Key Items to Watch out for in the Gold’s Gym Franchising LLC 2019 FDD
Please consider the following RISK FACTORS before you buy this franchise: 1. THE FRANCHISE AGREEMENT AND DEVELOPMENT RIGHTS AGREEMENT REQUIRE YOU TO RESOLVE DISPUTES WITH US BY ARBITRATION OR LITIGATION ONLY IN OUR HOME STATE (CURRENTLY TEXAS). OUT-OF-STATE ARBITRATION OR LITIGATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO ARBITRATE OR LITIGATE WITH US IN OUR HOME STATE THAN IN YOUR OWN STATE. 2. THE FRANCHISE AGREEMENT AND DEVELOPMENT RIGHTS AGREEMENT STATE THAT TEXAS LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. YOUR SPOUSE MUST CONSENT TO YOU SIGNING A GUARANTY WHICH PLACES YOUR SPOUSE’S INTERESTS IN THE MARITAL ASSETS AT RISK IF YOUR FRANCHISE FAILS. 4. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
We use the services of one or more FRANCHISE BROKERS or referral sources to assist us in selling our franchise. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should make sure to do your own investigation of the franchise.
Item 5: Initial Fees
Franchise Agreement If you sign the Franchise Agreement for a new Gold’s Gym Facility (including a Conversion Facility), then unless you qualify for a Veteran Discount (described below), you will pay us a $40,000 initial franchise fee in a lump sum when you sign that Agreement. If youoperate an existing Gold’s Gym Facility under a franchise agreement that is about to expire, and are signing the Franchise Agreement and Renewal Addendum to renew your rights to operate that Gold’s Gym Facility, then you will pay us a $20,000 initial franchise fee in a lump sum when you sign that Agreement and Addendum. The initial franchise fee is not refundable under any circumstances. We might pay a portion of your initial franchise fee to a referral source. We currently offer new franchisees who qualify as a Veteran (as defined below) a 20% discount (the “Veteran Discount”) on the initial franchise fee. If you qualify for the Veteran Discount, your initial franchise fee is $32,000. This Veteran Discount only applies to qualified Veterans signing their first Franchise Agreement with us. This Veteran Discount does not apply to any future Franchise Agreement that a Veteran might sign with us, nor do we offer the Veteran Discount to our existing Gold’s Gym Facility franchisees. In addition, this Veteran Discount does not apply to any renewals, conversions (from another form of Gold’s Gym franchise agreement) or extensions of the Franchise Agreement. A “Veteran” is defined as any person who served in the Army, Navy, Air Force, Marine Corps, Coast Guard or National Guard and obtained an honorable discharge or release. If the new franchisee is a corporation, limited liability company, or other entity, then the Veteran Discount applies if one or more Veterans owns more than 50% of the new franchisee. We will provide initial training for your Facility’s personnel at no additional charge. If we determine that you or any of your personnel cannot complete the initial training programs to our satisfaction, then we may require you or your personnel to attend additional training programs at your expense. We currently charge $500 per person per session for this additional training, and this fee is not refundable. In the fiscal year ended December 31, 2018, under a few isolated circumstances, we charged initial franchise fees as low as $20,000.
Studio Program Fees If you participate in one or more optional Studio Programs, you must pay us an initial fee of $500 per program. Accordingly, the initial fees for the Studio Programs will range from $0 (if you elect not to offer any Studio Programs) to $1,500 (if you elect to offer all 3 of the Studio Programs that are currently offered). This initial fee is not refundable. In addition to the initial fee, if you participate in one or more optional Studio Programs, you must pay us certain training fees. Training for the Studio Programs will typically occur at “Gold’s Academy” in Dallas, Texas; however, if you have a minimum of 5 trainees for Gold’s Fit and Gold’s Burn (taught jointly) or Gold’s Cycle, we may offer “field-based training” in which our instructor would travel to your location to provide training. The training fees you incur will be as shown in the following table: If we provide field-based training, you will also pay us the travel expenses incurred by our instructor(s) for traveling to your Facility. We estimate these expenses to range from $1,500 (if you only elect to participate in one training program, with one instructor attending) to $3,000 (if you elect to participate in all currently offered Studio Programs, with one instructor attending). As an example, if you participate in all 3 Studio Programs, and each training program is conducted by field-based training, you will incur a minimum (based on 5 trainees for each program) of $2,500 in training fees (if only one instructor attends the training session for each program) plus approximately $3,000 in instructor travel expenses payable to us (depending on whether the training for all three programs is conducted back-to-back). These training fees (and any applicable travel expenses) are not refundable.
