Preventable Consequences.
The Federal Trade Commission has obtained a landmark $17 million settlement against Xponential Fitness, a franchisor operating popular fitness brands including Club Pilates, Pure Barre, YogaSix, StretchLab, and BFT. This enforcement action underscores the critical importance of compliance with franchise disclosure requirements and serves as a cautionary tale.
What franchisors should do right now.
- Insure full, complete and proper disclosure of timeframes.
Xponential allegedly misrepresented the time required to open franchise studios, claiming that franchisees could open their locations within six months of signing the franchise agreement. In reality, franchisees typically required more than a year to open their studios—if they opened at all. Track opening timelines and accurately disclose those timelines. Work on simplifying openings to reduce the timelines.
2. Insure full, complete and proper disclosure of employment, litigation and bankruptcy history.
Xponential allegedly failed to disclose that a former CEO had been involved in the sale or operation of other franchises and had faced multiple fraud lawsuits arising from those activities. Additionally, Xponential failed to disclose a former President of Franchise Development’s bankruptcy history, as required by the Franchise Rule. Obtain written confirmation by executives of employment, litigation and bankruptcy history in items 2,3 and 4 for inclusion in the FDD. If gaining compliance is a problem, consider an independent electronic investigation.
3. Insure full, complete and proper reporting of former franchisees’ contact information.
Xponential allegedly omitted the names of franchisees whose studios had ceased operations, been terminated, cancelled, or not renewed. Where names were disclosed, the FTC alleged that Xponential provided outdated contact information, effectively preventing prospective franchisees from obtaining meaningful information about studio turnover rates and the experiences of former franchise owners. Providing franchise candidates with complete information about former franchisees is not an option. Also, if you obtain confidentiality agreements from former franchisees, that needs to be properly disclosed as well.
4. Provide Timely and Accurate Disclosure Documents.
Xponential was accused by the FTC by failing to provide timely FDDs, or not providing FDDs at all. Resolve any disclosure issues in favor of franchise candidate disclosure. It is worth waiting a few days and confirming that all members of the franchisee candidate were disclosed, rather than taking an unnecessary risk.
These errors by XPonential seem more than accidental. The processes followed by executive leadership and perhaps even legal counsel appear to be irresponsible. The FTC intends to bring more frequent enforcement actions, so now is the time to insure complance with the FTC Rule.