I Lost a Million Dollars Investing in a Franchise - What You Need to Know Before Starting Your Own Franchise Search

I lost a million dollars investing in a franchise and I’m sharing my story to help others who may be considering a move from a corporate, government, or military job into franchising. Read on for my lessons-learned and the formula I would follow if I had it to do all over again.??

I consider myself a typical franchisee. I grew up in a modest, middle-class home, went to college, got a job, married, helped raise two kids, and reached a place in my career where I had some money saved up and wanted to try something different. I always thought of owning my own small business. When I was 14 years old, my brother and I started working for a cleaning franchise in Casper, Wyoming. The owner, a former teacher, had a contract with the local newspaper. My brother and I would wake up early and ride our bicycles to the facility, clean-up around the printing press after the morning newspaper run, then hustle back home to get ready for school. I loved that job! It’s how I saved for my first car, a 1973 Ford Pinto Wagon. Yes, it was one of those with the wood grain look on the side. It’s a bit embarrassing to admit now, but for the $800 I had saved that car was the best option available. What can I say, I was fifteen years-old and had just obtained my learner’s permit.?

In part because of this early experience, I thought the most viable path to small business ownership was through franchising. That opportunity presented itself to me in the fall of 2021. I had just taken an early retirement from my corporate job and was anxious to realize my dream of small business ownership. The fact that I knew of franchising didn’t mean that I knew the best way to get started and search for the right brand. There are 3,500+ franchise brands and hundreds of new ones are added each year! How would I find the best one for my family? I wouldn’t say it was overwhelming. I knew I didn’t want a food concept, so that eliminated about half of the brands. I had some other filters that would help me narrow the list to a reasonable set of options. Still, I thought it might help to work with a franchise consultant who knew the industry and could guide me. That was my first mistake.?

I connected with a well-known franchise consultant affiliated with FranChoice who, over the course of a few calls, got to know me and my interests well enough to present four different brands. After researching each brand my wife and I soon began focusing on Premier Martial Arts International . This is a kid focused brand, and we liked the idea of having a business that contributed not only to the fitness of children and young adults, but also to their personal growth and character development. The founder had been in the martial arts industry for many years, and prior to franchising his business in 2019 he had licensed the brand to 70+ schools across the country. I wasn’t a martial artist, but Premier Martial Arts International said the business model was designed around a non-martial artist owner. We loved it!?

Things moved rapidly. We were not working directly with the franchisor. Instead, we were speaking with a Senior Director of Franchise Development for a company called Franchise FastLane . This franchise sales organization was hired by Premier Martial Arts International to market and sell territories, and that’s exactly what they did. Franchise FastLane sold at least 700 Premier Martial Arts International territories from 2019 until early 2023. None have been sold since. I’ll get to the reason for that later. But now, back to Franchise FastLane . Our first call with Franchise FastLane was on September 29, 2021. They moved us through the funnel quickly. We attended Discovery Day in Knoxville, Tennessee three weeks later. One week after that we signed the franchise agreement and wired $256,500 to Premier Martial Arts International for eight territories located in the Seattle, Washington area. To fund this, subsequent development costs, and working capital we took $1,000,000 from my 401K using the Rollover for Business Start-up (ROBS) plan. Based on the Franchise Disclosure Document and other information shared by Premier Martial Arts International and Franchise FastLane , we believed this would be enough to get three locations up and running, then we could use the cash flow from those locations to fund the remaining studios. It seemed like a good plan.?

A couple of months after we invested in Premier Martial Arts International , the brand was acquired by Unleashed Brands , a private equity backed company with a portfolio of other kid focused brands, including Sylvan Learning , The Little Gym International , Snapology , Urban Air Adventure Parks , Class 101 , and XP League .? Unleashed Brands has since been acquired by Seidler Equity Partners , the firm whose founding family owns a significant stake in the San Diego Padres major league baseball team. We had liked the idea of being part of a founder owned and led business, but the CEO of Unleashed Brands told a good story about the plans he had for growing Premier Martial Arts International , improving the marketing, technology, you name it. Plus, the founder of Premier Martial Arts International would continue as President of the brand. It sounded good to us. We were excited. We had already found a location for our first studio and signed a lease. We put our heads down and focused on planning the build-out, permitting, hiring employees, and training. Everything was going according to plan.??

Fast forward to September 2022. The mayor of Marysville, Washington came to our grand opening and cut the ribbon. We were in business! It felt good to finally have some revenue coming in after nearly a year of spending. We had completed pre-sales in the summer at a local elementary school, so we had seventy-five members by the time we opened the doors. A good start. Our plan was coming together. Then, in November 2022, a big surprise. Premier Martial Arts International , Unleashed Brands , Franchise FastLane , and other parties were sued by fifty-four other franchisees for fraud and other wrongdoing. We thought, “what's going on?”. We weren’t making any money yet, but membership was growing, and we could see what we thought was a path to profitability. We just kept working the plan.??

By early 2023 we had grown the membership at our studio in Marysville to around 125, but we couldn’t seem to push beyond that number. Fortunately, that was enough to break even, so at least we were no longer burning cash. We knew from the lawsuit that other franchisees were struggling, and our own slow growth gave us pause. Also, Unleashed Brands said they would stop selling additional Premier Martial Arts International territories. Another red flag. We canceled development of our second location in Lynnwood, Washington. We had already signed a lease for that location, but fortunately the county was very slow in reviewing the construction permit application, so construction had not started. We were out about $50,000 (not including the franchise fee) and still on the hook for a 10-year lease. Stopping the development of our second location seemed like the least bad option. That turned out to be a wise decision that likely preserved at least $400,000 of our savings.??

