Tiffany Cianci spends most of her days in socks, padding around the fitness studio she operates in Frederick, Maryland, about an hour outside Washington, D.C. 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 so as 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 onramp 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.
Private 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. “The financial impact and franchisee benefit of these efforts is undeniable,” the spokesperson wrote.
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.”
New rules for franchises
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.
As the FTC reviews the rules governing franchising, advocates have urged the commission to add stronger protections, such as more disclosure of how the average franchise location performs. The International Franchise Association — whose board Browning recently joined — has lobbied hard to avert those changes.
At the very least, 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.”