Published on Mar 10, 2023
Fitness franchisor Xponential (XPOF) in some cases appears to provide financial projections as part of its sales pitch to prospective franchisees beyond those contained in its franchise disclosure documents—a potential violation of federal franchise rules—according to interviews and documents reviewed by The Capitol Forum.
Former franchisees told The Capitol Forum that company officials made the financial representations orally and before the franchisees had agreed to buy franchise licenses. In some cases, the projections were included as part of an interactive spreadsheet provided in the early stages of the Xponential sales pitch, according to allegations contained in litigation, and screenshots provided to The Capitol Forum by a former franchisee.
In each case, the representations, including revenue estimates based on membership fee rates and member acquisition timeline projections, were not part of the franchise disclosure documents that the customers received.
Xponential oversees a portfolio of ten boutique fitness brands, including the well-established Club Pilates, Pure Barre and Cycle Bar, as well as newer concepts like boxing-based Rumble, running-based Stride and BFT, a strength-training workout. Its portfolio also includes AKT, a dance-based workout, Row House, Yoga Six and StretchLab.
Federal franchise rules do not require franchisors to offer financial representations about how a franchisee can expect their business to perform. If the franchisor chooses to provide this information in the course of its sales pitch, the franchisor must also include the information in the disclosure documents it files with the government and “must, among other things, have a reasonable basis and written substantiation for the representation at the time it is made, and disclose the bases and assumptions underlying the representation,” according to a compliance guide published by the Federal Trade Commission.
Attorney Stanley Dub, who represents franchisees in lawsuits against franchisors and teaches a franchise law course at Case Western Reserve University Law School, said providing a spreadsheet with information that’s not also contained in disclosure documents is “a clear FTC Rule violation.”
“The Rule does not permit any financial information before signing except what is written in the FDD,” Dub said.
A franchisor who makes a financial performance representation outside of the disclosure documents and denies having done so could open themselves up to “administrative and criminal liability, personal liability of the franchisor’s management, and rescission of franchise agreements,” according to an article published by the law firm Davis Wright Tremaine, which noted that the franchisor could have to disclose such violations for 10 years or more.
The Capitol Forum has previously reported that Xponential’s disclosure documents for several brands omitted the names of some franchisees who’d left the franchise system, despite a federal requirement for disclosure of this information.
Xponential has been aware of The Capitol Forum’s reporting on its brands and franchisee complaints for several months. The Capitol Forum has sent numerous sets of questions to the company and has not received answers. Instead, Xponential’s litigation counsel mailed The Capitol Forum a letter alleging that The Capitol Forum intended to write a one-sided story. In the letter, Xponential did not answer The Capitol Forum’s specific questions, but said that Xponential’s “profit is earned from monthly royalties paid by flourishing franchisees operating strong studios. The fact that Xponential is thriving, as reflected by its soaring stock price and accompanying financial metrics, is conclusive proof that our franchise partners are thriving.”
Xponential also did not respond to questions sent by The Capitol Forum relating to the company’s sales process and the financial performance representations reported here.
Xponential official has used spreadsheet in sales pitch on at least two occasions. A former Row House franchisee provided The Capitol Forum with copies of financial estimates the former franchisee said they received prior to purchasing their franchise license and prior to receiving the franchise disclosure documents.
The franchisee said they were sent a blank version of an elaborate set of spreadsheets, then attended a virtual call with an Xponential official, who filled out the spreadsheets for the prospective franchisee during the call. The spreadsheets detail costs for building out a studio as well as regular monthly operating expenses and expected revenues once a studio is up and running.
The franchisee provided The Capitol Forum with screenshots showing that the Xponential official had shared his screen with the franchisee and showing that the date was several days before the franchisee was given the company’s financial disclosure documents, according to a signed and dated document acknowledging the franchisee’s receipt of the paperwork.
The franchisee said that during the call, the Xponential official input numbers into the spreadsheets indicating that the franchisee could expect a maximum membership of 1,300 people, with calculations demonstrating the associated profits. The franchisee said they later learned that a studio could only accommodate a maximum of 600 members. The franchisee’s studio never reached even the 300-member threshold the Xponential official had assured them would exist by the studio’s grand opening, the franchisee said.
A former AKT franchisee made a similar allegation in a 2021 lawsuit against Xponential officials, saying that the same Xponential official had assisted the franchisee in filling out the spreadsheet and had provided “material data and information necessary to generate the expected financial performance” of the franchisee’s proposed location. The representations were made in the course of Xponential’s sales pitch to the franchisee, before the franchisee was given the disclosure documents, the lawsuit alleged.
The spreadsheet contained membership pricing tiers, which the Xponential official explained to the franchisee, according to the lawsuit. The franchisee recounted in the lawsuit that the Xponential official told the franchisee they should expect 120 members at opening and a total of 315 members by the end of the first year, and that the studio should be cash-flow positive within six months of opening. The lawsuit states that the franchisee agreed to move on to the next step in the sales process, which included receiving and reviewing the franchise disclosure documents, because they were “convinced by the specifics” offered in the sales call.
