I know nothing about the sauna business, the kind where patrons pay for a package or a monthly subscription to spend time in a steam bath to relax in dry heat. However, I do understand the physical therapy industry very well, and several years ago, I became intrigued with integrating PT services with a sauna business service model.
However, there are risks to such a business. It’s hard to test this idea in a given market. Just because an owner encounters success in Phoenix doesn’t mean another entrepreneur will replicate their bottom in a Midwestern location.
Accordingly, in the discussion that follows, I’ve listed ten tips for new sauna business owners. Most of these tips come from the QSR (Quick Serve Restaurants) industry, which I consider both fun and challenging. Many of the critical success factors at QSRs apply to sauna business owners.
Also, my ten tips include marketing, staffing, planning and analysis, and even accounting. Regarding accounting, don’t take this lightly. Show me a sauna business owner with terrible accounting, and I’ll show you a bottom line that’s a mess. One doesn’t cause the other, but when both are on rock-solid ground, there’s a competent leader in the background who understands the importance of integrating operations, marketing, and reporting.
Count the Cost of Your New Sauna Business
Why are you getting into the sauna service business? What makes you think you’ll succeed? And please do not refer to your fill-in-the-blank business plan for the answer.
There are two costs to entering this business. The first one is clear-cut. It’s your outlay to enter this business. That includes cash and loans for equipment, fixtures, and leasehold improvements (LI). Regarding this last item, don’t underestimate it. I guarantee the final outlay will balloon from the drawing board to the last change order that the general contractor requires to complete the build-out on time.
The other cost is forgone opportunity. Seriously, does any entrepreneur go through a thinking exercise where they consider alternative investments of time and money? My anecdotal evidence says rarely, but I’d be remiss if I didn’t include opportunity cost in this first of ten tips.
Before moving on, let’s add some math to counting the cost. And it involves answering a few simple questions:
- When do you want your money back or your full return on investment? Five years is too short. It’s unreasonable. And ten to twelve years is too long. I like seven years which is a realistic payback period.
- What is the projected free cash flow after taxes you project over those seven years? Be conservative.
Let’s say your total investment for equipment, fixtures, and LI is $400,000. Furthermore, let’s say you can expect to earn, on average, $70,000 in free cash flow after taxes and after a reasonable owner-manager salary.
We now have a numerator and a denominator. The free cash flow over seven years is $490,000, and the base investment is $400,000. That’s a multiple of 1.2. Is that good, or is that a bad return? What do you want that number to be?
Not only should you count the cost, but in doing so, try to calculate the estimated return on the investment. Then, work hard to exceed that investment during that seven-year investment.
Nail Down the Reporting of Your Leasehold Investment
There’s one area where I want excessive accuracy on the balance sheet, and that’s leasehold improvements. I’ve worked with scores of QSRs who continually get this reporting wrong from both a GAAP and tax standpoint.
Here’s my simple rule–when a new investment is made in a property, any cost stemming from a contractor’s project plan hits LI. I’ll let the tax jockeys at year-end determine what gets classified as a fixed asset vs. what can be recorded as repairs and maintenance. Remember, your internal and tax numbers don’t have to match; they just have to be reconcilable.
There are two critical reasons I obsess over smart and accurate LI reporting:
- Since I want my business tax return completed by February 1st of every year, I want my tax partner to have complete numbers with ample documentation that will not slow down the filing process.
- Since I’m a financial statement purist, I think like an owner. If my sauna business opens in July, I don’t want to see a lot of LI in repairs and maintenance, which muddies the P&L.
Before moving on, let me offer a tip on monitoring and tracking LI from the start to the end of the project. Create a budget template using construction cost codes and maintain this outside of your accounting in whatever system you use. But just make sure the accounting system ties out to your detailed budgeting tool.
At a minimum, I’d track the following categories as these will be relevant to a new sauna business buildout:
- General requirements
Every cost should be tagged with one of these construction code categories. This also ensures a quick turnaround on the income tax preparation at year-end.
Get Your Accounting Right From the Start
I wish I never had to touch the accounting of any business I serve. Unfortunately, nearly every business I’ve worked with has had horrendous accounting, and that includes whoever set up the system in the beginning.
I’m also describing clients I’ve worked with over the years that used either a CPA firm or an outsourced bookkeeper to do the daily bookkeeping. Unfortunately, they are more interested in debits and credits, and they are professionals who have never worked as controllers and are far more business-centric than they are.
If you are starting a sauna business through a franchise, do not use their chart of accounts. They are not accounting experts. Most franchise startups have marketing backgrounds. If they have a chart of accounts they want you to use, they pulled it from another organization.
