Building Your Business from the Ground Up with Tom Hatten

Join Ken McElroy as he interviews Tom Hatten, owner of Mountainside Fitness as he reflects on founding and growing a fitness empire.

Full Transcript:

Ken McElroy: 00:00 So what did you learn from, you know, losing everything, almost losing everything.

Tom Hatten: 00:05 Yeah, I think, you know, I actually ended up at one point filing for bankruptcy is they’re all LLC chapter eleven’s. I, uh, finished it all off right before my birthday in 2000, I think 12 a file on my own, chapter 11, because at that point I had just under $100 million in personal guarantees on real estate. So just say that out loud. Right? Uh, so that had to happen. So that kind of just put everything at the baseline of, you know, what was going wrong in the, in the economy was truly effecting, you know, certainly me and, and I was trying not to let it affect the business because it was just a real estate issue. I was tough and a lot of lessons learning that.

Ken McElroy: 00:44 Welcome to the real estate strategies podcast. I’m Ken McElroy and I’m here to give you creative ideas on how you can get started or continue your journey in real estate. Each week, we will bring you inspiring and informative conversations with successful people and their path to obtaining or investing in real estate. Enjoy the episode.

Ken McElroy: 01:10 Hey everybody Ken McElroy here again, I’m with my good buddy Tom Hatton. Hey Tom,

Tom Hatten: 01:12 How are you doing Ken?

Ken McElroy: 01:13 So Tom and I have known each other a long time. Uh, we’re in YPO (Young Professionals Organization) together. We were an EO together. We’ve got lots of mutual friends together and, we get together from time to time. He’s a very busy guy. He’s got a, a rags to riches story, just like a lot of us and just like myself and, and Tom. Welcome.

Tom Hatten: 01:31 Thank you.

Ken McElroy: 01:31 Yeah. So, and also I want to chat about your new book dream on, so I can’t wait to dig into that a little bit. So, well let’s talk about your story because I was always intrigued with that. Obviously, we had property now in Turkey. Yeah. Not just down the road. And I think that story, um, is the epitome of an entrepreneur. You know what I mean? When you were like sitting there and you go, well, what about this? Do you cut the deal and even I think the guy even got bought your, your your equipment.

Tom Hatten: 01:58 Yeah. Yeah. There was a, that was just a really kind of a magical time, if you can even use that term when the opportunity just kind of presented itself with the right people and, and I was pretty hungry.

Ken McElroy: 02:08 Yeah. But the, then you go to the owner of the center yeah. And a which was called mountain side plaza.

Tom Hatten: 02:15 Yeah. And I asked him to, he did all the ties. He invested 70,000. I was 22 years old, so with no balance sheet, no credits, nothing. You know, I had a car loan and he invests, he put in 70,000 on the tees and then, he paid for the sign, our actual sign on the building and then helped me with some of the equipment. He ended up giving me a loan, um, for like 10 grand that he never asked for back when I wanted to pay him back. He said, don’t pay me back.

Ken McElroy: 02:39 How great is that?

Tom Hatten: 02:40 Yeah. He had lost the center to, um, at that time they needed to be 92% lease. When, uh, when, uh, the ohs boy is 1993 when that crash happened and he was at 88% with two leases in tow and they said, nope, we’re taking the center back. Oh, just don’t worry about paying me the 10 grand. I’m like,

Ken McElroy: 02:57 Wow. I don’t think I knew that. So from there, right. Yeah. So tell me about that first year because I don’t think I dug in on that now. Now how many, how many members do you have?

Tom Hatten: 03:09 Well, we have 18 locations. 1400 employees and just under a hundred thousand members.

Ken McElroy: 03:14 Yeah, well, congratulate.

Tom Hatten: 03:16 Thanks. Thanks.

Ken McElroy: 03:16 So let’s talk about that first year.

Tom Hatten: 03:18 Yeah. That was, I remember not sleeping, that was not part of the deal then. And then trying to figure out how to run a business because I’d never had done that before. How to be a boss, um, how to understand what it meant to build a culture and a product and all that was happening simultaneously while trying to, um, work on the side. I still painted houses on the side because I couldn’t draw any money out of the business. Um, and because the business was open 17 hours a day, there wasn’t a lot of downtime. So it was just an interesting time, but it was so full of energy. There was just a lot of good things happening all the time. And I think that’s what kind of fueled getting through all that.

Ken McElroy: 03:54 Good things happen in gyms, you know, people are generally trying to be healthy. And so I would imagine that’s a pretty cool environment.

