Key Items to Watch out for in the STC Franchising, LLC 2020 FDD
Certain states require that the following risk(s) be highlighted: 1. Out-of-State Dispute Resolution. The Franchise Agreement and the Area Development Agreement require you to resolve disputes with us by arbitration in Louisville, Kentucky. Out of state arbitration may force you to accept a less favorable settlement for your disputes. It may also cost you more to arbitrate with us in Kentucky than in your home state. 2. The Franchise Agreement and the Area Development Agreement state that Kentucky 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 may be required to sign a document that makes your spouse liable for all financial obligations under the Franchise Agreement even though your spouse has now ownership interest in the franchise. This guarantee will place both your and your spouse’s marital and personal assets, perhaps including your house, at risk if your franchise fails.
Certain states may require other risks to be highlighted. Check the “State Specific Addenda” (if any) to see whether your state requires other risks to be highlighted.
Item 5: Initial Fees
The fees described in this Item 5 are payable prior to opening and are not refundable under any circumstances. Development Fee When you sign an Area Development Agreement, you must pay us a lump-sum, nonrefundable development fee equal to 100% of the initial franchise fee in the amount of $30,000 for the first Salon, and an additional $10,000 for each additional Salon to be developed under the Area Development Agreement. The initial $30,000 development fee will be credited against the franchise fee for the first salon at the time the first Franchise Agreement is signed. The allocable portion of the remaining development fee is credited against the initial franchise fee for subsequent Salons to be developed under the Area Development Agreement at the time that payment of the initial franchise fee is due for each Salon. You must pay the $20,000 balance of the initial franchise fee at the time each additional Franchise Agreement is signed, unless state law dictates otherwise. The development fee is calculated the same for all franchisees entering into Area Development Agreements under this offering, but the actual dollar amount paid will vary depending on the number of Salons you must develop and whether you are a Conversion Salon operator. The minimum number of Salons that you must open pursuant to the Area Development Agreement will be mutually agreed upon by you and us. Unless otherwise provided by state law in your jurisdiction, the development fee will be fully earned by us upon signing of the Area Development Agreement and is not refundable under any circumstances.
Initial Franchise Fee You must pay us a lump-sum nonrefundable initial franchise fee in the amount of $30,000, which is due in full upon signing the Franchise Agreement. In 2019, the initial franchise fees ranged from $0 to $30,000. Unless otherwise provided by state law in your jurisdiction, the fee will be fully earned by us upon signing of the Franchise Agreement and is not refundable under any circumstances. We may, in our sole discretion, waive o r r e d u c e th e a m o u n t o f the initial franchise fee for each existing and operating tanning salon that you are converting to a SUN TAN CITY Salon through a mutually acceptable conversion plan. In determining whether an adjustment is warranted, we consider, in our sole discretion, such factors as the number of existing tanning salons to be converted, the experience of the operator, any prior history with the operator, the impact of market forces in a given location, and such other factors we deem relevant in our sole discretion.
Site Evaluation We will provide site evaluation assistance for your first Salon at no additional charge. We are not obligated to provide this assistance for any subsequent Salon that either you or an affiliate of yours will operate under one or more Franchise Agreements with us. If we do, you may be required to pay or reimburse our reasonable expenses, including our cost of site analysis software, travel, lodging and meals.
Inventory You must purchase an initial supply of inventory and selling supplies, which you may purchase from us, our affiliate STC Consolidated Operations, LLC, or our approved suppliers. You are not required to purchase your initial supply of inventory or selling supplies from us or our affiliates. The cost of your initial inventory and selling supplies is estimated at $4,000 to $6,000. We’ll give you a list of everything else you will sell, which may not be uniformly priced by our approved suppliers for our franchisees.
Training You (and any other person we deem to be a key employee for your Salon) must attend and satisfactorily complete our initial training program before opening your Salon. For the first Salon that either you or an affiliate of yours opens, we do not charge for training given in a Company Salon for any first role positions, including the initial Salon Director, District Manager, Training Salon Director and Trainer (collectively, the “Salon Operators”). You are responsible for all expenses that you and your employees incur for all training programs, including the cost of travel, lodging, meals, and wages. If you have additional attendees, we reserve the right to charge you the then standard fee charged by us to other franchisees for additional attendees, which is currently $300 per day on-site training session, minimum of three days. In addition, in the event that you or an affiliate of yours opens one or more additional Salons under one or more Franchise Agreements with us or an affiliate of ours, we, or an affiliate of ours, will charge you our then standard fee for training your additional Salon Operators, which is currently $300 per day on-site training session, minimum of three days.
