How the Australian fitness phenomenon F45 ran out

So, what exactly went wrong?

big ambitions

When the F45 listed on the New York Stock Exchange in 2021, it had plans for world domination.

The F45 was now on US military bases and was developing a “military-to-millionaire” franchise offering for retired American veterans. This was the first fitness franchise to be accepted on American college campuses and high schools were another target for expansion.

Australian fund managers have joined the fitness frenzy. L1 Capital acquired a 7.1 percent stake in a share sale by Gilchrist and Wahlberg in December 2020. L1’s stake was valued at $113.6 million by the time of the offering.

Caledonia reportedly acquired $100 million worth of shares in the IPO. The fund manager declined to comment.

Gilchrist was surrounded by Wahlberg as is Bloomberg Financial Network One of its major expansion plans on the New York Stock Exchange – before it was first put on the market in July of last year.

He was unfazed by the fact that the company was losing money, losses ballooned to $182.7 million by the end of 2021, and its franchises had just reopened from the initial COVID-19 attack.

“We want to be the biggest franchisor in the world,” Gilchrist said. “We want to go beyond Planet (Fitness) and be bigger than McDonald’s.”

On sheer numbers, the F45 was definitely shaping up as a contender. The total number of franchises sold more than tripled from 907 in 2017 to more than 2,800 across 63 countries at the time of the float.

By May of this year, when F45 announced first-quarter results for fiscal 2022, Gilchrist was smashing plans to expand into the grandstands in a way he would be proud of in cricket.

He stated that the group sold a record 706 franchises for the March quarter, and raised its goal for the year from 1,000 to 1,500. Even that was conservative, he hinted.

“We’ve never seen so much demand from franchises. We continue to grow our business by leveraging great influencers, like David Beckham,” he told analysts and investors in his May Q1 investor call.

“We’ve increased guidance from 1,000 sales to 1,500. However, if I look to the future…that could go up again, closer to 2,000, before the end of the year.”

But these growth plans did not impress the financial market. F45 shares have traded for less than half of what investors paid in the IPO just 10 months ago.

The blackjack was sold on the grounds that the gym world opened up again after COVID, but new strains of the virus were already showing their presence.

Gilchrist has revealed a secret weapon that will solve a huge problem for the franchisor.

Rocket F45 franchise sales figures reflect the new franchisees’ signature on the dotted line and their filing of their deposit. But in reality, getting the financing, approvals, and preparation to the point that the franchisee was up and running and paying the fee was a different story.

He said the record 706 franchise sales announced for the March quarter won’t be fully open until the end of 2023.

In fact, in its May first-quarter results, Gilchrist admitted a backlog of more than 2,200 franchises where deposits were paid but studios did not open. This represents more than half of the total 4,007 franchise sales as of March 31.

F45 planned to help remove a significant funding hurdle by getting third-party funders, such as Fortress Investment Group, to provide funding to franchisees.

Fortress was providing $150 million to help fund the F45 franchises, and Gilchrist said this would likely expand to $300 million, and possibly $500 million by 2023. There was another $100 million available for its military program.

“In terms of franchise financing, we believe that will help accelerate the openings backlog,” he said.

“We believe that could be up to six months in terms of backsliding periods from contract signing to opening.”

As he explained to analysts and investors, this funding was off balance sheet – meaning that F45 had no direct exposure to debt apart from what he described as a “limited guarantee” – and this backlog represented a significant business tailwind.

Almost two months later, it was a completely different story. Amid rising global interest rates, franchise financing has disappeared. It will be disastrous for business.

Last week, F45’s share price fell to $1.35, more than 90 percent less than the $16 investors paid in July of last year. The latest decline came with lower levels of hiring, revenue and targeted earnings. The precarious state of its financial resources was revealed.

Any ideas of selling 2,000 franchises this year have evaporated. As of last week, the F45 was targeting at least 350 franchises.