Instead, find a controller who can design your accounting structure that coincides with your continuous business planning (planning, reporting, and analyzing results).
Below is a simple structure where I blow out the revenue accounts (only):
As a bonus tip on getting your accounting right, make sure the controller provides checklists and workflows for the following:
- daily cash and credit card reconciliations
- inventory management which includes weekly cycle counts
- sales tax compliance and reporting
- basic onboarding activities for new staff members
- a simple scorecard system for tracking member subscriptions (goals and actual results)
- a one-day close of the financials
Getting the Right People in the Right Positions of Your Sauna Business
I used to run a mastermind group in Columbia, Missouri, for about a dozen future business leaders. All but one or two members were sons of first-generation business owners. The talent and drive were rich in this group. As of this article, three members have since taken over the CEO role in the family business.
One of the mastermind members ran several CrossFit locations. One of the locations was suffering, and the owner attributed the issue to onboarding new customers. In this particular location, it was slow, tedious, and inconsistent.
First, as a group, we used Post-it notes to visualize the workflow at the problem location and his best-performing location. Something didn’t look right. The workflow was supposed to be the same. The execution was off at the poor-performing location.
The owner liked his manager as they were buddies. But the owner thought his hand-picked manager was the issue. The rest of the staff liked this manager, so it wasn’t a personality issue. Accordingly, I asked to meet with this manager whom we are friends today, even though I somewhat caused his termination.
Let’s call this manager Adam. I met Adam for coffee the following day after my mastermind session. We got along great. Smart, energetic, and business savvy, but something was amiss in his CrossFit box. I had a hunch. I had him take the Kolbe A™ index, and the next day, I had my answer.
This is not a conversation about the Kolbe A™ index, which measures our conative instincts. Instead, the short story is that Adam was not in the right spot for this CrossFit location. His index also revealed some of the stress and strain he was encountering on a daily basis. He remained silent because he didn’t want to let his friend down, the owner.
The owner had no choice but to let him go but on very friendly and generous terms. I stayed in contact with Adam for about three more years via LinkedIn. He said our coffee conversation and the Kolbe process was a career-transforming process.
Incidentally, Adam’s next job was a COO position for a small public company in San Diego. I was a bit worried that his COO role did not match his Kolbe A™ action modes. Turns out I was wrong, as this COO position required much in the way of creatively keeping and growing its existing customer base.
The point of this story is to get the hiring right in the sauna business. In the early going, if someone can smile, talk, and carry out simple instructions, then that person is a job candidate. I realize it’s hard not to hire quickly because finding help is hard. Try your best to refrain from hiring fast. Be deliberate instead (I know, easier said than done).
Turnover will be high in this business. Find a coach that is skilled in hiring the right people for certain roles in retail. It will save you many headaches over the following seven years as you recoup your investment.
Model the Top Line
I’m going to bet my net worth, but only in my mind, that every sauna business owner created a business plan with top-line revenue numbers. Let me place a second bet–the top line was a guess based on revenue dollars only.
I won’t make the bet of the owners, who ultimately go on to create a yearly budget where they forecast or plan the top line to the best of their ability. My educated guess is that few sauna owners do this.
If I’m right in both cases, I have a suggestion that could lead to a far higher top line. What I want you to do is model your top line. Below is a quick video to give you ideas on how to model your top line.
Act on Your Newly-Created Model
Creating a model is not enough. You have to work on it, revise it, improve it, and keep acting on the numbers you are projecting.
To translate, “Owner, get out of the office, and go sell, sell, sell.”
One of the biggest dangers in setting up shop is to do what Ray Kinsella did with his Field of Dreams in Iowa. He built it hoping ‘they’ would come. And they did, the players and the fans.
Without trying and with little advertising, you will get a shot in the arm when the business opens its doors. If you do nothing after that, the rise in subscriptions will level off, if not drop.
This is where you have to get aggressive and start finding key partners who can help you augment your customer base. For example, holistic chiropractors would be a great referral partner. I started this discussion with the PT industry. They would be great referral partners too. Don’t forget nearby colleges with dynamic athletic programs.
Before you start your referral marketing campaign, you need to know the answers to these questions, thanks to Doug Hall:
- What is your overt benefit or meaningful uniqueness for your ideal customer? What’s the overt benefit for your referral partner to recommend your business?
- How can you back up your overt benefit claim above?
- What’s the dramatic difference between your deliverable compared to services similar to yours? This one will be harder to answer.
