Strong Shoulders

When the economy crumbled, the owners of the Fayetteville Athletic Club had to reinvent their lives

Bob and Katherine Shoulders are all-Arkansas. This is where they’ve lived for most of their lives, where they raised a family and built a business. Now they’re leaving. Their two boys are both in college, so Bob and Katherine are going to sell their home and move to North Carolina—they’re thinking Wilmington.

“Katherine’s always dreamed of living on the ocean, and there are great golf courses around Wilmington,” says Bob.

They’ll be working for Retention Management, a Charlotte-based company that provides membership-retention and communication-consulting services. Richard Ekstrom, the president of Retention Management, hired the Shoulders to help him transition the firm from an e-mail-based platform into one proficient in social media.

“We were on Facebook and Twitter in our own business, the Fayetteville Athletic Club,” explains Bob, “and we found that the viral nature of these new communication networks not only can save a lot of money, but can also transform your relationship with members.”

Katherine is excited about the possibilities. “Clubs can communicate better, create more connections, initiate new conversations,” she points out. “Social media transforms a club into something more than just a place to work out. These new platforms allow you to deliver content—about eating healthy, staying fit—even when members aren’t in your club.

“We know what it takes to get members excited about programs and how to roll them out,” she says. “We know how to put a spotlight on them.”

They know because they used to own a club. They know how clubs work. The business is in their blood.

What entrepreneurs do

Katherine grew up in Little Rock. After earning her master’s degree in health fitness management, she returned home to help her family get involved in the fitness industry. With the assistance of Dr. Kenneth H. Cooper, the founder of the Aerobic Centers in Dallas, the family opened its first facility, the Little Rock Athletic Club, in 1988. Today, Katherine’s brother, xx, owns four clubs in the city.

In 1998, Katherine, who was then a personal trainer and group-exercise teacher, married Bob, the president and CEO of Riley’s Total Health, Inc., a continuing-care retirement facility in Little Rock. With their fitness backgrounds, the young couple dreamed of moving to northwest Arkansas to own and operate their own health club. In 1995, Bob begin drafting a business plan that, in 1996, resulted in their purchasing the Fayetteville Athletic Club (FAC).

“Raising the capital and borrowing money to buy the FAC,” Bob recalls, “was the hardest work I’d ever done.”

The Shoulders had apparently chosen well. FAC was a 60,000-square-foot fitness facility, situated in a single two-story building, with 1,200 members. It was located in the bustling northwest corner of the state, which was home to three Fortune 500 companies—Walmart,  Tysons Chicken, and J.B. Hunt Transport.

But, by 2003, the Shoulders were feeling the pressure to expand: After all, that’s what entrepreneurs do. That’s what business is all about. If a business doesn’t grow, it stagnates. If it doesn’t expand and offer customers what they want, they’ll find clubs that will.

A master plan

The Shoulders’ master plan called for the construction of a small medical-rehab center, a new tennis center, and a new kids’ center. The tennis component would include six courts, three on each side of a new two-story building, which would feature an 1,800-square-foot restaurant and a 1,200-square-foot pro shop on the first floor, plus a 3,000-square-foot observation deck upstairs. There, members and guests could hold parties and watch tennis matches below.

The kids’ center would offer pre- and after-school programs.

“We had a very detailed business plan,” attests Bob. “We knew what the interest payments would be, we had new membership coming in, we were implementing new programs to help cover the debt, and our market research supported this kind of expansion—absolutely.”

With $5 million in outstanding loans, FAC hoped to borrow another $3 million to underwrite the expansion. When interest, legal expenses, and associated costs were accounted for, the Shoulders planned to bundle everything into a single loan of some $9.5 million. To make that work, the Shoulders agreed to personally guarantee the loan.

But not long after the Shoulders broke ground in early 2004, Katherine had her first sense of foreboding. “Things got challenging during construction,” she says. “The project went over budget and took far longer than we’d expected.”

Unexpected problems

Everything looks clearer in hindsight. In 2004, few people could have anticipated the economic havoc that lay waiting for the U.S. and Europe. And, once contracts have been signed and money has changed hands, projects gather momentum. “Bob and I are different personalities,” Katherine observes. “Bob’s the big-picture guy, totally optimistic. I’m more conservative; I would have been more comfortable proceeding slowly, but I was on board with everything we were doing.”

Katherine wonders what might have happened if they’d approached the expansion one project at a time. But then she thinks: “The families that join a tennis club have kids. Where’s mom going to park the kids while she’s playing? We needed both a tennis center and a kids’ center.”

And then there were the economies of scale to consider. It doesn’t make a lot of sense to subject your members to the disruption and inconvenience of construction only to do it all over again a year later. “Back then, our neck of the woods was one of the fastest-growing metropolitan areas in the country,” Bob recalls. “Thousands of people were moving in, and new banks were popping up every month, each one of them lining up to hand you money. Construction companies everywhere were working 24/7. At the time, you couldn’t obtain a hard-bid contract; everything was cost-plus.

“In retrospect, of course, these were all red flags warning that the economy was over-heating.”

