FDD Talk 2018: Massage Envy Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Massage Envy franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Massage Envy franchise, based on Item 7 of the company’s 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Massage Envy franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Massage Envy outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of Massage Envy’s financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 average, median, highest, and lowest net sales for the 374 franchised Massage Envy locations in the United States that opened between January 1, 2013 and December 31, 2015 and have been in operation continuously for at least 2 years but not more than 5 years

• 2017 average, median, highest, and lowest net sales for the 570 franchised Massage Envy locations in the United States that opened between January 1, 2008 and December 31, 2011 and have been in operation continuously for at least 6 years but not more than 10 years

• 2017 average, median, highest, and lowest net sales for the 157 franchised Massage Envy locations in the United States that opened prior to December 31, 2006 and have been in operation continuously for at least 11 years

Section I – Background Information

13 Things You Need to Know About the Massage Envy Franchise

News Reports Surface on Reported Sexual Assaults at Some Massage Envy Locations

1.  In late November 2017, an investigative report conducted by BuzzFeed News revealed that more than 180 women have reported sexual assaults by Massage Envy employees. The report opened with the story of one of the alleged victims, Susan Ingram. According to the report, Ingram was just one of more than 180 women who “have filed sexual assault lawsuits, police reports, and state board complaints against Massage Envy spas, their employees, and the national company. Over 100 reported that massage therapists groped their genitals, groped their breasts, or committed other explicit violations.”

2.  Additionally, BuzzFeed News reported that Massage Envy franchisees mishandled the claims. BuzzFeed News investigative reporter Katie Baker said, “I think that the descriptions of the sexual assault claims that I heard are really horrific. But to me, it’s awful to be assaulted when you’re in a very vulnerable position…But I think that for some women it’s even worse to go and report what happened to you and not have it taken seriously.” BuzzFeed News discovered that Massage Envy only requires franchisees to conduct internal investigations of abuse claims except in the few states that require notification of local law enforcement.

3.  Immediately following the release of the BuzzFeed News report, Massage Envy CEO Joseph Magnacca released a statement apologizing for mishandling the sexual assault reports. Magnacca said that each location has been “required to review, recommunicate and, in no uncertain terms, recommit to our safety and reporting policies.” Additionally, Magnacca said that Massage Envy has conducted a review “of all massage therapist files to ensure they have a completed background check and professional reference checks as well as to ensure their licensure/certification is current and annual training requirements have been met.”

4.  Magnacca added that Massage Envy’s “accredited third-party background screening company has begun rescreening each and every one of the 20,000 licensed massage therapists within the Massage Envy network.” At the end of Magnacca’s open letter, he promised that these were only the first steps that Massage Envy was taking to rectify the situation and that the company would be making additional changes to ensure its members’ safety.

Renewing Commitment to Members’ Safety

5.  Following the release of an investigative report conducted by BuzzFeed News, which stated that over 180 women had reported that they were sexually assaulted by Massage Envy employees, Massage Envy announced that the company had devised a six-point plan to ensure their customers’ safety. Massage Envy outlined the plan in a press release in early December 2017, about a week after BuzzFeed News released its report. In the press release, Massage Envy said that the plan would be rolled out and implemented across its entire network over the coming weeks.

6.  In addition to the six-point plan, Massage Envy said that it was working with industry groups, like the American Massage Therapy Association, to create a solid foundation for change across the massage industry. Massage Envy added, “The safety and well-being of members and guests has been our mission from day one and our commitment has never been stronger. We know that you put your trust in the brand, and we will keep working to earn it.”

7.  Massage Envy’s six-point plan is as follows:

• Prevention: “We are mandating updated background screening for all massage therapists on an annual basis. We’re also launching a fully-automated, third-party system with UBS (Universal Background Screening), consistently rated the country’s top background screening company, that tracks compliance of service providers’ employment requirements in real time. And, the network has just recently completed a review of all massage therapist files to ensure they have completed background and reference checks, have current licensure or certification and that annual training requirements have been met.”

• Reporting: “We are requiring that if a client makes an allegation of sexual assault, the franchisee will provide the client with contact information for local law enforcement and offer a private room to complete the call.”

• Investigations: “We are creating a qualified list of independent third-party resources that we will make available to assist franchisees in their investigations of sexual assault claims.”

• Review: “We are partnering with RAINN, the nation’s largest anti-sexual violence organization. RAINN works to prevent sexual violence, help survivors, and ensure perpetrators are brought to justice. Experts from RAINN will begin an end-to-end review of our policies and procedures — including reporting and investigation. They’ll recommend changes and together we will put change into action.”

• Support: “We are working with RAINN on response services, including victim support, and through the National Sexual Assault Hotline, free access to immediate confidential assistance, trained staff and other resources.”

• Guidance: “We are forming the Massage Envy Safety Advisory Council. This group, which will initially include a representative from RAINN, as well as Danielle Dick, who was instrumental in advocating for this change, will help us develop, maintain and implement strong safety and support standards. We’ve also created a dedicated corporate department that will lead the development and implementation of safety policies, supported by RAINN and the Advisory Council.”

