The fitness sector continues to do well, with large fitness enterprises and boutique gyms bringing in millions. Experts value the boutique gym sector alone at over $5.4 billion and project it to reach over $13 billion by 2032. With these numbers it is no surprise that many entrepreneurs are considering joining the market – and what easier way to do that than to buy into a franchise?
In many cases, this is a solid business decision. The franchisee can benefit from a business model that is already successful while having the support of a franchisor. But how can an entrepreneur better ensure they find a franchisor that lives up to their end of the bargain? The following tips help franchisees looking to enter the boutique fitness market mitigate the risk of entering a bad deal.
Important questions to ask a franchisor
Before you invest, use the due diligence period to test whether the system is legally sound, financially realistic and operationally supportable. The following questions can trigger discussions that help to unearth any potential issues:
- What fees apply?
- What increases are permitted?
- What territory protections exist and what company-owned locations are planned nearby?
- What training is provided and what is the ongoing support?
- What minimum performance standards apply?
- What happens after noncompliance?
- What are the renewal, transfer, and termination rights?
Review the answers and verify them against the FDD. If a promise is not in writing, treat it as nonbinding. Ask for franchisee references, then confirm patterns across multiple operators.
Remember, these questions are just a starting point. You will likely need additional information to make sure you have the data you need to make the decision that is right for your situation.
Watch for these red flags
Some early warning signs can help you avoid franchise agreements that present an elevated risk. Once you identify these potential issues you can decide whether negotiation is possible or if it is best to walk away. The most common examples include:
- Pressure. Pressure to sign before full FDD review, discouragement of counsel review, and claims that changes are impossible can be a concern.
- Omissions. Take Item 19 omissions paired with aggressive earnings talk, inconsistent disclosures across salespeople, refusal to explain assumptions seriously. Omissions from Item 19 mean the statements are generally not supported.
- Unequal rights. Broad termination rights for minor defaults, short cure periods, sweeping personal guarantees, and cross-default clauses tied to leases can put too much power in the franchisor’s hands.
- Strict supplier requirements. Mandatory suppliers with unexplained markups, required technology with unclear data ownership can take steep cuts into the franchisee’s potential profits.
- Turnover. As with any business, high turnover in the same market is a concern worth noting.
If multiple red flags appear, treat the proposed deal as one with high potential for issues. Document all representations and compare the franchise agreement to market norms through discussions with experienced franchise counsel. Our firm offers free consultations and has experience in these matters.
A boutique fitness franchise can be a strong entry into a growing industry. By applying the tips above you can mitigate the risk of surprises and better ensure the deal is all you hope it to be.
