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'You are getting very insolvent...’ Hypnosis chain stumbles in NW


Published:

Beth Ewen

Illustration by Jonathan Hankin

Positive Changes uses life coaching and hypnosis “to advance relaxation, create focus and thereby achieve behavioral change,” its website says, but the Chapter 7 bankruptcy filing by its largest franchisee is stressing both customers and the franchise system.

ET Research Inc., operated by Sheryl Manchester, president, abruptly closed her four Pacific Northwest locations in April and filed Chapter 7, which means liquidation.

The locations were in Spokane and Bellevue, Washington; Beaverton, Oregon; and Boise Idaho.

That leaves Positive Changes with only four franchised locations: three in Canada and one in Tucson, Arizona, and one corporate location in Iowa, and an uncertain future.

Positive Changes was founded in 1987, and calls itself “the leader in behavior modification … if you don’t find a center near you, simply contact us. We’re expanding,” its website says. The management consultant acting as “chief restructuring officer” of the concept, Joe Patten of MainStream Management, said, “we’re continuing to support the four remaining stores,” but added “the future of the franchisor is yet to be decided.”

He said the Chapter 7 filing was shocking. “Look at all the people who got hurt—a lot of people got hurt.” In a court filing in the Eastern District of Washington, assets were listed between $100,000 and $500,000, with liabilities between $500,001 and $1 million. Kevin O’Rourke, the debtor’s attorney at Southwell and O’Rourke in Spokane, did not return calls seeking comment.

Customers who showed up for appointments at the closed locations expressed frustration on social media, regarding both their monthly membership dues and the bankruptcy process, which included the first meeting of creditors scheduled for August 2.

“Just called the bankruptcy court at the number above,” wrote one. “This is a Chapter 7 bankruptcy, and they’re claiming no assets to liquidate. (Which is B.S. They were getting me for $300/month, and there were dozens of people in there at any given time who were no doubt paying as much as I did).”

In a Chapter 7, wrote another, “as a creditor, you have rights, but not many. The first claimants to get money from any potential assets will be the government. Taxes, secured SBA loans, etc. Then it’d probably be wages to employees. Then probably other secured creditors. They basically disburse those funds on a priority basis and to be quite honest, any of you consumers will be almost dead last.”

Hard to find

Reaching anyone in management at Positive Changes was an exercise in frustration that stretched over four weeks. Laura Brunner is listed as the CEO of Lifestyle Improvement, the franchisor, with Kathy Silverstein listed as the media and public relations person. Neither returned calls seeking comment.

Brunner also serves as president at MainStream Management, a consulting company that specializes in corporate growth, with offices in Cedar Rapids, Iowa, and Washington, D.C. MainStream has a partnership interest in Positive Changes, according to the website. Calls to her number there were not returned.

Patten, chairman and founder of MainStream Management, returned my calls in mid-July, and said Brunner was no longer CEO. He said he is acting as chief restructuring officer for the franchisor, after being retained about two years ago to fix the franchise system that had been in decline. A single investor in Ohio, whom he didn’t name, financially backs the brand.

He said no one outside of ET Research saw the bankruptcy coming. “Obviously that’s a big shock. The franchisor did not see it coming. Even to this day, it’s hard to understand,” he said.

Gross revenue at ET Research from January 1 to the April 20, 2017, filing was $1.59 million. Revenue last year was $10.39 million, down from $12.7 million in 2015, according to court documents.

ET Research Inc. is an ESOP or employee stock ownership plan, which gives employees an ownership interest through shares allocated to them. The shares are held in an ESOP trust until the employee retires or leaves the company. An ESOP is a form of retirement plan, and similar to a 401(k) or pension plan, this is frequently an individual’s most valuable asset.

The annual filing for the ET Research ESOP shows 85 participants with account balances at the end of 2015, the most recent year reported. Dale Stevens is listed as the administrator of the plan, and his company is listed as Break-Thru Benefits in Spokane. He did not reply to a request for comment. The number for Sheryl Manchester, president of ET Research and the plan sponsor, is no longer in service. Mike Merritt is listed as trustee of ET Research Inc. ESOP, and also operates Merritt Accounting.

Reached in July, he said their bankruptcy attorney had advised all of them not to comment.

Scott Skinner, a bankruptcy attorney with Detroit Lawyers and a specialist in ESOPs, wrote in a blog post that whether ESOP shareholders get their money back or not depends on the structure of the plan.

Clients out of luck

As for clients of the four closed centers, who in many cases paid for programs in advance, they will have to line up at the end of the long list of creditors. Patten said the franchisor would continue to provide some products to support customers’ programs, such as guided imagery recordings, but obviously could not provide the hypnosis and other services that were offered in the stores.

Positive Changes’ website says hypnosis “is supported by renowned research institutions like the National Institutes of Health and the Mayo Clinic. It is safe and natural,” and used for weight loss, smoking cessation and stress management.

In a personal hypnosis session, “your hypnotist will guide you to a state of deep relaxation much like a daydream,” the website says. “You will be fully aware and in control, but in the restful state of heightened alertness your subconscious will be open to positive suggestions for change.” That last phrase is exactly what the franchise itself could use.

Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to bewen@franchisetimes.com.

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