Unpacked: The epic rise and dramatic downfall of fitness chain F45

Leading Australian fitness brand F45 looked ripped when it went public in 2021 with a US$1.4 billion valuation – but it has hit the wall hard since then. Here’s the untold story behind F45’s downfall – and how it can get back on top.

It was a remarkable success story for F45 to reach unicorn status in 2021, a stratosphere usually reserved for tech startups. Hell, it even had Hollywood A-lister Marky Mark Wahlberg on the cap table.

But since its IPO, the business has been plagued with problems.

The share price tanked from an ATH of $16 to just 53 cents.

Its CEO and CFO have resigned.

It is facing multiple lawsuits from investors.

And its franchisees are going under.

In this financial teardown, I’ll uncover what went south with this Aussie fitness brand.

What is F45?

The story of F45 started in Paddington, Sydney back in 2012. It began as a single brick-and-mortar location that attracted a cult-like following.

Whereas traditional gyms were just boring boxes filled with big equipment and stringer singlet-wearing meatheads, F45 switched up the model by providing group high-intensity interval training (HIIT) programs. The programs changed every day, combining functional fitness and weights, and they went for exactly 45 minutes – hence the name.

Because of the circuit-based training, F45 gyms didn’t require as much square meterage compared to traditional gyms. This meant they could be squeezed into high-density retail locations and office buildings, making it convenient for white-collar office workers – their target market – to get in a workout. Due to the group training dynamic, each gym only needed two to three staff members at a time, keeping running costs low.

After refining the programs, the brand, and the aesthetic, F45 was developed into a franchise model with the help of CEO Adam Gilchrist (not the cricketer).

The F45 business model

Whilst the F45 business model started as a gym, it isn’t in the business of operating brick-and-mortar fitness centers. Rather, it’s in the business of selling intangible assets – franchises.

Franchising is an attractive business model for capital-intensive consumer businesses like fast food chains and gyms because the unit economics are wonderful.

For example, for F45 to expand via a traditional corporate-owned model, they would have had to scout suitable locations, secure long-term leases, and outlay significant capital for the building fit-outs and equipment. Once operational, they’d need to keep trainers on payroll and deal with all the risks and operational headaches of running each site.

But with a franchise model, F45 is selling an information product to aspiring business owners in the form of an operating playbook and brand that franchisees buy via an upfront franchise fee, and then a percentage of revenue. In exchange, the franchisees (the operators) get ongoing training support, new customer leads and use of the brand assets.

A franchise model means pivoting from selling capital-intensive gym memberships, to selling zero marginal cost information products at much, much better margins and recurring revenue. All new franchises you sell are at incremental margin – the more you sell, the better your profit margins.

So how did the franchise strategy play out for F45?

F45 by the numbers: The financial teardown

From those humble beginnings with one gym in Paddington in 2013, F45 grew to 2,247 franchises across 63 countries by March 2021.

This was followed by the company’s Wall Street debut in July 2021, at that whopping US$1.4 billion valuation. But at the time of writing, the company’s market cap is at just US$51.6 million.

So, what happened?

Let’s start by looking at F45’s profit and loss statement for the last five years.

A few things to note:

Revenue was growing healthily at 40% CAGR.
Gross margins increased with scale, which is what you would expect to see in a franchise model with operational leverage.
The business was profitable the first few years – until it wasn’t.

With the exception of the operating costs in FY21, the business looked pretty good. But digging a little deeper into the numbers reveals some interesting insights.

Revenue breakdown

F45 derived its income in two ways.

Franchise fees – fees generated from franchisees.
Equipment sales – sales derived from the sale of fitness equipment to franchisees.

These financials offer a breakdown of its revenue and associated margins.

What I was surprised to learn was that a significant portion of revenue comprised of equipment and merch sales – almost 50% of total revenue in FY21!

Breaking down the gross profit by sales category unveiled a few other tidbits.

Franchise revenue has very attractive gross margins, reporting 92% in FY21! (Remember what I said earlier about franchise business models being wonderful?)
Despite a large chunk of F45’s revenue being derived from lower quality equipment and merch sales, the gross margin generated on these sales almost doubled from 40% in FY20 to a whopping 74% in FY21!

In short, F45 wasn’t just in the business of selling franchises.

A large chunk of its business was selling fitness equipment to franchisees at extraordinarily high margins.

According to the FY21 financials, the spike in gross margins from the equipment sales was primarily attributed to chunky supplier rebates. Rather than passing on this cost saving to franchisees, F45 kept it for themselves.

As for the whopping increase in operating expenses from FY20 to FY21, unfortunately, the annual report lacks detail (which is typically a signal…) but here’s the commentary that was offered:

The $124.8 million, or 216%, increase in selling, general, and administrative expenses during the year ended December 31, 2021 as compared to the same period in 2020 was primarily attributable to:

$48.3 million increase in stock-based compensation expense primarily from the vesting of certain RSUs upon consummation of the IPO
$37.9 million increase in stock-based compensation for certain employees and directors as the Company’s incentive plan became effective at the IPO date

The rest was general marketing, rent and employee costs.