Projections of up to $275 million for this year have also been torn apart. Revenue can reach 120 million USD.

F45’s preferred income measure — adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) — fell from $100 million to no more than $25 million.

Projections that it will generate free cash flows of between $50 million and $60 million have been withdrawn. F45 has also received a waiver from its banks for any potential loan defaults in the coming months.

The company’s diminishing cash reserves will also be stretched due to the large cash payments to Gilchrist and 110 employees being reduced to ensure that the F45 lives within its means.

The company said the recurring costs – including a cash compensation payment of more than $7 million to Gilchrist – would cost it up to $12 million.

Gilchrist’s payments include the agreement that he is not asking for an offer to take the weak F45 private for at least 12 months.

The F45 had less than $14 million in cash at the end of March this year, and it has yet to say how those payments will affect it. The company’s chief financial officer is also set to receive $2.4 million from F45 on October 15 this year, or sooner if the company leaves him.

The full extent of the damage will be revealed in the group’s second-quarter earnings statement in the middle of this month, and it could come as a shock to investors who were sold off on the F45 Capital-lite model, which has been dependent on a steady stream of royalties from franchisees.

The explosive growth of the franchise means that the company generates most of its revenue from selling its $150,000 package of equipment to franchisees. The fees it gets from operating the franchisees was less than 40 percent of their revenue in the March quarter.

What we don’t know yet, is whether it was in trouble for the tens of millions of dollars in equipment that it was expecting to sell to franchisees this year.

This equipment inventory buildup led to a $15 million increase in F45 accounts receivable for the March quarter.

In full force in Australia

The good news is that Australian business remains significantly unaffected. Until now.

It makes sense that Australia is a mature market for the F45. Its market offerings show that little change is expected for the more than 800 franchises here.

This is reflected in the attitude of franchisees who Announces And the age He spoke to this week which he described as “business as usual.”

They had almost no concerns about what was happening outside, although some questioned the impact the loss of nearly half of the head office staff would have. Contacts from the head office have been frequent — including a phone call on Thursday that included interim CEO Ben Coats.

“I think everything that happened with this CEO and the stock price [issue] “It had very little impact on the company’s operations…we didn’t see any impact of layoffs,” said one franchisor. He did not wish to be named because the agreement does not allow them to speak to the press without the permission of the F45.

But the business still faces its challenges here.

“I think the struggle in our industry has been post-lockdown and post-support,” said the veteran franchisor.

“When everyone was allowed out, I think the first place everyone went was to have a drink and eat and visit friends and family. Getting people into gyms is [already] hard work. I think the people who had not trained for two years, persuaded them to come back – it was slower than what most other industries have been saying.”

A Sydney gym reported losing 20 members last month as the latest working-from-home procedures arrived.

Things haven’t been better for the mind behind F45’s fitness regimen, co-founder Luke Istomin, who left F45 in 2016 due to creative differences and has since founded his own fitness business franchise, Reunion Training.

Last year’s plans to target 150 Reunion franchises had to be reworked as the latest version of COVID-19 came to light.

F45 co-founder Luke Istomin left the business in 2016 due to creative differences.

F45 co-founder Luke Istomin left the business in 2016 due to creative differences.

We were on the verge of realizing our potential. Then COVID came along and really decimated the business,” he said while finishing part of the process and working on other business ideas.

“The actual training model that I built has been phenomenal. But unfortunately, that is the harsh reality of trying to get through two years of COVID; it wasn’t nice to start a business.”

If it’s any consolation for F45’s investors and franchisees, Wahlberg remains a contributor and has continued a steady stream of posts to his 19 million followers on Instagram. The disaster last week means the F45 is worth less than half of what Wahlberg paid for his initial investment in 2019.

But it clearly didn’t dampen his enthusiasm for the product.

“The best workout in the world. The reason is that anyone can do it at any level of fitness,” he says in one of his recent posts this week outside the F45 studio.

“It’s the best, it’s the best.”