Ian Silverberg was considering acquiring a health club when he discovered a surprising lease that all but guaranteed his acquisition would be a winner.
To read a transcript of this episode, click here.
Ian Silverberg wanted to get into the health club business and approached a former employer about buying his gym.
As Silverberg did his due diligence, he realized the club was sitting on a real estate goldmine that would all but guarantee his exit would be lucrative. Silverberg went on to separate the health club from the real estate it was sitting on and sold the gym for almost five times EBITDA and then negotiated a lease that would pay him another $25,000 a month for the next ten years.
In this episode, you’ll discover:
In Ian Silverberg’s case, his long-term ground lease was an asset the former owner never understood, allowing Silverberg to operate the gym for pennies on the dollar. Do you know the drivers that make your company valuable? If not, get your Value Builder Score to see how your company is performing on the eight important attributes of a business (that acquirers look for in the companies they buy).
John Warrillow: Hey, do you own the building that your company sits on? If you do, the building itself may be a separate transaction from the company you operate. You see, when acquirers look at a building, they’re looking at whole different set of value metrics than they would an operating company. You may be better off to separate the two, which is what my next guest, Ian Silverberg, did. In this episode, you’ll hear a fascinating story of a surprising ground lease. Stay with it, because I think it’s worth understanding this lease. It gets a little bit technical at times, but I think it’s worth understanding what Ian had in this lease. Once you see it play out, and over the next 15 years what it meant to him as the owner of this lease, I think you’ll find it fascinating. Listen for his definition of a ground lease.
John Warrillow: You’ll also hear the definition of something called RDC, which I’d never heard of before, you may find interesting and a helpful resource to help you finance your business. He’ll also talk about the techniques and unusual approaches he took to running a gym, which enabled him to triple the value of the business over the ensuing 10 years. Here to tell you the entire story is Ian Silverberg.
John Warrillow: Ian Silverberg, welcome to Built To Sell Radio. Good to have you here.
Ian Silverberg: Thank you, John. Great to be here.
John Warrillow: You were in the health club business. Tell me about that. How did you get into it?
Ian Silverberg: I was. Yeah, it was actually an interesting path. I originally thought that I was medical school bound. I have always had a fascination for the human body. I’m amazed at the human experience, the fact that you and I are having this conversation at the same time. I’m processing all sorts of stuff, and fighting off various different viruses, and whatever. If I see you in the street, I’m going to remember you. The whole thing is just mind-boggling to me. I always loved helping people. It was just something that I was good at a young age, so I was the guy you called in the middle of the night in high school when you were having problems with your girlfriend, and I would talk you through it.
Ian Silverberg: I just thought, well, I love the body and I love helping people. I’ve got to be a doctor. My father was a pediatrician. I went to school thinking that was going to be the deal. I went to UC Santa Barbara, and I started to work at a small little gym in town. I didn’t realize it, but it was connected to a larger health club across the way. I used to … In the summer, I would go back to Los Angeles, and I would sell boats. I would make enough money to carry me through the school year. When the owner of the health club found out that I was selling boats, he did not have an internal sales department, and things were getting a little hard for him at the health club.
Ian Silverberg: He came to me and said, “Hey, will you manage … Create a …”
John Warrillow: How did you … You came to work there and manage the sales of the operation. How did you come to own it?
Ian Silverberg: Yeah. That’s where I’m getting at. I came in as the manager as the membership sales. I was student at the school, and the university passed an initiative to build a rec center, which it did not have. He had catered his business more to focusing on the students, which I, as a membership director, thought was a mistake and wanted to try and turn it more towards the community. When the university finally did build the rec center, which was five years later, I had the left the business because I had tried to tell him that I think he needed to steer in a different direction. I had left Santa Barbara, and had gone home, and became a … Started another business.
Ian Silverberg: When I came back to Santa Barbara to sell that original business, I had a new concept that I was trying to do. I decided I didn’t want to go into medicine. What I was really trying to do was bridge the gap between medicine and fitness. At the time, people don’t really remember, but fitness was the … The verdict was still out on fitness back then. Doctors would all tell you to get in shape, but no one would tell you where to do it. I had this idea and created a company that lived between the fitness industry and the medical industry, so physicians would refer.
Ian Silverberg: I went to Goleta Valley Athletic Club, to the old owner, and said, “Hey, I’ve got this great idea. I think it’s going to help for you.”
Ian Silverberg: He said, “Hey, you were right. They built the university, built their rec cen, I’m going out of business.”
Ian Silverberg: In truth, I was having a really hard time getting traction with health club owners who didn’t understand that medical fitness concept I had. I couldn’t figure out whether it was just a lack of sophistication or whether my concept didn’t make sense. I bought it. I basically put an LOI together and I locked it down, and the hard work began. I had to try to figure out how to actually raise the $700,000, which was what the cost of the club was.
John Warrillow: LOI being letter of intent. The price of $700,000, how did that come up? Did he ask you for that? Did you make an offer?
Ian Silverberg: Yeah.