The financial disclosure documents that the franchisee later received did not include many of the representations made by Xponential officials, the lawsuit alleged, including the expected number of members and timing for acquiring members, membership fee pricing tiers and the “earnings calculations that Defendants enabled and assisted Plaintiffs in making.”
The franchisee’s studio did not achieve the projected membership totals, according to the lawsuit.
The Xponential officials did not address the specifics of the AKT franchisee’s allegations in the answer to the complaint that they filed in court. AKT Franchise, in its 2022 franchise disclosure documents, said the matter had been settled, with its affiliate acquiring the franchisee’s studio and development rights for a purchase price of $375,000. “As part of this settlement, the parties agreed and acknowledged that no party was admitting to any kind of liability in connection with the proceeding or otherwise,” the company stated in the disclosure document.
Several other former franchisees told The Capitol Forum that they did not receive the spreadsheet until after they had bought their licenses, but that they received verbal projections from company officials about the number of members and amount of revenue they could expect upon studio opening, as part of the company’s sales pitch. Such verbal representations, because they were not included in disclosure documents, are also forbidden by federal franchise rules.
Xponential sales operation linked to company with history of allegations of undisclosed financial representations, including use of spreadsheets. The Xponential official who both franchisees identified as the person who walked them through the spreadsheet was, at the time, an employee of the St. Gregory Development Group, which entered into brokerage agreements with some of Xponential’s brands in 2018. He is now Xponential’s director of franchise development. Another former St. Gregory employee also named in the AKT lawsuit is now Xponential’s president of franchise development.
St. Gregory Development Group was an Ohio-based franchise sales company that sold franchise licenses on behalf of many franchisors, including a franchisor of a men’s salon brand, a franchisor of a file storage and digitization service, and the Cycle Bar franchise before it was acquired by Xponential.
A Cycle Bar franchisee in Mississippi sued St. Gregory Development Group and Cycle Bar Franchise in 2018, alleging that when she bought her franchise licenses in 2015, she was provided with a “unit economics worksheet,” which made “several representations regarding the amount of initial investment for [the] prospective Mississippi franchise and its purported profitability, many of which were not contained in the FDD.”
In its 2022 disclosure documents for Cycle Bar Franchise, Xponential disclosed the existence of the lawsuit, saying the matter was settled and that neither the “franchisor nor any other named party admitted any kind of liability as part of this settlement.” As part of the settlement, Cycle Bar Franchise acquired the franchisee’s studio for $28,000.
St. Gregory was also a defendant in a 2017 lawsuit brought by a File Depot franchisee who alleged that they were sent spreadsheets that included “monthly and annual revenue projections and gross profit projections, as well as a breakeven number of boxes,” prior to the franchisee’s purchase of a franchise license. The lawsuit alleges that the financial performance projections they were provided were “both inaccurate and provided without required disclosures.”
In its 2018 disclosure documents, The File Depot franchisor disclosed the existence of the lawsuit, saying the company “denied the allegations supporting these claims.” The case was settled out of court, with The File Depot agreeing to pay a total of $265,000 to the franchisees.
Franchise Rule requires transparency for financial representations. The strict disclosure requirements for financial performance representations are intended to ensure that franchisors do not make unsubstantiated claims or promises to potential franchisees. For representations contained in disclosure documents, the franchisor must also explain the bases and assumptions that were used to arrive at the representations.
In the case of both Row House and AKT, the company was franchising concepts that had been previously operated by a brand founder, meaning there was little to no data available about franchise locations operating those brands. Both the AKT franchisee who brought the lawsuit and the Row House franchisee who spoke to The Capitol Forum said the projections they were provided by Xponential couldn’t have been substantiated because there weren’t any franchise studios to derive them from.
“McDonalds, they have proof that they’ve sold a million burgers or whatever,” said the Row House franchisee. Of Xponential’s projection that the studios would have 300 members upon opening, the franchisee said, “Where are they getting that?”
The FTC’s franchise compliance guide defines a financial performance representation as, “any representation, including any oral, written, or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits.”
The guide specifies that, “the term includes a chart, table, or mathematical calculation that shows possible results based on a combination of variables.”
Xponential appears to be aware of this; its disclosure documents include a section, with a designated space for the franchisee to initial, declaring that the franchisee was not provided any “oral, written, visual or other claim, guarantee or representation (including, but not limited to, charts, tables, spreadsheets or mathematical calculations to demonstrate actual or possible results based on a combination of variables, such as multiples of price and quantity to reflect gross sales, or otherwise), which stated or suggested any specific level or range of actual or potential sales, costs, income, expenses, profits, cash flow, tax effects or otherwise.”
Attorney Dub said such a provision likely wouldn’t hold up in court.
“This is intended to head off future claims that impermissible representations were made,” Dub said. “But if in fact such representations WERE made, signing this cannot undo that fact.”