Medical Spa MD - Inside Sona Medspa series Part 3: The Franchise Pitch.
These posts are written by former Sona Medspa owner Ron Berglund to provide an inside view of the way medical spa franchises recruit, train, and support their owners as well as detailing some of the problems with medspa franchises.
The Medical Spa Franchise Pitch:
Sona and its officers made numerous representations to prospective franchisees such as my partner and I regarding Sona’s “magic formula” for success. They had to promise a great deal to justify the astronomical price they were charging for admission. Their representations were supplemented by written materials, sales materials, and information provided on their web site and other franchise web sites such as Bison.com.
Sona claimed that it had developed a “proven business model” for removal of unwanted hair through laser technology that could be utilized by franchisees with no prior experience in the field and with great success, because it had the “fastest, most powerful laser technology and offered services at much lower fees than competitors.” My three year hitch with Sona, and the failures of numerous other Sona franchisees, certainly makes this representation look absurd. The only thing “proven” about their business model is that it is proven to drive many followers to bankruptcy. I will go into the “fastest, most powerful laser” statement later in the story.
Sona’s claim to have a patent-pending “revolutionary” concept, that removed 93 to 97 percent of hair in all areas permanently in five treatments also proved to be totally bogus. Dennis Jones specifically said that Sona would offer clients a sixth treatment at no cost if the first five had not removed all hair, but that this was “extremely rare.” Sona also said that this “patent-pending process” resulted in hair removal in “less time with better results” and that ensured that franchisees had “a compelling competitive advantage.” These misrepresentations proved to be an “economic death sentence” for many of us. Our entire business model was premised on the understanding that the treatment packages we sold would be completed- and our clients satisfied- after the five pre-paid treatments were performed. Unfortunately for those of us holding the bag—and whose “necks were on the line”—the overwhelming majority of our clients required significantly more than five treatments to achieve anything even close to 90% hair removal. After over promising thousands of clients during the first 18 months of operation, we found there way no way to get out of the corner we had painted ourselves into.
Sona stated that it was safe to use Sona’s laser hair removal processes two weeks after sun (or tanning bed) exposure sufficient to tan the skin. Furthermore, they told us that after treatments our clients could immediately return to tanning. Both of these statements proved to be totally false. Tanning proved to be an incredibly dicey aspect of the laser hair removal process, and added an additional wild card to our safety and efficacy problems.
Sona claimed that it had other proprietary technologies that gave it a major competitive advantage, including a topical anesthetic called “Sonacaine” that minimized any discomfort resulting from the laser treatments. As we quickly discovered, there was absolutely nothing proprietary about their 4% lidocaine topical product.
Sona further claimed that whereas our laser hair removal competitors would be unable to successfully treat blonde, red or gray hair, we would have an “exclusive license” for a product called “Meladine” (produced- coincidentally- by another company owned by Dennis Jones). According to Sona, their magical “Meladine”, which they claimed was proven to be effective in clinical studies, would make light colored hair follicles “visible” to lasers. The use of Meladine in our clinics would therefore “enable all hair colors to be treated”, would make our Sona Laser Center far more competitive than other laser treatment venues, and would increase our revenues substantially.” Not surprisingly, those of us who incorporated the use of Meladine in our operations found that it not only did not work as claimed, but that it also set us up for having to give thousands of dollars in refunds to unhappy clients. My experience was that the success rate of Meladine was almost nil. I cannot even imagine how much this fiasco cost us in terms of creating unhappy clients who would do nothing but spread negative goodwill about our business.
Sona claimed that its operations typically resulted in a 55 percent gross profit margin or more. They further claimed that we could expect to achieve “break-even” with gross revenues between $44,000 to $50,000 per month. Sona’s franchise offering circular showed pro formas reflecting financial results at assumed revenue levels ranging from $50,000 per month to $125,000 per month and earnings ranging from $288 to $36,240 per month. The same offering circular stated that average monthly gross revenues were over $65,000. At this level, it was stated that earnings would be $6,768 per month. Sona’s officers privately whispered to many of the franchisees that they could easily expect to receive an actual profit of 20% of gross revenues each month. Unfortunately, in the real world I don’t think any of the Sona franchisees made any true “profit” at all when the ramifications of selling prepaid packages for cash upfront played out. The entire financial projection furnished by Sona proved to be misleading, unsubstantiated and blatantly deceitful. One needs to simply look at the track record of the pioneer affiliates and franchisees who have been falling like dominoes during the past two years to substantiate this conclusion.