John Warrillow: How did that come up?
Ian Silverberg: Yeah, that’s a great question. When I went into pitch him on my new concept, and he informed me that he was selling the business, I asked him how much he wanted for it. In truth, I actually thought it was … I was going to try and put the deal together for a friend of mine. He told me that he had been talking to a local competitor, and that they were kicking around this number of $700,000. In truth, that’s where it came out. I just looked at the deal. Luckily, I had some … It had been three or four years prior to when I worked there, but I knew the market. I knew what I felt they were doing wrong. I understood it.
Ian Silverberg: I had figured out that there was some real estate in the deal. I don’t think that he fully understood that, but to try and keep this in simple terms, he had a long term ground lease. The health club was built on leased ground. This was a strategy that people will do if they own a lot of property, but they don’t really want to invest the money to put a building up, they’ll do long-term ground leases where people will come in. This one, I think, was a 40-year ground lease when they started it. They build the health club on top of it, so technically you own the building, but at the end of the 40 years, you just have to hand that back.
John Warrillow: When you say you have to hand that back, do you mean the land or the land with the building on it?
Ian Silverberg: The land with the building on it. It’s actually up to … If you’re the landowner, you have a choice usually, depending on how the lease is structured. The ground lease is, you can grab it back with the building, or you can tell the person you need to knock it down, and get the land back to the way-
John Warrillow: Okay, let me see if I understand this. This health club, the guy thinks it’s worth 700 grand. He doesn’t realize it, but at the time, it’s sitting on leased land. It almost sounds like a ticking time bomb. Here it is ticking down to 40 years, and when the clock strikes 40, you’re out of business, in essence. Am I getting it correct?
Ian Silverberg: You are absolutely capturing, I think, what the essence that he thought. A lot of people will look at that and say, “Wow, that’s kind of a ticking time bomb.”
Ian Silverberg: If you look at it from the financial perspective of it … Here’s the reality. You have a piece of land that, let’s say, you pay $3000 a month for. Now, you’ve built a building on it. In this case, a multi-purpose athletic club that was … Had approximately 20,000 square feet, plus a pool outside, all sorts of stuff. Right? You’ve got this building that has a market value. Let’s just say the market value for that is $25,000 a month. What you really have is, say, 25 years left. By the time I came in, I think the health club had been 10 or 15 years old. If I recall correctly, it was 25 years left on the lease, so what I have is 25 years of an income stream.
John Warrillow: That’s fantastic. Again, if he’s paying $3,000 a month for this land … Is that about what he was paying? Three grand? And you figured the market value was about 25 grand?
Ian Silverberg: Yes.
John Warrillow: In essence, there’s a $2,2000 a month almost worry-free income stream there?
Ian Silverberg: Exactly. I looked at that and said, “Okay.”
Ian Silverberg: We can go into the long story about what my motivation behind wanting to get into the fitness industry was, but in truth, I was 27 years old. I had not a lot to lose, which makes it a little easier to bet. My thinking here was, I’m going to give it a go as a health club. I had my own passion behind where I thought the fitness industry had really just missed the mark.
John Warrillow: I want to go back to this idea of the future cash flow. If the owner was sitting on this goose that laid the golden egg, so to speak, this beautiful cash flow, why would he want to sell? What was his motivation, given the economics?
Ian Silverberg: Yeah. I think the only … I’m trying to figure out a way to say this without it sounding disrespectful, because it’s not meant to be at all. I think there was a sophistication level that they just didn’t understand what they were sitting on. I think their reason was, when he bought the building, his father basically gave him the money … I’m sorry, when he bought the business. He wasn’t the original owner of the business. He had purchased the business about seven years prior. When he did, I think that his father just gave him the money.
Ian Silverberg: Number one, they never had to go to a bank. I think that if you went to a bank, a bank’s going to want collateral. That’s probably where you start to uncover what collateral you really have. Right?
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: This was just purchased. He had cash, came in, bought the club, and then had continued to bankroll the club. I think what ended up happening was, there was a point where, once the university built their rec cen and he started to really lose money, where his funding source just said, “I’m sorry. I’m not giving you anymore money.”
Ian Silverberg: At that point, he just decided … Businesses get really hard when you’re not making money.
John Warrillow: How did you come up with the 700 grand?
Ian Silverberg: Yeah, well, I got very creative. I literally went to 13 banks. Every bank in Santa Barbara, every one of them turned me down. I finally …
John Warrillow: Did you tell them about this little … I don’t know, it’s almost like arbitrage, this little secret about the 22 grand? Did you tell them that?
Ian Silverberg: I did. Yeah. I put together this business plan, this big, fat business plan. It was incredible. I was so proud of it. Everyone of them just said, “We don’t do land leases.”
Ian Silverberg: For a bank, it’s a little bit … It’s not cookie-cutter. Right? When a bank wants collateral, they want collateral they can really get their hands around. This was this … Okay, wait, we have this lease and this building, but if we … It’s not like something that you can sell as quickly. They don’t have that whole network to liquidate the assets if they really needed to. A lot of banks just aren’t comfortable with it, number one. Number two, I was a guy … I think I had $3,000 that I put into this deal when I first did it. I’m not kidding you. I had three grand of the 700.
