CURVES INTERNATIONAL: You Failed? Pay Up!
April 9, 2009 by Sean Kelly
Filed under Business
When you’re considering a particular franchise opportunity, most franchisors will provide you with a wealth of sales literature, marketing 
brochures, videos, and legal documents (FDD), as well as an ample supply of timeworn cliches (”You’ll be in business FOR yourself, but not BY yourself”).
Franchisors should provide you with one more thing: The email or certified letter they’ll send you if you fail.
Ask for it. Get it. Read it. Think about it.
Don’t listen to the franchise salesperson when he tells you If you think negative thoughts you will kill the success fairy!
Realistic ain’t negative. And this letter contains an important message: As a franchisee, you are under a legal, contractual obligation to succeed.
Curves Email to Closed Club Owners
A reader at Unhappy Franchisee posted the email that Curves International (The AAFD “Franchisor of the Year“) allegedly now sends to Curves franchise owners who are in distress, have run out of money and closed their struggling clubs:
From: Wendy Law
I have received notification that you have closed your club. I have attached the closing requirements if indeed you have in fact closed. Please contact me and let me know the reason of the closure.
The resale department has received information to indicate that you abandoned (closed) your facility. You realize, of course, that closing your facility is a breach of the terms of your franchise agreement with Curves International, Inc. (“Curves). You place yourself in default of the terms of your franchise agreement and you not only remain responsible for all delinquent fees (including monthly royalties/advertising fees), but also all future fees due and owing to Curves (including maximum monthly royalties/advertising fees) for the remaining Term of your franchise agreement. If you fully comply with all Curves’ requirements, including the procedures listed in the attached Closing Procedures document, Curves will allow you the opportunity to pay a settlement fee and execute a Mutual Release with regard to said franchise.
The completed Club Worksheet, Intent to Close Facility form, and an active, inactive, and archived member list must be returned to the resale department within two (2) business days of your receipt of this email by facsimile to (254) 751-3035 or by return email.
Carefully review attachments. If you have any questions please feel free to contact me. I hope to assist you through this transition and to make it as smooth as possible.
Sincerely,
Wendy Law
Resale Specialist
Curves International, Inc.
If and when a Curves franchisee closes their club during the term of their franchise agreement, Curves International dispenses with the touchy feely stuff one encounters in Curves franchise marketing. No, you won’t even get a “We’re sorry to hear…” or “Our condolences…”
In fact, in the closing email CI doesn’t even pretend that they know – or care – whether your club is dying or dead except in regard to what you owe them.
February 1st, 2008 CI began requiring franchise owners who closed clubs prematurely to pay a $10,000 closing fee (”Failure Fee” Our term). Readers report that Curves often accepts what they can get from the distressed franchisees, and negotiated as low as $2000.
Then there are the “delinquent fees (including monthly royalties/advertising fees), but also all future fees due and owing to Curves (including maximum monthly royalties/advertising fees) for the remaining Term of your franchise agreement.” Unhappy Franchisee readers have reported Curves demanding amounts averaging from $29,000 to $49,900 in future royalties and fees.
This does not include the outstanding credit card debt, past and future lease payments, and all that is owed to equipment cos. and vendors.
A Contractual Obligation to Succeed
Curves International CEO Gary Heavin recently attributed the high rate of SBA loan defaults to the reselling of Curves franchises at inflated prices by greedy 3rd parties. Perhaps Curves International, Inc. should require every new franchisee who enters the system to read and digest this farewell email. There will be less of a backlash for the Franchisor of the Year if it’s clear that franchisees are contractually obligated to succeed.
Franchisees should know coming in that failure is not an option. At least for Curves International.
WHAT DO YOU THINK? SHARE A COMMENT BELOW.
Photo: Unhappy Franchisee
Owch, I have curves, lots of them, I could let you have some for free.
Good point!
Too often prospective franchisees (and franchisees) do not realize that there may be “damages” to the franchisor if the franchise business fails, and they’ll have to pay additional money to the franchisor. Of course, it’s all in the Franchise Disclosure Document, but so many prospective franchisees never read that.
I’ve always said to folks who talk to me about buying a franchise that they can set aside the brochures, videos, recordings, articles, booklets, etc. (often it’s valuable information) and pay attention to the Franchise Disclosure Document. It has almost everything you’ll need to know about your life as a franchisee, good and bad. I said almost. It’s important to interview franchisees (current and past) as well as vendors to the franchise company. And it’s important to speak with professional advisers who not only may know the company in question, but will know about franchising in general.
Joel Libava, The Franchise King, posted a question today on Twitter about whether or not a business plan is important when considering a franchise opportunity. My response was a firm yes, but the plan must include an exit strategy. That exit strategy must include a plan for predetermined events like retirement, as well as unforeseen events usually as a result of poor sales, employee theft, mismanagement, etc.