Development Fee under the Development Rights Agreement You must pay us a lump sum development fee when you sign the Development Rights Agreement. Your development fee is $10,000 multiplied by the number of Gold’s Gym Facilities you agree to develop in the Development Area. We will insert this fee in the Development Rights Agreement before signing it. The development fee is not refundable under any circumstances. However, we will reduce by the $10,000 the amount of the initial franchise fee due under each franchise agreement you or your affiliate sign under the Development Rights Agreement (other than the first Franchise Agreement), subject to a maximum aggregate reduction for all initial franchise fees equal to the total development fee. Except as otherwise noted, the fees described above are uniformly applied.
Item 8: Restrictions on Sources of Products and Services
Franchise Agreement System Standards You must operate the Facility (and, if applicable, any Studio Program in which you participate) according to our System Standards, which may regulate, among other things, the Facility’s design and appearance; minimum and required standards and specifications for products, equipment, materials, supplies and services that Gold’s Gym Facilities use and/or sell; and designated or approved suppliers of these items (which might include or be limited to us and/or our affiliates). To maintain the quality of the goods and services that Gold’s Gym Facilities offer and the reputation of the Gold’s Gym franchise network, you must purchase or lease products, equipment, materials and supplies that meet our minimum standards and specifications and, if we require (but subject to the limitations described below), only from suppliers that we designate or approve. We issue and modify our System Standards based on our, our predecessor’s, our affiliates’, and our franchisees’ experience in licensing, franchising, and/or operating Gold’s Gym Facilities. We will notify you in our Manuals of our System Standards and names of designated and approved suppliers. Currently, the purchases and leases that you must make from us or our affiliates, from approved suppliers, or according to our System Standards represent approximately 85% to 95% of your total purchases and leases in establishing, and approximately 75% of your total purchases and leases in operating, your Gold’s Gym Facility
Suppliers Except as described below, neither we nor any of our affiliates currently are designated, approved or recommended suppliers for any products or services that Gold’s Gym Facility franchisees sell or use. In the future, we may designate us and/or our affiliates as approved suppliers or the only approved supplier for certain products and services as described below. We and/or our affiliates may derive revenue based on your purchases and leases, including from charging you for products and services we or our affiliates provide to you and from promotional allowances, volume discounts and other payments that supplies and/or distributors that we designate or approve for some or all of our franchisees make to us. We and our affiliates may use all amounts received from suppliers and/or distributors, whether or not based on your or other franchisees’ actual or prospective dealings with them, without restriction for any purpose. During 2018, we did not receive any revenue from selling or leasing products or services to franchisees. We currently administer a Global Vendor Program (“GVP”) under which we approve and recommend suppliers and vendors (the “GVP Vendors”) for certain goods and services that you must buy or lease to develop and operate the Facility. GVP Vendors provide a wide variety of goods and services, including insurance, exercise and other equipment, signage, promotionali tems, Gym Management System and computer system components, and other items. Thebranded product licensees are also part of the GVP Program. GGM licenses these GVP Vendors to produce and sell to franchisees and others officially-branded Gold’s Gym merchandise. We provide our relevant standards and specifications to some GVP Vendors. Noneo f our officers owns an interest in any GVP Vendor or other supplier to Gold’s Gym Facility franchisees. You currently must acquire the Gym Management System and related services only from an approved supplier and must buy Gold’s Gymb randed products only from GGM’s authorizedl icensees. You also currently must acquire site selection and lease negotiation services, all Operating Assets and other products and services for the Facility’s development, and certain equipment, supplies, broadcast services, and direct mail, public relations and other marketing-related services relating to the Facility’s ongoing operation, only from suppliers that we designate or approve. If you participate in an optional Studio Program, you must subscribe to a software service with our designated supplier that allows members to reserve and pay for classes online. In addition, if you participate in the optional Gold’s Cycle Studio Program, you must subscribe to a software service with our designated supplier, which software enables the technology components of the Gold’s Cycle Studio Program to function. If you participate in the Gold’s AMP Program, our designated vendor will make available marketing/POP kits and that vendor is currently the only supplier of those items. Except as described in this Item, therec urrently are no goods, services, supplies, fixtures, equipment, inventory, computer hardware or software, real estate, or comparable items related to establishing or operating your Facility that you must purchase from us or designated or approved suppliers. “Operating