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Financial Trouble Plagues Some Health Club Franchisees

Financial Trouble Plagues Some Health Club Franchisees

<b>Lights Out: The troubles that continue to plague circuit club companies also extend to business-savvy franchisees who trusted the reputations of some of the biggest names in the industry.</b>

It sounded so simple. It made so much sense. Experienced, knowledgeable people banked on the marriage of a well-known sandwich chain and a fitness industry legend to create an exciting new circuit club franchise. At another promising company, people counted on the experience of a group of investors that included the founder of the biggest revenue-producing chain in the industry.

1-2-3 Fit, Denver, which opened in 2005, was the brainchild of Rick Schaden and Brooksy Smith, two men who made Quiznos a successful national restaurant chain. Schaden and Smith called upon fitness legend Ray Wilson, whose background includes opening several club companies, to help them with their venture into the fitness industry.

“It was the perfect mixture of franchise team and fitness team,” one former 1-2-3 Fit franchisee says.

Butterfly Life, San Ramon, CA, opened in 2003 and had the initial backing of Mark Mastrov, the founder of 24 Hour Fitness who resigned last month as chairman of 24 Hour. Mastrov's colleagues, Mark Golob and Tom Gergley, had operated Linda Evans clubs in California before opening Butterfly Life.

“With Mastrov's name, how could you go wrong?” one former Butterfly Life franchisee says.

But according to many franchisees at the two companies, plenty did go wrong. The same problems that have confounded franchisees at express club companies such as ShapeXpress and Contours for Women (both of which were featured in the November issue of Club Industry's Fitness Business Pro and online at have hit 1-2-3 Fit and Butterfly Life franchisees. Several have closed their doors and face debts of more than a quarter of a million dollars. Even Mastrov and Wilson have left the two companies.

“I call it an American tragedy,” says Barbara Jorgensen, who closed her Redmond, WA, 1-2-3 Fit store last month, just nine months after its opening. She says her losses total $300,000.

1-2-3 Fit

Franchisees at 1-2-3 Fit may not be surprised to learn that 1-2-3 Fit's 2007 Uniform Franchise Offering Circular (UFOC) shows the company is in financial trouble. 1-2-3 Fit has incurred losses of $9.5 million since Jan. 1, 2006. The company states in its UFOC that an independent accountant's report reveals that 1-2-3 Fit's circumstances raise substantial doubt about the company's ability to stay in business.

That's not the financial state that Schaden or Smith likely envisioned for the company in 2005 when they began franchising. Smith would not comment for this story, but in an April 2005 story in Club Industry's Fitness Business Pro, he discussed the new coed, 30-minute 1-2-3 Fit club franchise.

“In the fitness business, we saw Curves out front with a remarkable business,” Smith said. “And we saw a muddled water of people jumping in, and it looked a lot like what we saw in the sandwich business 10 years ago.”

At that time, Subway was the only successful national chain of sub sandwich shops. Then, Schaden and Smith launched Quiznos, quickly elevating it to the No. 2 sub sandwich company in the United States. It also was one of the fastest growing franchises. In 2006, Quiznos had more than 3,300 franchised stores, placing it third in overall franchises behind Subway and Curves, Waco, TX, according to

The success of the Quiznos executives led several fitness franchisees to believe they could pull off a similar success in the circuit express club market. Former 1-2-3 Fit franchisee Mark Metevia initially felt good about his investment.

“I thought they knew what they were doing,” Metevia says of 1-2-3 Fit executives.

Metevia owned another business in the early 1990s and knew the risks that went into opening his 1-2-3 Fit franchise in Parker, CO. When company reps encouraged him to open his location about a quarter-mile from a community rec center, Metevia saw it as a red flag, but he followed their advice anyway. Company reps also told Metevia that he would have 200 members before he opened his doors. Six months after opening, however, Metevia's club had only 100 members, and he ran out of money.

“You're in business for yourself, not by yourself,” Metevia says of being part of a franchise. “But I started to feel by myself.” When he closed his store last May, Metevia had lost about $250,000, but more strikingly, he says the stress of the situation contributed to his divorce, and his financial situation caused him to sell his boat and automobiles. He also is losing his house.

Lloyd Doolittle of La Quinta, CA, brought a wealth of management and sales experience to 1-2-3 Fit and had the No. 1 franchise in the company with more than 600 members. Despite the high numbers, Doolittle closed his store last August, just 16 months after it opened.

Doolittle, whose losses totaled about $250,000, says 1-2-3 Fit lied about opening costs, increasing the costs with each UFOC. In the 2005 1-2-3 Fit UFOC, the total initial investment was estimated between $39,315 and $69,928. In the June 20071-2-3 Fit UFOC, the initial investment had increased to between $176,750 and $229,425.

