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Back in the saddle

A snapshot of a company in litigation


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Sona Medspa's legal problems were fodder for the trade press and industry blogs, including several updates in Franchise Times. The most recent FT article reported an arbitrator found Sona "guilty of negligent misrepresentation" of the company's technology to consumers and dismissed the remaining nine counts. It took two years to come to that decision, and a lot of angry former franchisees. That made us curious: Just how does a legal battle affect the franchisor's staff and non-litigious franchisees? Here's a look at how litigation affected the day-to-day operations of Sona.

Little did Heather Rose know when she moved Sona Medspa to the business-friendly Nashville, Tenn., area that the location also would prove to be personally cathartic. During her company’s two-year legal battle with several franchisees, her weekend stress-reliever was riding horses on her 10-acre property. “Riding is a release…it was my escape,” Rose says. “When you’re on a 1,600-pound animal, you have to pay attention.”

Those few hours in the saddle were the only time her attention was diverted from what was happening back at the office.

“I don’t do balance well, as my husband will tell you,” she admits.

 
Heather Rose, who weathered a two-year legal battle, is back selling.

Rose says she and her father, James Amos, and their financial partner, Carousel Partners, “bought litigation” when they purchased Sona Medspa in May 2004. Rose had been researching the medical spa industry, with plans to open her own company. But the speed at which the industry was growing convinced her she needed to get to market faster than she could with a start-up. She found Sona, and decided an acquisition would be the prudent way to go, but didn’t have the funds to do it on her own. She brought in her father as a partner. She had worked with him at Mail Boxes Etc. during its transition to UPS and also at Brice Foods, the parent company of I Can’t Believe It’s Yogurt! And, while they don’t always think alike “from a career perspective,” Rose says they have a strong friendship and respect for one another.

Amos, who is well-known in the franchise community because of the high-profile positions he’s held at franchise companies as well as his stint as chairman of the International Franchise Association, has attracted both admirers and critics. Controversy seems to follow him. Mention his name online and the blogging gets vicious.

His involvement in the company most likely drew more attention to Sona’s troubles than a small, regional company would normally receive, even though he’s no longer involved in the day-to-day management.

Rose started as the chief operating officer, but in 2005 she became the president and CEO. Amos is chairman of the board.

The team had barely settled in before they were presented with multiple lawsuits. Among them was an arbitration request filed by franchisee Kempton & Associates, which claimed that it was misled by Sona’s claims of the effectiveness of its treatments. The arbitrator ultimately found Sona guilty of negligent misrepresentation and fined the company $400,000, but decided that its actions did not constitute fraud.

Another action involved Paul Amoruso, owner of two Sona centers in the Washington, D.C., area who alleged that Sona pushed him to open more centers.

Franchisee Byron Ashbridge, who now operates five Sona centers with his business partner Joe Pitt, headed the franchisee advisory group at the time and was close to a number of litigants. Pitt was originally with Carousel Capital before deciding to become a franchisee in the system.

Ashbridge says franchisees had “high expectations” for the amount and type of support they should receive from the franchisor and believed the fee arrangement was too high for what they were receiving. According to Ashbridge, Amoruso made several recommendations to management about the fee structure, which were ignored. It was a case of headstrong franchisee meets headstrong franchisor, Ashbridge says.

The difference between Amoruso’s take on the situation and his, Ashbridge says, is that Amoruso is an entrepreneur, while Ashbridge comes from a corporate background. As a corporate escapee who had put up with years of bureaucracy, Ashbridge says he knew it would take time for Sona management to make changes. Entrepreneurs, on the other hand, aren’t always content with the slow track. Amoruso sued, and other franchisees were encouraged to join him.

The result for those left behind was a $3 million tab—“thank god for insurance,” Rose says, even though it didn’t cover all of it—no growth, more work for fewer people and abbreviated services to the remaining franchisees.

“It’s a cloud, it impacts every decision you make,” Rose says. “It can derail an organization, if you let it.”

What’s so ironic, Ashbridge says, is that the fee structure was changed to the better and “at the end of the day, most of the people (who sued) are still involved in the medspa industry.” Only not with Sona.

 
Noel Halgreen operates three clinics with wife Desiree.

While Ashbridge and his business partner continued opening centers—which he refers to as successful—during that time, “the whole organization was much more stagnant.”