Assets” means all required furniture; computer equipment (including all hardware, software and connectivity components and Gym Management System components); exercise features, facilities and equipment; lighting components; and fixtures and other equipment, furnishings and signs that we periodically require for the Facility. If you want to use any Operating Assets or other products or services for or at the Facility that we have not yet evaluated, or purchase or lease any Operating Assets or other products or services from a supplier or distributor that we have not yet approved (for Operating Assets or other products and services that we require you to purchase only from designated or approved suppliers or distributors), you must submit sufficient information, specifications and samples for us to determine whether the product or service complies with our standards and specifications and/or the supplier or distributor meets our criteria. We may condition our approval of a supplier or distributor on requirements relating to product quality, prices, consistency, warranty, reliability, financial capability, labor relations, customer relations, frequency of delivery, concentration of purchases, standards of service (including prompt attention to complaints) and/or other criteria. We have the right to inspect the proposed supplier’s or distributor’s facilities and to require the proposed supplier or distributor to deliver product samples or items, at our option, either directly to us or to any independent laboratory which we designate for testing. Either you or the proposed supplier or distributor must pay us a fee (currently, not more than the reasonable cost of the inspection and the actual cost of the test) to make the evaluation. Under our current process for evaluating alternative suppliers or distributors proposed by franchisees (which process may change from time to time), we will use commercially reasonable efforts to notify you of our approval or disapproval within 90 days after receiving all information we require. We may periodically re-inspect the facilities, products and services of any approved supplier or distributor and revoke our approval of any supplier, distributor, product or service that does not continue to meet our criteria. If we determine at any time that a product, supplier or distributor no longer satisfies our System Standards, we may revoke our approval by notifying you and/or the supplier in writing. Despite these rights, we may limit the number of approved suppliers with whom you may deal, designate sources that you must use, and/or refuse any of your requests for any reason, including if we have already designated an exclusive source (which might be our affiliate) for the applicable product or service or if we believe that doing so is in the best interests of the Gold’s Gym Facility network. We or our affiliates may derive revenue or other material consideration from approved suppliers based on purchases made by our franchisees of the suppliers’ products or services (e.g., rebates). The basis for these payments or other consideration will depend on the type of product or service supplied and the arrangements we or our affiliates negotiate with the supplier, but will typically be either a fixed dollar amount rebated to us or our affiliate when the franchisee purchases the item from the supplier (currently, we have one arrangement like this where our affiliate receives $1.50 per case of product purchased) or a percentage of the revenue derived by the supplier from the sales it makes to our franchisees (currently, those arrangements range from 1% to 7% of the amounts sold to franchisees). In addition, our affiliates may be approved suppliers and, as a result, derive revenue from sales made to our franchisees. Currently, GGM licenses certain suppliers to brand their items with the Gold’s Gym trademarks, in exchange for which it receives royalties from the branded products sold to our franchisees by those licensed suppliers (currently, the royalties range from 1% to 12.5% of the suppliers’ net sales to our franchisees). During the 2018 fiscal year, we did not derive any revenue or other material consideration from approved or designated suppliers. During that period, our affiliates received $84,045 in rebates from approved suppliers based on purchases made by franchisees. We will not provide material benefits, like renewal or additional franchises, to franchisees based on their purchase of particular products or services or use of particular suppliers. We negotiate purchase arrangements with GVP Vendors and other suppliers, including price terms. In doing so, we seek to promote the overall interests of our franchise system and our interests as franchisor. There are no formal purchasing or distribution cooperatives in the Gold’s Gym Facility franchise network.
Local Marketing You must at your expense participate in the manner we specify in all advertising, marketing, promotional, customer relationship management, public relations and other brand-related programs that we designate for the Facility, subject to the Marketing Spending Requirement. Before using them, you must send to us, for our approval, descriptions and samples of all proposed Local Marketing that we have not prepared or previously approved within the previous 6 months. If you do not receive written notice of approval from us within 10 business days after we receive the materials, they are deemed disapproved. You may not conduct or use any Local Marketing that we have not approved or have disapproved. At our option, you must contract with 1 or more suppliers that we designate or approve to develop and/or implement Local Marketing.