John Warrillow: 697 to go.
Ian Silverberg: What happened was, I found a local … A guy named Lou Stone. He was a bank president. I remember on it … It was the 13th bank I walked into. At that point, I just felt like I had nothing to lose. I just put my guard down. I remember walking in there, no joke, I put my feet up on his desk. Long-haired, ponytailed guy, I had just come from my … I put my feet up on my desk and I just was really natural about it, and he just loved it. He said, “You know what? I’m going to give you a shot.”
Ian Silverberg: He was also close to the deal, proximity-wise. His bank was a mile and a half down the road. He just understood. He was willing to take risk, and he ended up finding … There was an organization called California Coastal, which is like the SBA. What they did was, it was a loan guarantee company. They would come in and they would guarantee the loan for the bank, so that banks would go out there and give what they call sub-prime borrowers, like me, somebody who didn’t have experience.
John Warrillow: Tell me about California Coastal. I’ve heard of the SBA. For listeners outside of the United States, they may not have. Small Business Administration loans, where essentially the government is backing the loan, or a portion of the loans, the bank offering it is somewhat guaranteed, making them more willing to lend to small business. I’m not familiar with California Coastal. Was this a subsidiary of the SBA, or …
Ian Silverberg: Yeah, great question, and a very important organization. There are many of them out there, and I think they’re great resources. They’re called rural development corporations. Okay? RDCs. What these generally are … This one was in California. It had originally started for farmers, because farmers were having a very hard time getting loans, and getting funding, and financing, because it was a very challenging business.
Ian Silverberg: These organizations would come up, and they were non-profit organizations that had a mission to try and help people who can’t go through the normal … Who may not have the collateral. Right? In this case, they would put together loans for farmers, and then they’d realize that there are a lot of businesses that could utilize them. These guys did two things. Number one, they were actually … The SBA, they don’t have direct lending. The SBA, what they would do, the SBA has programs, and those programs are put through banks and RDCs.
John Warrillow: Sure.
Ian Silverberg: Cal Coastal had a few of the SBA programs. Some of the things they offered … They have an arrangement with the SBA, where they will do the underwriting and the vetting, and if it passes their sniff test, and it goes through their loan committee, then they have a deal with the SBA that the SBA would approve that. Right?
John Warrillow: I see. Okay.
Ian Silverberg: Some of it was that. The other part of it is they have their own funds. They had gotten some from California, where they did their own loan guarantees. They would go to local banks and do much like an SBA would, and said, “Hey, we’ll guarantee you. We’ll guarantee, say, 80% of this loan.”
Ian Silverberg: In this case, for example, in my case, it was a $700,000 purchase. Lou Stone said to me, “Ian, I’ll give you half the deal if I can get Cal Coastal to guarantee it.”
Ian Silverberg: What he did was, he went to Cal Coastal. Cal Coastal gave him an 80% guarantee, which means that as long as that loan’s outstanding, 80% of that $350,000 was guaranteed. Lou Stone, by giving me a $350,000 loan, was only on the hook for 20% of that 70 grand.
John Warrillow: Got it. Where did you get the other 350?
Ian Silverberg: Yeah, so, that I got a little creative. What I did was, number one, the person that I bought club owned 75% of it. There was another 25% shareholder. I went to him, and he was actually one of the people that originally built the club. I shared my vision with him and really resonated with him, and he happened to be a physician in town. I was able to talk him into rolling his share over. Right? 25% of the $700,000 basically rolled over. Now, I only needed 150 to go.
Ian Silverberg: My 3,000 came … Honestly, a legal bill came due. I didn’t have any money left from … I mean yet from anybody, so I paid the $3,000 legal bills, and then the rest of it, I friends and family-ed it. I went out to friends and family, and raised, I think it was $100,000. The last 50, I figured out that I could probably get a credit in escrow, because in the health club industry, a lot of people pay for a year in advance. It made me realize, well, if I’m about to buy a business, and there’s, say, 500 people out there who have pre-paid their memberships, in a sense, there’s a liability. I came back and said, “Okay, these 500 people, there’s a total here of about $50,000 that I haven’t received that you have.”
Ian Silverberg: I honestly … Had I not figured that out, I don’t think I would have been able to pull the deal together in the end.
John Warrillow: Wow. You really did cobble it together.
Ian Silverberg: I cobbled this together.
John Warrillow: Yeah. Did you provide Lou and Cal Coastal a personal guarantee? Did you have to personally sign?
Ian Silverberg: Yeah.
John Warrillow: Yep. I guess it wasn’t worth much at the time, just giving … It would been blood from a stone.
Ian Silverberg: It was worth the three grand. You know? He made a bet on me, but yes, I had a personal guarantee. Yes, absolutely. I had very, very little. I had a little … I had started a business, or two, before. He believed in me, and the concept, and more importantly, what Lou understood was that … What I understood. I knew that there wasn’t a chance that I wasn’t going to survive as a health club. I knew that if not, I would pivot and I would rent that building out, and I’d still be able to make it work.
