“Medspa” Explosion a Headache for Some Franchisees

This posting was written by Peter Reap, editor of the CCH Business Franchise Guide.

In the past three years, the number of “medspas” (businesses offering medical treatments in a spa environment) has more than tripled to about 1,500, according to Rhonda L. Rundle, writing in the Wall Street Journal. However, the fast-growing industry has turned into a financial and legal pain for some unsuspecting medspa franchisees

Medspas offer services such as laser hair removal and botox injections in an upscale, comfortable environment very different from a doctor’s office. Licensing rules vary, but many states do not specifically regulate medical facilities that provide relatively routine treatments.

Two years after opening his medspa franchise in St. Louis, Jeff Nebot, a franchisee of Sona Medspa International, Inc., thought he had struck gold when his business’ annual revenue hit $3 million. Soon thereafter, however, Nebot realized that his revenue lagged behind his payouts for marketing staff and franchise fees. The gold was gone for good when Mr. Nebot sold the assets of his business for only $2 last April, the Journal reports.

Nebot lays the bulk of the blame on his franchisor. He complains that the marketing, advertising, and support services provided by the franchisor in exchange for roughly one-fourth of his revenue were inadequate, forcing him to develop his own marketing. He also says that he was misled as to the efficacy of Sona’s laser hair removal treatments.

Several of Sona’s franchisees, though not Mr. Nebot, are currently in arbitration with the franchisor. The franchisees claim that the franchisor represented a complicated business as a “turnkey operation” and failed to provide adequate support.

Some franchisees of another franchisor—Radiance MedSpa Franchise Group, PLLC—have alleged that their franchisor overestimated revenue and underestimated initial start-up costs in its financial projections. According to the Journal, the president of Radiance, Charles L. Engelmann, recently acknowledged that some franchisees are attempting to get their money back, but also claimed that the number of Radiance businesses was expanding and none of them have closed.

While there is no official tracking of medspa businesses, interviews with industry consultants, franchisees, and others indicates numerous failures, according to Ms. Rungle. Medspas “are coming up like mushrooms and then they are gone,” states Hannelore Leavy, executive director of the International Medical Spa Association. Leavy says that many of the struggling businesses are affiliated with a franchise system that has a flawed business model, which may require that too much of a franchisee’s revenue to go for marketing, among other problems.

The regulatory environment for medspas is changing as states react to complaints about burns and other serious mishaps. In the wake of a recent law change in Florida, some medspas are required to spend an extra $60,000 a year to hire a dermatologist or plastic surgeon to oversee their operations.

Stricter enforcement of existing laws has also begun. In February 2005, the California Corporations Commissioner denied registration of a franchise offering of HealthWest, Inc., a California-based medspa franchisor with approximately 20 franchisees around the country. According to the agency, HealthWest had offered and sold unregistered franchises within California and had “falsely represented” that prospective franchisees could legally own a medspa in the state without a medical background.
http://www.corp.ca.gov/enf/info/dr/05pdf/HealthWest.pdf

Ms. Rungle’s article, “Medspa Boom Has Become A Bust for Some,” appears on page B1 of the Tuesday, November 21, 2006, Wall Street Journal.