Facility Development The Facility must satisfy our specifications and requirements for dimensions, design, image, interior layout, decor, Operating Assets, and color scheme. The Facility must contain all of the Operating Assets, and only the Operating Assets, that we periodically specify. The Facility must offer all amenities and services that we specify as mandatory and may not offer any amenities or services that we have not authorized. At our option, you must use only the architect, design firm, and other contractors that we designate or approve to develop the Facility.
Facility Upgrades In addition to your obligations to maintain the Facility according to System Standards, once during the Franchise Agreement’s term (after the Facility opens), we may require you to substantially alter the Facility’s and the Site’s appearance, branding, layout and/or design, and/or replace a material portion of your Operating Assets (including exercise equipment), in order to meet our then current requirements for new similarly situated Gold’s Gym Facilities. This obligation could result in your making extensive structural changes to, and significantly remodeling and renovating, the Facility, and/or in your spending substantial amounts for new Operating Assets. You must incur any capital expenditures required in order to comply with this obligation and our requirements, even if those expenditures cannot be amortized over the Franchise Agreement’s remaining term. Within 60 days after receiving written notice from us, you must have plans prepared according to the standards and specifications we designate and, if we require, using architects, design firms, and contractors we designate or approve, and you must submit those plans to us for our approval. You must complete all work according to the plans we approve within the time period that we reasonably specify.
Renewal Addendum and Conversion Addendum If you are signing the Franchise Agreement to obtain a renewal or successor franchise for an existing Gold’s Gym Facility, you also will sign the Renewal Addendum. Under the Renewal Addendum, you must, at our option, either relocate and redevelop the Facility according to the Franchise Agreement’s requirements for site selection and development or upgrade and update the Facility at its current site according to the schedule we specify. If you sign the Conversion Addendum you must upgrade and update the Conversion Facility according to the schedule we specify.
Insurance You must procure and maintain general comprehensive liability, business automobile liability insurance, employer’s liability (workers’ compensation), umbrella liability coverage, professional liability, and employee practices liability with policy limits in amounts we specify in the Manuals. Our current minimum coverage amounts are: (1) commercial general liability insurance with limits of $1,000,000 per occurrence and $2,000,000 general aggregate; (2) automobile liability insurance insuring owned, non-owned, hired and all vehicles used by your Facility, with combined single limit of not less than $1,000,000 per occurrence for bodily injury and property damage; (3) workers’ compensation and employers’ liability as required by any state in which your Facility operates, but no less than workers’ compensation coverage of $1,000,000; (4) umbrella liability coverage with limits of (i) $1,000,000 per occurrence and aggregate if you own one to three Gold’s Gym Facilities, (ii) $2,000,000 per occurrence and aggregate if you own four to six Gold’s Gym Facilities, and (iii) $5,000,000 per occurrence and aggregate if you own seven or more Gold’s Gym Facilities; (5) professional liability insurance with limits of $1,000,000 per occurrence and $2,000,000 aggregate; and (6) employee practices liability with limits of $500,000 per occurrence. You will ensure that all insurance policies name us and our affiliates as additional insureds (on a primary and non-contributory basis), and contain a waiver of subrogation for general liability and workers’ compensation. We may establish reasonable minimum standards for coverage to be met by underwriters for insurance, which we will state in the Manuals. Currently, we require that all insurance policies be issued by insurance carriers rated A- or better by A.M. Best Company, Inc. You agree to send us a valid certificate of insurance or duplicate insurance policy evidencing that you have maintained the required coverage and paid the applicable premiums. If you fail to obtain or maintain (or to prove that you have obtained or maintained) the insurance we specify, in addition to our other remedies, we may (but need not) obtain such insurance for you and the Facility on your behalf, in which event you shall cooperate with us and reimburse us for all premiums, costs and expenses we incur in obtaining and maintaining the insurance.
