CURVES: Franchise Resale Buyer Cries Fraud

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Thu, Apr 2 - 10:45 am EDT | 5 years ago by
Comments: 18
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Curves International Inc. chief executive Gary Heavin, recently said that high SBA loan defaults were a result of “the overpriced resales of franchises between third parties.” (See QUIZNOS, COLD STONE, SUBWAY & CURVES TOP FRANCHISE LOAN DEFAULTS)

On the Unhappy Franchisee website (See CURVES: Disturbing Resale Story), a Curves franchise buyer of two existing clubs provides an example of how a resale business can be artificially, even fraudulently, inflated.  The results can be disastrous for the unsuspecting buyer.

The Curves franchise owner writes:

I am a Curves resale. I bought 2 clubs from a friend of the family, who I thought was a good person. She claimed Curves International told her to base the purchase price of her clubs, on the number of “active” members. When I bought my clubs, an active member was any member who had not canceled their membership. Therefore, the previous owner came up with the purchase price this way, (500 members x 12 months x $29 (plus tax) ~ $175,000 x 2 clubs ~ $350,000).

However, the new franchisee claims that a large percentage of the 1000 supposed members had actually cancelled their memberships and didn’t know their bank accounts were still being charged for their monthly fees.

When we bought the clubs, we switched from paper drafts to an electronic drafting system. A month later we started getting calls from women who were threatening to sue us for taking money from them without permission. I explained that I was the new owner, that they were still under contract, and based on my knowledge, the previous owner was drafting them when I bought the clubs. They argued with me and said they had cancelled their contracts, and they had not been getting drafted from Curves until we started drafting them.

How were 600 women billed for a service they had cancelled without them noticing?  Turns out that the previous owners’ charges appeared on their bank statements simply as “merchant.”  When the new owner switched to an electronic system that identified the charges as “Curves,” all hell broke loose.

I asked them to bring in a bank statement from any month prior, and the current months statement. When they brought in their statements, we discovered that the previous owners draft was coming out as “Merchant”. They didn’t realize they were being drafted until they saw our “Curves” draft. Over the next 3 months, we had over 300 women cancel in each club.

The lesson to be learned?  When doing your due diligence, do thorough and rigorous due diligence… hopefully with the help of a professional who knows these kinds of tricks and nuances, and knows the warning signs.

And keep in mind the wise words of my favorite doctor:

I have heard there are troubles of more than one kind.
Some come from ahead and some come from behind.

Dr. Seuss

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Photo: Bobu.  Licensed by Creative Commons.

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  • Wipedout

    Entrepreneur magazine shows that 940 Curves closed in 2008, from 7,269 to 6,329 still open in the US. That amounts to nearly 13% in just one year.

    606 Curves closed in 2007.

    2009 is sure to be even uglier for Curves.

  • Wipedout

    Sounds like the owner and her relatives should take this “friend of the family” to court.

  • Carol Cross

    Of course, in the resale of franchise units, the burden is on the seller of the franchise to “disclose” to the new buyer and BOTH the buyer and the seller will sign a release to the franchisor, and to each other, as a condition for the franchisor to approve the new franchisee, who will sign a franchise agreement with the franchisors. Resales are usually attractive if their P&L statements suggest to new owners that there is a job and profits and the price is right.

    However, If the selling franchisee doesn’t disclose adequately, how can you prove this in the courts when the asset-purchase agreement will probably bear terms that wiull protect the seller from the new buyer and neither the seller nor the buyer have any recourse against the franchisor?

    Churning and turning of units in large systems is hard to uncover and those who have been “churned” to great disadvantage want to pass on the problem to the next franchisee and get out from under. If they believe they have been cheated and lied to by the franchisor, or whomever they bought the unit from, they rationalize that this is only fair, etc..

    It is my opinion that a resale of a franchise does present better possibilities of doing better due diligence on the deal because you can demand to see the P&L Statements and the Business Tax Statements, etc… as a condition of purchasing the franchise.

    As for recourse against the seller, read the terms of the contract. Could the seller be taken to court for “fraudulent inducement to contract” in a State Court if it could be proven that they intentionally misled and cheated the new buyer?

    We know the franchisor is protected by public policy and the FTC Rule and the State UFOC/FDD from claims of fraudulent inducement to contract, but what about the owner of a franchise who commits fraud in the resale of the unit. Can the victim get satisfaction in the State Courts? I don’t think so but I’m not an attorney —just an observer of rhe law.

  • http://www.franbest.com Sean Kelly

    Another lesson of this story is to check your credit card or bank statement carefully each month. Hundreds of women paid $29.00 every month to “merchant” without verifying what the charge was for. Amazing.

  • jd

    Sean, there are so many things wrong with how this person went about their due diligence, it’s hard to figure out where to begin. First, if they were making $300-400k a year based on their tax return, the $350k price tag on the franchise was way too low.

    Second, not requiring the seller to put at least a piece of the price into escrow is probably a trap that most people fall in to. If a seller has no problem putting a portion into escrow (paid for by the buyer and with some sort of interest on the funds to go to the seller if nothing was wrong), then there is probably a good case that they are being completely honest. Someone that doesn’t agree to this is probably ‘hiding’ something in the sales process.