Tom Hatten: 04:00 It is. And back when I started, it wasn’t nearly like it is today. You know, the, the world changed and fitness right in the early two thousands and, uh, it was more of a, it could it be a fad? Is this a real business kind of a thing? But people were happy. And I think if we created a culture that made people feel comfortable and it wasn’t just about how you look, it’s about how you felt. I think that was part of the basis of our culture and how we be able to grow.

Ken McElroy: 04:22 So thank you for that. Um, I know, uh, you know, then you started to expand. Obviously you’re like, okay, this works, so let’s go to two. Let’s go to three and now you have 18. Um, and most of that you’ve done on your own, right? You had some investors on the real estate along the way.

Tom Hatten: 04:37 Yeah, we have built about 25 altogether. Some have moved or, you know, I moved out because of the leases were up and stuff. But, uh, I learned pretty quick when I was so young that nobody was really going to keep allowing me to build bigger clubs because our balance sheet just wasn’t big enough. Uh, so it was probably about five years after I opened, four years after I started looking at SBA loans and seeing if I could do that in owner occupied deals. And it did, it worked. 1996 I did my first SBA loans. So about five years after I opened the first, you know, club, um, and built an 18,000 square foot club on two and a half acres and got a million dollar SBA loan. And that’s changed the game because then I did, I started to learn about sale leasebacks and that’s what my partner was, you know, it was really the real estate equity flipping into another.

Ken McElroy: 05:23 Yeah, that’s a really smart cause. The SBA is a small business administration and they have these loans that they give up and coming entrepreneurs. But I think the rule is you have to own it. You have to occupy 51%

Tom Hatten: 05:35 51% of the building and now and then have more than a majority share of the operation.

Ken McElroy: 05:40 Right. What you did. So I did. That became your model.

Tom Hatten: 05:43 That became my model. Yeah, it was interesting. That is something I learned from my father when we were growing up with, with houses. He would live it, we live in a house and then he would go, that’s enough of this and he would sell it and trade up and that’s the way we kind of did it. And I’m like, well this can kind of work in my business. And it was easier because I would say the company was the talent. So we always had that tenant ready to go in there and in that tenant would stay and we would divide, you know, define that lease and then I’d sell it, sell the building. And that worked in the tenant stayed.

Ken McElroy: 06:09 So fast forwarding to today now, so you have the real estate, right? And then you have the Mountain Side, business, right? The kind of occupies the real estate. Is that how it’s all set up?

Tom Hatten: 06:20 It is how it was all set up. And then, you know, probably a lot of the emphasis in the book, what a life changing kind of thing. In 2008 happened and we were building six clubs, three in Arizona and three in Colorado all at the same time. And, and a whole bunch of, you know, stuff going on with that and how he, you know, got the debt and all this kind of stuff. And when everything came crashing down, when all that kind of the dust settled, it took about four years, uh, for all the subtle, that was it. I was done. I kept one building, just, uh, cause they had a lot of meaning and I talk about in this book, but everything else I sold, you know, off and said, that’s it. We’re, we’re done on your real estate because that was just its own functioning beast on it. And it was out of my control how values would go and those things. And I didn’t want that anymore. I just wanted to have the business and you know how that would work.

Ken McElroy: 07:07 So that’s like the perfect segue for where we are right now. Yeah. Right. Because what’s happening in my space is there’s a lot of people going out and expanding like you did and they never had ever, never been through a correction. You know, and they’re, they’re getting bank loans and they’re getting equity and all that kind of stuff. And you know, I’ve been through it too as you know. And uh, so you got all the way down to one property, right?

Tom Hatten: 07:35 One that I own.

Ken McElroy: 07:36 One that you owned back in 2012.

Tom Hatten: 07:38 Yeah, I kept that one. I bought that one. We built a short story here. We built, we were into it for a total of 23 million, appraised at 27 the day we broke ground, a year later we completed the project and it was 2009 that same valuation came in at 14 million.

Ken McElroy: 07:55 Yeah.

Tom Hatten: 07:55 And then it fell all with eight (million).

Ken McElroy: 07:58 This can happen folks, you know, like right

Tom Hatten: 08:00 It’s insane!

Ken McElroy: 08:00 Tom, I mean you’ve been through it. I’ve been through this, you know, and I think what’s happened is, you know, a lot of the people listening here, um, you know, our real estate folks are entrepreneurs and a lot of the guys like you who have been through it, you just come into this next cycle. A little bit more wise.