Sona claimed that their company-owned laser centers in Virginia were profitable. Sona never furnished profit and loss statements from their corporate-owned centers, but I would wager my first born child that an analysis of their financial statements- or the statements of any Sona center in the entire U.S.- would establish that nobody was actually making a profit.
Sona stated that it surveyed, reviewed and tested all lasers on the market, and had selected only the best, state-of-the-art lasers, manufactured by Cynosure, for use by franchisees. Moreover, Sona’s program provided “continuous maintenance and replacements to keep each center a step ahead of the competition.” Mindful of the very competitive and fast-paced landscape of the medical laser industry, I was very hesitant to handcuff myself to dealing with a single laser manufacturer. At the time, I had heard very little about the Cynosure company, and I would have much preferred to be able to negotiate with any of the dozen or more leading providers of equipment suitable for laser hair removal. The one advantage I did see, however, was that we would not have to purchase (or lease) our lasers as Sona’s franchise agreement incorporated a revenue share agreement for the lasers. Hindsight is always 20/20, and in hindsight I discovered a number of things that made even this aspect of the Sona program a disaster. First, a number of us later discovered in litigation that Sona did not “survey, test and select” the Cynosure lasers at all. In fact, Cynosure was a 40% owner of the Sona corporation. This meant that we had no ability to negotiate freely with other laser companies, and we were essentially a “captive audience” of Cynosure. Second, as will be detailed later, the Apogee 9300 lasers furnished by Cynosure were horrible.
Sona stated that it had “television, radio and print media materials … unsurpassed in the industry” that were worth “hundreds of thousands of dollars”. Sona promised that these materials would be made available to franchisees, not only for the grand opening, but also for “the ongoing success of the center.” Sona further promised to provide hundreds of thousands of dollars in new additional advertising each year as part of the base franchise fee it charged us. Sona also stated that it had a “corporate marketing director” and “marketing staff.” A grand opening event would be planned and executed by Sona that would include press releases, media packages, radio and television appearances, and an “all out media blitz.” Not surprisingly, Sona’s entire marketing program was pathetic, and most of us essentially took on the entire responsibility for advertising and marketing on our own.
Sona further claimed that it provided world-class, state-of-the-art training “that goes far beyond standard industry practices”. Sona stated that even franchisees who had no prior experience with the market would be fully trained and able to run their businesses successfully. “There is no more in-depth training to be found,” Sona claimed. After operating the center for several months, we found that Sona’s “world class” training was so bad that it actually proved to be a negative. Among other things, the clinical training provided to our nurses and Sona’s treatment protocol recommendations were so ultra-conservative that – in the typical case—we later found that most clients were not being treated at an efficacious energy fluence until their fourth or fifth treatment. Many of the clients were just beginning to achieve a percentage of permanent hair reduction at the point in time when they were expecting to be 90% complete! A large part of the blame for this relates to the fact that Sona took a high-volume “McDonalds” approach to laser hair removal and did not allow the time necessary to perform the necessary test spot procedures before actually beginning treatment. I now recommend that anyone doing laser hair removal spend 15 minutes testing several different energy and pulse duration parameters—and observe after 24 to 48 hours for skin and hair response before actually treating a client. Following the Sona program, I found that time and time again my nurses would go ahead and use the Sona ultra conservative treatment protocols to treat- for example-an entire pair of legs. This session might take 90 minutes (at $20 to $35 per hour for the nurse performing the treatment) and consume over 3,000 precious laser pulses to complete. And under the “patent-pending Sona concept” we would not provide a second treatment for the client treating her legs for four months (the longest treatment interval I have ever observed!). The client would typically have received only three of her prepaid treatments after a year, and she was often still being treated at energy levels below what was required for an efficacious result for her. This was a recipe for thousands of unsatisfied clients and hundreds of arguments for additional free treatments.
Sona represented that they had custom-designed “world class” software that would facilitate operation of multiple centers including scheduling appointments and managing cash. Not surprisingly, their software was a “cheapo” merger of off the shelf Quick Books and Goldmine which proved to be totally inadequate and incredibly cumbersome. The invoicing was so difficult and awkward that my “front office coordinator” would typically spend entire days creating invoices which should have been able to be done in seconds with an adequate software system. And the reports? Forget about it! I have since discovered that the basic $799 MedSpa package sold by Orchid is far superior to what we were provided by Sona. $799 vs. $400,000???