Unfortunately, it’s human nature only to look at the positives of a relationship, personal or business. How many couples avoid the issue of prenuptial agrrements because they don’t want to start off on the wrong foot? Maybe they feel it will jinx their relationship or provide an out to the party not willing to work at the relationship? The same is certainly true in the franchise arena. However, in both cases, it is prudent to look at the potential downside and have all the issues outlined ahead of time. If nothing else at least it keeps everyone focused on the potential consequences of failure. Something that may give them even more incentive to succeed. I mean it is easier to fail than it is to succeed!
In the case of franchisee failure, there’s no way it can be a surprise to anyone. Trends become evident and it would take a tremendous amount of shear stupidity and ignorance for anyone to believe a franchise location closing is a surprise. I guess we could chalk it up to the “head in the sand” scenario?
My recommendation to franchisees and franchisors alike is to have a business plan in place at the beginning, complete with an exit strategy. Understand your mutual obligations upon termination. Communicate, communicate and communicate all the way from franchise diclosure to franchise closure. Notice the only thing missing is “dis.” To use the street slang of “dis”, make sure you don’t dis communications, don’t dis obligations, and don’t dis responsibility. For anyone that doesn’t know what dis means, it’s most easily defined as “ignoring and/or disrespecting.”
My advice to franchisees, don’t get all starry-eyed at your partner like you’re in love. Realize it’s a business relationship and make sure all parties to the agreement, including yourself, live up to their obligations. Further, when trouble is on the horizon, do not, I repeat, do not put your head in the sand. Keep in mind that when your head is in the sand, your most vulnerable ass-et, is exposed to the entire world to take advantage of.
To the Curves franchisor I say “Shame on you as you tarnish the good name of franchising and all the franchise bretheren because of your greed, unprofessionalism and lack of common, decent care for individuals. The very individuals that trusted you to take them to the altar.”
Paul Segreto is President and Founder of franchisEssentials, an organization dedicated to franchise success at all levels. You can learn more about franchisEssentials by visiting their website at http://www.franchisEssentials.com and by reading their new blog at http://franchisEssentials.wordpress.com.
Thanks, John & Paul (hopefully George & Ringo will contribute shortly) for your important insights.
I think candid discussions like this are critical in creating the necessary revolution in franchising. For too long, franchising has been portrayed as this success machine (just add money) that operates with a 97% guaranteed success rate. That myth is bad not only for franchisees but franchisors as well.
We need smarter, more realistic franchisees who come in with a basic understanding of business and the real roles of franchisor & franchisee. Franchisees are buying use a trademark, use of systems and procedures and specific support services. They need to make sure the advantages outweigh the cost in $$ and autonomy. Success is always their responsibility – with or without a franchise.
Thanks again
The truth is that most franchisees don’t understand that there is a “failure fee” because usually the terms of “termination” and “abandonment” are written in such a way, and placed in the contract in such a way, that unless a prospective franchisee knows this up front, he/she wouldn’t pick up on it.
Prospective franchisees aren’t thinking about failure at all and the franchisors can avoid disclosing failure statistics in their possession to new buyers because of the FTC Rule and the State FDD’s in which the franchise contract is wrapped and delivered ten days before signature of the new franchisee to the sale.
Unbeknownst to most prospective Mom and Pop franchisee prospects, and even to more sophisticated prospects, most franchise agreements are malicious legal traps designed by top law firms to protect the franchisor in all circumstances. Those franchisees who are trapped at breakeven status or with profits at least get something for their money. Those franchisees who are failing after exhausting startup financing and who are threatened with bankruptcy, or who want to cut their losses, are threatened with a “failure fee” from their franchisor.
The constructive fraud of the government mandated disclosure document that is wrapped around a binding, adhesory, unfair, non-bargainable, uniform franchise agreement protects the franchisor from fraud for not disclosing material risk factors such as UNIT historical performance statistics to new buyers of franchises. All franchise agreements indicate that the buyer is not promised success or profits and the buyer indicates with his signature that he is not RELYING on anything outside of the four corners of the contract when making the purchase.
On the surface the failure fee appears so unfair and unreasonable that those not trained in legal trickery would reject the idea and think that it would ONLY apply to those who had NOT tried their best and who had NOT exhausted their startup costs, etc… as provided by the franchisor. (But, of course franchisors are not held responsible for faulty startup numbers)
Of course, even if prospective franchisees did understand that the failure to thrive and the need to close the business meant that you had “abandoned” the business, they would assume that this happened rarely because as long as Item 20 of the FDD indicated expansion, and not contraction, the disclosure document would obscure “abandonments for failure to thrive.” The transfer column of Item 20 also obscures the “fire sales” of units by failing franchisees who are trying to get out from under the large debt of the long-term lease that is personally guaranteed.