Tom Hatten: 08:15 Yes. Oh yes. Oh my gosh. Those scars are still there and how all that worked. And you know, how many people were affected down line, whether it was banks, businesses, and so, you know, you name it, people just in general, you know, my best friend killed himself.

Ken McElroy: 08:31 Oh no.

Tom Hatten: 08:31 So it was, uh, it was everything that you could imagine that could come out of all that turmoil happened. Yeah.

Ken McElroy: 08:37 That’s horrible. Sorry to hear that. So what did you learn from, you know, losing everything, almost losing everything.

Tom Hatten: 08:45 Yeah. I think, you know, I actually ended up at one point filing for bankruptcy is they’re all LLC chapter eleven’s. I, uh, finished it all off right before by birthday in 2000, I think 2012 a file on my own, chapter 11, because at that point I had just under $100 million in personal guarantees on real estate. So just say that out loud. Right. Uh, so that had to happen. So that kind of just put everything at the baseline of, what was going wrong in the, in the economy was truly effecting, you know, certainly me and I was trying not to let it affect the business because it was just a real estate issue and I was tough and a lot of lessons learned.

Ken McElroy: 09:24 I’ve been there. I tell you, I talk a lot about these personal guarantees with people they don’t understand. So you may know, I think we’ve talked about this before, but I have no personal guarantees anymore anymore on anything on $800 million worth of stuff. Because of that, you know, because of having gone through that, you go in and I think what’s happening right now is that I just talked to a guy yesterday, you know, he’s doing, he’s sold priceline.com and um, you know, they’re doing mez lending and all this kind of lending. I’m like, dude, like you gotta be careful because you know, like, like this is, this is recourse debt. They’re going to come after you and trust me though, they will. And, um, you know, those real estate values are, he was doing it in Austin, Texas. I’m like, Austin is pretty hot right now. So, so, you know, uh, those real estate values can go up and down pretty quickly. When you were talking about those valuations of $27 million, I went down to 14. Right. That happened in just a few months probably. Yeah. So people don’t, haven’t been, a lot of people haven’t been through this cycle yet. I think it’s a very, very important lesson. And thank you for bringing it up because it’s a lot of people don’t talk about that pain and those scars and, and those, the, you know, I call them, you know, a little hurdles.

Tom Hatten: 10:48 Yeah. Little hurdles. Yeah. I hope people don’t have memory loss. Cause I feel like that, especially in this state where we are back rolling again and you know, our growth is so much determined on credit and certainly housing, it’s a little bit tweaked nowadays I think. But with that, I hope people have,

Ken McElroy: 11:06 Yeah. And then, so really you’ve grown to 18 locations in six years.

Tom Hatten: 11:12 Yeah. I think that we really hit our stride again in 2012 when the, when the dust settled, I sold my clubs in Colorado. I had, you know, the ones here that we had opened up. And then we said, okay, we’re through this let’s go. And we went differently. There’s a different route that we took to kind of get where we are today. Certainly a lot more solid, you know, definitely based on the business, certainly increasing the brand and so forth. And I think that was the big game changer. You know, learning everything from eight to nine where I was super aggressive and didn’t ever think something would happen like it did. Now that still plays in my mind and we’d go out at a different for you.

Ken McElroy: 11:45 Yeah, that’s exactly how I approach things now too is we were just had our investor conferences, I was telling you last week and these guys are like, what you going to buy more deals? I said, guys, we are peaking or not right.

Tom Hatten: 11:57 Sometimes the best things to say no.

Ken McElroy: 11:59 I know. It’s hard though. It’s hard with all these people. You see these cranes and everything going on. I see your gyms all over the place and congratulations on just incredible brand. You’ve built incredible culture. 1400 employees. Um, that’s not an easy thing to do. Um, what uh, what is, uh, what, what is the best thing about owning a gym? You know, and the, the facilities that you have.

Tom Hatten: 12:22 I think it’s the culture. I think it really became, we’re really lucky because a lot of things happen either through the, through just social media, certainly through the crash and then evolution of good health is it became a mainstream business, a real business. And I say because of the crash, because big boxes started to die and retailers started to die, Amazon started to grow and so on. So that left, you know, major boxes available to grow into its created different health club models. But it also said, hey, it’s a sustainable thing. People want this, they want to go to a, you know, health clubs and do that. So I think that progression’s been really nice to the sustainability of the business. And then to know if you do it right, where people truly look at it like in the crash, what we learned is that man is there stress reliever. It’s, their places that are placed that they can bring their kids, they kids have fun or they can just say, hey, I’m just going to get away from everything for a minute. Where you know, I’m in a class or you know, working out.