Sona stated that the franchise was a “turn-key” operation; that is, Sona agreed to delivere a center to the franchisee that was ready to operate, requiring only minimal preparation on the part of franchisees. Moreover, Sona claimed that the center could be operated without direct involvement of the owner and entirely through employees (i.e, that it was suitable for investment by an absentee owner). This statement is so preposterous that it doesn’t even deserve a response.
Sona further stated that each franchisee would have a dedicated account executive at headquarters who would be available to assist in resolving any problems or issues. The various individuals assigned to our account during my three year stint had one thing in common—not one of them had actually operated a med spa! Unfortunately, what they also had in common is that they were of absolutely of no help whatsoever. The only advice their head marketing guru could give us when we pleaded with him for help in the fall of 2004 as we were sinking like the Titanic was to “spend more on advertising”. Are you kidding me?
Sona also stated that franchisees would enjoy a large tax savings due to deferred revenue in the first year of operation. This proved to be another incredible trap, and the Sona reports generated by their “world class software system” were a mystery to our tax accountants. Sona’s accounting system required that we essentially keep two different set of books. One accounting was on a cash basis and would track the revenues we took in and our monthly expenses. The second accounting was on the accrual basis and tried to account for the treatments performed as we were not required to pay taxes on amounts taken in for pre-paid treatments until the services were actually performed. Trying to do a standard tax return with this convoluted system was beyond pulling teeth! And with a confusing accounting system and financial statements such s these, can you even imagine how difficult it was to try to produce financial statements in an effort to sell the business?
Finally, it was stated that the Sona business was “high margin” and a “proven business model”. Right! And I’ll see you in bankruptcy court, too!
Unfortunately for me, virtually each and every one of the aforementioned representations proved to be untrue, false, and flat out wrong! As if this wasn’t bad enough, Sona also made a number of promises that were to be delivered “up front” in consideration of its franchisees forking over from $125,000 to $400,000+ including the following:
To provide “world class” training and set-up services, software management systems, advertisements, furniture and fixtures, office equipment and software, medical supplies and other supplies and equipment for opening the center. Sorry. Once again all untrue.
Sufficient training for the owner and up to four other individuals that would be adequate for them to open and operate the center, together with a set of manuals that would enable owners to operate the business. The manuals were Ok for allowing someone to get started with a medspa. Other than that, training was totally inadequate and very amateur.
Assistance with site selection and lease negotiation. My partner and I selected our own site. I had a hard time believing that a real estate “expert” from Virginia could do a better job of selecting a good site than two businessmen who liven in the Twin Cities their entire lives and had retained a local commercial real estate agent.
Advice on construction, set up and opening, organizing the business. Surprise! This was one—perhaps the only- aspect of the transaction in which Sona was quite helpful.
Assistance with determining and assessing the local demographics and hiring staff and a medical director. Their “assistance” consisted of providing us with one sentence recommended help wanted “ads” for the local newspaper! Then again- what do you expect for $400,000!
Assistance with the installation of equipment. What laser company does not do that!
Finally, Sona agreed, during the operation of the businesses, to provide:
Reviews and analyses of the operations of the individual franchisee. Once again, their help was a joke.
Improvements in administrative bookkeeping, accounting, inventory control, and general operating procedures. Are you kidding?
Updates to manuals to incorporate improvements and new developments. Big deal.
Periodic telephone and electronic mail assistance on daily operations, marketing, advertising, financial management, personnel and other operating issues. The real reason Sona took a continuing interest in these matters was to insure that they got their hefty “cut” right off the top. Their “laser placement fee” cut ranged from as high as 27% of gross revenues to 15% based on sliding scale. It was beyond painful to cut them a check for an average of $22,000 each month. After paying an average of $20,000 for advertising, over $20,000 for payroll (average), rent, insurance, supplies, etc. it became impossible to pay ourselves anything after a short while.
Review of proposed equipment, supplies and service contracts to see if they met the specifications of the Sona system. Sona’s one-sided documents gave it absolute control every aspect of the business, so when the business started to fail we were utterly helpless to do anything about it. They even hassled me about trying to sell a sun block as they didn’t offer one during the first 18 months of our stint.
Administration of a system-wide advertising and promotional fund. Sona actually spoke early on about “national advertising” campaigns and had delusions of grandeur about having 100 centers operating by the end of the first year, etc. It was preposterous.
Assistance with laser equipment, servicing, maintenance and repairs. This was such a nightmare I need to dedicate an entire chapter to it—I will get to it down the road.