Development Rights Agreement Except as described in this paragraph, the Development Rights Agreement does not require you to buy or lease from us or designated or approved suppliers, or according to our specifications, any goods, services, supplies, fixtures, computer hardware and software, real estate, or comparable items related to establishing or operating the business under the Development Rights Agreement. However, you must follow our requirements under the franchise agreement for each Gold’s Gym Facility you develop. For each site at which you propose to operate a Gold’s Gym Facility, you must send us a complete site report and other materials demonstrating your (or your Affiliated Entity’s) financial and operational ability to develop the site.
Item 10: Financing
We do not offer direct or indirect financing. We do not guarantee your note, lease or obligation.
Item 12: Territory
Franchise Agreement You will operate the Facility at a specific Site that we first must accept. If you have not yet located an accepted Site when you sign the Franchise Agreement, we will designate a “Site Selection Area” when you sign that Agreement. We typically identify Site Selection Areas either using city boundaries or as a circle with a radius of a specified distance that we determine from a specified intersection. There is no minimum size for a Site Selection Area. The Site Selection Area is the area within which you must look for your Site. You must propose a suitable site in the Site Selection Area promptly, and obtain our acceptance of the Site and sign the lease that we have accepted for the Site within 9 months, after the Franchise Agreement’s effective date. After you sign a lease for the Site that we have accepted (if you have not located an accepted Site when you sign the Franchise Agreement), or upon signing the Franchise Agreement (if you have located an accepted Site at that time), we will define your protected territory (the “Territory”). The Territory is a circle with a radius of a specified distance that we determine from the Facility’s main front entrance. We will determine that distance based on the factors that we deem relevant, which might include demographics, the character of the Site and nearby businesses and residences. The minimum Territory may be as small as one-eighth (?) of a mile in a densely populated area, or in some rural areas, up to 3 miles. The Territory will be smaller than the Site Selection Area. Once we define the Territory, you will have no further territorial or other rights in those portions of the Site Selection Area that are outside the Territory. Except as provided below, if you are complying with the Franchise Agreement, then neither we nor our affiliates will, during the term of the Franchise Agreement, operate or authorize any other party to operate a Gold’s Gym Facility the physical premises of which are located within (i) the Site Selection Area (until we designate the Territory) or (ii) the Territory (once we have designated the Territory). However, we and our affiliates may: (1) operate, and/or authorize any other party to operate, a Gold’s Gym Facility located at any hotels, motels or similar operations (“Hotels”) located within the Site Selection Area or Territory, but they will be authorized to sell goods and provide services only to guests of the Hotel; and (2) acquire the assets or ownership interests of an entity (in either case, regardless of the form of transaction) that operates, and/or grants rights to other persons to operate, one or more health and fitness center(s) within the Site Selection Area or Territory, as applicable. If any of those health and fitness center(s) are located or are under development within the Site Selection Area (prior to our designation of the Territory) or the Territory (after the designation of the Territory) on the date upon which that acquisition closes, then we and our affiliates may, following that acquisition, convert or authorize the conversion of any or all of those health and fitness center(s) to Gold’s Gym Facilities, and those health and fitness center(s) may continue to operate as Gold’s Gym Facilities throughout the remaining Term (and after that). Because of these exceptions, you will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control. We and our affiliates at all times have the right to engage in any activities we or they deem appropriate that the Franchise Agreement does not expressly prohibit, whenever and wherever we or they desire. This includes: (a) establishing and operating, and granting rights to other persons to establish and operate, on any terms, Gold’s Gym Facilities at any locations (x) outside the Site Selection Area (until we have designated the Territory); or (y) outside the Territory (once we have designated the Territory); (b) establishing and operating, and granting rights to other persons to establish and operate, on any terms, health and fitness facilities or any similar or dissimilar businesses that are not primarily identified by the Marks at any locations, whether within or outside the Site Selection Area or Territory; (c) using or licensing the use of the Marks, and all products and services associated with any of the Marks, in any methods of distribution, except as specifically described above. This includes providing, and granting rights to other persons to provide (except as specifically described above), products and services that are similar or dissimilar to, or competitive with, any products and services that Gold’s Gym Facilities provide, whether identified by the Marks or other trademarks or service marks, regardless of the method of distribution, and at any locations; (d) acquiring the assets or ownership interests of, or being acquired (regardless