KKR Laser Clinic buys dozens of unhappy franchisee operations

The purchase price for the clinic is believed to be less than $30 million, ranging from under $300,000 to over $1 million, depending on the size and location of the clinic. The settlement figures are far from the investments sunk into the business by some franchisees.

This is a far cry from the $80 million compensation demanded by the 52 franchised clinics in March last year when they joined forces and filed a 140-page letter of dispute alleging that LCA had gouged them for equipment and supplies costs, while forcing them to take aggressive action. discounts that make it difficult for them to cover their costs and condition customers to expect discounts.

‘It was despair before losing everything’

Mediation for unhappy franchisees failed in May last year. A second mediation attempt was held earlier this year, and a settlement was agreed earlier this month.

“It wasn’t an option to finish, it was despair before losing everything,” said one franchisee. “For some in the group it was a choice between taking a small amount of their loss or losing their home.”

The business model is based on LCA which takes a royalty of 10 percent of each sale. But some franchisees argue that headquarters’ directives to provide discounts on services and products, coupled with the hefty markups imposed on them by headquarters on machines, dermal fillers, Botox, and other products, are hurting business.

The LCA is the latest scandal to hit Australia’s $170 billion franchise system, which has been the subject of several federal parliamentary questions, with few significant changes. At its heart is a failure of the law and regulators.

Until private equity entered the fray, initially with a 50 percent sale to Archer Capital in 2014, then a direct sale to KKR in 2017, the relationship between franchisor and franchisor – former actuary Babak Moini and IT legal expert Alistair Champion – was a partnership in which everyone makes money.

Aggrieved franchise owners launched a rebellion against the nation’s largest laser hair clinic and the Botox chain. Mark Stehl

Private equity brought about a change in emphasis, with a focus on how to make more money at headquarters, rather than how to continue partnerships with franchisees.

Discounts become more frequent, more players enter the market, and it becomes a race to the bottom, with customer loyalty based on who offers the lowest price.

The LCA website currently has a range of discounted services including 50 percent off laser hair removal services including arms and legs and $50 off some facials.

There has also been a push to introduce a new machine, which LCA is selling to clinics at an attractive price.

For example, in 2019 it introduced CoolSculpting, which the clinic purchased and marketed as a “non-invasive treatment that freezes unwanted fat”.

Linda Evangelista circa 1995. She said the CoolSculpting treatment was very wrong. Getty

According to insiders, many franchisees find it difficult to make money. Treatment success rates are uneven, and beauty therapists don’t actively sell them, especially after retired supermodel Linda Evangelista posted on social media last year that she became depressed after fat-freezing treatments.

“To my followers who wonder why I am not working while my colleagues’ careers are booming, the reason is that I was brutally ravaged by [a] cool sculpting procedure that does the exact opposite of what it promises.” He said “it increased, not decreased, my fat cells and left me permanently disabled even after undergoing two painful, unsuccessful corrective surgeries. I have been left, as the media described, ‘unrecognizable’.”

He filed a lawsuit with the manufacturer, who defended the case. LCA declined to comment on the impact Evangelista’s social media posts had on business and subsequent media attention.

Whatever the case, the perception is that service discounts and constant international expansion will continue as KKR seeks to drive top-line revenue growth to fatten LCAs for asset turnover.

Things will only get harder for the franchisee

With a bear market in tow, and a dismal economic outlook coupled with rising inflation and interest rates, alternative investment funds such as private equity will become more attractive, and players like KKR will investigate options to increase returns.

As the cost of living bites the demand for cosmetic services, things will only become more difficult for franchisees.

LCA declined to answer a series of detailed questions, including a clause that nearly derailed a settlement agreement with the franchised clinic.

A source familiar with the deal said clauses seeking guarantees from the franchisee group that came out in connection with underpaid staff during their tenure also tried to include independent contractors. This means if nurses decide to challenge their contract, which classifies them as independent contractors, not employees, the responsibilities if they succeed are pensions, workers’ compensation, and vacation pay.

The franchise is pushing back, leaving LCA with the potential of a ticking bomb if a challenge arises.

In a statement, LCA confirmed it had purchased 38 clinics and was finalizing documentation with the “small number of remaining franchisees” and that “the terms and conditions of this contract of sale remain confidential”.

It is said to be committed to providing a great customer experience. “We are looking forward to working positively with our group of sustainable franchisees, who are aligned with our strategy, appreciating and sharing our commitment to driving sustainable growth, outstanding customer results and continued success for the brand.”

For franchisees who have left, there are doubts that unity can be restored.

“It was a terrible experience, and we were lucky to get out,” said one of them.

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