Before moving on, never ask for a referral without stating how you’ll become a partner to those you are talking to. Here’s hoping they’ll get as many referrals from you as you do from them. That’s a win-win relationship.
All Hands On Deck
I almost skipped this tip as I mentioned it briefly about modeling out the top line.
Please share the critical membership numbers with your staff. Since you probably have monitors mounted throughout your facility, have one in the back office and show a Geckoboard of your current membership counts along with the recent trends.
Weekly, either on Friday or Monday, I’d do a post-mortem of what’s working and not working. Employee co-participation can lead to more excitement, interest, and commitment (hopefully).
Try it. I’m 99% you’ll see instant improvement.
The Daily DCR
It’s back to accounting for this next tip. One thing I appreciate about most QSRs owned by professional managers and investors–they demand accurate and smart accounting. I do too. Plus, it’s easy.
However, many owners without strong financial reporting acumen think cash basis reporting is the only way to report numbers. When that’s the case, this week’s sales are wrong because Monday sales generally include the previous Friday, Saturday, and Sunday because those days of credit card sales typically don’t hit the bank until the first day of the workweek. This mom-and-pop reporting never truly provides a clear picture of our weekly revenues.
What’s bothersome in these cases is that outsourced CPA firms and bookkeepers are generally okay with booking revenue on a cash basis. Remember my earlier point–they are not business-centric and have probably never worked as corporate controllers.
In short, nail down your daily cash reporting (DCR) and book revenue accordingly. I once heard a bookkeeper say, “I can’t do that because multiple days of credit card receipts are lumped together.” I was dumbfounded because that’s where the credit card merchant statements will solve this simple dilemma.
Unless you have an accounting manager on staff, get help on this tip. In the long term, you’ll become a better financial student of your own business. Plus, the effort to nail down your DCR is easy, taking only minutes a day for the accountant to book the daily revenue entry.
No Excuses, The One-Day Close
I started my consulting practice in 2001. On client number one, we closed out the financials on the evening of the last day of the month. The key is using a month-end schedule where every balance sheet account is reconciled, and every P&L account is analyzed. The time to close was about three hours.
Today, I rarely participate in any month-end closes unless I’m asked. But let me offer an insight you might find puzzling. Every time I ask a CEO where the greatest friction exists in a fast and accurate close, they never get the answer correct.
The greatest point of friction comes from the accounting group. Some are lackadaisical; others are apathetic. I get more pushback from bookkeepers and accounting managers than any other team members when implementing a month-end closing checklist. It’s partly because they do not think like owners. It’s partly because they have never worked for a controller before. And in nearly all cases, they have so many inefficient processes that generating timely and accurate financials is a low priority.
It’s time to eliminate these excuses. We need and want timely numbers so that we can plug them into our planning model and start making adjustments to hit our desired top-line and bottom-line goals. Don’t let a CPA firm create your schedule. You want a controller who has created scores of these and has a track record of achieving accurate one- to five-day closes.
The Monthly Debrief
I think the world of Arlan Alburo. He’s one of the best CEOs I’ve ever been blessed to work with. Not only does he share weekly metrics with all team members throughout his PT organization, but he also shares the financials as well.
I cannot guarantee the promised land should you share the financials. Sharing financials is an extension of how you view your employees. If you live in a world of fear and distrust, then don’t share the numbers.
If you live in a world of abundance, trust, and transparency, consider sharing the numbers. Notice I didn’t write, “Share the numbers.” Instead, consider doing so.
Ask the question, “What’s the job to be done by sharing the numbers?” It’s the same as posting customer numbers on your Geckoboard in a back office. It’s employee co-participation where your best people can provide ideas on how to improve the numbers.
Consider one of my favorite lines from the book, Maverick by Ricardo Semler:
What people call participative management is usually just consultive management. There’s nothing new to that. Managers have been consulting employees for centuries. How progressive do you have to be, after all, to ask someone else’s opinion? And to listen to that opinion—well,that’s a start. But it’s only when the bosses give up decision making and let their employees govern themselves that the possibility exists for a business jointly managed by workers and executives. And that is true of participative management as opposed to merely paying lip service to it.Ricardo Semler, Maverick
The Long Game
Congratulations on starting your sauna business. I hope it goes well. Remember, you are running a marathon, not a sprint. That means you’re playing an endurance game where exhaustion can turn up periodically.
If you need to come up for air, revisit the ten tips above. As stated repeatedly, they will not ensure success, but you’ll not fail for implementing these suggestions baked deeply in financial wisdom.