    I’m guessing that the buyer did not review any contracts or the appropriate files, if they knew that some contracts were ‘cancelled’ the price might have been less. Plus, this is something that could’ve been covered in an escrow agreement.

    My guess, is that the buyer looked at the tax returns and didn’t do much additional research, and found out too late that the club wasn’t as good as shown. As for fraud, you’d have to prove that they intentionally misrepresented facts, which it sounds like they didn’t. As for the

  • Wipedout

    I’ve heard one year’s revenue is a good selling price.

  • Pingback: CURVES: Franchise Overview & Links | Unhappy Franchisee

  • http://www.mrfranchiseman.com Fayaz Karim

    Curves resale buyer

    It is all about proper due diligence, seller’s disclosures, some seller financing (for insurance), and getting a second opinion from some qualified experts. What an amazing valuation methodology that defies all logic and reference to CASH FLOWS and an assessment of future revenue…….

    mrfranchiseman, Franchise Valuations, Due diligence and more buyer services

  • Wipedout

    How would the new owner have known the old owner was still billing members who had quit? I think the new owner’s got a good case.

  • Curves Owner2

    You would think so, but you can’t win a fraud case like this. The seller sold 500 members per club. She was drafting 500 members and bringing in the income for 500 members. The buyer bought the assets. Yes, the seller was drafting deceptively, but it’s not against the law. Id this went to court, a judge would say, “The amount was coming out every month, it’s not the sellers fault, the women should have noticed it.” This is the problem. If there was a law that didn’t allowing drafting in this way, the buyer wouldn’t be in this situation.

  • unhappy

    To all curves owners who have had problems with curves International and Gary Howie Havein please send your complaints to the BBB of your city and Waco TX. As well as the attorney general of your state and TX. And the federal trade commission. Below are web links where you can file the complaints on line.

    http://www.bbb.org/

    http://waco.bbb.org/WWWRoot/SitePage.aspx?site=40&id=ab5100aa-4c5a-4314-8e1b-f5996973f10c

    http://www.oag.state.tx.us/consumer/index.shtml

    http://www.ftc.gov/bcp/index.shtml

  • unhappy

    the moral of the story is that even if the frachise is for sale for a buck thats right one losy dollar DON’T GET SUCKERED INTO THIS BUISNESS UNTIL THE CROOK HOWIE IS GONE OR YOU WILL BE VERY SORRY AND BROKE WITH NOTHING LEFT BUT TO FILE A LAWSUIT AGAINST THIS BLANTANT ASSHO—–

  • Curves Owner 2

    Will the lawsuit get rid of Gary, but Curves will go on. If so, should we hold on, in hopes that in due time, we may be able to make the money we need to pay off our debt?

  • RS

    The buyer of the clubs in this article really should have done more research and examined the books of the previous owner her “friend”. A simple look at her attendence records would have shown that only 10% of her members were working out and active at the club…if they are not comming there is a good chance they will cancel very soon.

    Curves does have a bad rep right now and has had it for the last couple of years, just walk into your local club and you will see exactly why. 95% of all the clubs out there are extremely small, dirty, boring, and they have overweight staff “trainers”. A recipe for disaster when it comes to a gym.

    Before we purchased into this franchise we visited about 15 curves, figured out why they are failing and fixed it. Seven months later and 500 very active members later, we are ready to expand not close. If you are condisering purchasing a resale or opening a fresh club do your research and make sure you love exercising all the time and all of your staff loves exercising.

  • CurvesOwner2

    We didn’t have access to the attendance records. As a potential buyer, at the time, we didn’t have access to very much. Unfortunately, Curves International wasn’t there, making sure the owners provided this information to the potential buyers. We were told we would only be granted access to this information when we became the new owners, because the information contained personal information that we could not see it until we had been approved as the buyer. Once we had been approved, we took over the location, and then discovered the mess.

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  • Curves Owner2

    Jd, the seller made $400k profit in the first 2 years of owning the clubs, which means the seller made $200k profit each year, for 2 years. The buyer believed they had purchased 2 clubs with 500 members each, who knew they were paying for their membership. As the buyer in the article states, “When we bought the clubs, we switched from paper drafts to an electronic drafting system. A month later we started getting calls from women who were threatening to sue us for taking money from them without permission. I explained that I was the new owner, that they were still under contract, and based on my knowledge, the previous owner was drafting them when I bought the clubs. They argued with me and said they had cancelled their contracts, and they had not been getting drafted from Curves until we started drafting them. I asked them to bring in a bank statement from any month prior, and the current months statement. When they brought in their statements, we discovered that the previous owners draft was coming out as “Merchant”. They didn’t realize they were being drafted until they saw our “Curves” draft. Over the next 3 months, we had over 300 women cancel in each club.”
    I don’t believe any amount of research would have given the buyer access to the fact that the previous owner was drafting these women deceptively. The seller would have had to mention this. Obviously, she didn’t.

  • unhappy

    I wish I had a crystal ball and could answer that question. It has been on many owners mind and we are all hopefull that things will change as most owners love helping women reach their fitness goals. Only time will so if you decided to go on you should at least go to the yahoogroupcurvesowners site as they are a good resorce to help you stay open. Good Luck and God Bless you and your family.