Computers and Software You must purchase all computer hardware, software and peripherals from us or one of our affiliates or approved suppliers. The cost of the required computer equipment for your SUN TAN CITY Salon is approximately $7,000 to $10,000.
Maryland Franchisees The State of Maryland, Office of the Attorney General, Securities Division, requires us to defer payment of the initial franchise fee and all other initial payments owed by Maryland franchisees to us until we have completed all of our pre-opening obligations under the Franchise Agreement. If you are a resident of the State of Maryland or will operate your Salon in the State of Maryland (or if the offer is otherwise made or accepted in the State of Maryland), we will defer the payment of your initial franchise fee and all of the other initial fees described above in Item 5 until after we complete all of our pre-opening obligations under the Franchise Agreement.
Item 8: Restrictions on Sources of Products and Services
Required Purchases from Us or Our Affiliates While you generally have no obligation to purchase or lease any inventory or supplies from us or our affiliates, certain franchisees have determined that they would purchase both the initial inventory and selling supplies for their new Salons, along with inventory and selling supplies for their existing Salons, from one of our affiliates. In addition to these voluntary purchases, there are some exceptions where you are required to purchase from us or our affiliates, as follows: EFT Services. You must use service agreements that allow you and us to electronically debit your clients’ accounts for the monthly membership dues. You must use us or one of our affiliates to provide electronic fund processing (“EFT”) services on your behalf. We will distribute the proceeds of the monthly EFT draft to you net of all royalties, fees and other amounts due to us, our affiliates and your suppliers (if you fail to pay your suppliers in a timely fashion). Computer Equipment. You must purchase all computer hardware, software and peripherals from us or one of our approved suppliers. The computer software and hardware we require you to use is not our proprietary property.
Required Purchases from Approved Suppliers or in Accordance with Our Specifications You must comply with our System and Standards for all supplies, materials, fixtures, furnishings, equipment and other products used in or offered for sale at the Salon. Currently, we require that you purchase the following from our approved suppliers: tanning equipment, sunless solutions, tanning lotions, tanning lamps, tanning acrylics, wall systems, ceramic tile, counter systems/shelving, in-salon music, POS computers and software, IT support, advertising and promotional materials, digital signage system and credit card processing integration. We may from time to time develop proprietary private label equipment, systems and products that are an integral part of our System and Operating Standards, and you must comply with all our specifications and requirements relating to incorporating and using such equipment and products in the operation of the Business, as we may require (Franchise Agreement Article 2.5). This requirement currently includes an audio system in each location with a custom SUN TAN CITY promotional loop and the MySunTanCity Client web application. Approved suppliers and our Standards are generally included in our Manuals or in other communications shared with franchisees. If we have approved suppliers for any item, you must obtain the item from our approved suppliers. Approved suppliers and our Standards are determined based on the current needs for operating the Business. We evaluate approved suppliers based on price, service, quality, and other commercially reasonable factors and benchmarks. The identity of approved suppliers and these specifications are updated periodically in writing by modifying the appropriate pages of the Manuals. We will send you modified pages through the United States Mail or by any other commercially reasonable means. We reserve the right to limit the number of vendors and suppliers for products, goods, supplies, fixtures and equipment. We also reserve the right to designate a single source of supply for certain products and services. We or one of our affiliates may be that single source. Our reason for these requirements is to ensure uniformity and consistent quality in all SUN TAN CITY Salons for the benefit of the System and Salon operators. The items that you purchase from our approved suppliers may not be uniformly priced for our franchisees. Neither we nor our members, officers, managers, employees or directors own any interest in our approved suppliers aside from STC Consolidated Operations, LLC and STC Management Group, LLC.
