Corporate retaliation?
When private equity came for the toddler gyms
Tiffany Cianci spends most of her days in socks, padding around the fitness studio she operates in Frederick, Md., about an hour outside Washington. Her clients are young: kids ranging from 4 months to 12 years old. They come to learn somersaults, try the monkey bars, sing some songs. (“Little Red Caboose,” complete with a train- whistle accompaniment, is one of her favorites.)
Cianci, 41, spent the first part of her career as a sommelier, specializing in sake. In 2017, wanting to leave the hospitality industry for something that allowed her to spend more time at home, she and her husband bought their facility as part of a franchise chain called The Little Gym. Its slogan: “Serious fun.”
They got what generations of franchise owners have gotten out of similar deals, with brands such as Mcdonald’s or Jiffy Lube: a known brand name and detailed business plans in exchange for an initial fee and a cut of the revenue. For Cianci, it was more than just a business.
“I love it. I really love it,” said Cianci, a mother of three who studied dance. “I love my students, and I love that it lets me make a difference.”
In the past year and a half, since The Little Gym was acquired by a private equity- backed firm called Unleashed Brands, her work has felt far less idyllic.
According to legal filings, internal documents and interviews with more than a half- dozen other franchisees — most of whom requested anonymity to avoid retaliation — Unleashed began to demand higher fees and institute more stringent requirements, which the independent owners thought would threaten their profits. The day after Cianci organized
her fellow franchise owners into an association to push back against the changes, the corporate office told her it was terminating her license on the grounds that she was chronically late in paying her fees. Given the timing, Cianci maintains in the legal filings that it constituted retaliation.
Along the way, Unleashed Brands surveilled Cianci’s business with undercover shoppers, met with her landlord and disparaged her to fellow franchisees. When she tried to salvage her business under a new name — it’s now called Teeter Tots Music n Motion — the company sued, accusing her of violating its trademarks and a noncompete clause in her franchise agreement.
The episode has plunged Cianci about $ 300,000 into debt and enmeshed Unleashed in a nasty court battle not long after it acquired several new brands. The outcome will be a test of just how much a franchiser can unilaterally change the rules of a business relationship that has served as an on- ramp to entrepreneurship for hundreds of thousands of people.
The legal fight — along with two others Unleashed has faced with franchisees at its other brands — also reveals the challenges of applying the private equity playbook to the unique world of franchises.
Pr ivate equity has notched decades of high returns for investors by following a well- worn strategy: acquire distressed or undervalued companies or real estate, increase profits and then sell them. Greatest hits include foreclosed homes, highway rest stops and coal mines bought out of bankruptcy.
Franchising has become one of private equity’s targets du jour. According to the research firm Frandata,
the number of franchise brands acquired by private equity firms and other investors rose from 52 in 2019 to 149 in 2021 and was on track to nearly equal that total in 2022.
Private equity firms tout their ability to bring new ideas, technologies and efficiencies, and franchises, financially weakened by the pandemic, appeared ripe for those kinds of changes.
But the reality is not so straightforward. The nation’s franchisees ( 237,619, according to Frandata), like Cianci, think of themselves as independent small businesses, who have often sunk their life savings into the enterprise. That’s why Little Gym owners are resisting Unleashed’s attempts to squeeze their profits to pad its own.
Unlike, say, factory workers, who can be laid off at will, franchisees are supposed to be protected by legal documents that prescribe a certain business model for years at a time. Moreover, Unleashed — and its investors — need franchisees to stay motivated so they can keep generating revenue and recruit others to keep expanding the franchise system.
Cianci, who is now in arbitration with Unleashed Brands, has been working to change state laws to better protect franchisees who might find themselves in her position down the line. The Federal Trade Commission, meanwhile, is reconsidering federal regulations on franchisers, which haven’t changed for more than a decade.
Direct inquiries to Michael Browning Jr., Unleashed’s CEO and founder, and other executives were not returned. Instead, a public relations firm answered detailed questions via email, saying the company’s changes have improved business across the board.
Many of the changes, however, are simply not what franchisees say they had signed up for.
“What this reflects is a conflict between the private equity firm that bought this and what they actually bought,” said Francine Lafontaine, an economist at the University of Michigan who specializes in franchise relationships. “In their due diligence, they didn’t seem to think too much about who they were going to be working with once they owned this chain.” Browning, the son of a real estate developer with a background in health care investing, viewed The Little Gym as a perfect part of his vision: He was building a conveyor belt of activities for kids.
