Mark Wahlberg-backed gym chain goes from abs crisis to credit crisis
F45 Training’s workout regimen is designed to challenge the body, but also seems to harden the mind. Every day, tens of thousands of fitness enthusiasts in cities ranging from Anchorage, Alaska, to Johannesburg, descend on identical gyms where, for 45 excruciating minutes, they tackle a circuit of exercises high-intensity workouts that burn calories and build muscle. “When you leave this studio,” Hollywood movie star Mark Wahlberg said after a recent predawn shoot, “you feel like you can accomplish anything.”
Wahlberg, which invested in the gym brand in 2019, sold nearly $13 million worth of stock this year and remains a top shareholder. The company completed an initial public offering worth $1.4 billion last year after a lockdown-defying growth sprint that marked a stark contrast to YogaWorks, Town Sports International and other fitness operators once ubiquitous that went bankrupt during the coronavirus pandemic. By the end of last year, F45 had nearly 1,800 gyms in dozens of countries and had signed contracts with local franchisees to open around 1,500 more.
Yet, just as the wider gym industry is recovering, F45 has failed. Shares of the company, which peaked at more than $17 a year ago, recently traded at $1.35 and closed at $2.23 on Wednesday. In an unscheduled announcement last month, the chain said it was parting ways with chief executive Adam Gilchrist, laying off most of its workforce and slashing the number of new gyms it plans to open this year by around two-thirds. .
This week, F45 announced a quarterly net loss of $35 million on revenue of $30 million and announced that it had begun looking for a successor to Gilchrist. Acting chief executive Ben Coates said he was implementing a “cost reduction plan to align the business more closely with current macroeconomic conditions and business trends.”
These drastic actions – prompted by the sudden unavailability of an off-balance sheet funding facility that was supposed to fuel the company’s final stage of growth – underscore how companies that have thrived on cheap capital during the pandemic are facing painful adjustments as inflation bites and central banks raise rates. “It doesn’t have to be as big as it is,” said one person whose company has staked millions on F45’s US expansion. “It was risky growth.”
The reversal also highlights vulnerabilities in a financial model that has so far been F45’s strength. Shortly after opening its first gym in Sydney a decade ago, the Gilchrist team began transforming high-tech training into a sophisticated franchise business that opened new locations at a rivaling pace with the early years of McDonald’s, Starbucks and other major brands.
Unlike full-service gyms, which require expensive kit and cavernous real estate, the F45 thrives in small spaces. In a recent session above a drug store in lower Manhattan, two trainers gave pep talks while TV screens showed proper form for movements that included squats and crunches. A dozen members of the class completed the circuit and by the end they looked exhausted. “You crushed it,” one of the instructors told the participants.
Everything about this workout, from the choice of muscle-tearing resistance exercises to the thundering electro-synth remixes of 1980s pop songs, was designed in F45’s offices in Austin, TX. But while programming decisions are made centrally, ownership of gyms is local, with franchisees contributing capital and making their own decisions about where to set up shop, who to hire and how much to charge.
A typical owner is Donald Jordan, who is now suing the company, according to court filings earlier this year. He enjoyed an F45 workout so much on a trip to the Middle East that, back home in Michigan, he signed up to open his own gyms on the outskirts of Detroit. Jordan agreed to pay a fee of at least $40,000 for each location he planned to open, according to franchise agreements reviewed by the Financial Times. He also pledged to stock each location with $122,000 of equipment purchased directly from F45, including heart monitors, sound equipment, weights, signage and staff uniforms. Jordan declined to comment.
These upfront fees, which come due before a gym even opens its doors, make up a significant portion of the money F45 receives from franchisees. This may have encouraged senior managers to focus on expansion. “What Adam has really tried to do since the IPO is just drive that growth,” said a person who has had lengthy discussions with top F45 executives. “He did everything he could to try and stick to the projections he set. The result was a self-inflicted injury.
F45 did not provide a comment from Gilchrist, who is still a director of the company.
The meteoric growth has made F45 a voracious consumer of capital since at least 2019, when Wahlberg contributed alongside other investors in a $110 million funding round. The former New Kids on the Block singer turned Oscar-nominated actor offers more than just cash, promoting F45 on Instagram alongside other lifestyle companies including Municipal Activewear, prayer app Hallow and a casual dining chain called Wahlburgers. “Mark is not going to get on a plane and go to your grand opening,” said a franchisee. “But if you open a gym in Las Vegas, he’ll definitely come if he’s already there.”
About a year after Wahlberg’s investment, F45 made its first failed IPO attempt, announcing a merger with Crescent Acquisition Corp, one of the types of “blank check” special-purpose acquisition vehicles that were at the center of a feverish summer of Wall Street trading. This transaction, which was to value the gym chain at $845 million, collapsed. Instead, last year’s IPO raised $279 million for the company, much of which was used to pay down debt.
Twelve months later, all but $14 million of the remaining cash from the IPO has been spent, and F45 is less than $10 million from reaching the maximum of a $90 million bank line of credit. dollars which is one of its few remaining sources of cash. About $9 million of the total went to senior executives in the form of bonuses, severance for Gilchrist and a retention agreement for the chief financial officer. Much of the remainder was used to purchase equipment that F45 expected to sell to new franchisees before their grand openings.
Some of the craft have arrived at a container terminal near Los Angeles, according to company information, but it’s unclear when they will be needed. As recently as May, F45 announced an agreement with Fortress Investment Group, an alternative asset manager, to provide $150 million in off-balance sheet funding that would have allowed franchisees to pay their start-up costs – including l money they owe to F45 – with borrowed funds.
This facility became unavailable after the fall in F45’s share price triggered the covenants of the Fortress facility. F45 executives held talks with Fortress to unblock him in exchange for warrants or other sweeteners, according to two people familiar with the talks, but the conversation came to nothing. F45 said it “always considered exploring other franchise financing options,” and that no money was withdrawn from Fortress when F45 officially ended the facility on Sunday.
Unable to borrow through F45 or raise their own financing, more than 170 would-be franchisees canceled contracts under which they were to open new gyms. An additional 300 new openings could be subject to cancellation, although F45 expects many of these to go ahead as planned. While several gym operators have told the FT they remain committed to the F45 and plan to resume expansion plans when funding becomes available, not everyone is so optimistic.
Jordan, who once aspired to build his own fitness empire in Michigan, is instead fighting F45 in court. In a lawsuit filed earlier this year, he alleges the chain misled him about the likely earnings of his three planned locations, a claim F45 denies. Two of the three gymnasiums considered never opened; in the third, Jordan estimates he’s racked up losses of $1.3 million so far.