Remember, Sona had been purchased by Rose as a platform for growth—and she wasn’t the only one wanting to see the small company increase its numbers. The franchisees had bought into an aggressive growth plan that would benefit them as well as headquarters.

“We lost morale and the benefits that come with growth and critical mass,” says Noel Halgreen, who operates three clinics in Houston with wife Desiree. “We were shrinking rather than growing. We didn’t get national branding so we had to market harder in our markets.”

While Halgreen didn’t have to defend the brand to many customers, since the case was covered in the trade press more so than the general press, the litigation hurt them in other ways. “We set out to be the employer of choice,” he says, and when your franchisor is facing major litigation that tarnishes the franchisees’ crown, too. Financing may also be harder to secure in the future as he expands his units, he adds, since lenders will look at the litigation section of the UFOC. Lender skepticism also could affect new franchisees coming into the system, therefore delaying that crucial critical mass the system needs to keep up with a thriving industry.

When Sona stopped offering franchises while it fought the litigation, Rose had to let go of about half her staff, including the franchise sales, real estate and construction departments. It also made more work for the remaining staff who also had to gather “massive” documentation and be deposed by lawyers.

Alex Bernard, franchise communications and logistic manager for Sona, had a hard time not taking it personally. She had helped many of the franchisees open their clinics. “For some, I was the first person they met (at the company),” she says. “The whole fraud thing…I remember thinking how could they think I would do that? I was born and raised Midwest.”

While corporate staff was struggling with morale issues, so were the franchisees.

“It made me question my decision,” says Gloria Lerma Lopez, whose clinic is in the Coral Gable, Fla., area. “I was worried that I might lose my investment.”

Lopez says she was bombarded with e-mails from the litigants and their attorneys trying to turn her against the system.

“Heather had constant contact (with us),” she says. “She would counter with their side.”

Even with the problems, Lopez says she’s glad she stuck with Sona. “I know others who went with other companies and are regretting not going with Sona.”

Frequent and open communications with staff and franchisees was Rose’s strategy. “We disclosed everything we could…the positives, yes, but also the negatives,” she says. She also took a three-week road trip where she talked about the issues in person with franchisees, also asking for them to sign a release.

“I did have a sit-down with management, and they gave me their view,” Halgreen, an Australian who bought and sold companies before deciding to own his own business. “The more I looked (into it), the more I realized I didn’t share the view of the litigants…I focused on getting my business up and running. Jumping ship was never an option.”

Halgreen says the “what-if” questions rarely get answered, and therefore, there’s no way of knowing what would have happened if the arbitrator’s decision had been different. Those who didn’t believe in the system got out, he says, and those who stayed believed in it.

If litigation is hard on regular staff, pity the inhouse lawyer. Sona was Grayson Brown’s first job out of law school, and he says he received a baptism by fire. Instead of dealing with registrations and contracts as expected, “a good portion of my duties were shifted to give my full attention to litigation.” The actual litigation duties were handled by experienced outside counsel, he adds.

“Did I ever doubt the moral fiber of the people who run this company?” he replies to our question. “110 percent I felt that Heather and Jim (Amos) did no wrong. I had no problem getting up every morning and defending these people.”

The franchisees’ attorney, Michael Garner of Dady & Garner, feels differently. In an interview reported in a Franchise Times column in the June issue, he states that he believes Rose and Amos were guilty of not doing proper due diligence when they bought the company and with their experience in franchising, they should have known better.

The costs to the system were more than just in the money paid out to lawyers. The company lost potential revenues from two years of no growth, plus income from top-performing stores, because once they became part of the lawsuit they stopped paying royalties, Rose says.

A lesson learned, she says, is that “after we made the investment, I would have grown company stores along side (franchises)…to mitigate the risk.”

One positive: The company was able to upgrade its technology during those two years and it developed a point-of-sale system that won an award from Microsoft. “While the litigants tried to cripple us, not selling gave us time…to build a tech platform for the franchise network,” says B.J. Emerson, director of IT. The system will give the company a competitive advantage when it starts selling again.

All the people we talked to credit Rose with holding the organization together.

“Rose is an extremely good communicator…very polished,” says CFO Patrick Fox. “She doesn’t sugarcoat, she’s straight-forward.

Sona will now gear up to sell again, but staff is still bruised from the fight. Bernard says that when she got the e-mail to meet in the conference room after the arbitrator’s decision was handed down, she and the others were relieved.

“Finally, we can get back to work,” she says. “It was a good morning.”

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