John Warrillow: You let him into the secret about the 25 grand, minus the .
Ian Silverberg: Oh, yeah. Yeah.
John Warrillow: Yeah.
Ian Silverberg: The thing was, I needed money not just to acquire the club. He said, “I’ll give you half the money, and I’ll give you … I’ll give you 350, plus I’ll give you a $300,000 loan for operating capital.”
Ian Silverberg: The club was in shambles. It had no roof, it had no air conditioning. It was just … They had run it into the ground because it didn’t have any … He’d been losing money for so long. Unfortunately when I finished the deal, and I went back to him a couple of weeks later, then he basically said, “Hey, sorry. On the 300 grand? No can do. I need you to have a year under your belt before I can do that.”
Ian Silverberg: I was like-
John Warrillow: Why did he change his mind?
Ian Silverberg: I still, to this day, not sure if … I think the problem was Cal Coastal wasn’t willing to do that, so that one, he would have had to take on himself. I think the reality is, when he went to loan committee, now that I understand … After I sold the business, I went and I was on the board for Cal Coastal.
John Warrillow: Oh, interesting.
Ian Silverberg: Now that I understand that process, I think when he went to his loan committee, his loan committee said, “Are you nuts? This kid-”
John Warrillow: Where’s it go from there? Where did you get the money to fix up the club?
Ian Silverberg: I just … I really went down to basics. I realized I had a … I sat down and thought about what we were doing, and what were the most important pieces of our business, and what business were we really in, and what were we really selling? It became clear to me that what we were selling is … We didn’t have a widget. We were selling a feeling. Right? We were selling a feeling that when you walked in the door, did you feel like this was a place that you wanted to be at? If so, we had you.
Ian Silverberg: Immediately, first things I did, I went out and traded. I needed a new front desk. It was in shambles. I went and found a company that did cabinet work, and I gave them all memberships, and I got some lipstick on the front desk. I did the same thing for some stuff on the walls, and I immediately hired a great … I just started hiring great people. I knew that the problem was, with fitness, is that the industry had really started to focus on what I would call the freaks of the bell curve. Right? Any population, there’s about 10 to 15% of that population that goes to an athletic club. Those are the people that somehow figured out how to get over the hump and enjoy it. The entire industry has catered to those people, which is bright lights and flash. For everybody else, that is intimidating. I was somebody who experienced that.
Ian Silverberg: I just thought, let’s just make this a really comfortable experience. Let’s not have contracts. Let’s not have pushy sales people. Let’s make all of our administrative offices in the front of the club, have people that are here full-time. If you want to quit, don’t make it some maze to quit. I just flipped the whole thing on its head. I got creative. I really did. To be honest, I did things like … I took loans from the government that the government … I don’t know if they know they’re giving these loans. Payroll taxes.
Ian Silverberg: One of the things we would do is, we would … If you don’t pay your payroll taxes on time, I think they charge you 1 or 2%. We used that. I would use that float and I would pay … I would have to pay my 1 or 2% on the payroll taxes, and then I would pay them back. Slowly, but surely, within … Literally within six months, we were breaking even.
Ian Silverberg: There’s great story here too, that I think’s a really important … One of the things if I could go back in time, and really helped me on the sales side, my due diligence was horrible. I was a 27 year old kid. I didn’t know anything about it. I saw tax returns, which I just assumed, well, hey, if it’s the tax returns, then of course that’s legit. Right? That’s Uncle Sam. What I didn’t do was go through the bank statements and look at what happened, and what the reality was. This may have played into Lou’s $300,000 withdrawal.
Ian Silverberg: In this industry, you have what’s called electronic funds transfer. Right? They call it EFT. I don’t know how the fitness industry did this. They’re the only industry … They were the ones that pioneered this idea of automatically taking money out of your account.
John Warrillow: Sure.
Ian Silverberg: It blows my mind that they did, but they did. There was $30,000 a month, according to my calculations, and what the seller represented to me, that came in every month. It turned out that three days after it came in, since that health club was in such shambles, and they were … There students who were transient, who had old credit cards, who had quit but they just never stopped … 13,000 of that 30,000 would leave, would go back because it was … I just never caught it.
John Warrillow: Go back, meaning it was … Not fraudulent, but it was being pulled out of accounts that were either overdrawn, or closed, or whatever?
Ian Silverberg: Right. The way that system works behind the scenes is, you have a software program that just goes out and bills it. Then, you get this debit that hits your account. What ends up happening is, the reality, it settles and five days later, whatever was … If it was a credit card that didn’t go through, or a bank account that doesn’t [inaudible 00:24:00], that gets sucked out of your account.
John Warrillow: Got it.
Ian Silverberg: I didn’t know that.
John Warrillow: Almost more than a third of this money was actually not real.
Ian Silverberg: No.
