factor, but I’ve seen your gym and I’m sure that isn’t an issue… Culture is also driven by events and socials- these should be regular occurrences (nothing extravagant, just things to get people together or stay at the gym longer). Random gifts for your clients works well (not just the bday card or wedding gift- random things that your trainer picks up on from small conversation- do they enjoy wine, the Phillies, etc, consider making it mandatory that your trainers have to provide a small gift ($20) to 1 or 2 clients a month… and on that point, make it mandatory that your trainers have to interact with 1 or 2 clients after each session and note the conversation. Building a strong culture is the best thing to help curb attrition- but again, it starts up top with your trainers and takes true/genuine interaction with your clients. 

Portfolio Risk

QUESTION: I have a taxable investment account that is earmarked for purchasing a house within the next 18-30 months. We have been moderate with the investment allocation but my advisor wanted to purchase more equities- what are your thoughts?

ANSWER: Definitely not! Equities will increase your portfolio risk. Moderate is even too much if we’re talking 18-30 months, take all risk off the table! We’re at a market peak, tons of instability, and at the end of the day what would be the opportunity cost- even if there was +7-10% more to climb, is that going to allow you to purchase a larger house? However, if the market crashes by 50%, that will be a significant blow to your savings (and right now, probability says the latter is more likely). Take the funds and invest it into a high yield savings account and earn 2%. You want to keep the strong purchasing power when we’re talking short-term horizons, don’t risk it in the markets.  

Form 1099-MISC

QUESTION: Do I need to issue 1099s and who exactly are they for? 

ANSWER: Typically, your tax accountant will handle the filing and distribution of Form 1099-MISC but we can definitely gather the information. In general, a business owner must issue this form to any person you have paid at least $600 in rent, services, prizes, awards or any other income payment during the course of the year. Penalties are minimal ($30-$100 per missed form) and typically we don’t have many in this industry, but the fees increase if you intentionally disregard the requirement.

The list of required vendors/sub-contractors does have some exceptions: you don’t have to send a 1099 to S or C-corps, or partnerships that are taxed as S or C-corps, unless they are a lawyer (the government doesn’t trust lawyers will report their full income so even if they are a corporation, you must issue them a 1099:)  

Another exception is if you pay these vendors with a credit card, Paypal or Venmo- they can be excluded because the 3rd party payment processor will be responsible for issuing the 1099.

There may be times that you or your tax accountant are not sure if the vendor is eligible for a 1099 so it is always best to request a W9 from individuals as soon as you start the relationship and begin making payments. The W9 will specify what type of entity the individual/company is and how they are taxed which will allow us to determine whether we should issue and file a 1099.

We can gather a list of the vendors, record their tax ID and address (received from the W9), and how much we paid them over the course of the year, and forward over to your tax accountant to process.

Robinhood Savings Account

QUESTION: Do you know anything about the Robinhood bank and their 3% savings account? 

ANSWER: Yes, had a few inquiries about them this month. They did offer a “savings” account but have since taken it off their website. Robinhood isn’t a bank, they are a low-cost brokerage firm so technically they weren’t offering a “savings account” but an actual brokerage account (SIPC insured, not FDIC insured which potentially has it’s cons if something were to happen to the health of their business). They’re looking to IPO soon so they’re trying to raise a bunch of capital. In general, I worry about the low-cost brokerages because they don’t make money on trade commissions (always commission free) so they make their money on debt (selling leverage to unsophisticated investors)- obviously not what you’re looking to get into, but I would worry about the overall stability of the business if we do see a downturn in the market (their institutional credit risk). In all cases you want to know what your assets are tied up in to receive a 3% return and Robinhood did a bad job in explaining that (return is not free, there is always some risk, and you need to know these details especially if you are SIPC insured. Regular bank accounts are FDIC insured will allows you to get your money back quicker, dollar for dollar)… Clearly the larger institutions aren’t immune to failure (Lehman, Bear Stearns, etc:) but offers that are too good to be true always cause me concern. Robinhood default chances are low, but still probably not worth the risk for the small % gains.

Pricing the Trial

QUESTION: What are your thoughts on raising my trial price to put it closer to the monthly contract?

ANSWER: I like to base the trial price on our conversion metrics. In this case, your retention is great and your sales (consult and trial close) are well above industry averages so individuals are clearly seeing value in your service. The issue we’re having is lead quality- we’re just not getting the volume in the door needed to see significant growth. In this case I would actually lower the trial price, decrease the barriers of entry and get more individuals in the door because the metrics show you’ll convert them into members.

If we’re seeing a high amount of leads interested (your scheduled ratio is high) but your sales and trial close were not efficient, we would first review your processes, but more than likely we would raise our trial price closer to the monthly membership to get a better quality lead in the door. Either way, the trial should be the best service you have, with all the bells and whistles- when people see value in something, they’ll pay whatever you ask!

Raising Capital

QUESTION: My husband and I have a successful facility that we opened just over 4 months ago. We want to expand into new locations but need the capital to get it going. Any knowledge on who to reach out to?

ANSWER: Congrats on the success! However, 4 months is very early in a business cycle (to show proof of concept) so outside funding will be difficult. In general, institutional money (the private equity world I’m associated with) won’t fund single entity businesses (they’re looking for the $5mm businesses that they can turn into $100mm) which is obviously the dilemma start-ups face… that being said, friends and family are the first place to start (they generally have the best terms:) Also, current clients that enjoy your service is a great place to start as well.

I would recommend first putting together a business plan (if you haven’t already) that details your business, the marketing strategy, and the start-up cash needed (basically how much you are looking for- both the start-up cost and potential burn rate when you open the door). Obviously having done it already, you’ll have very accurate numbers… and of course make sure you have clean books and financials so that you can show a potential investors proof of the numbers.

