Franchising is a popular method for expanding business. Through a licensing relationship a franchisor, or business owner, essentially sells a franchisee the rights to open a new business location. For instance, Planet Fitness has many franchise locations, all of which were sold to various franchisees across the country. Once the Planet Fitness franchisee purchases a franchise, they are granted the right to build their own location using preexisting systems, regulations, etc.
Franchising is an attractive business model for anyone new (or not) to the industry. Unlike an independent business, which requires growing from the ground up, a franchise comes with a pre-established, and usually successful, operational system. Through extensive training programs, franchisees learn all the ropes behind the business, eliminating the daunting trial and error process. Not to mention, a franchise comes with brand recognition is built right in.
FRANCHISING IS AN ATTRACTIVE BUSINESS MODEL FOR ANYONE NEW TO THE INDUSTRY.
Anyone looking to purchase a franchise will be given a Franchise Disclosure Document (FDD). It’s imperative that any franchisee fully understand the components and contents in any business’ FDD. Consisting of 23 different parts, the FDD, a legally mandated document, outlines different key pieces of information involved in franchise purchase. For instance, a Franchise Disclosure Document tells the interested franchisee more about the total fees and costs associated with purchasing the franchise of their choice.
The overall intention of the document is transparency. Both the company and franchisee need to be on the same wavelength in order for the purchase and future management of the business to run smoothly. Click here to see a more in-depth description and analysis of the Franchise Disclosure Document.
The Story Behind the Business
Planet Fitness started with two brothers, Mike and Marc Grondahl, three years out of college, loathing their jobs in real estate and accounting, according to Open Forum’s interview with Marc Grondahl. When the brothers saw a Gold’s Gym in Leominster, MA going out of business, they decided to buy the space and run the place. However, this decision ultimately resulted in eviction due to issues with the location and management.
Despite initial challenges, the Grondahl brothers decided to continue working in the fitness industry, opening a new gym called Coastal Fitness in 1993. It wasn’t until the following year that Coastal Fitness was renamed Planet Fitness, as it is known today.
What began as a single, family-owned location exploded into a key player in the fitness industry. When Planet Fitness began franchising in 2003, business boomed. With monthly membership dues at only $10, it’s hard to beat Planet Fitness pricing. Whereas other gyms and sports clubs may charge monthly fees upwards of $200, Planet Fitness is unique in its low pricing and streamlined system. Each Planet Fitness location runs 24-hours a day with 12 to 18 employees at each location. Unlike other gyms, the franchise does not offer group fitness classes or daycare. Instead, Planet Fitness caters to the casual gym-goer.
As of 2017, Planet Fitness holds approximately 10.5 million gym members, most of whom have never owned any gym membership in the past. Not to mention that the francishe’s total revenue was found to be $91.1 million, a nearly 10 percent increase from the previous year. The upwards trend has only continued in 2018.
Planet Fitness is a fun and collaborative business, Marc Grondahl told Open Forum. The company tries to involve staff in big decisions, encouraging them to contribute to company growth. In fact, most Planet Fitness franchisees do not come from a fitness industry background. The simple model works well with prospective franchisees of all backgrounds, given the small staff sizes.
Currently, with 1,500 locations, CEO Chris Rondeau has taken over the company’s operations. Early this year, the company opened its 1,500th location with the opening of its first branch in Hawaii, the last remaining state without a Planet Fitness.
Incorporation & Franchising Since 2003
Christopher J. Rondeau, President and Chief Executive Officer since 2013
Dorvin Lively, Chief Financial Officer
Richard Moore, Chief Administrative Officer, Secretary, and General Counsel
Brian Belmont, Executive Vice President of Operations and Development
William Mulleady, Vice President of Franchising
Kevin Fitzgerald, Director of Real Estate and Construction
Any prospective franchisee of Planet Fitness is expected to pay a nonrefundable Initial Franchise Fee of $10,000 upon signing a Franchise Agreement. Should the potential franchisee decide to participate in the Area Development Program, they are expected to pay the same fee per location.