            Not recognizing the signs, the Shoulders, Katherine says, believed that “if we could execute our plan, we thought that we could collapse the market. The FAC would be the only club in the area that offered everything a family might want.”

But, as problems mounted, anxieties grew.

The Shoulders were expanding at a time when material costs were going through the roof, contractors dictated terms, and their grand plan had little built-in margin for error. Instead of opening in the spring of 2004, the tennis courts made their debut on Thanksgiving. Though the summer season had been lost, the Shoulders held out hope that the indoor season could be salvaged. Unfortunately, the double-bubble that was designed to cover both sets of courts was also running behind schedule. Fabricated in Italy, it didn’t arrive until January. No sooner had it been erected than the Shoulders had to deflate it because of the arrival of spring weather.

The expansion increased FAC’s footprint by four acres, which the Shoulders used to expand parking for members and staff. The kids’ center opened in the fall of 2005, well behind schedule, but, it was immediately apparent, filled an obvious need. “We had four buses collecting children from 15 different schools for our after-school programs,” notes Bob.

Financial impact

Yet, for every step forward, FAC seemed to be taking a step sideways or backwards. “Enthusiasm got the best of us,” Katherine admits. “We did everything first-class. We had to have plexi-cushion courts, our tennis bubble was made in Italy, and we decided that we wanted to own and operate the tennis-center restaurant.”

All the while, the delays and cost over-runs were inflating the Shoulders’ loans—by a total of 30%. “Instead of making payments at 6.25%,” Bob explains, “we were looking at an extra million of debt and an interest rate of 8⅞, which meant that we had an additional $30,000 of debt service.”

By 2006, the Shoulders were also struggling with a number of operational challenges. They’d hired a talented manager for the tennis center, but the staffer they’d put in charge of the kids’ center proved unsuitable, and they could have installed a revolving door for the restaurant’s string of managers.

Realizing that they needed help, the Shoulders hired a consultant to identify areas of strength and weakness, and to advise them on ways to improve performance. “We weren’t sticking our heads in the sand,” Bob insists. “Through the winter of 2007 into the first quarter of 2008, we made a lot of progress in changing how the club operated. We brought in new management, and our business lines were profitable.”

But, even as it seemed things were turning around, the Shoulders were finding it increasingly difficult to meet their financial obligations. “Our core club was running smoothly,” explains Katherine, “but the debt was a lot of weight for the club to carry when our new programs weren’t even up and running.”

All through the dismal winter of 2007, the Shoulders were in constant contact with their lender, the Arkansas National Bank (ANB), about restructuring their loan. “The bank kept telling us that we had a great club and they were working on a new deal,” says Katherine. “’Just keep things going,’ they reassured, ‘and everything will work out.’”

But the Shoulders were confronting a different reality. “Basically, we wound up funding the club on our own,” says Katherine. “We began to use our own savings to pay these loans, because we believed it was the right thing to do, and because we believed that, if we could just get through this rough patch, we could recoup our personal investment, and wind up with this fantastic new club.”

What the Shoulders couldn’t know is that, by fall of 2007, ANB was no longer in control of its own fate. In late October, the Office of the Comptroller of the Currency (OCC) had required ANB to hire an external loan review consultant because of its concerns about the bank’s asset quality. Over the next six months, the OCC continued to monitor ANB in an attempt to right that ship.

According to an Audit Report of the Office of Inspector General at the Department of the Treasury dated November 25, 2008, the OCC had known about ANB’s problems as early as 2005, but “took no forceful action until 2007,” by which time it was impossible to save the bank. On May 9, 2008—just four months before the collapse of Lehman Brothers would spark financial panic on Wall Street—the OCC closed ANB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

Solution rejected

A winter of discontent gave way to a spring of despair. The Shoulders were meeting with FDIC representatives twice a week, trying to work out a deal to buy back their loan. “We’d meet with this nice lady from Dallas,” Katherine remembers, “then walk back into the club, putting on a brave face until we could shut the door to Bob’s office and ask each other: ‘What’s really going to happen?’”

The Shoulders were upfront in their relations with their FDIC representative. After ANB failed, they made an additional loan payment as a sign of good faith. “But we finally had to tell her that we couldn’t make any more loan payments,” acknowledges Katherine. “It was the smartest decision we ever made, but it was a hard one.”

And so it went, through the summer and into the fall. The Shoulders maintained their charade, working behind the scenes to hold onto a club that seemed to be slipping away from them. But they wouldn’t give up or give in. “Here we were,” says Katherine, “a business whose bank had just failed, with everything in flux and an economy that’s tanking, and we managed to convince a local bank to loan us enough money to pay off the FDIC. We felt very positive.”

By September, the Shoulders had drafted a finance plan. “We had new equity coming in,” recounts Bob. “We were offering 70 cents on the dollar.” The Shoulders’ offer was passed along to the Dallas office of the FDIC, which promptly rejected it, and, just as promptly, put the FAC loan up for public auction. A bid of $3.4 million by SM-WLJ Asset Owner, LC, of Coral Gables, Florida, was accepted instead.

“We’d offered to buy our loan for double what the FDIC eventually accepted,” says Bob. “It was incredibly frustrating.”