of the form of transaction) by any businesses providing products and services similar or dissimilar to those that Gold’s Gym Facilities provide, and franchising, licensing or creating other arrangements for these businesses once acquired, wherever these businesses (or the franchisees or licensees of these businesses) are located or operating, whether within or outside the Site Selection Area or Territory; and (e) selling the assets or ownership interests of any Gold’s Gym Facilities owned by us or our affiliates, even if the buyer of such assets or ownership interests intends to reimage the Gold’s Gym Facilities and/or such sale causes the number of Gold’s Gym Facilities within your general market area to decrease. We have no obligation to ensure that there exists a certain minimum number of Gold’s Gym Facilities within any particular area. There are no restrictions on your soliciting and accepting memberships from outside your Territory or otherwise competing with other Gold’s Gym Facilities which are now, or in the future may be, located outside your Territory. Except for the System Website’s online membership enrollment function and for limited, short term, off-site, promotional purposes we approve in advance, you may not use other channels of distribution, such as the Internet, catalog sales, telemarketing, and other direct marketing, to make sales (as opposed to advertising and marketing) because you may only make sales at the Facility. Under the Franchise Agreement, you have no options, rights of first refusal, or similar rights to acquire additional franchises within your Territory or contiguous territories. Continuation of your territorial rights does not depend on your achieving a certain sales volume, market penetration, or other contingency. If anything happens that would allow us to terminate the Franchise Agreement, we may instead temporarily or permanently reduce the size of the Territory, in which case the restrictions on us and our affiliates described above will not apply in the geographic area that was removed from the Territory. Otherwise we may not alter your Territory or modify your territorial rights before your Franchise Agreement expires or is terminated (although we may do so for a successor franchise). As described in Item 1, OHMC and OHFC’s franchisees operate Omni Hotels, some of which have health clubs. These health clubs are associated with the “Omni” name and are primarily for hotel guests, but some have outside members. OHMC also is exploring whether to associate some of these health clubs with the “Gold’s Gym” brand. We do not anticipate conflicts between these health clubs and Gold’s Gym Facilities because Gold’s Gym Facilities typically offer a wider array of equipment and services than those found in hotel health clubs and because the health clubs inside the Omni Hotels are primarily for hotel guests. If conflicts do arise concerning territory, customers and franchisor support, we, OHMC and OHFC will resolve them as we deem appropriate. We disclose OHMC’s and OHFC’s principal business addresses in Item 1. Neither we, our affiliates (including OHMC and GHC’s subsidiaries), or our or OHFC’s franchisees are restricted from soliciting or accepting memberships from within your Territory. We and our affiliates may use other channels of distribution, such as the Internet, catalog sales, telemarketing, and other direct marketing, to solicit and make sales to members in your Territory using the Marks and other trademarks without compensating you. We currently offer and sell certain products (including Gold’s Gym branded apparel, workout accessories, and equipment) and services directly to customers through our System Website and other direct selling methods. Except as described above, neither we nor our affiliates operate, franchise, or have plans to operate or franchise a business under a different trademark that sells or will sell goods or services similar to those that you will offer, although we and they have the right to do so. If you sign the Renewal Addendum and are relocating your Facility, you will not receive a Site Selection Area, and we initially will define your Territory under the Franchise Agreement based on the Facility’s existing site. You will retain your rights in this Territory while you are looking for and developing the new site for the Facility. However, after you sign the lease or sublease for the new site, we may, at our sole option, redefine the Territory. We have no obligation to redefine the Territory. Our process for redefining Territories is the same as our process for granting new Territories, which we describe above. Once we redefine the Territory, you will have no further territorial or other rights in your former Territory. If you lease the Site from a lessor who is not your affiliate and you choose not to, or do not have the right to, renew the lease or otherwise remain in possession of the Site after the lease term expires (a “Lease Expiration”), or if the Site or Facility is destroyed, condemned or otherwise rendered unusable, you may relocate the Facility to a new location that we accept in advance. You must comply with our then applicable relocation policies and reimburse us for all out-of-pocket expenses that we incur. If you are relocating the Facility because of a Lease Expiration, then (i) we typically will not accept a proposed new location unless we and you determine, in each of our and your respective sole judgments, that the Facility operating at the new location is likely to retain at least 75% of the Facility’s then existing members; and (ii) you must develop and open the Facility for member workouts at the new location, in compliance with the Franchise Agreement, before the original lease expires.