John Warrillow: Did you go back to the sellers and have some legal proceedings to try to recover that, or no?
Ian Silverberg: No. No. I’ve always been a … I have to own my … I own my stuff. That one was on me. I could have and should have figured that out, number one. I didn’t have enough time or energy to do anything other than figure out how to solve the problem.
John Warrillow: I want to move ahead now. Thank you for really digging into the details of the acquisition, because I think when it comes to the sale of this business, some of those details are pertinent. What was the … Before we get to the sale, what was the trigger that made you want to sell? What was going on in your life that made you want to sell?
Ian Silverberg: Yeah. I think that’s a great question. One, as I mentioned a little earlier that my … Originally, I was medical school bound, and then I started thinking about this medical fitness concept. When I bought the club, I thought … Part of the reason I bought the club was I thought I’d be one less health club owner I’d need to convince for my bigger concept of this medical fitness concept. Right?
Ian Silverberg: I had a bunch of doctors that were all lined up, who loved it. I couldn’t get the health clubs. About a year after owning the club and getting it stabilized, I went back to my doctors and said, “Okay, I’m ready. Send me your patients.”
Ian Silverberg: And then my doctors looked at me and said, “Now it feels like you’re just trying to sell us gym memberships.”
Ian Silverberg: It was really interesting. All of a sudden, I woke up realizing, wow, now I’ve just … The whole premise of this separate, arms-length entity, well, now I just rolled it in. What I did was, I ended up creating a separate business that was a physical therapy clinic. I housed that business inside the health club. Then I went back to my doctors and said, “Okay, now I’m a physical therapy clinic inside.”
Ian Silverberg: And they were okay. The motivation for me to go into that business was because I really wanted to help people make lifestyle changes. It’s the reason I chose that, as opposed to going to medical school. That, and I think medical school does require the attention span greater than a seven year old, and I don’t think I … I just couldn’t check that box.
John Warrillow: Speaking of attention span, let’s focus again on why you decided to sell. What was the …
Ian Silverberg: Okay. All along, I knew that what I really wanted to do was have a broader impact. Okay?
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: Every year, what I would do as part of my process, is I would sit … I would have this alignment process where we’d sit and say, “Okay, is this … Are we adding value to this club in this community? Is this club adding value to us?”
Ian Silverberg: This would be my general manager, who she was amazing, and I would sit and do this. There were some trends that I started to see. Number one, I was seeing a consolidation in that industry. Number two, I knew that it was going to be time soon for me to have a family, and in my interviewing of physicians and doctors earlier on, I had always asked people the question of knowing what you know now, what would you do different? Hands-down, everyone always told me, “I would spend more time with my kids.”
Ian Silverberg: I knew that there was going to come a point in my life where I’m going to want to be present. I was coming up on that. I also had gotten involved in real estate. I didn’t like the stock market very much, mostly because by the time I started being profitable in the health club business was 2000, 2001.
John Warrillow: Right, where it all went …
Ian Silverberg: The crash. I did more real estate. I saw the writing on the wall. This was now 2005, 2006. I saw what was happening in real estate. I started to be just a net seller of everything. I just saw various different trends. Some external and some internal. I realized, more importantly, that if I didn’t … I either had to make a commitment right there. I had to grow into multiple facilities, so that I could cultivate long-term employment. Right? My general manager was amazing, but I knew she was amazing and I knew that it wasn’t going to be long before she either left or decided to have a family.
Ian Silverberg: I think it was a diversification, also. I had a lot. At the time, I had … Some of my net worth was in it. Those were all the things that made me say probably time to start shopping this.
John Warrillow: At that point, how much debt did you still have on the company?
Ian Silverberg: The $350,000 loan, I had paid off. I had bought out all of my partners, for the most part. I had to do a remodel of the club, so I took out another loan of about $500,000, I think at the time, which paid off the first one and allowed me to put some money back in the club. I think … What I had done, as I saw this … I realized that I might want to sell it. I took the operations of the business. I started a new company, and I moved the operations into a debt-free company. All the debt I kept on the building. Now, I had two businesses. The operation was renting from me, and then the building, that was basically a landlord for the next 20 some odd years.
John Warrillow: Let me see if I have this straight. The building, you didn’t actually own the underlying earth underneath. You had this ground lease, but it was worth something because, again, you’re paying a fairly low rent, and it was the market rent was quite high. You applied the debt, the $500,000 to pay off your investors, as well as to refurbish it, was against that cash flow, essentially, that was inherent within the lease and the building on top of the lease?
Ian Silverberg: Yep.
John Warrillow: And then the health club was a separate entity that you carved out as an operating business?
Ian Silverberg: Yeah. All the lenders … The lenders were really more interested in the real estate. All of the collateral when I got these loans was really the building and that cash flow.
John Warrillow: What changed? When you first went out and tried to get money for the $700,000 acquisition, the 12 banks you went to weren’t prepared to borrow against that … Excuse me, lend against that cash flow. They couldn’t understand it. It was odd, peculiar, dirt underneath the building. What changed when you actually went to separate it out, that you were able to borrow $500,000?
