1-2-3 FIT Sold to Diversified Health
April 21, 2009 by Sean Kelly
Filed under Business
There’s an ancient saying that’s been passed down through generations of fitness franchise bloggers: Old Fitness Franchises Never Die, They Just Get Acquired by Diversified Health & Fitness.
And just as Blogstradamous predicted, the troubled and troubling 1-2-3 FIT franchise chain was sighted being led across a misty field by a grim character carrying a scythe and sporting a black “Diversified Health & Fitness” hoodie.
Yes, just after aquiring the Butterfly “I’m not quite dead yet!” Life fitness chain, Diversified Health and Fitness has acquired 1-2-3 Fit, the coed express fitness club created by the supposedly dark knights of franchising, the controversial founders of the Quiznos franchise chain, Rick Schaden and Brooksy Smith. 
For more on the acquisition, check out the Unhappy Franchisee post: 1-2-3 FIT Acquired by Diversified Health
Make Millions in 5 EZ Steps!
To understand what I suspect this Diversified is all about, let me share a neat trick I learned from the folks who ran the Java Jo’z and Cuppy’s Coffee scam. Feel free to follow it to scam a bunch of people and have nobody be able to touch you.
1) Form a corporation and collect a bunch of money from naive and trusting prospective franchise owners.
2) Don’t follow through on your obligations.
3) When the finally music stops and they’re all ready to sue you, sell the assets (including franchise agreements and intellectual property), but not the liabilities of the corporation to a 3rd party.
4) Since the 3rd party is not liable for you, the franchisor’s, obligations and since your ass is on the beach in Cancun by this time, the franchisees are left to sue an assetless corporation.
5) When funds run low or you’re bored with golf and tropical rum drinks, return to #1 and repeat.
So what’s Diversified Health & Fitness up to?
Why ask me? I’m just a lowly blogger who’ll be lucky to vacation under some NJ shorepoint boardwalk this year. OK. I’ll give it a shot…
It seems to me that Diversified Health (kind of an ironic name, aye?) CEO Roger Wittenberns is selling escape pods, and playing the role of the “3rd party” that acquires the assets when the franchisors are ready to bail.
Pretty brilliant, really. He probably gets these little chains for a song (or a dirge) and can play the savior to the remaining franchisees of the chain, collect their royalties and go after the others for what they might still owe on their franchise agreements.
Kind of like a combination collection agency & hospice program.
I could be wrong… Maybe the folks at Diversified Health & Fitness and franchisees of those they’ve acquired can set the record straight with a comments left below.
Related stories:
BUTTERFLY LIFE: Assets Bought by Diversified
DIVERSIFIED Health & Fitness, ShapeXpress Franchise Complaint
LIBERTY FITNESS Franchise Owner Describes Chain’s Decline
Diversified Health & Fitness Wants Failed Liberty Fitness Owners to Pay Up
“They Lie”: 1-2-3 Fit Franchise Owners Sound Off
Will the 1-2-3 Fit Franchise be the Quiznos of Health Clubs? Is That a Good Thing?
WHAT DO YOU THINK? SHARE A COMMENT BELOW.
Image: Unhappy Franchisee
I know in the case of the Quiznos FA there is a protection for the principals like Schaden from personal liability, I assume they wrote the same in their other FAs. Even so, the various Quiznos Class Action suits names them individually, in addition to all the LLCs. I can’t help but wonder how much this clause in the FA would protect them if Quiznos were to be sold in the same way, or if the 123FIT zees named him personally in their suit.
Perhaps there are some legal minds out there that can answer this.
Could this be the scam artist Schaden’s escape route? If so, what can be done to stop him from getting away with it?
Although I am not an attorney and just interested in franchise law, I think the average uniform non-bargainable franchise agreement makes it almost impossible to sue the individual and the corporation for exercising any rights they have reserved to themselves under the contract the franchisee signs.
I believe you won your lawsuit against Quiznos for wrongful termination because of the arbitrary actions of their inhouse legal person who believed he had absolute power under the contract do do anything he wanted to do.
You were a good strong man who fought back because you knew what they were doing to you was “Wrong” and you were lucky to have a judge who ruled for you because he could under the provisions of the law governing “wrongful” terminations.
I believe, however, that franchisors, because of the contract terms, can sell their portfolio of contracts, etc.. or use them as collateral, and even go into bankruptcy and the franchisees are still held to paying royalties as provided in the signed contract to the new owner or to the bankruptcy court or to the interim manager in the event the franchisor borrowed under a securitization and is going to be reorganized in bankruptcy. Securitizations, of course, are desirable and possible for franchisors because they can borrow at a lower rate of interest, but, in securitizations, the true owner of the receivables of the franchisor is protected from the creditors of the franchisor when the franchisor is thrown into or declares voluntary bankruptcy.
When a franchisor sells his assets to a new buyer, the terms of all of the franchisee contracts that have been sold will be honored by the courts and, of course, Diversified bought these two failing fitness franchises because they theought there was money to be made.
Whether or not this will be good or bad for the still “surviving” franchisees is yet to be seen. Doesn’t look good for the franchisees who have already failed out of business and are hoping for some recourse against their franchisor unless the corporate shields can be pentrated and the principals are found guilty of fraud.
They know every step their going to take. They are very smart. (Not in a good way.) I can’t wait until this is behind all of us zees.
Dear Sean,
Thank you for the opportunity to respond to your blog post. With your permission, we would like to have a sign made quoting the first line of your post to hang above our door. Very amusing.
To be perfectly candid, yes, we have been very active in acquiring the franchise contracts of struggling franchisors. In today’s market, franchise sales have become a difficult prospect in all franchise industries, leaving many franchisors in the unenviable position of being forced to cut back on support to cover their own overhead. This leaves many otherwise innocent franchisees in the lurch with little or no support from the system into which they made a significant investment. These people deserve better.
This is where we step in. We, like the franchisees before us, make a significant investment of our own and acquire the assets and the franchise contracts of the struggling system. We use the know-how of our teams of marketing, operations, real estate, and financial experts to do everything in our power to work with the acquired franchisees to strengthen their business operations. Our motto is “your success is our success,” meaning that the better our franchisees perform, the better we will perform as a company.
Our philosophy is that, in order to be a good franchisor, we need to be a good parent. In being a good parent, we strive to provide our franchisees with the tools it takes to be successful business people. While it is unfortunate that some of our acquired franchises are in the process of winding down when we take over, we still do everything we can to resuscitate them. Though it may not be reflected on your site and others like it, we have reams of letters and e-mails from our franchisees praising our efforts.
I can assure you that there is no “role playing” when it comes to our acquisitions. All of our transactions have been at arms length and have been very thoughtfully, if not contentiously, negotiated. I believe anyone who has had the pleasure of dealing with our acquisition team can attest to that.
Lastly, we certainly do not see ourselves as donning a billowing cloak and scythe with DHF stenciled across our back. Rather, we prefer to see ourselves as the “savior,” to use your words, breathing life back into systems that have seen hard times. If we can be successful at this, we see a great opportunity when the economy rebounds as the parents of twelve fitness chains soundly planted in freshly potted soil.
I hope this gives you and your readers some insight into our business. Thank you again for this opportunity.