So, you want to open a fitness franchise?

What’s up Gym World?

We’ve talked about the wealth-building potential of franchising but really haven’t covered the downside.

While being a franchisee is a great option when done right, it’s also a great way to lose everything when done wrong.

This eye-opening article by Natalie Wong dives into Xponential Fitness—the largest holdings company of boutique fitness brands like CycleBar, Club Pilates, Pure Barre, and Rumble—and their alleged role in turning “suburban moms into bankrupt franchisees.”

Many of them bought into the dream of running a business ‘on autopilot’ while using it as a passive income stream to make lots of money. Instead, some lost up to $1M and filed for bankruptcy.

The article dropped on December 7th. Just before that, Xponential was trading at $13.59 per share. In just a few days, they were down 33%. They’ve slightly bounced back since, but the market clearly took notice.

This is an excellent reminder that if you’re going to open a franchise, picking the right concept is essential. So today, we’re talking about the downsides of franchising so you can avoid expensive mistakes. Let’s dive in.

Myth #1: Franchising is less risky

Many gym owners, like Greg Morrone, view franchising as a safer way to open multiple locations. It makes sense—using an established brand and a proven concept cuts down the uncertainty and trial-and-error that come with starting a gym from scratch.

When opening a franchise, you go into it knowing:

• Who’s running it,

• The range of costs for opening a unit,

• The best- and worst-performing units,

• The overall opportunity, &

• Contact information for anyone who has closed a unit.

That’s because franchisors are required to provide you with a Financial Disclosure Document (FDD). This data should be reliable and used as a tool to help you make informed decisions.

The problem is that many take the FDD at face value and assume their units will perform similarly to the numbers in the FDD.

This was not the case for many Xponential franchisees.

Xponential said it would cost $400-$500k to open a unit, but some owners reported paying more than 50% of that figure (part of this was due to the inflationary environment of the last few years).

Another problem is that franchisors can manipulate the data to make the numbers in the FDD look better. Currently, Xponential is being accused of hiding underperforming gyms from their reports.

Myth #2: The franchisor’s and franchisee’s incentives are aligned

In a franchise, you give a percentage of your TOP LINE to the franchisor, and you keep whatever is left on your BOTTOM LINE. The franchisor makes money whether you’re profitable or not.

They’re incentivized to:

1. Grow system-wide revenue: Their valuation heavily depends on opening more units and growing top-line revenue.

2. Increase vendor kickbacks: Most franchises have preferred vendors for things like equipment, software, and payment processing, and make money off of everything the franchisee buys.

Myth #3: You are in control of your business

If you own your gym, you can change your business and find new ways to be profitable. In a franchise, you’ve signed an agreement to follow their playbook.

The advantage is that a lot of trial and error has already been done for you. But we all know fitness trends change, so what happens when the playbook no longer works?

The answer is that you’re stuck running a broken model.

Myth #4: It’s easy to sell or walk away from a franchise

If you’re a non-franchise gym owner and want to shut down your gym, you’ll likely work out a deal with your landlord. But if you’re a franchisee, it’s not that simple.

Franchisees typically have to deal with the landlord, lenders, and the franchisor. It’s more complicated for them since franchise agreements are filled with onerous legal clauses that can cause trouble.

Broke Xponential franchisees who wanted to leave the franchise were allegedly threatened with lawsuits or given the option to:

1. Open more studios to see better returns,

2. Pay a $115k exit fee, or

3. Sell their business for $100 or less, where Xponential would either take over or resell it to another franchisee.

You can see how easy it is to get stuck in a money-losing pit without having an easy way out.

TL;DR: it’s not all sunshine and rainbows

Franchising isn’t an easy process. I think there are four big things to keep in mind if you want to make it work:

1. Find a good concept: If your plan is to operate for a long time, choose something that’s viable and not just another fitness trend.

2. Know your market: What works in one place might not work in another.

3. The operator matters a lot: Look for someone with solid industry experience, access to capital, strong management skills, and a proven concept. These elements are essential for successfully running a fitness franchise.

4. Timing is everything: When you start impacts your chance of success.

For deeper insights, be sure to watch or listen to the latest Gym World.

happy holidays,

j