Ian Silverberg: I’d say a couple of things. First and foremost, my track record changed. Right? Now I’m coming back with a guy who can say, “Hey, I came to you three years ago. This is what I said I was going to do. I’ve done it.”
Ian Silverberg: That goes a long way in that industry, number one. Number two, the collateral was legitimized by the first loan. Once that happened …
John Warrillow: What are saying, the collateral was legitimized?
Ian Silverberg: Yeah. What I mean is that once Goleta National Bank, Lou Stone, actually loaned on that. When I walked into another bank, I knew the language. What I could say is, “Hey look. It’s a long-term ground lease. Let’s just get that out of the way.”
Ian Silverberg: If we can’t get our heads around that … Here’s how the other bank had gotten their head around that. It’s a combination of the model was proven, the club was very successful, and let’s not forget I can’t take any credit for this at all, but we were in … I had the tail wind of one of the greatest economic expansions in real estate of all time. Right?
John Warrillow: Right.
Ian Silverberg: I bought the club in 1996. Now, we’re at 2001, 2002. The land value … That delta, that they called the sandwich lease, the amount of money that building was worth over the ground payment was only getting higher. The other thing I was able to do was, I was able to find an appraiser who was willing to appraise it. An appraiser that everyone in my community knew. The same appraiser you would use to-
John Warrillow: Appraise the health club or appraise the land?
Ian Silverberg: The building.
John Warrillow: Or the building? Got it. He recognized it. Yeah. At this time, what are the operating metrics, top and bottom line, of the health club? When you stripped out the real estate component, and you’re just looking at the health club itself, what’s your revenue? What’s your profitability like?
Ian Silverberg: Yeah. When I bought the club, it had 900 members. I think it was doing about 600 grand a year.
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: I built that up to 3,000 members. We were doing about two million a year in revenue. If I’m not mistaken, the EBITDA was about 4 to $500,000, depending on how you sliced that. Right? You can change that significantly by raising your rent or you can lower that by lowering the rent.
John Warrillow: Were you charging yourself what you thought was a market rate?
Ian Silverberg: I was trying to charge myself what I thought was a fair rent. That 400, 450,000 assumed, if I remember correctly at the time, around a $25,000 a month rent.
John Warrillow: Okay.
Ian Silverberg: There were some standard metrics in that industry. I had a lot of connections in that industry. I had started to help other health club owners and consult for other health club owners, as well as the technology in that industry was really rough. I became part of a trade organization to try and help the technology, the membership technology.
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: I knew a lot of the players. I understood the market, I understood what deals were going for. It was basically three to five times EBITDA. Well, one to five times EBITDA, was what transactions were going for.
John Warrillow: EBITDA being the earnings before interests, taxes, depreciation, amortization, for those following along on the acronyms. Okay. You thought they were trading somewhere between one and five, depending on the quality of the health club?
Ian Silverberg: Yes. Yeah.
John Warrillow: Got it. What did you find when you went and marketed the business? What was the reaction?
Ian Silverberg: Yeah. It was interesting. Again, I started this process pretty early on. It was probably two years … A year or two before I sold, I started to just float it in the circles that I … I went to the competitor who originally wanted to buy it.
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: He was going to buy it, originally. I went to them. They were a local … They had three little gyms. I thought it made some sense for them. They were, at the time, mired in a … I didn’t know it at the time, but they were in the process of selling, so they said no. I went to another multi-purpose club about 15 miles down the road, which I thought was the logical connection. I spent literally two minutes in an office with their owner. I was very good friends with the general manager, but the owner, I realized, was not the type of person I wanted to do business with.
Ian Silverberg: I was getting traction at the number, and I was just floating … What I decided to do was focus on the terms, as opposed to the price. Meaning, hey, let’s just … Let’s talk about what you think. Where in that one to five range do we think my health club would sit, and if we feel like we can all agree that’s four, or a five, or a three, then … It’s just an exercise. Okay, what’s the real EBIDTA? We can go back and forth On that. Or, what’s real earnings? What’s the amount we’re going to multiply by three to five?
Ian Silverberg: That was where I decided. I got a lot of traction on that. And then I had … Unfortunately, I had a couple of people who really wasted some of my time. I had a big health club chain come through and just take me all the way down to the one yard line. They were … He called themself the sleeping giant. We’re going to come on board. They gave me this low ball offer at the end, and I said, “I don’t think it’s worth it for me to do that.”
Ian Silverberg: They literally threatened me with “Well, we’re coming into your market, and we’re going to close you down.”
Ian Silverberg: Luckily, I was in a market where I knew that you can’t just come … Real estate was not easy to come by. That was tough. That was really stressful, actually. I ended up putting it on an online … At the time, there was an online … I can’t remember the name of the company. I just listed it online, and I ran it. I found a father-son operation out of Malibu. They had one club. They were, to me, the perfect buyer. I wanted somebody who was really willing to come in and put their heart and soul into it, not just make this some commodity and part of their growth strategy. We really connected, and we agreed on that range very quickly.