Item 20 references are a poor excuse and just an artifice that permits the franchisors to use the references as “due diligence” help instead of making the franchisor, himself, disclose the risks of failure and success to the buyer before the sale is finalized. Anything a referenced past or present franchisee says to a prospective buyer has no legal significance and if prospects rely on these references to purchase a franchise, and the franchise fails, their damages are proximate to the statements of the references and NOT to any representations made by the franchisor.
But! very hard to understand why the AAFD would choose Curves International as its “Franchisor of the Year” when they would know that Curves will use this award to sell NEW franchises out the front door and will abet the sale of used and failed franchises out the back door with impunity under existing laws. This will also help Curves in the Courts where numerous lawsuits have been filed against them for fraud and incompetence, etc..
Of course, Curves legal would blame “greedy” franchisees for selling their units at too high a price and for the SBA defaults, etc.. but isn’t this just a “crock” when attorney Michael Webster tells us that Curves wants to hold up the “resale” value of their units and, of course, their EBITDA that backs their paper. Surely, Curves abets the sale of units at as high a price as possible, knowing that all of the time the new franchisee is trying to break even, Curves’ profits are perpetuated. Curves knowingly churns its units.
Additionally, the SBA defaults are not as true picture of the failure rate of Curves becasuse the failure of loans against home equity or 401’s or other assets are not visible to new buyers of this franchise.
Will the banks and lenders, because of 90% SBA guaranteed loans, that can be sold in the secondary market as securities, continue to loan to Curves franchisees?
Does the FAILURE FEE act as an incentive to failing Curves franchisees to give their businesses away in fire sales to newly approved franchisees?
Would Curves really SUE these failing and failed franchisees who have exhausted their startup funds (and even more) in our courts if they close up and don’t pay the $10,000 failure fee? Would our courts really uphold this unconscionable practice?
If Haven is right, then Curves should have an expansive Item 19 disclosure and as a matter of course hand over a couple years worth of royalty payments to the prospective purchaser.
Michael Webster, who is an expert and who often writes and exposes franchise fraud, once suggested on Blue Mau Mau in a posting that if franchisees who transferred their units had to post the sale price of the unit, this would uncover churning and be very helpful to the new buyers of the franchise.
But, of course, if franchisors had to do this, they would be exposing to start-up franchisees that re-sale prices were not compensating for the sunk startup costs of the original buyers, etc.
The imprecision and inadequacy of Item 20 as a “due dilligence” tool is a definite subsidy of the franchisor. Item 19 earnings claims could be helpful but they are optional. I’m sure Curves doesn’t opt to disclose earnings, do they?
Can’t believe that Curves Legal was suggesting that franchisees were cheating new franchisees by asking more for the units than they were worth, or what?
Chiming. in.
Curves. never liked it. Never will. Didn’t the CEO recently start up a Doggie Day Care business? Happy.
Ringo
Curves didn’t start charging this fee until early 2008, when clubs started closing left and right. They saw a way to profit from others’ misfortune.
What an abominable state of affairs this fiasco with Curves reveals.
It has repurcussions on Valuations, bankruptcy and liquidation scenarios, Resale values and terms, and Collections( I confess I have not read their FDD)
Franchise resellers take note: better to get out of the contract as a resale even for $2,000 or peanuts, as long as your name is no longer on the franchise and you are released. I know there are legal opinions on this issue, but it makes sense for the franchisee to resell at any price rather than abandon the premises and get this kind of letter, enforceable or not, collectible or not.
New franchisees entering any system had better do their due diligence with existing owners and, if possible, with those who exited with their tail between their legs. I look forward to reading more on this form of Franchise Abuse
mrfranchiseman, for Franchise Valuations and Resales
The common wisdom has been that large franchise chains provide great benefits, such as national advertising, buying power, etc.
Unfortunately, there are a number of instances that suggest that some of the larger franchise chains never pass the benefits along and add onerous rules and fees simply because they can. IMHO, most smaller chains could not get away with the seeming indifference the Curves closing procedures convey… at least not and keep selling. Some, like Quiznos, not only don’t pass purchasing savings on to their franchisees, but are accused of adding on large mark-ups. They get away with it precisely because they’re huge.
Smaller franchise chains with more franchisee-friendly policies and practices would do well to start promoting this as a point of difference… and stop sitting by while larger competitors attract franchisees on sheer name recognition alone.