Supplier Approval Process If we require that an item be purchased from an approved supplier, and you wish to purchase it from a supplier we have not approved, you must submit a written request to us for approval. Similarly, if we require you to use a particular item or brand of equipment, and you wish to substitute a different item or brand, you must request our approval in writing. Subject to our prior written approval, you may contract with alternative suppliers; however, you must not purchase or lease the item until and unless we have approved the item and/or supplier in writing. Nothing requires us to approve any particular supplier. We will provide you notice of approval or disapproval of your supplier request within 180 days of your initial request. Currently, we have not established fees or specific procedures to seek approval to purchase from an alternative supplier. We will judge the product or service of alternative suppliers on a case-by-case basis, based on, among other factors, quality and compatibility with our Operating System and Standards. We may revoke the approval of a supplier that fails to continue to meet standards that are at least as equivalent to the standards of our approved suppliers.
Purchasing Arrangements We have negotiated certain purchase arrangements (including price terms) with suppliers for the purchase of certain items, such as services, construction materials, tanning equipment, s u n le s s s o lu tio n s , tanning lotions, tanning lamps, audio and other supplies, equipment and inventory that are available to franchisees. We do so to promote the overall interests of the System and our interests as the franchisor. There currently are no purchasing or distribution cooperatives for the System. The following table contains our estimates regarding the things we require you to purchase or lease from our approved vendors and suppliers relative to your total initial investment and annual operating expenses (not as a percentage of gross sales).
Revenues Received By Us or An Affiliate In Consideration of Your Purchases Effective January 1, 2011, we purchased the tanworld(R) franchise system, which added 59 franchised units under our STC Franchising, LLC umbrella, most of which subsequently converted to the SUN TAN CITY brand. The tanworld franchise system operated under an economic structure under which franchisees paid a low royalty rate, supplemented by vendor rebates paid to the franchisor. With the purchase of the tanworld system, STC Franchising, LLC agreed to honor the royalty rate and vendor rebate structure in place at tanworld(R), for both existing units and future openings by current or former tanworld(R) franchisees operating within our system. In the fiscal year ended December 31, 2019, we received $404,283 in revenue from rebates, discounts and other similar payments from current or former tanworld(R) franchisees, which represented 8.3% of our total revenue for fiscal year 2019. We have entered into an agreement under which our parent company, STC Consolidated Operations, LLC, earns a 4% product credit from a supplier for each $100,000 in lamp purchases by company-owned or franchised SUN TAN CITY Salons. In the fiscal year ended December 31, 2019, STC Consolidated Operations, LLC received $29,691 in credits from this supplier. We have negotiated an exclusive purchase arrangement with a supplier of tanning lotions and related products, under which company and franchise operators generally receive a discount of between 40% and 70% off the salon cost for tanning lotions and related products purchased from the supplier. In connection with this arrangement and in consideration for the supplier’s right to produce private label products for the SUN TAN CITY system, our parent company, STC Consolidated Operations, LLC, will receive an annual credit equal to ten percent (10%) of systemwide lotion purchases for the previous year over the 5-year term of the agreement. In the fiscal year ended December 31, 2019, STC Consolidated Operations, LLC received $689,744 in earned credits from this supplier. We will continue to receive rebates, discounts and other similar payments from our designated suppliers for purchases by franchisees. In the fiscal year ended December 31, 2019, our franchisees spent $489,780 with our parent company, STC Consolidated Operations, LLC, for the purchase of supplies, fixtures, parts and equipment items STC Franchising, LLC did not receive any revenue from these purchases. In the fiscal year ended December 31, 2019, our total revenue was$4,823,204. We do not provide other material benefits to you, i.e. special renewal privilege or additional franchises, based on your use of our designated or approved sources. We will terminate your franchise if you purchase services or goods that are (i) not according to our Standards and specifications; (ii) have not been approved by us; or (iii) not from our approved suppliers.
Item 10: Financing
Neither we nor any affiliate of ours generally offer any direct or indirect financing to you, guarantees any note, lease or obligation of yours or has any practice or intent to sell, assign or discount to a third party all or any party of any financing arrangement of yours.
Item 12: Territory
You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels or competitive brands that we may own or control.
