Our client owned two health clubs: the first in a wealthy LA suburb, the second in downtown LA. At the start of our engagement, the first had operated profitably for 10+ years while the second had been open less than a year. Having invested $1M into the location downtown and still cash-flow negative, our client sought commercial capital to extend the runway for a further year. He was not aware of the extent of the downtown location’s monthly losses.
The critical lesson was on the importance to entrepreneurs of adequate financial oversight as well as an objective partner to help combat wishful thinking and confirmation bias. Our client did not know the extent of his losses; it required months of due diligence, constant communications, and financial statements to convey the problem. Afterwards, he interpreted small increases in sales (and decreases in costs) as significant progress toward profitability. After 12 months, List Ventures presented the annual financials and recommended drastic action. We offered two quarters of probation with the second quarter pro bono. When sales did not reach the projected goals by the end of the probation period, we assisted our client in closing the second location.
- Structure the client’s corporate structure to qualify for traditional debt financing.
- Perform due diligence on delinquent tax filings, expired permits, and other legal issues.
- File business and personal tax returns for 2014–16.
- Implement accounting package, financial oversight and reporting processes.
$400,000 to complete construction and leasehold improvements, working capital.
- Restructuring of the company’s corporate infrastructure.
- Preparation and submission of tax returns for 2014–16.
- Implementation of accounting package.
- Generate Executive Summary with a detailed report on Use of Funds.
- Developed and implemented Debt Service Coverage (DSC) Ratio.
- Monitor monthly Profit & Loss Statements in accordance with DSC Ratio.
An SBA-guaranteed term loan for $350,000 at 5.275% with an amortization period of 10 years.
- Accounting package and monthly financial oversight revealed an annual loss of $750,000 in the second location.
- This was a drastic difference with the estimated $100k loss our client mentioned at the start of the engagement.
- The loss was covered globally by the first location’s net profit so it remained unnoticed without adequate financial reporting.
- The second location constantly underperformed in all metrics; it never generated the necessary memberships to break even.
- The ratio of income to fixed costs on the second location was far less favorable than projected.
- The second location was closed 18 months after the start of our engagement.