Another form of deceit, 1-2-3 Fit franchisees allege, is the company's Simbio System equipment, which company officials say is developed exclusively for 1-2-3 Fit. Franchisees point out that the equipment is part of a major manufacturer's circuit series that is available to anybody. One franchisee says the manufacturer could not explain why 1-2-3 Fit claims the equipment is exclusive to its franchisees.

One industry veteran, whose wife opened and closed a 1-2-3 Fit franchise, says members eventually tire of the 30-minute circuit routine. Also, many people who join a club like 1-2-3 Fit simply are not gym goers and quit more frequently, he says.

“With the smaller facility, you get no ‘wow’ factor,” says the industry veteran, who requested to remain anonymous. “Maybe the market is saying, ‘This is nothing. This is doing me nothing.’”

Although the industry veteran, whose wife lost $200,000, has nothing bad to say about Smith, 1-2-3 Fit's president and CEO, or the company itself, he appears to be in the minority.

“They just lie. They don't understand that exaggerating is lying,” Jorgensen says of 1-2-3 Fit executives. “They're using real people for guinea pigs. The truth is, the system does not work.”

The numbers show that several 1-2-3 Fit franchisees have closed their doors or sold their clubs. The 2007 UFOC, which includes information as of Dec. 31, 2006, listed 26 franchisees in operation, 76 franchises sold but not yet open and 12 former franchisees. A year later on Jan. 30, the 1-2-3 Fit Web site listed 27 stores open in 11 states with seven more stores listed as opening soon. A list created by a 1-2-3 Fit franchisee, updated on Jan. 31, shows 27 franchises are open, 52 have been sold but are not open yet and 22 have closed.

As for Wilson, whose name helped sway some franchisees to buy into the company, he sold his share of the company two years ago and says he has had no contact with 1-2-3 Fit since.

Wilson says he remains a firm believer in the need for smaller, less intimidating clubs. He also says running big companies doesn't excite him.

“I'm a pioneer,” Wilson says, “and I'm really good at pioneering. ”

Butterfly Life

Although 1-2-3 Fit franchisees say they have few resources to file a lawsuit, Butterfly Life and its franchisees are in litigation.

Butterfly Life filed an arbitration last fall against one of its franchisees, Beth Tomei of Walnut Creek, CA, for terminating the franchise agreement in the company's UFOC and changing the name of her club. Tomei and nine other franchisees then filed a class-action counterclaim against Butterfly Life on Jan. 10 in California through the American Arbitration Association.

Mario L. Herman, a Washington, DC-based class arbitration attorney who is representing Butterfly Life franchisees, says 250 franchisees are potential members in the counterclaim. Herman says Butterfly Life misrepresented itself by orally providing illegal earnings claims, such as stating that the break-even point for franchisees was 200 members and that franchisees would make a profit within their first six months of operation. None of the franchisees have made a profit in that time frame, Herman says.

“We believe that there was a standardized pitch that was provided to everyone before they purchased,” Herman says. “It's fraud in the inducement of the agreement as opposed to any breach-of-contract, post-signature, post-execution agreement.”

Item 19 of the Butterfly Life UFOC, titled Earnings Claims, states: “Butterfly [Life] does not furnish or authorize sales persons to furnish any oral or written information concerning potential sales, costs, income or profit of a Butterfly Life Center. Actual results may vary from unit to unit and Butterfly cannot estimate the results of a particular franchise.”

Golob, Butterfly Life's president and CEO, refutes the claims by franchisees that they were misled about how much it costs to operate a Butterfly Life club.

“Whatever they were told was in that franchise circular,” Golob says. “If one of my employees told somebody something that wasn't true — and I do not believe they did — they still had the numbers.”

The numbers don't look good for Butterfly Life. In an unaudited financial statement dated Aug. 31, 2007, the company listed losses of $815,255 and pretax losses of $771,361.

In an apparent attempt to reach out to franchisees, Gergley, the company's chairman, sent out two letters on Dec. 11, 2007. In the first letter to current franchisees, Gergley offered services such as a $200 per month reduction in royalty fees for 2008 and announced the establishment of a franchisee advisory council and an area representative council.

In the second letter addressed to former Butterfly Life franchisees, Gergley wrote that the company would attempt to re-sell the territory of closed clubs and send the closed franchisee 50 percent of the $29,500 franchise fee. The company also says it will attempt to re-sell available equipment, with 100 percent of the earnings going to the closed franchisee.

Whether or not these efforts will quell complaints by fomer franchisees, they don't address the belief that many franchisees held that Mastrov was going to play a big role in the company, Herman says. In the first three Butterfly Life UFOCs, Mastrov was listed as a director and founding shareholder of Butterfly Life, but he was not listed in either of the last two company UFOCs.