Launches New Collection of Serums

8.  At the beginning of July 2018, Massage Envy introduced CyMe™ Boost – a first-of-its-kind collection of serums that bring the benefits of personalized skincare to the entire body. According to Massage Envy, these highly concentrated serums contain potent, efficacious ingredients that blend with the brand’s massage oils and creams. The serums were designed to hydrate, purify and balance the skin, and to smooth and brighten the skin’s appearance.

9.  Joe Magnacca, CEO of Massage Envy, said, “CyMe Boost addresses the emerging trend of consumers beginning to care about treating their skin beyond just the face and neck. Collectively, the Massage Envy franchise network has performed more than 135 million massages and facials, far more than anyone else in the industry. We used that expertise, and the input of therapists and estheticians, to create CyMe™ Boost.”

10.  The six different CyMe™ Boost Serums can be used separately, paired together, or combined with other enhancements in the selection of Massage Envy’s offerings, like aromatherapy. Massage Envy said there are more than 720 possible enhancement combinations. CyMe™ Boost is available at all Massage Envy locations nationwide, with an added cost of $10 per Boost to any massage session.

Company History

11.  Massage Envy was founded in 2002 by John Leonesio and Shawn Haycock in Scottsdale, Arizona. Leonesio and Haycock first met in the 1990s through a fitness chain, Q The Sports Club, which was co-founded by Leonesio. After Leonesio’s fitness chain was acquired by 24 Hour Fitness, he and Haycock decided to try bringing the fitness industry’s membership model to the massage industry. At the time, massages were mostly offered only by upscale spas or in medical offices. Leonesio and Haycock wanted to offer affordable massage at convenient mini-spas that would stay open nights and weekends.

12.  In 2003, Leonesio and Haycock started franchising the Massage Envy concept and the brand spread across the country. Around 2008, Massage Envy was sold to a conglomerate based in India and a year later, the company was acquired by New York City-based private equity firm, Sentinel Capital Partners. In 2012, Roark Capital Group, an Atlanta-based private equity firm focused on franchises, acquired Massage Envy from Sentinel. Massage Envy is currently the largest chain of franchised massage spas.

Entrepreneur’s Franchise 500

13.  Massage Envy ranked No. 45 on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Massage Envy franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Massage Envy’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  1,051
• Outlets at the End of the Year:  1,127
• Net Change:  +76

2016

• Outlets at the Start of the Year:  1,127
• Outlets at the End of the Year:  1,159
• Net Change:  +32

2017

• Outlets at the Start of the Year:  1,159
• Outlets at the End of the Year:  1,173
• Net Change:  +14

Company-Owned

2015

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  0
• Net Change:  0

2016

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  0
• Net Change:  0

2017

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  0
• Net Change:  0

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

• As of December 31, 2017, there were a total of 1,173 franchised Massage Envy Locations open and operating and, of that number, 1,101 Massage Envy Locations were in operation continuously throughout fiscal year 2017 and had been open and operating for at least 24 calendar months.

• Of these 1,101 Massage Envy Locations, 1,025 were Total Body Care Locations (including 75 locations that offered skin care conversions during 2016 and 2017) and 76 were Traditional Locations.

• These tables exclude 72 Massage Envy Locations which, as of December 31, 2017, had not been open and operating continuously since at least January 1, 2016, or which were located outside the United States.

• The franchised Massage Envy Locations included in these tables are of substantially the same size and layout as the Total Body Care Locations that Massage Envy expects franchisees to develop.

• These figures do not reflect the costs of sales, operating expenses, or other costs or expenses that might be deducted from the Net Sales figures to obtain your net income or profit.

• For purposes of these tables, “Net Sales” means the total of all revenue and receipts derived from the operation of the Massage Envy Location, including, but not limited to, all amounts received at or away from the physical location of the Massage Envy Location, or through or by means of the business conducted at the Massage Envy Location, such as fees for massage services, facial services, membership fees, fees for optional member services and charges, gift card sales, and revenue derived from products sales, whether in cash or by check, credit card, debit card, barter or exchange, or other credit transactions, but excluding only (1) sales taxes collected from customers and paid to the appropriate taxing authority, (2) all customer refunds and credits your business actually makes, and (3) tips received by massage therapists and aestheticians.

• Without limiting the generality of the foregoing, “Net Sales” includes all amounts that third party marketing agencies, such as, for example, Groupon, receive and retain from your customers for marketing products or services that these customers purchase from your business.

• The tables presented below show Net Sales information from fiscal year 2017 for Massage Envy Locations open and operating for various periods of time (i) 2-5 years; (ii) 6-10 years; and (iii) 11 or more years.

Part 1 – Statement of Average Net Sales for Fiscal Year 2017 by Quartiles for Franchised Outlets Opened Between January 1, 2013 and December 31, 2015

• The covered class for this table are the 374 Massage Envy Locations that opened between January 1, 2013 and December 31, 2015 and have been in operation continuously for at least 2 years but not more than 5 years.

Top Quartile