John Warrillow: What was the agreed to price?
Ian Silverberg: We agreed to 2.1 million dollars for the business, and I’ll lease that, the property, I think it was 25 grand a month with various different terms on that lease. The 2.1 million, to be honest, we never really negotiated much. We came up with, I think … If I remember correctly, it was 450 or $400,000 EBITDA earnings. We multiplied, I think, by four and a half. We agreed. They never really negotiated because I really … I carried back paper, so I carried back about $700,000 over a 10 year-
John Warrillow: What does that mean? For folks who don’t know what it means to carry back paper, what does that mean exactly?
Ian Silverberg: Yeah. What I did was, since again, I had pushed this out and I didn’t have any debt, I offered to finance. I basically was seller financing a portion of it. They went to the SBA, and they got a loan for, I think, a million dollars. A million something. They put up $40,000 of their own. There was a million four that came up front. And then the last $700,000, I basically financed them. I, what they call, carried back the paper on that note. That was a loan over a 10 year period.
John Warrillow: Got it. They’re basically paying that $700,000 off to you over 10 years. That’s unique and separate from the rent they’re paying you, 25 grand a month for rent. On the 700 grand, what was the interest rate you were getting?
Ian Silverberg: Yeah. I think we had it tied to … It was a variable interest rate loan, and it was similar to the SBA loan. I think we had matched the terms, but I think we had it tied to prime rate, plus two or three.
John Warrillow: Got it. What would have happened if you had … If they had defaulted on that 700 grand?
Ian Silverberg: I would have got the business back.
John Warrillow: Would you have been ahead or behind the bank, or the SBA loan?
Ian Silverberg: I would have been behind the SBA, but I was very confident that the SBA would not want to take that over. That’s just not what the SBA does. I was confident that the SBA would work with me.
John Warrillow: What gave you that confidence, Ian? What gave you that confidence?
Ian Silverberg: Yeah. Well, number one, I think as I mentioned Cal Coastal, I started to … Once I became more successful, I wanted to give back to Cal Coastal. I got involved. I sat on their loan committee. I started to learn about what banks really do when they have to step in and take something back. Banks do not want to step in. There’s no bank, especially the SBA, is not going to want to come in and operate a health club. Me being, A … I had them sandwiched, if you think about it. Right? I had this note behind them and I was the landlord.
Ian Silverberg: What’s going to happen is, I’m going to get on the phone with the SBA and say, “Hey, we can make a deal, or starting tomorrow, you guys have to start paying me rent. All your equipment is in my building.”
Ian Silverberg: Right? Everything you have that’s collateralized your loan, which is the business, which is what? The membership, the equipment, all the things that they had that they used to collateralize it is sitting in my building. I felt like if they defaulted, I was in a pretty good position where I would probably get a second bite at the apple, so to speak. Right? I’d come in and I’d operate the business, if I had to.
John Warrillow: With your million four, in your jeans, kind of thing? Got it. How did it actually work? Did they honor the 700,000? Did you get your money?
Ian Silverberg: I did. I got all of my money out of the deal. There was a period there where I was a little concerned. Right? We went into a very difficult economy. I had sold the club right before this downturn.
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: They ran a very different health club than I did, which were some of the things I think I learned from it. Some of the things I would do differently if I went back in time, where I think I would have paid a little more attention to the detail of the transition process. I didn’t do that very well. I was concerned. I’m not going to lie. There were periods where I thought I might come in and operate it, but in truth, other than … My concern was honestly more for here are some guys that have paid me a lot of money, and continue to pay me a lot of money, and I would have been devastated if they lost. I genuinely … Every deal I ever do, if I bring somebody in it, I genuinely want them to win. I really would have felt bad, but I wasn’t concerned about me.
John Warrillow: What was the outward display or symbol that gave you concern that maybe things were going to go south? Did they miss a payment or did they say they might miss a payment?
Ian Silverberg: No, I think that it was … I really present there, so again, remember, I started this physical therapy clinic in it. In the building, what I kept out of the deal, was I also kept some space for my physical therapy clinic that was still there. Part of the reason I wanted to sell was to start to expand this broader concept.
John Warrillow: Mm-hmm (affirmative).
Ian Silverberg: I was there. I was present. As I mentioned, in this transition, I didn’t think about … I was there and I offered up my services. There was a period where I think I had to do 30 … I had to do 30 days. In the deal, I had to stay on for 30 days and help them. My general manager had to stay on for a minimum of a certain amount of time. I think it was 90 days. I just started to watch a lot of my key employees leave. I just saw a very different management style. I saw decisions, and then I saw broader economy getting harder. I just … because I was the landlord, I knew our rent increases were tied to their revenue. I knew what was happening to some degree on their revenue side. I just knew how much debt they had. It wasn’t that long ago where I was them. You know? I still had that sense.
Ian Silverberg: I was concerned, but to their credit, they never missed a payment. We had our differences on certain aspects of it. There were challenges we had as landlord and tenant, but honestly, we both really always played a very respectful long game.