Once all the various fees and costs are considered (see below) Planet Fitness estimates that the initial investment for a Planet Fitness franchise typically ranges from $824,200 to $3,725,000. Again, these estimates depend on many factors including the location, local economic conditions, favorability by local consumers, prevailing wage rates, etc.
Planet Fitness does not offer any financing to potential franchisees. The company also explicitly states that it does not permit the franchisee to borrow more than 80 percent of the initial investment without written consent from Planet Fitness.
Training & Assistance
While Planet Fitness is not required explicitly to provide specific assistance to a franchisee, the company does make certain training promises. For one, Planet Fitness instructs the franchisee in all methods of operation. The company also ensures it will provide an initial training program as well as a list of start-up inventory and a pre-sale marketing plan. All salaried managers are also expected to undergo and successfully complete a training program.
The Franchise Agreement between Planet Fitness and a potential franchisee gives the right to operate a single Planet Fitness in a specific, approved location. Franchisees are encouraged to use Planet Fitness recommended architects but any potential franchisee may use their own architect. In this case, the franchisee must receive approval from Planet Fitness and pay a Construction Development Plan Review Fee.
Franchisees may also take advantage of their local market to advertise and appeal to potential clients, however only within preapproved methods and boundaries.
Term of Agreement and Renewal
The of the franchise term is ten years from the signing of the Franchise Agreement. Termination of the Franchise Agreement by the franchisee can occur on any grounds. However, the franchisor may not terminate without cause. Additionally, all transfers require express approval from Planet Fitness.
Restrictions on Sources of Products and Services
Before any Planet Fitness location opening, the franchisee and all salaried managers must undergo and successfully complete a training program. All methods, standards and specifications specified by Planet Fitness must be followed at all franchised branches in order to ensure uniformity across locations. If the potential franchisee obtains their equipment from a designated supplier, like PF Equipment, they are expected to make all payments on time. Failure to submit payment in a timely manner will add extra fees from Planet Fitness.
Item 9 of the FDD lists all the potential franchisee’s principal obligations. These include site selection, pre-opening purchases, site development, fees, compliance with standards, among others. The franchisee is also expected to personally manage and operate the franchise as their primary obligation. Franchisees are not permitted to delegate any management authority or responsibility. In order to delegate any obligations in order to further develop the business, the franchisee must have any Approved Operator sign a non-disclosure and non-compete agreement. This operator must be approved through Planet Fitness.
At the end of 2013, Planet Fitness owned a total of 704 franchised outlets and 45 company owned outlets. Item 20 provides several charts that provide a three year breakdown of Planet Fitness franchises within different states.
Initial Investment and Costs
|Name of Fee||Low||High|
|Site Selection Costs||$1,000||$3,000|
|Computer system, POS system||$10,000||$17,000|
|Real Estate Lease Deposits||$0||$57,000|
|Your Out-of-Pocket Initial Training Expenses||$1,500||$6,500|
|Type of Fee||Amount|
|Royalty||5% of total gross monthly and annual membership fees|
|Internet Membership and Balance Payment Administration Fee||$5 per membership application or balance payment processed for franchise location|
|Refresher Training Workshops||$500 to $1,500|
|Per Diem Fee||$100 to $1,000|
|Re-Equip Costs||$250,000 to $760,000|
|Remodel Costs||$75,000 to $550,000|
|Fees to Evaluate and Approve Alternative Suppliers||$1,500 to $5,000|
|Insurance||$10,000 to $15,000|
|National Advertising Fund Fee||2% of total gross monthly EFT Dues|
|Local Advertising Fee Special Marketing Programs||Greater of $5,000 per month or 7% total gross monthly EFT Dues|
Varies, maximum of 9% total gross monthly EFT Dues
|Auditing Costs||$3,000 to $15,000|
|Franchise Agreement Transfer Fee||$25,000|
|Construction Development Plan Review Fee||$1,750|
|Successor Franchise Fee||Will not exceed $20,000|
|Costs and Attorney’s Fees||Actual Costs|
|Inspection and Compliance Reimbursement||Approx. $1,200|
|Cure Period Extension Fee||2% of the total gross EFT Dues Draft|
|Extension Fee (Area Development Agreement)||Variable|