The wheels came off at our Marysville studio in June 2023. That’s when our main instructor quit. Despite promises to help recruit new instructors and provide temporary coverage when needed, the franchisor did nothing. I had a couple of part-time instructors who were able to keep classes going on a reduced schedule through the summer. To retain members, I waived the monthly membership fee. So, I had nearly all the expenses, but none of the revenue. I searched for three months but couldn’t find a new instructor. We had no choice but to close. It made no sense to keep throwing good money after bad. Never underestimate key person risk.??

Our franchising journey lasted just under two years. We started with $1,000,000 and today we have $16,767.54 left in our business checking account. We never took any salary or distributions. Every penny went into the business for franchise fees, development costs, operating losses, and costs to exit two 10-year leases. That’s our franchising story.??

So, what did we learn? Lots. Here are my top five lessons-learned:?

? Unless you are very wealthy and can afford to lose your investment, only invest in a brand that has been franchising for more than five years and has a minimum of fifty units open. FRANdata publishes FUND Reports and?FUND Scores for mature brands like these that help to assess risk and creditworthiness. Most franchise brands that fail do so in the first five years of franchising, so only looking at brands beyond the five-year mark helps to reduce risk. ?

? Be patient and disciplined in your approach. Allow several months for your search. Don’t get emotionally attached to any single brand. Keep multiple brands in play until you are ready to make a final decision.?

? Preparation is key. Establish the type of franchise that best fits you and your goals. Identify your key criteria and don’t sway (avoid shiny object syndrome). Do your research. Be thorough in the questions you ask franchisors and existing franchisees.??

? Talk to several (more than 10) existing and former franchisees for each brand you are seriously considering. Don’t just rely on the word of franchisees suggested by the franchisor. Contact information for franchisees is included in the Franchise Disclosure Document. Pick up the phone and start calling.??

? Understand the incentives of players in the market – franchisors, franchise sales organizations, and franchise brokers / consultants. Follow the money. If someone is being paid a commission by the franchisor based on the investment decision you make, are they really looking out for your best interests??

Ten months have passed since we made that very difficult decision to close. We joined a couple dozen other franchisees in a second lawsuit filed against Premier Martial Arts International , Unleashed Brands , Franchise FastLane , and other parties in July 2023. Currently, approximately one-third of all Premier Martial Arts International franchisees are involved in litigation against the franchisor. Franchise agreements are very one-sided, so pursuing recourse is slow, expensive, and extremely difficult. Together with other Premier Martial Arts International franchisees, we are also pressing the Federal Trade Commission to take action.??

In October 2023, the month after we closed the studio in Marysville, I went back to work in the corporate world to take my mind off all the drama surrounding Premier Martial Arts International . For us this was painful, both emotionally and financially, but we will recover. We are more fortunate than many. I have spoken to some other Premier Martial Arts International franchisees who are on the verge of bankruptcy. These are all smart, skilled, accomplished professionals. Some are military veterans. It is wrong what happened, and it is frustrating that our laws seem to provide cover for these types of franchisors and their agents.?

Despite our franchising experience I still see it as a viable path to business ownership, though more treacherous than I could have ever imagined when I began my search. If I did it again, here’s the formula I would follow to get started:?

? Start with the basics. Is franchising right for you? Are you comfortable working within a system? Consider which franchise category is the best fit for you. Food v. non-food. Service v. retail. Skill level and number of employees. Working hours of the business (24/7, Monday to Friday, 9 to 5, or something in between). Do you have sufficient financial resources??

? Picture yourself working in the business. If you eventually scale to multiple units, you can hire a manager and step out of day-to-day operations. But until then, this is a job. If a key person quits you must be able to step into that role until you can hire and train a replacement. If you can’t picture yourself doing that for a particular concept, ditch it?and move on. ?

? Unless you are a budding venture capitalist, focus on mature brands that have been franchising for at least five years AND have fifty or more units open.?Refer to my first lesson-learned above. ??

? Now that you have your criteria, you are ready to engage with franchisors or franchise consultants on your own terms. If you choose to work with a franchise consultant, don’t get locked in with just one. Franchise consultants are typically affiliated with a franchise broker. FranServe, Inc. is one of the largest franchise brokers, representing nearly 800 brands, but this is less than a quarter of all brands. Most other franchise brokers represent far fewer brands. You need to know how small the pool is that you are swimming in. Ask the franchise consultant for a list of brands that meet your criteria, then go find?franchise consultants affiliated with other brokers and ask them for the same list. Now you have a reasonable list of brands that you can start researching.

Don't think that Premier Martial Arts International , Unleashed Brands , Franchise FastLane , and the other defendants stepped up to right their wrong. To the contrary. They are hoping to skirt any accountability by hiding behind terms in the franchise agreements, regardless of how many small business owners and families get crushed in the process. It's a bad look for them and the franchising industry as a whole. Surprisingly, the CEO of Unleashed Brands even enjoys a Board seat at the International Franchise Association !