John Warrillow: And that was … It was a 10 year period during which you were being paid off, is that right?
Ian Silverberg: Yeah.
John Warrillow: Has that now come to an end? Or where are you at now?
Ian Silverberg: That portion of it has come to an end.
John Warrillow: But the land lease remains?
Ian Silverberg: The land lease remains. Yeah.
John Warrillow: When will the land lease come up?
Ian Silverberg: We’ve been up … We have another three … About three years left on the ground lease. At that point … Now, we’re in this three-way negotiation with the landowner, myself, and the tenant. In truth, this can get really ugly. Right? As the landowner … I mean, as the building owner, I know I have to hand back … One of the problems with these land lease deals is that the last five years is really tough, because the owner of the land, me in this case, the landlord, the building owner, doesn’t really … I don’t want to be putting a lot of money into a building that I’m going to have to hand back.
John Warrillow: Sure.
Ian Silverberg: Right?
John Warrillow: Yeah.
Ian Silverberg: I’m going to fulfill my obligations, but not go much more. The landowner wants … Is going to get this building back, and they want … Any repairs being done to it, they’d like to be longer term repairs. The tenant is really in a tough spot, because they don’t know their fate is. Right? They’re a health club. It’s not like you just move down the road. Moving a health club is a very, very, very big challenge.
John Warrillow: Sure.
Ian Silverberg: Luckily over the years, there have been issues. We had a Target that came in, was trying to get into our community, and wanted to buy that building. They came in and were trying to get me to shake the landlord … They were trying to get me to boot the tenant. We’ve all stayed together in the end. That’s making this process much easier. We all have a deep, respectful relationship. I think, we’re not through it yet, but I think that we’re going to be able to work through some of the tenant improvements and the capital improvements that are needed. I’m really trying to help them get a lease signed, so that when my lease is done, they still have a place to operate.
John Warrillow: Right. The ideal outcome is that the original owner of the dirt takes over the ownership of not only the dirt, but also the building that sits on it, and leases that back to the current owners of Goleta, and you gracefully step away, having greased your pockets for the last 15 years, which is great. I say that with tremendous respect.
Ian Silverberg: I had an annuity, and my annuity is coming to an end. In truth, yeah, I feel like I’m just nuisance at this point. I’m trying to just step out of the way and let them talk to each other directly.
John Warrillow: Have you sat down to calculate what that lease was worth to you? The delta between what you were paying for the ground lease, and then what the market value of the rent was? Have you ever sat down to calculate that over the years?
Ian Silverberg: From a straight revenue perspective over the period of time, the land lease … I mean, it’s well over five million dollars, just in straight revenue. Now, there are costs to that revenue that I’d have to pull out of that. Right? I had debt that I had to service, I had my land lease. Right? Let’s just say half of that. Right? Over a period of time, perhaps it’s two million bucks. That’s just from the time I sold it. I owned it for nine years. Right?
Ian Silverberg: Now at the beginning, it wasn’t worth anything to me because I wasn’t making any money in the business.
John Warrillow: Sure. But things changed quite significantly.
Ian Silverberg: Yeah.
John Warrillow: You know, I’m grateful for you sharing this story. We have now done more than 200 episodes of this show. Although I know real estate is a big part of a lot of business sales, we don’t actually talk about it that much. In this case, I was really keen to have you share the story. If people want to reach out, Ian, or want to get to know you, or maybe connect with you, what’s the best way to do that? Are there …
Ian Silverberg: Sure. People can reach out directly to me. You can … My email is firstname.lastname@example.org, which I can give you. You’re welcome to post, if you want.
John Warrillow: I’ll put it in the show notes, for sure.
Ian Silverberg: I’m on LinkedIn. I have a website that you could go to, called intentfullife.com, which is a little bit about the intentionality, which does bring me to something before we go, that I do want to thank you. I’ve been a listener of your podcast now for … I don’t know how I stumbled on it. I don’t know, a year and a half, two years. I am deeply appreciative. I find it a great … I think the awareness that you’re bringing to this issue is really, really important. It taps into one of the key principles of life for me, and that’s intentionality. The idea of thinking out. I think even if you look at my story, my sale was something that I had contemplated way before. I wish that I had known you then. I probably would have been able to get more for it. I was out there on my own.
Ian Silverberg: I think this service that you’re doing and this idea of bringing intentionality to it is incredible. I think, and I would love for there to be a podcast on the acquisition side.
John Warrillow: Oh yeah, that’d be great.
Ian Silverberg: I think it would be really cool. In truth, I think the buy is sometimes a lot hairier than the sale, at least in my case it was.
John Warrillow: Mm-hmm (affirmative). You should do it.
Ian Silverberg: I’m game. I’m happy to host it for you.
John Warrillow: Yeah. Yeah. Well, thank you for saying that, Ian. It’s great. It’s a testament to people like you that make it all possible, so thank you for sharing your story. It was great to be with you today.
Ian Silverberg: Thank you. It was great to be with you, too.