In other words, the majority of the expenses were share-based payments. A bunch of it was to Mr Wahlberg himself!

How much money did Mark Wahlberg make?

In March 2019, two years before the IPO, Mark Wahlberg made a $100 million investment in F45 at an alleged US$450 million valuation, both personally and via an investment company called MWIG LLC.

We have to assume the “MW” in MWIG means Mark Wahlberg, but the company is co-owned by a family office called FOD Capital. Mark owned 26% of MWIG.

In total, I calculated that Mark owned ~8,018,071 shares, or ~8% of F45, at the IPO share price of $16.20, meaning this parcel of shares was valued at 4x his original investment.

MWIG took his invested chips off the table at IPO and sold $25 million worth of shares. The firm also offloaded 3.2 million of shares to Aussie fund manager L1 Capital in 2020 for an undisclosed amount.

But here’s where it gets juicy…

In a bit of conspicuous timing, Wahlberg dumped ~$12 million of his shares on the market in the months of March 2022 and April 2022.

This timing was interesting, because just a few months later, on July 26, 2022, F45 released a material update to the market where it announced:

The company slashed its FY22 revenue guidance by 50%, from $255 million – $275 million in revenue to $120 million – $130 million.
F45 slashed its net new franchise expectations by ~60%, from 1,500 to between 350 and 450 due to the collapse of external financing (i.e. potential franchisees couldn’t get loans to buy the franchise).
CEO Adam Gilchrest “stepped down” as CEO and was replaced by board member and interim CEO Ben Coates. At the same time, 110 staff were sacked in order to “turn the business around”.
The company lost a $250 million franchisee financing facility – a facility F45 had arranged for franchisees to open additional studios.

On the same day, the share price tanked ~60% from $3.51 to $1.35.

Mark ‘departed’ the majority of his shares before shit hit the fan.

Good timing, eh?

Mark still owns ~1.6 million shares in F45, which at today’s share price of 50 cents, is valued at ~$900,000.

So how did things go south so quickly?

The franchise model and public company dilemma

I’ve always been fascinated by the franchise model.

The value of a franchise is only as strong as the sum of its parts. The franchisees are the broad shoulders that support the value of the franchisor. The success of each franchisee is symbiotically dependent on the support and infrastructure offered by the franchisor, and a franchisor’s reputation depends on the public face of the system, which is dependent on the performance of its franchisees.

The more successful the franchisee, the more revenue the franchisor has to re-invest in brand, training, systems and R&D – all of which can be leveraged by the franchisee network to make the business even more successful.

More franchisees = greater brand awareness = greater opportunities to expand franchise footprint.

This should create a symbiotic relationship between both parties, because they are incentivised to build value together. However, this dynamic can be tested when you have a new stakeholder at the table – Mr Market.

F45 was listed on the NYSE in 2021, which in hindsight was a wonderful time to go public. It was in the middle of COVID-19, when a low-interest rate environment and government stimulus cheques meant the markets were flush with cash.

F45’s IPO was a benefactor of the good times. On IPO it was valued at a whopping 18x revenue, which would have been fine if:

a) The business generated high-margin recurring franchise fee revenue (not just equipment sales), and

b) investors had confidence the business would grow into its valuation with new franchises.

But they didn’t. And this is what I think led to the downfall.

When you become a listed company, management can be at the mercy of Mr Market. You carry an additional load on your shoulders to appease the market and grow that share price. If revenue demand in the form of new franchises declines, or in this case is vapourised, due to an economic downturn or forced lockdowns, the market will certainly let you know about it.

Another problem is balancing new franchise growth as well as servicing the needs of existing franchisees.

The story from a franchisee’s perspective

When F45 IPO’d back in 2021, I was curious to learn more about the business from a franchisee’s perspective.

I had a few chats with some owners across Australia. Here’s what I learned.

The typical upfront investment for an F45 franchise is $300,000, divided between a $100,000 – $150,000 franchise fee (use of the IP, branding, and some training), and a $150,000 equipment package (F45 branded equipment, of course).

On top of the equipment package came “compulsory” equipment purchases, merch and ancillary products. F45 has an online portal where franchisees are required to purchase branded equipment, and all of the franchisees I spoke to said this equipment has large markups.

The franchise fee used to be a flat $1,000 to $3,000 per month. But as the business grew, it shifted to a variable model of 8% of revenue.

A typical F45 club will break even at 120 to 150 members.

F45 marketing reported that franchisees could achieve 30% ETBIDA margins on their clubs. Of the six owners I spoke with, only one of them had a club doing anything close to these numbers.

Since the public listing, HQ has pooled a tonne of resources into growing the brand, but has left the existing franchisees a bit ignored. It was rare/non-existent for HQ to do quality control checks, check-ins or even monitor controls to ensure consistent brand experience across gyms.