Franchise Agreement By the terms of the Franchise Agreement, we will grant you rights to operate a single SUN TAN CITY Salon at a Salon whereby, except in the limited circumstances outlined below, we will not locate another franchise, nor ourselves directly or indirectly own or operate, another SUN TAN CITY Salon within a two (2) mile radius of the Salon (the “Area”). If you sign an Area Development Agreement, the Development Area will correspond to the Development Area as described in the Area Development Agreement. We have the right to establish SUN TAN CITY Salons anywhere outside your Area. We also have the right to sell our related products, whether or not using the Marks, through distribution channels other than SUN TAN CITY Salons, including through catalogs distributed within your Area or Development Area, or through our Internet web site. We will not owe you any compensation for any such product orders accepted from clients located inside your Area or Development Area. In the event that you sign an Area Development Agreement and we or our affiliate acquire another business with a franchisee or licensee in the Development Area, you will be required to waive your rights with regard to the Area and Development Area with regard to such franchisee or licensee. In addition, in the event that you sign an Area Development Agreement and we or an affiliate enter into an agreement to purchase another tanning salon within the Area or Development Area, then you will have the right to purchase such tanning salon for a period of thirty (30) days from the date that we or our affiliate provide you notice of such transaction. If you do not exercise your right to purchase such tanning salon then we or our affiliate are able to purchase such tanning salon and operate within your Area or Development Area. You must operate the SUN TAN CITY Salon only at the site identified in your Franchise Agreement. You cannot relocate your Salon without our consent. If you lose possession of the site through no fault of your own, you may apply to us for our approval to relocate your Salon to another site. If we consent, which consent is in our sole and absolute discretion, you must comply with our reasonable site selection and construction procedures. Our consent to any relocation will be based on various factors, including the proposed site’s demographic characteristics, traffic patterns and parking, competition from other businesses in the area and other relevant factors. The franchise is only for a SUN TAN CITY Salon at the site identified in your Franchise Agreement and does not give you any rights to operate or offer and sell any of the products or services described in the Franchise Agreement at or from any other location or distribution channel. We and our affiliates can operate and can grant franchises to others to operate SUN TAN CITY Salons under the Marks (or under other trade names, service marks and trademarks) at any location other than your Salon and outside the Area or Development Area. These outlets may compete with your SUN TAN CITY Salon. Among other things, this means that we and our affiliates may: (1) Grant other licenses for use of the System and the Marks; (2) Develop and establish other business systems using the Marks, or other names or Marks and to grant licenses to use those systems without providing any rights to you; (3) Advertise and promote the System without restriction; (4) Operate, and license others to operate, retail tanning salons under the Marks, or under other names or marks, at any location other than the Area or Development Area; and (5) Engage, directly or indirectly, at wholesale, retail or otherwise, in the production, distribution, operation, license and sale of tanning products and services under the Marks, or under other marks through any method of distribution, including, Internet, catalog sales, telemarketing or other direct marketing and other tanning facilities regardless of the proximity to, or the competitive impact on your SUN TAN CITY Salon, without compensation to you.
Area Development Agreement If we enter into an Area Development Agreement with you, we will grant you a Development Area under the Area Development Agreement based on various market and economic factors like market demographics, the penetration of SUN TAN CITY Salons and similar businesses in the market, the availability of appropriate sites and growth trends in the market. The Development Area may be all or a portion of a city, a single or multi-county area or some other area and will be described in the Area Development Agreement. You must develop Salons in the Development Area under the Development Schedule in the Area Development Agreement. You and we agree to the Development Schedule before signing the Area Development Agreement. Except as provided below, if you comply with the Area Development Agreement and any other agreements that you or your affiliates have with us or our affiliates, then we and our affiliates will not establish, or authorize anyone except you to establish SUN TAN CITY Salons in the Development Area during the term of the Area Development Agreement. We retain all other rights. Among other things, this means that we can conduct activities in the Development Area like those described above in relation to the Area under the Franchise Agreement without compensating you. In the event that you sign an Area Development Agreement and we or our affiliate acquire another business with a franchisee or licensee in the Development Area, you will be required to waive your rights with regard to the Area and Development Area with regard to such franchisee or licensee. In addition, in the event that you sign an Area Development Agreement and we or an affiliate enter into an agreement to purchase another tanning salon within the Area or Development Area, you will have the right to purchase such tanning salon for a period of thirty (30) days from the date that we or our affiliate provide you notice of such transaction. If you do not exercise your right to purchase such tanning salon then we or our affiliate are able to purchase such tanning salon and operate within your Area or Development Area. If you fail to comply with the Development Schedule, or otherwise materially default under the Area Development Agreement beyond any applicable cure period, then we may (in addition to other remedies) terminate or modify your territorial rights, reduce the area of the Development Area or reduce the number of Salons that you may establish. Your rights in and to your Development Area are not dependent upon your meeting a minimum sales quota. The configuration of your Development Area will not change except by mutual agreement of you and us. Absent an Area Development Agreement, you will not have any rights to a specific area or to additional areas.
