Feb 1, 2008 12:00 PM

The troubles that continue to plague circuit club companies also extend to business-savvy franchisees who trusted the reputations of some of the biggest names in the industry.

It sounded so simple. It made so much sense. Experienced, knowledgeable people banked on the marriage of a well-known sandwich chain and a fitness industry legend to create an exciting new circuit club franchise. At another promising company, people counted on the experience of a group of investors that included the founder of the biggest revenue-producing chain in the industry.

1-2-3 Fit, Denver, which opened in 2005, was the brainchild of Rick Schaden and Brooksy Smith, two men who made Quiznos a successful national restaurant chain. Schaden and Smith called upon fitness legend Ray Wilson, whose background includes opening several club companies, to help them with their venture into the fitness industry.

“It was the perfect mixture of franchise team and fitness team,” one former 1-2-3 Fit franchisee says.

Butterfly Life, San Ramon, CA, opened in 2003 and had the initial backing of Mark Mastrov, the founder of 24 Hour Fitness who resigned last month as chairman of 24 Hour. Mastrov's colleagues, Mark Golob and Tom Gergley, had operated Linda Evans clubs in California before opening Butterfly Life.

“With Mastrov's name, how could you go wrong?” one former Butterfly Life franchisee says.

But according to many franchisees at the two companies, plenty did go wrong. The same problems that have confounded franchisees at express club companies such as ShapeXpress and Contours for Women (both of which were featured in the November issue of Club Industry's Fitness Business Pro and online at www.fitnessbusinesspro.com/mag/fitness_times/) have hit 1-2-3 Fit and Butterfly Life franchisees. Several have closed their doors and face debts of more than a quarter of a million dollars. Even Mastrov and Wilson have left the two companies.

“I call it an American tragedy,” says Barbara Jorgensen, who closed her Redmond, WA, 1-2-3 Fit store last month, just nine months after its opening. She says her losses total $300,000.

1-2-3 Fit

Franchisees at 1-2-3 Fit may not be surprised to learn that 1-2-3 Fit's 2007 Uniform Franchise Offering Circular (UFOC) shows the company is in financial trouble. 1-2-3 Fit has incurred losses of $9.5 million since Jan. 1, 2006. The company states in its UFOC that an independent accountant's report reveals that 1-2-3 Fit's circumstances raise substantial doubt about the company's ability to stay in business.

That's not the financial state that Schaden or Smith likely envisioned for the company in 2005 when they began franchising. Smith would not comment for this story, but in an April 2005 story in Club Industry's Fitness Business Pro, he discussed the new coed, 30-minute 1-2-3 Fit club franchise.

“In the fitness business, we saw Curves out front with a remarkable business,” Smith said. “And we saw a muddled water of people jumping in, and it looked a lot like what we saw in the sandwich business 10 years ago.”

At that time, Subway was the only successful national chain of sub sandwich shops. Then, Schaden and Smith launched Quiznos, quickly elevating it to the No. 2 sub sandwich company in the United States. It also was one of the fastest growing franchises. In 2006, Quiznos had more than 3,300 franchised stores, placing it third in overall franchises behind Subway and Curves, Waco, TX, according to Entrepreneur.com.

The success of the Quiznos executives led several fitness franchisees to believe they could pull off a similar success in the circuit express club market. Former 1-2-3 Fit franchisee Mark Metevia initially felt good about his investment.

“I thought they knew what they were doing,” Metevia says of 1-2-3 Fit executives.

Metevia owned another business in the early 1990s and knew the risks that went into opening his 1-2-3 Fit franchise in Parker, CO. When company reps encouraged him to open his location about a quarter-mile from a community rec center, Metevia saw it as a red flag, but he followed their advice anyway. Company reps also told Metevia that he would have 200 members before he opened his doors. Six months after opening, however, Metevia's club had only 100 members, and he ran out of money.

“You're in business for yourself, not by yourself,” Metevia says of being part of a franchise. “But I started to feel by myself.” When he closed his store last May, Metevia had lost about $250,000, but more strikingly, he says the stress of the situation contributed to his divorce, and his financial situation caused him to sell his boat and automobiles. He also is losing his house.