Obviously track your leads, make sure your marketing campaigns are working, how many of those leads convert to paying customers, etc. having books that show growing profitability along with market data on leads and conversions will go a long way with an investor… anyone that is not a friend/family (and just investing in a vision) will want to see hard data that supports your revenue forecast.

It takes time to open up new locations, don’t try to do too many at once. If the current location is indeed successful, maybe hold off on the personal spending (make sure you guys are budgeting at home!) and put some of the profits aside for the new location. I’m assuming the capital investment wasn’t huge so it shouldn’t take too long to save yourself, you just want to make sure you have a plan in place, and stick with it!

The other option is a line of credit from the bank you currently have a relationship with- right now rates are still relatively low (but only increasing, so now is the time to lock in a rate!). Start with a second location, prove it is repeatable, and use the profits for the third location, etc… when the concept is proven and repeatable, you can then go to institutional funding.

Without having much detail, it sounds like friends/family or your local bank will be the most realistic options today. In the near future, there could be some high net worth individuals I know interested, but it’s just way to early… but either way ensure you have the plan and books in order, and start collecting that marketing data to prove your revenue forecast is realistic!  

Contractors vs Employees

QUESTION: I have a trainer that I want to move to a 1099 to avoid paying the employer tax- what do you recommend?

ANSWER: DO NOT PAY YOUR TRAINER (or any “employee”) AS A CONTRACTOR! I know it costs a little more to put an individual on payroll, but the risk of being audited is not worth it. I’m going through it now with one of my clients. The Department of Labor will request invoices from your “contractor”, your agreement, their business license, business cards, address, telephone listing, etc. They will be looking to prove there is not an employer-employee relationship, meaning, you don’t control the details of how the services are performed (ie, when, where and how the service is performed).

If your trainer is indeed a contractor, he is collecting money from the client and paying you, he is bringing in his own equipment to use to train the client, he is not required to attend meetings, he is wearing his company’s uniform while training in your gym, etc... If your trainer does not do these things, then he should be paid as an employee. It is highly unlikely he fits the contractor role, please play it safe and pay your trainers as employees! You don’t want to deal with the past taxes and penalties if you are caught.

Level 1: Monthly Budget Homework

QUESTION: When filling out my monthly checklist, I beat my revenue forecast and all discretionary spending was under budget, but I didn’t hit my net income goal- should I be concerned?

ANSWER: Generally, if we hit our revenue goals and control our variable spending, we’re going to turn a profit and hit our goals. The reason why your net income didn’t hit our goal is because there was a large “fixed” expense that hit your account that month. When we do our forecast and budget, we average the fixed costs over the course of 12 months, but the reality of it is a lot of the fixed costs aren’t paid monthly, they’re inconsistent, and sometimes a bill for the entire year is paid in one month (ie, liability insurance). We need to track the data on a monthly basis, but when looking at a budget we don’t want to make drastic changes after that one month. If you don’t hit your goal, that is fine, focus on being under budget the next month. We’ll review your budget on a quarterly basis (sometimes longer because we want to see trends, small datasets are insignificant), if we find we’re not keeping up with expectations, then we’ll make changes, so do not be concerned over one month. Budgets are forever changing, as revenue beats expectations, we can be more lenient in our expense allocations, but if we are under our forecast we’ll need to cut back on our spending. Continue to complete our monthly homework and we’ll let you know when a budget adjustment is needed.  

PIF and Loans from Clients

QUESTION: Should I request from clients up front payment of services (maybe for the year) to help out with my move to a new facility?

ANSWER: YES!! Going to close members (ones that have been around for years and you have a good relationship with) and seeing if they would pay in full for the year is an excellent way to boost cash flow to help with the start-up/set-up costs of moving into a new facility. Members are also a great place to look for a loan if you needed additional funding. Obviously you'll get more favorable terms going to friends/family/members than if you were to go to a bank. However, do not give up equity- typically there is not enough profit in the business to satisfy the needs of multiple partners. 

Is this guy ready to join my team?

QUESTION: I was considering hiring this trainer but this was an email I received:

I took time to think about the offer you presented along with discussing things over with my wife. My current position has me working a range of 12-20 hours a week. The position you're offering will pretty much limit me to around 12 hours a week. This job offer will naturally be more work than my current position due to the nature of starting a business from scratch. I do like the idea of working together to grow the business into a full time opportunity, but I'm not sure how lucrative that opportunity will be since everything is just starting up. We can definitely speak on the phone this week, but just wanted to send an email with some of my thoughts. 

How do I respond???

ANSWER: He’s not the right guy! Any start-up/venture involves a risk and the individual has to be comfortable with that. No one knows how lucrative it will be! but he has to understand that starting something from scratch will allow him to put his own stamp on it, control his environment, and in the end help him grow as a business owner. We can talk about future bonus plans, comp packages, etc… but it doesn’t really matter unless he puts the work in to make it a successful company. Sounds like he just wants to show up, do his job and go home- get paid the same amount and have zero risk. Let's move on!  

How Many Leads do I need?

QUESTION: The FB ads for the challenge and the 2 week trial gave an uptick in leads, but I'm not sure what my goal for leads would be?  I know I need to get about 8 consults because we convert about 50% of the consults we have.

ANSWER: Industry averages generally have half the leads converting to consults/trials and half of those converting to memberships…  Obviously it’s not always the same for everyone- this can be a product of lead quality (does your marketing campaign hit the correct areas with a clear message towards your target market), follow-up system (texting, calls, emails- review the system in place and the admin driving the process), and of course location (some areas simply require higher volume because the population is more diversified and the target market his harder to hit).