Development Rights Agreement We and you will identify the Development Area within which you and your Affiliated Entities may develop Gold’s Gym Facilities in an exhibit to the Development Rights Agreement before signing it. We typically identify Development Areas either using city boundaries or as a circle with a radius of a specified distance that we determine from a specified intersection. We base the Development Area’s size on the number of Gold’s Gym Facilities you agree to develop, the market, other characteristics of the Development Area, and demographic factors, but Development Areas usually are an entire city (for an urban area) or county (for more rural areas). There is no minimum size for the Development Area. We and you will negotiate the number of franchise agreements for Gold’s Gym Facilities that you or your Affiliated Entities must sign, and the dates by which you and they must sign them, to keep your territorial rights and insert this information in the Development Rights Agreement before signing it. If you are fully complying with the Development Rights Agreement, we will grant you and your Affiliated Entities franchises to operate the agreed-upon number of Gold’s Gym Facilities in the Development Area. Franchises that we grant to your Affiliated Entities will count toward your Development Schedule. You and your Affiliated Entities may not develop Gold’s Gym Facilities outside the Development Area. For each Gold’s Gym Facility that you (or your Affiliated Entity) develops under the Development Rights Agreement, you or your Affiliated Entity will sign the form of franchise agreement and any ancillary agreements we then customarily use in granting franchises for Gold’s Gym Facilities, the terms of which may differ substantially from the terms contained in the Franchise Agreement attached to this disclosure document. We will determine the territory and territorial rights for each Gold’s Gym Facility that you develop under the Development Rights Agreement using the standards in place at the time when you sign the franchise agreement for that Gold’s Gym Facility. To retain your rights under the Development Rights Agreement, each Gold’s Gym Facility it covers must operate continuously during the Agreement’s term. Otherwise we may terminate the Development Rights Agreement. Except as provided below, if you are complying with the Development Rights Agreement, and you and your Affiliated Entities are fully complying with all of your and their obligations under all franchise agreements for the operation of Gold’s Gym Facilities, then during the Development Rights Agreement’s term only, neither we nor our affiliates will operate, or authorize any other party to operate, a Gold’s Gym Facility the physical premises of which are located within the Development Area (except for franchises we grant you and your approved Affiliated Entities). However, we and our affiliates may: (1) operate, and/or authorize any other party to operate, a Gold’s Gym Facility located at any Hotels located within the Area, but they will be authorized to sell goods and provide services only to guests of the Hotel; and (2) acquire the assets or ownership interests of an entity (in either case, regardless of the form of transaction) that operates, and/or grants rights to other persons to operate, one or more health and fitness center(s) within the Development Area. If any of those health and fitness center(s) are located or under development within the Development Area on the date upon which that acquisition closes, then we and our affiliates may, following that acquisition, convert or authorize the conversion of any or all of those health and fitness center(s) to Gold’s Gym Facilities, and those health and fitness center(s) may continue to operate as Gold’s Gym Facilities throughout the remaining term of the Development Rights Agreement (and after that). Because of these exceptions, you will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control. If you fail to meet your Development Schedule, we may terminate the Development Rights Agreement. Otherwise we may not alter your Development Area or modify your territorial rights in the Development Area. We also may engage, and allow others to engage, in any other activities of any nature within the Development Area, including those which we now reserve in our Franchise Agreement. We may sell the assets or ownership interests of any Gold’s Gym Facilities owned by us or our affiliates, even if the buyer of such assets or ownership interests intends to reimage the Gold’s Gym Facilities and/or such sale causes the number of Gold’s Gym Facilities within your general market area to decrease, and we have no obligation to ensure that there exists a certain minimum number of Gold’s Gym Facilities within any particular area. When the Development Rights Agreement expires or terminates, we (and our affiliates) may establish, and allow others to establish, Gold’s Gym Facilities the physical premises of which are located within the Development Area and engage, and allow others to engage, in any other activities we desire within and outside the Development Area without any restrictions, subject only to your (or your Affiliate Entity’s) rights under existing franchise agreements with us.