Lloyd Doolittle of La Quinta, CA, brought a wealth of management and sales experience to 1-2-3 Fit and had the No. 1 franchise in the company with more than 600 members. Despite the high numbers, Doolittle closed his store last August, just 16 months after it opened.

Doolittle, whose losses totaled about $250,000, says 1-2-3 Fit lied about opening costs, increasing the costs with each UFOC. In the 2005 1-2-3 Fit UFOC, the total initial investment was estimated between $39,315 and $69,928. In the June 20071-2-3 Fit UFOC, the initial investment had increased to between $176,750 and $229,425.

Another form of deceit, 1-2-3 Fit franchisees allege, is the company's Simbio System equipment, which company officials say is developed exclusively for 1-2-3 Fit. Franchisees point out that the equipment is part of a major manufacturer's circuit series that is available to anybody. One franchisee says the manufacturer could not explain why 1-2-3 Fit claims the equipment is exclusive to its franchisees.

One industry veteran, whose wife opened and closed a 1-2-3 Fit franchise, says members eventually tire of the 30-minute circuit routine. Also, many people who join a club like 1-2-3 Fit simply are not gym goers and quit more frequently, he says.

“With the smaller facility, you get no ‘wow’ factor,” says the industry veteran, who requested to remain anonymous. “Maybe the market is saying, ‘This is nothing. This is doing me nothing.’”

Although the industry veteran, whose wife lost $200,000, has nothing bad to say about Smith, 1-2-3 Fit's president and CEO, or the company itself, he appears to be in the minority.

“They just lie. They don't understand that exaggerating is lying,” Jorgensen says of 1-2-3 Fit executives. “They're using real people for guinea pigs. The truth is, the system does not work.”

The numbers show that several 1-2-3 Fit franchisees have closed their doors or sold their clubs. The 2007 UFOC, which includes information as of Dec. 31, 2006, listed 26 franchisees in operation, 76 franchises sold but not yet open and 12 former franchisees. A year later on Jan. 30, the 1-2-3 Fit Web site listed 27 stores open in 11 states with seven more stores listed as opening soon. A list created by a 1-2-3 Fit franchisee, updated on Jan. 31, shows 27 franchises are open, 52 have been sold but are not open yet and 22 have closed.

As for Wilson, whose name helped sway some franchisees to buy into the company, he sold his share of the company two years ago and says he has had no contact with 1-2-3 Fit since.

Wilson says he remains a firm believer in the need for smaller, less intimidating clubs. He also says running big companies doesn't excite him.

“I'm a pioneer,” Wilson says, “and I'm really good at pioneering. ”

Butterfly Life

Although 1-2-3 Fit franchisees say they have few resources to file a lawsuit, Butterfly Life and its franchisees are in litigation.

Butterfly Life filed an arbitration last fall against one of its franchisees, Beth Tomei of Walnut Creek, CA, for terminating the franchise agreement in the company's UFOC and changing the name of her club. Tomei and nine other franchisees then filed a class-action counterclaim against Butterfly Life on Jan. 10 in California through the American Arbitration Association.

Mario L. Herman, a Washington, DC-based class arbitration attorney who is representing Butterfly Life franchisees, says 250 franchisees are potential members in the counterclaim. Herman says Butterfly Life misrepresented itself by orally providing illegal earnings claims, such as stating that the break-even point for franchisees was 200 members and that franchisees would make a profit within their first six months of operation. None of the franchisees have made a profit in that time frame, Herman says.

“We believe that there was a standardized pitch that was provided to everyone before they purchased,” Herman says. “It's fraud in the inducement of the agreement as opposed to any breach-of-contract, post-signature, post-execution agreement.”

Item 19 of the Butterfly Life UFOC, titled Earnings Claims, states: “Butterfly [Life] does not furnish or authorize sales persons to furnish any oral or written information concerning potential sales, costs, income or profit of a Butterfly Life Center. Actual results may vary from unit to unit and Butterfly cannot estimate the results of a particular franchise.”

Golob, Butterfly Life's president and CEO, refutes the claims by franchisees that they were misled about how much it costs to operate a Butterfly Life club.

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