Businesses Offering Similar Products or Services Neither we nor our affiliates have any plans to sell franchises under a different trademark within the current and next fiscal year. We no longer offer or sell tanworld franchises. A tanworld salon offers tanning services, tanning supplies, and related items. We do not own or operate any tanworld salons. tanworld franchisees may solicit or accept orders within your Area or Development Area. The principal business address of our tanworld operations is 101 Catalog Drive, Elizabethtown, Kentucky 42701. We do not maintain, and have no plans to maintain, physically separate offices and training facilities for the tanworld business. Our affiliates currently operate 35 franchised PLANET FITNESS clubs in Kentucky, Indiana, and Tennessee and have the rights to develop an additional 11+ franchised PLANET FITNESS clubs in certain markets located in these states. PLANET FITNESS clubs primarily offer fitness training facilities and services, including exercise machines and free weights, but also offer tanning and related services. Neither we nor our affiliates have any ownership or management relationship with the PLANET FITNESS franchisor, Planet Fitness Franchising, LLC, and with the exception of Clarksville, Tennessee and Hopkinsville, Kentucky, we do not have PLANET FITNESS development rights in markets where SUN TAN CITY franchisees operate or have the right to develop. It is our general policy not to offer the sale of SUN TAN CITY franchises within markets in which our affiliates operate or have the right to develop PLANET FITNESS clubs, and not to solicit or accept orders for products or services within such markets, but we reserve the right to do so in the future. The principal business address of our affiliates’ PLANET FITNESS operations is 445 E. Market Street, Suite 310, Louisville, Kentucky 40202. If a conflict arises between our franchisees regarding territory, clients or support of competitive businesses that are in the same area as SUN TAN CITY Salons, our appropriate officers and the appropriate officers of our affiliates will meet and resolve the conflict under internal procedures that we will establish as necessary.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
You (or your managing owner) agree to (i) personally manage and operate the franchise as your primary occupation, or (ii) hire and delegate your (or your managing owner’s) authority and responsibility with respect to management and operation to an individual who will personally manage and operate the franchise as his or her primary occupation (each, a “Supervisor”). You, your managing owner or your Supervisor must, at all times, faithfully, honestly and diligently perform your obligations under the Franchise Agreement, continuously operate, and exert your best efforts to promote and enhance the Business and not engage in any other business or activity that conflicts with your obligations to operate the Business in compliance with the Franchise Agreement. Each of your Controlling Principals must be bound by the terms of the Franchise Agreement and personally guarantee performance of all agreements.
If the franchisee is a business entity, you must designate and we must approve a managing owner to operate the franchise. There is no required amount of equity interest that the managing owner must have in the franchise. If you elect to hire a Supervisor to operate the franchise, the Supervisor must successfully complete our initial training program and must be bound by the confidentiality and noncompetition provisions of the Franchise Agreement.
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You must operate your franchise in accordance with our Manuals and our Methods of Operation. Our Manuals and our Methods of Operation contain mandatory and suggested specifications, standards, operating procedures and rules that we specify periodically for the operation of the Business, (i.e. the purchase of supplies and other products, membership, transfers, etc.), and information relating to your other obligations under the Franchise Agreement and related agreements. The Manuals may be modified by us periodically from time to time to reflect changes in our Methods of Operation.
You may only offer and sell those services and related goods that we have approved. You must offer all services and related goods that we designate as required for all franchises. We have the right to change the types of authorized services or goods offered by your franchise. Your refusal to comply with these requirements may result in termination of your Franchise Agreement. There are no limits on our right to change the types of authorized goods or services.
To view the full Franchise Disclosure Document, please click here