Unhappy Franchisee received this email from a former Liberty Fitness franchise owner. He claims that a year after closing their failed fitness club, the new franchisor owner, Diversified Health & Fitness, decided to hit them up for future royalties for the remainder of the 10 year agreement.
Talk about adding insult to injury. Here’s the email:
About 4 years ago, my wife wanted to open her first business and enjoyed working out in a ladies-only gym. So after a little searching around options, she bought and opened a Liberty Fitness franchise . At it’s peak there were about 61 franchisees and it seemed to be growing (there were about 50 when my wife opened).
After spending over $250k in purchase, buildout, and continuous / mounting monthly losses, she notified the current franchise owner that she would close her club at the end of 2007 (about 4 months notice) – she was open for total of 3 years. In October 2007, Diversified bought the franchise and my wife notified them that we were closing, and had notified the prior owners of this too. We actually closed [in] 2008, with all monthly fees to Diversified fully paid up (minimum monthly fees for franchise including marketing etc which was never done).
In January of 2009, we get a surprise letter from an attorney for Diversified that they were trying to collect 7 years FUTURE franchise fees; about $250k. They said they interpreted the franchise agreement as REQUIRING us to operate for 10 years. Several Liberty Fitness franchisees that closed are getting similar letters; there are only 6 open and rumor has it three are about to close. Several clubs closed before Diversified, and this was never an issue – they just closed, done deal.
Even in the short period we worked with Diversified (about 3 months) they were aggressively trying to get us to pay a franchise exit fee that was NOT written in the contract for Liberty (maybe it was there for Shapexpress or for other franchises and they got confused; we never did understand it). But they went silent for a year, and now this shakedown.
Is this common in this industry, or even just this segment (women’s health clubs), or is it just Diversified? I’m surprised with this development and the almost total collapse of Liberty Fitness that there are no BLOG reference points ala the Shapexpress blog.
You know times are hard when companies are looking to defunct businesses for revenue.
What do you think? Share a comment below.
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I am a former ShapeXpress franchisee who recently closed down. After reading the two e-mails about Liberty Fitness - they sound so familar to the ShapeXpress scenario. I have heard that 38 ShapeXpress/Sedona Fitness for Women locations were purchased in May of 2008 by Diversified Health and Fitness. Today I am not sure, but I only know of a couple that are still open. I pesonally know of three locations ( and I assume this is the standard operating procedure) that closed and Diversified sold off ( or at least tried to sell off) the remaining members contracts to another local club - it did not matter if it was a mom and pop or franchised location and it also did not matter if the new club was women's only or co-ed - Diversified just picked an existing club nearby and called them up and said " hey do I have a deal for you!").
The deal that was cut ( or attempted) was that the customers' contracts that were transfered to another club would be split evenly with the new club and Diversified Health and Fitness. The monthly drafts would continue to be billed by Diversified's biller, National Fitness. By doing this, it would seem that Diversified actually makes more money by the acquired club going out of business and Diversified selling off the current members' contracts. Instead of getting 5-8% royalties, they get 50% - what a deal!
Another windfall is that Diversified seems to be very slow in having the billings turned off for those members that choose to discontinue their membership, since they had originally signed up with a women's only club and the new club is co-ed. The members have to call or e-mail in their cancellation request. If they do not notify Diversified then they can count on getting billed for another couple of months by Diversified's biller, National Fitness - at least that is what happened at our location.
Another thing that happened when Diversified bought out the previous ShapeXpress franchisor is that all member billings were transfered over to Diversified's biller of choice, National Fitness. National Fitness considers Diversified as their client and does whatever Diversified tells them to do as far as withholding franchisees deposits for royalties or whatever other fees that Diversified wants witheld from the franchisees deposits. I always wondered if this is standard practice - for the franchisor to receive the monthly drafts and tell the franchisee when and how much of the revenue they were going to get.
Anyway - do you think there is actually a strategy here to buy up struggling chains and have your way with the franshisees and their membership in order to pad a greedy pocket?