“Our understanding is that [Mastrov] may have made a financial contribution to this thing initially but really has nothing to do with it on an on-going basis,” Herman says.

Mastrov could not be reached for comment for this story. Golob refused to answer questions involving Mastrov's involvement with the company, but he did respond to the counterclaim by Butterfly Life franchisees.

“There is no merit to their answer of the lawsuit,” Golob says. “We plan on fighting this lawsuit to the end, and there is no doubt in my mind we will win.”

In 1991, Golob was 24 Hour's vice president of marketing. In 1992, he left 24 Hour and along with Gergley started the Linda Evans clubs. In 2003, Golob launched Butterfly Life. In 2004, he sold six Linda Evans clubs to 24 Hour, but kept five Linda Evans clubs, some of which became Butterfly Life clubs.

Tomei purchased one of the former Linda Evans franchises and converted it to a Butterfly Life club, which boasts a 30-minute training circuit along with group exercise classes and a weight-loss program. But Tomei's club began struggling, and she started receiving e-mails from other Butterfly Life owners who were in the same boat. Tomei began compiling a list of Butterfly Life franchises that were closed, closing, in the process of re-sale or had not yet opened. By Tomei's count, 88 Butterfly Life clubs in 16 states fit in one of those categories.

Golob would not provide details about the number of Butterfly Life clubs in operation. He did, however, say that franchisees should be responsible for their failures.

“People think when they buy a franchise, they're automatically going to make a lot of money,” Golob says. “They don't realize it takes a lot of hard work. Very few people ever blame their failures on themselves. If for any reason a franchise is struggling, it's always the franchisor's fault.

“You really have to feel bad for anybody that invests money in anything that doesn't make it. But how many health clubs have you known to close their doors for whatever reason? There's not a franchise out there today that doesn't have franchises that close.”

Golob says the company spent $2 million in marketing alone last year. Part of that marketing went toward a TV spot on The Learning Channel. Tomei describes the spot as a 5-minute infomercial.

“It's not an easy thing to create a brand,” Golob says. “But I can tell you we'll be standing when the rest are gone because we have the product. When we all put this together — and that was all of us — we wanted to have the best product out there. We knew selling franchises was the easy part of the business. Having them make money and being around 20 years from now is the key to the whole business.”

Learning Curves

Whether it's 1-2-3 Fit or Butterfly Life, or other circuit franchise companies such as Contours, ShapeXpress, Lady of America Fitness Centers and Liberty Fitness (which have also faced struggles), the standard for circuit club companies continues to be Curves.

However, some people say even Curves could be facing problems. In his book “The Big Fat Health and Fitness Lie: Enrich Your Life and Improve Your Health Without Getting Ripped Off in the Process,” Craig Pepin-Donat writes that Curves is a franchise and marketing dynamo that may already have hit its peak.

“The big-bucks dream was sold to would-be franchisees who believed the pitch that they could build up a small chain and sell it for a large return on their investment,” Pepin-Donat writes in his book. “In the early days of the franchise, it actually worked for many operators. As Curves territories peaked and attrition rates started to climb along with competition from other Curves knock-off concepts, the dream of making big bucks on the re-sale of a Curves franchise has diminished, leaving many Curves owners wondering what happened.”

In November, Curves spokesperson Becky Frusher said that as many as 800 Curves clubs are for sale at any one time but that those clubs are usually sold without closing. Frusher added that Curves is closing more clubs than in the past but that it's still a small percentage of the 10,000 locations worldwide, including 8,000 in the United States.

However, the Boston Business Journal recently reported that, according to the publication's research, the number of Curves gyms in Massachusetts is down 20 percent, from 194 clubs in 2006 to 156. Membership has also dropped 20 percent in that state, from 77,600 in 2006 to 62,400.

Entrepreneur magazine's annual Franchise 500 rankings are based on factors such as financial strength and stability, growth rate and size of the system. The magazine also considers the number of years a company has been in business. According to the rankings, Curves has fallen from No. 2 in 2005 to No. 185 in 2008. Anytime Fitness and Snap Fitness, two key-card club companies, rank No. 75 and No. 96, respectively, while Gold's Gym is at No. 183 on the 2008 list. Quiznos, by the way, was not on either the 2007 or 2008 list.

Despite the lower ranking, Curves remains the largest player in the circuit club industry. Curves recently launched its breakfast cereal and cereal bar brands, and it has aired a national commercial. Curves CEO and founder Gary Heavin has compared Curves to big-name brands like Coca-Cola and McDonald's.

“Gary sometimes says, ‘We're like Coke, and there's no Pepsi,’ or, ‘We're like McDonald's, and there's no Burger King,’” Frusher says. “I think we are so far ahead. We have nailed the target market for our target demographic. We have saturated the market or penetrated the market with our brand.”