Subcontractors retained by the FDIC to help ANB manage its loan portfolio had hired loan officers to help the bank’s clients restructure their loans. “We worked to reduce the interest rate or forebear the loan,” says one of them, who asked not to be identified. “I knew almost every loan officer, and, of the hundreds and hundreds of loans we worked on, not one of these proposals, to my knowledge, was ever approved. I really have no idea why they didn’t approve any short sales or loan restructures—it’s still a mystery to me. They should have just told the applicants, ‘We’re putting you out of your misery. It ain’t happening, pal.’”

In February 2009, the new holder of the FAC loan filed a foreclosure claim against FAC. Soon thereafter, the Fayetteville Athletic Club filed for bankruptcy.

A cautionary tale

Rick Caro, the president of Management Vision, Inc., an industry consultancy based in New York City, testified on behalf of the Shoulders during their bankruptcy trial. “Lots of businesses hit road blocks when the economy goes sour,” observes Caro. “But who’s prepared for their bank to fail in the midst of an expansion? Typically, it’s your bank that you turn to for help in times of crisis, but the Arkansas National Bank had troubles of its own. So the rules of the game changed, and the Shoulders had no one to coach them.”

Still, Caro notes, the Shoulders’ saga is a cautionary tale. Entrepreneurs, risk takers by nature, need a devil’s advocate in the conference room. “Questions about restructuring loans are almost beside the point,” he suggests. “You have to make sure you have sufficient working capital and resources to carry you through unexpected rough periods. You can’t play things too close to the vest. With no wiggle room, problems began to cascade at FAC. Other clubs opened up locally, making the competition for new members tougher. Rumors started to swirl. And, once the FAC went into foreclosure, the press coverage didn’t help.” One of the more embarrassing stories was an article in The New York Times headlined “After the Bank Failure Comes the Debt Collector.”

Wrapping up business

The Shoulders’ legal problems didn’t excuse them from continuing to run their club. “Bob never let any rumors or negative PR get to him,” recalls Katherine. “He went about his work, pleasant and positive. I was amazed, because there were times I drove up to the club, and I had to turn around and drive home. I couldn’t let people see me like that. Bob held down the fort.” But the strain was tough both on their relationship and their family.

In 2008, the Shoulders elder son was 17 years old, a senior in high school, and their younger boy was 15. “Our troubles spanned our sons’ high school years,” says Katherine. “It was horrible. Bob and I were so absorbed in trying to keep our business alive that we had no energy left over for our children. They were amazing—somehow, they understood this. I’d come home and tell my 15-year-old, ‘I’m sorry Patrick, I can’t deal with anything else right now. I just can’t handle any more stress. We’re on the brink, so you can’t get into any trouble—we just can’t handle it right now.’”

At his graduation ceremony, Katherine apologized to her son for not having been around. “He told me not to worry, that I didn’t miss much.”

It was against this backdrop of stress and pressure that the Shoulders were preparing to do battle with SM-WLJ Asset in bankruptcy court. After depositions, but before the trial, SM-WLJ offered the Shoulders a deal. “After all we’d been through,” says Katherine, “when we looked at a deal that would let us to get out from under Chapter 11, we decided to be done with it and move on.”

SM-WLJ agreed to assume the Shoulders’ personal guarantee on the loan and permit them to retain a 10% minority interest in FAC. Under the terms of the agreement, the Shoulders could have continued to work at FAC, but decided that would be awkward and chose, instead, to leave. FAC continues to operate successfully today.

Inventing the future

And so the Shoulders are pulling up stakes and moving to North Carolina, leaving FAC behind, and ending their long reign as club owners and managers. “Will we ever run a club again?” Katherine ponders the question. “You know, you never know what the future may hold, but I suspect that clubs are now a part of our past. Right now, we’re still a bit shell-shocked. We’re making the transition from being responsible for 150 employees and 7,500 members to being accountable to one another and Retention Management.”

For his part, Ekstrom, of RM, couldn’t be happier to have the Shoulders on board. Customers since the firm was founded in 2003, Bob and Katherine have been a source of valuable customer feedback for the company. “They’re savvy club owner/operators, and they’re pioneers in the use of social media in the fitness industry. I can’t think of a suggestion they’ve made that we haven’t implemented.”

Ekstrom’s current goal is to build on RM’s e-mail platform. “When we started this business,” he explains, “e-mail really wasn’t being exploited in the fitness industry. We’re firmly convinced that combining e-mail and social media will add up to more than a sum of the parts.”

But Ekstrom is quick to add that, for him, the hiring process is about much more than simply acquiring experience and expertise. “What gets lost in conversations like these,” he says, “is that I hired Bob and Katherine because they’re good people. Yes, they bring great strengths to our firm, but good people are hard to find; and when I find quality people, I find a way to work with them. The Shoulders are more than survivors—they’re thrivers.”

After all that’s happened, Bob Shoulders remains deeply optimistic, and he’s excited about the future. “When Rich asked us to join the firm, he told me, ‘Running a club is so hard, and you’re out of it. You’re going to be so happy working here.’

“And we are.”