All of this is so hisheartening. I too went into the business with good intentions about helping women get healthier and more fit, having seen success personally with the program. I’ve had to come to the painful realization that I cannot do this any more and now must figure out a way to extricate myself from this situation with the least amount of further stress and pain. The stories that other owners have told about losing their homes are like punches to the gut. But, hey, as long as Gary and Diane have their private jet, it’s all good, I guess! While at the regional “meetings,” we were treated to Gary telling us it that failure was all the fault of franchisees who don’t do things the Curves way. What an insult.
The Heavins and staff all come across as Christians with family values and tell us we are of thier family now. Is this how you treat a family member who is in trouble? When times get rough, you kick us when we are down. we are hanging on by threads and instead of helping to keep us going,you want to make it worse by demanding money from a club that hasn’t a pot to p— in or a window to throw it out. Cold, that is so cold. CI prides themselves as being a close knit group,and ready to help their franchisees, huh, I dont think so. With all the clubs still goin and other projects Heavin and wife are into, they should offer relief for a few months or so to thier tiring clubs to help them pick themselves up, not step on them when they are down. God has blessed you Mr. Heavin, with all you have, spread that blessing, God dont like ugly.
Charging franchisees for closing their clubs is akin to pulling gold fillings from a corpse’s mouth. Gary Heavin is literally a GRAVE-ROBBER.
Can Curves International be held responsible for knowing that franchisees were cheating new franchisees by asking more for the units than they were worth?
Curves Owner 2,
Though I did not buy a resale I have often asked this question myself. Specifically, I believe what you are asking is can Curves be sued for fraud. I can think of many examples where this maybe possible and you are really going to have to get an attorney to answer those questions.
The area in which I personally believe that Curves can be held accountable is in the membership numbers. Remember I am not a lawyer so take my opinion with a grain of salt. Owners are required to send in their reports to Curves, which provides financial and statistical data. This data includes membership numbers can revenue.
Therefore, when a sale of a club is made Curves has the opportunity to do a quick “sanity check” on the price of the club, such as anything over a 3.5 multiple of the revenue would raise a red flag to them. With this information, Curves can go back to the prospective buyer for verification of the membership and revenue numbers to ensure the correct information is given to that buyer. However, Curves would not be responsible to prevent the purchase of the club at a price. But, I would thing they should bring the facts that they contain to the buyers attention.
Though I did not buy a resale I have often asked this question myself. Specifically, I believe what you are asking is can Curves be sued for fraud. I can think of many examples where this maybe possible and you are really going to have to get an attorney to answer those questions.
The area in which I personally believe that Curves can be held accountable is in the membership numbers. Remember I am not a lawyer so take my opinion with a grain of salt. Owners are required to send in their reports to Curves, which provides financial and statistical data. This data includes membership numbers can revenue.
Therefore, when a sale of a club is made Curves has the opportunity to do a quick “sanity check” on the price of the club, such as anything over a 3.5 multiple of the revenue would raise a red flag to them. With this information, Curves can go back to the prospective buyer for verification of the membership and revenue numbers to ensure the correct information is given to that buyer. However, Curves would not be responsible to prevent the purchase of the club at a price. But, I would thing they should bring the facts that they contain to the buyers attention.
They also tell you when you buy a resale club that the legal team goes over every contract to make sure both seller and buyer are getting a good deal. That is the biggest bunch of BS I have ever heard.
At one stage, we owned outright – 3 Curves franchises and our home. 3 years and lots of heartache later, we now have 1 Curves franchise that no one wants, 2 abandoned franchises we are being sued over, and live in a small rental property.
We DID evevrything the Curves way. Every single step of the way. We paid, and we still continue to pay. We are firm believers in Karma, and Gary Heavin, you and your cronies will rot in hell.
Though I did not buy a resale I have often asked this question myself. Specifically, I believe what you are asking is can Curves be sued for fraud. I can think of many examples where this maybe possible and you are really going to have to get an attorney to answer those questions.
The area in which I personally believe that Curves can be held accountable is in the membership numbers. Remember I am not a lawyer so take my opinion with a grain of salt. Owners are required to send in their reports to Curves, which provides financial and statistical data. This data includes membership numbers can revenue.
Therefore, when a sale of a club is made Curves has the opportunity to do a quick “sanity check” on the price of the club, such as anything over a 3.5 multiple of the revenue would raise a red flag to them. With this information, Curves can go back to the prospective buyer for verification of the membership and revenue numbers to ensure the correct information is given to that buyer. However, Curves would not be responsible to prevent the purchase of the club at a price. But, I would thing they should bring the facts that they contain to the buyers attention.
We are going through this same thing. I sent an email to curves asking for help and what to do since we couldn’t stay open. Have not heard anything from them. I did everything the “Curves” way as well. What a mistake that has proven to be. While other Curves around me are doing whatever they want bad mouthing curves every chance they get, they are still open and I have been forced out.
Is curves legal charging $5000. transfer fee for new owner ?