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Franchise Agreement We do not require, but do recommend, that you (if you are an individual) or your managing owner (if you are an entity) participate personally in the direct operation of the Facility. You must at all times retain and exercise direct management control over all aspects of the Facility’s business and all amenities and other products and services it offers. You may not enter into any management agreement, subcontracting arrangement or other arrangement under which any other party (including your affiliate) provides or exercises management control over any aspect of the Facility’s operations or the amenities or other products and services it offers. Only your employees may provide services at the Facility, and neither you nor your owner may engage consultants or independent contractors to provide any products or services at or relating to the Facility. For example, neither you nor your owner may engage or contract with any consultant or independent contractor (including your affiliate) to provide personal training services, massage services or any other health-related services to Facility members or guests (whether those services are provided at the Facility or any other location), or to operate any retail location providing any products or services that are ancillary to the Facility’s business to Facility members or guests (such as a juice or smoothie bar) which is located in the Facility or at or near the Site. Only an individual who devotes his or her full working time and best efforts to the dayto-day, on-premises operation of the Facility, has satisfactorily completed our management training program, and is not engaged in any other business endeavor except passive investments which do not interfere with the performance of his or her duties as manager may manage the Facility. The Facility’s manager need not have an equity interest in the Facility (or in you). At our option, you must ensure that all of your Facility’s managers and other employees having access to Confidential Information sign agreements in a form we reasonably specify under which they agree to comply with the confidentiality, innovations, and non-compete restrictions in the Franchise Agreement. If you are a corporation, limited liability company or other business entity, each of your owners who at any time owns (directly or indirectly) 20% or more of your ownership interests, and each other individual or entity that we specify (each a “Guarantor”), must sign a guaranty in the form we designate undertaking personally to be bound, jointly and severally, by all of the Franchise Agreement’s and any ancillary agreement’s provisions, the current version of which is attached to the Franchise Agreement. If you are an individual, your spouse must also sign this guaranty form for the limited purpose of acknowledging and consenting to the execution of the guaranty by his or her spouse to bind the non-owner spouse’s interests in marital assets. The execution by a non-owner spouse does not bind the non-spouse’s personal property nor does the non-owner spouse otherwise personally guarantee or personally assume the franchisee’s obligations to us under the Franchise Agreement. In addition, each of your other owners who is not a Guarantor must sign a principal’s agreement in the form we designate undertaking personally to comply with certain confidentiality, non-competition, transfer and dispute resolution provisions of the Franchise Agreement, the current version of which is attached to the Franchise Agreement.
Development Rights Agreement You must develop your Development Area according to the Development Schedule. We do not require, but do recommend, that you (or your managing owner) personally supervise your development of Gold’s Gym Facilities. You must hire sufficient personnel to manage and supervise the development of your Gold’s Gym Facilities. The personnel need not have an equity interest in any Gold’s Gym Facility (or in you) and need not attend our training program. If you are a corporation, limited liability company, partnership, or other business entity, your owners need not sign any personal guarantees of your obligations under the Development Rights Agreement.
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You must offer all amenities and other products and services that we periodically specify as being mandatory. You may not offer, sell, provide or otherwise distribute at the Facility, the Site or any other location any amenities or other products or services we have not authorized, and you must discontinue selling and offering any amenities and other products or services that we at any time disapprove in writing. We may periodically change the types of authorized services and products for your Facility.
Our System Standards may regulate participation in and requirements for member/customer loyalty programs, reciprocity programs, membership transfer policies and programs, and similar programs for members of similarly situated Gold’s Gym Facilities, including the terms and conditions we periodically specify for (a) providing Facility access to members of other Gold’s Gym Facilities; (b) honoring memberships covering some or all Gold’s Gym Facilities and providing Facility access to those members; (c) accepting memberships that we or our affiliates process or assist in processing for the Facility, including paying us and our affiliates reasonable fees for online membership applications that we process and other assistance we and they provide relating to your Facility’s memberships; and (d) each Gold’s Gym Facility’s bearing, or sharing in, the costs and expenses associated with participating in any of these programs. Our System Standards also may regulate the terms of membership offerings and maximum, minimum and other pricing requirements for memberships and other products and services that the Facility offers, including requirements for promotions, special offers and discounts in which some or all Gold’s Gym Facilities participate, in each case to the maximum extent the law allows (although you must ensure that your membership offerings and membership agreements comply with applicable laws and regulations). You also must participate in the manner we specify in any group membership programs that we periodically establish.
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