Ken McElroy: 13:18 What are you guys doing differently in the club? Because I tell you what, here locally in Arizona, you’re definitely heads above any other club.

Tom Hatten: 13:26 Well, thank you. I think what we learned along time ago through the, for the first days when I opened up the you and my first little club, it was how do we create a pack as much value as we can in the box. So we don’t really sell price, you know, I don’t sell high end, you know, let’s say tennis courts or swimming pools. What we’ll do is to say on a 40,000 square foot box, how can we make it feel like the highest end facility United States, by the way it looks, how can we give you the kind of amenities that you would get if you went to a specialty yoga or you know, a high performance, you know, club with your strength equipment. So we’ve had a smashed all that together into this box. It looks and feels very high end, but gives you all these different amenities plus a 4,000 square foot childcare that we changed diapers and you know, don’t all that stuff to where say man for $44, this feels like I’m getting a deal everyday that I walk in.

Ken McElroy: 14:17 Is that what it is now? 44 bucks. 44 times…

Tom Hatten: 14:20 That is the highest price. That’s it. That’s a top price. It goes down from there. You know, couples are less stuff like that, families are less.

Ken McElroy: 14:27 Well think about that. $44 times 100,000 people.

Tom Hatten: 14:32 Yeah. It’s okay.

Ken McElroy: 14:33 Not Bad. Not a bad job buddy.

Tom Hatten: 14:34 Thank you. That’s good.

Ken McElroy: 14:36 So what are some of the downsides of owning in a gym?

Tom Hatten: 14:39 Well, I think in this day and age, it’s funny, there’s not a day or a week. I, oh, I that doesn’t go by that I don’t worry about liability. You know, when you, when you’re smaller, you know, it’s Kinda round front of you. But now when there’s so going on, I mean will, I was like, today’s Day is Wednesday, right? So we’ll put in, I don’t know, 22,000 workouts today will happen through the cloud. So that’s 22,000 possibilities. She hasn’t mentioned the kids in the childcare, which we average about 75 an hour in there. So you think of all the moving parts that could go wrong. You know, that’s what Kinda keeps me up at night and I’ll, thankfully we’ve done great.

Ken McElroy: 15:14 With all your folks.

Tom Hatten: 15:15 All the folks. Yeah. So, uh, and we keep the facilities really maintaining clean, but that’s a worry. Yeah. People getting injured.

Ken McElroy: 15:22 So, you know, we talk about a lot about this reoccurring revenue model. How great is that now? That’s financeable.

Tom Hatten: 15:29 That’s financeable. You Bet. Yeah. It’s a, you know, the old days where it used to be a contract, now it’s an agreement, right? Yes. People can cancel, but it is a subscription base. But that’s everything. Netflix, the HBO, and that’s the way the world is. We held clubs were in front of it. Yep. Thankfully, uh, it just takes a lot of bodies, especially if you have a, you know, more expensive building to, to get to that break even. But once you do, it’s really nice.

Ken McElroy: 15:50 You know, it’s interesting. When I in my apartment business, I used to go to health clubs and hire the salespeople.

Tom Hatten: 15:56 Smart!

Ken McElroy: 15:56 Well because they were always amazing. They were always incredibly well trained, and so you guys, honestly, the health club business has been way ahead of the curve in my opinion in many, many, many ways.

Tom Hatten: 16:09 It’s interesting, we try to sell information based and in the product, so when you come on in, you see everything that’s in front of you and then we’re going to inform you all the things that you’re going to get and then along the way you’re being sold. So it’s not feeling like we’re out in your face, you know, selling, you were doing it through a process the whole way through. Um, and I think that’s worked really well for us. You know, we have a good closing percentage when people come in. We have a good prospect percentage and then I think everybody’s kind of, everybody’s a salesperson in there. Like literally from my main maintenance guys to the girls in the childcare to the my instructors. They’re selling all the time. And not necessarily because there’s saying that, but because of the way they’re functioning.

Ken McElroy: 16:49 Yeah, for sure. Well, I do want to talk to you in the next podcast about your book dream on because, um, and we’ve talked a lot about this and when you are writing it and there’s a lot of incredible stories in here. So, uh, with that, Tom, uh, thank you for this interview and I want to dig into the book next.

Tom Hatten: 17:07 You Bet. Thanks Ken.


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