Bob Purvin, the chairman and CEO of the American Association of Franchisees and Dealers, says Curves has an “ingenious” model that, in a way, sneaked up on the industry.

“I've been in franchising for 35 years, and in my entire life, I have never seen, other than Curves, a major player get to plus-5,000 units and nobody knew who they were,” Purvin says. “How can that even happen? It was a business model that worked without a player like Starbucks putting millions of dollars in front of it.”

Too Much of a Good Thing?

Purvin is trying to mediate the problems with Butterfly Life and its franchisees and chose not to comment on that company specifically. However, Purvin says he does notice problems throughout the industry, suggesting that the market is oversaturated and oversold.

“With the exception of Curves, in terms of the circuit-training [companies], I don't know of any that appear to be doing well,” Purvin says. “Curves has garnered a huge part of the market with happy customers. So you have to distinguish yourself to ween away from the industry leader. Every place I go, there will be a Curves. Every place I go, there will not necessarily be one of the others. So what do I do? I spend more money on the location, I spend more money in the decoration, I spend more money on rent. The underscore is I spend more money. If I have a bigger cost of doing business, then it's going to be a difficult problem.”

Sean Kelly, who publishes the Internet blog, sees several posts on his Web site from struggling franchisees. Kelly says the 30-minute circuit club companies are suffering from what he calls the “hot new franchise syndrome.”

“When someone buys a ‘hot new’ franchise concept, they are saddled with both the financial burden and restrictions of a franchise and the uncertainty of a new, experimental start-up,” Kelly says. “Could the women-only, 30-minute model retain members in the third, fourth or fifth year? Can a club be successful on membership fees alone? Can they compete against the wave of new competitors? When you buy a franchise, you are paying for certainty, not questions.”

Despite the troubles that his franchisees face, Golob is adamant that Butterfly Life will succeed.

“Any new business has to cross the Grand Canyon,” Golob says. “You just need people that when times get tough, they know how to stay calm and steer this thing. That's why people buy a franchise. They're betting on us to be able to steer clear of a lot of this. I'm betting on the management team to make this thing happen.”

Some circuit club franchisees, however, no longer have the resources to weather the storm, nor do they have the trust in their franchisors.

“I think they're just bleeding us of all our money,” says Jorgensen, the 1-2-3 Fit owner who closed her club last month. “And they don't care.”

New Franchise Company Trying to Do It the Right Way

Shana Conradt and Lisa Welko were just 24 and 30, respectively, when they opened their group fitness studio five years ago in Appleton, WI.

Today, not only are the co-owners still in business, but they're also a franchise company, Ellipse Fitness. In addition to the corporate store in Appleton, Conradt and Welko own five franchised stores throughout Wisconsin. Ellipse Fitness features 45-minute classes of high-intensity cardiovascular work. Although it is a coed studio, most of the members are women, Conradt says.

Conradt and Welko began selling franchises in September 2006 after visiting The iFranchise Group, a franchise consulting company outside of Chicago. Conradt says she and Welko spent $125,000 to set up their franchise company.

The co-owners want to avoid some of the pitfalls that have plagued express club companies in the industry.

“I don't want to just make a buck,” Conradt says. “I want to choose people that are going to complement our business well and help us get stronger.”

The start-up costs, estimated at $100,000, are broken down to potential franchisees in the company's Uniform Franchise Offering Circular. Part of the breakdown of the costs includes $25,000 for a franchise fee, $30,000 for the build-out and $20,000 for equipment.

“No one has spent $100,000,” Welko says of her franchisees. “It's less than what they thought they would spend.”

Conradt and Welko pledge to support their franchisees. The co-owners still run and operate their corporate store.

“We still do the day-to-day things that they do,” Conradt says of her franchisees. “That's so important to me. I don't ever want to take for granted what they go through to be successful.”

Before they franchised their company, the co-owners attended sales meetings of other fitness franchise companies to learn how they operated their businesses. They took down notes of what to do and what not to do.

Conradt says she and Welko have an advantage over other franchise company owners because they are women.

“Women helping women works better because we understand each other better,” Conradt says. “When most of the people in the highest positions [in franchise companies] are male and most of these [franchise] owners are women, there's going to be problems.”

Potential Ellipse Fitness franchisees need to have a passion for fitness, Conradt says. All of the current owners teach classes. Other potential owners who want to just run the business must hire an American Council on Exercise-certified instructor to teach the classes.

Ellipse Fitness is registered to open studios in 43 states, and Conradt and Welko are talking to their consultants as to where to expand the company. They want to add another 20 franchises this year before expanding even more in their third year.

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