Browning spent the 2010s building a franchise called Urban Air, a chain of trampoline parks where parents could spend $ 700 on a birthday party to remember for their seventhgrader. The venture was staked by Browning and his father, and eventually, Urban Air formed Unleashed. Private equity was also interested in the Brownings’ growing business. Although a company spokesperson did not clarify the company’s relationship with private equity, on the websites of private equity firms AHR Growth Partners, Mantucket Capital and MPK Equity Partners, Unleashed or its brands are listed among their current or recent investments.
In 2021, he decided to scale up, following a hot new trend in private equity: building “platforms” to consolidate several brands in a similar industry that could then cross- sell a variety of services to their customers, as well as sell more franchises to their existing franchisees.
Browning’s company, Unleashed Brands, began buying other youth- enrichment chains. Parents — always moms, in Browning’s conception — could then spend money at his companies from the birth of their kids through high school graduation.
Cianci was immediately
skeptical of Browning’s vision for rapidly collecting children’s services and integrating their sales, operations and marketing.
“That might be OK when you’re cleaning a dryer vent, but it’s not when you’re throwing around a 4- month- old and you need them to be safe,” Cianci said. “He was moving faster than he would need to get to know the business.”
Changes didn’t take long. Within weeks, long- tenured headquarters employees started leaving. In conversations with franchisees across the country, numerous owners expressed frustration that the support they depended on had evaporated; instead of calling a trusted adviser whenever they wanted, they had to file an online ticket. ( Unleashed said that it “never sought to cut access” to its staff and that the ticket system was instituted to make sure they were responding in a timely fashion.) The company tried to impose a new payroll vendor that caused unending headaches. Certain activities, such as karate, were eliminated as Unleashed acquired businesses with similar programming; the company said it trimmed services with low enrollment to “streamline” the offerings. The company also outlined a process by which franchisees could lose their licenses if they failed to meet brand standards.
In the fall of 2021, the
company required all franchisees to sign a new agreement allowing Unleashed to automatically debit their bank accounts. Cianci noticed that it also contained broad language allowing the company to extract any other fees that might be owed, which she believed went beyond her franchise agreement.
Under the advice of a lawyer, she refused to sign it and started to send her royalty payments via paper check.
To sound the alarm to others, Cianci held conference calls, often with a lawyer present. As concerns spread, a group of Little Gym franchisees in May formed the Happy Handstands Franchisee Association, which ultimately reached more than 90% participation from across the system. Cianci was elected president.
On May 19, 2022, Happy Handstands’ lawyers sent Unleashed a cease- anddesist letter on behalf of the membership. The next evening, an email popped up saying Cianci’s franchise had been terminated. When she tried to check it, her email account was gone, too.
To save her business, Cianci went before an arbitrator and filed for a preliminary injunction decrying the termination as retaliatory; the arbitrator ruled that she hadn’t cleared the high legal bar necessary to stop the process. After that, she started tearing down all her Little Gym branding and adapting her curriculum so as not to violate the company’s trademarks. She paused when Unleashed’s lawyers wanted to discuss a settlement, which she said she rejected over its harsh terms.
In June and July, the company sent undercover shoppers — including one who was a licensed private investigator — who posed as parents and asked Cianci’s employees what kinds of lessons they offered and whether they overlapped with The Little Gym’s programming.
In early July, Unleashed, with the help of outside counsel DLA Piper, sued her in the superior court of Arizona for Maricopa County, where The Little Gym is based. The company accused her of failing to eliminate all branding fast enough, offering declarations from the investigators as evidence — the color scheme looked the same, for example, and a Wi- Fi network was still “ThelittleGym,” password “SeriousFun.”
Cianci’s case is winding its way through arbitration. Her new gym in a suburban mall next to Macy’s has only about 74 members, compared with the 275 she had before her termination by Unleashed. She said her husband, a federal trademark attorney, is working long hours to support them.
In the meantime, she’s trying to prevent future franchisees from being put in the situation she found herself in.
She hopes her case will ultimately prove that it’s possible to resist a franchiser’s efforts to impose its will outside what are supposed to be legally binding agreements, whether it’s how many birthday parties to offer or which insurance company to use.
“That’s exactly what went wrong here,” Cianci said. “He’s buying companies where people had rights.”