Recently, many of the F45 franchisees have been facing financial difficulties and either selling or going into liquidation, citing a lack of support from HQ to attract new members; competition from close territories; and external competition from other HIIT-style gyms such as Body Fit and Fitstop.

That last point is an important one because a big reason for the slowing forecast of new franchisee sales was that franchisees couldn’t get funding to acquire new franchises in the first place.

Remember that $250 million growth capital facility that was reneged by F45’s major financier? That facility was earmarked to finance new franchisee sales. In other words, $250 million of debt capital used to vendor finance new franchisee sales was gone. That’s a $250 million future sales pipeline vapourised overnight.

You can see how this can create a crushing doom loop for the company.

In short, F45 failed to meet its new franchise growth targets because:

Existing franchisees were already struggling and external lenders weren’t comfortable with lending against these businesses – particularly in a slowing economy and increased interest rate environment.
F45 attempted to self-finance the growth of these new franchisees via the $250 million facility, but the financiers didn’t have the confidence HQ could pull it off (presumably for the same reasons).

I wish I could say things will get better for the embattled company, but unfortunately, there’s a series of unfortunate events that are still to play out.

Accounting anomalies

F45’s FY22 financial report for December 31, 2022, still hasn’t been released (it’s now four months overdue). An update to the market just last week was that the delay was because the company discovered “material weakness” over its financial controls, and that the previously issued financial statements for the year-end December 31, 2021, should no longer be relied upon.

This news followed the resignation of interim CFO Robert Madore last month.

Not to put too fine a point on it, but it looks like the accounts are a complete shit show, and no one has any confidence in what numbers the business is actually doing.

Legal battles

F45 paid sports stars and influencers as brand ambassadors – but it turns out not all of them got paid. That soccer bloke David Beckham alleges he’s owed $US18.9 million from a series of broken contracts and missed opportunities he was promised as part of his “influencer” and marketing contracts. Golf Shark Greg Norman is also suing for $US1.5 million in promotional payments he alleges he is owed.

It’s a whole lotta bad news for F45, unfortunately.

What’s next for F45?

The board is getting operational in “operation turnaround”. And they all have good reason to do so – they have significant skin in the game.

Mark Wahlberg has been promoted to head of brand and has installed his bestie business partner Tom Dowd, aka ‘Big Deal Dowd’, as president and CEO. Big Deal Dowd was previously the CEO of the supplement brand Performance Inspired, which he co-founded with Wahlberg himself. Talk about nepotism!

Big Deal Dowd is part of a consortium of shareholders in an entity called Gil Spe LLC, which is basically owned by other insiders – departing CFO Robert Madore, Kennedy Lewis Asset Management, FOD Capital, and even Adam Gilchrist himself. This entity owns 23% of the company.

Another 23% is owned by Michael Raymond, Marky Mark’s original co-investor at FOD Capital.

Another 14.5% is owned by Kennedy Lewis Investment Management, which has also underwritten a $90 million debt facility to keep the company liquid.

These folks collectively own over 60% of the cap table.

The company is trading a measly $50 million market cap, so relatively speaking, it currently ain’t worth much — but it could be worth saving.

Here’s what I think will happen.

Voluntary administration is off the table because Kennedy Lewis is a major shareholder and creditor to the company – he ain’t shooting his own foot.

Instead, Kennedy Lewis will make a buy-out offer to take F45 private and run it as a lean and profitable business, in partnership with Wahlberg and his entourage. (Fun fact, Kennedy Lewis attempted an unsolicited buy-out offer in September 2022 for $385 million, or $4 a share. If they liked the business at $4 a share, I’m sure they would love it at 50 cents.)

The plan would be to get to profitability by:

Slashing OPEX
Continuing the franchise growth strategy at a much slower pace
Focusing on supporting existing franchisees (fix the leaky bucket)
Generating profit via a new revenue stream – pumping Wahlberg’s and Dowd’s Performance Inspired supplements business to underlying F45 members
In other words, leverage the F45 distribution and sell the members protein and creatine power!

Let’s run the numbers on this potential new revenue stream.

F45 has approx 2,300 studios worldwide. Let’s conservatively assume each studio has 150 members.

Total active members of F45: 350,000

Let’s assume that:

AOV of Performance Inspired protein powder is $80
A conversion rate of 5%
12 purchases per year

Given that Performance Inspired already has warehousing and fulfillment sorted, this would be a ‘plug and play’ strategy for the new owners.

Every health influencer will eventually try to sell supplements to their audience.

This strategy takes the cake!

Ultimately, my take is that F45 focused too much on new business growth, and lacked a lot of the infrastructure and franchisee support critical to building an enduring brand.

That said, there’s no doubt that F45 is a valuable brand. With the support of action hero Wahlberg and his entourage, I believe the business can be turned around.

Hell, if he can’t do it, nobody can!