Sona MedSpa "The Rest of the Story"

A Franchisee's Story, Part 2: Professionals Lost Millions

Sona MedSpa is a true American tragedy; where many families lost their entire or a substantial part of their life savings.  The losses are well in to the millions of dollars that these various families lost.  It is about an imperfect if not actually fraudulent franchise model which simply did not work against any known medically proven concept.  The business model was based on at best a deceptive cash based financial model.  This is a story about highly professional people (CEOs, JDs, MBAs, CPAs, MDs and other Professionals) who bought in to a “turn key” concept with a high cost of entry and then over time failed. 

My name is Kempton J. Coady, III and I was one of the litigants against Sona in the recent Arbitration against them.  My background is as follows:  Business executive with over 30 years domestic and international experience in the “medical device business.”  I have managed a variety of functional areas including sales, marketing, communications, finance, product management, engineering, manufacturing, research and development, applications, service support, and logistics.   My management responsibilities included divisions of companies up to $300 million in size.  The companies I have worked for include Philips Medical Systems, Pfizer Medical Systems, Corning Medical Systems, etc. I have been a CEO, President, VP of Marketing, VP of Business Development, etc. Earned BS (Bates College ‘70), MBA and MPS (Cornell University ‘74).  

I originally bought into the Sona MedSpa franchise to succeed in my own business, not to fail, and certainly with no desire to litigate against Sona MedSpa and Carousel Capital Partners.  Indeed, at one point in late 2005 I tried to give the business back to Sona MedSpa the franchisor under the terms of the franchise agreement.  They declined to take it back.

I wanted just to go on quietly with our “Win” in hand over Sona MedSpa, Carousel Capital Partners II and their principals, but I feel it necessary to respond as indicated above.   

Franchisee Win $400,000. Franchisor Awarded $0.

Sona and Carousel did not overwhelmingly win in fact the Coadys “Won.”  The following is a quote from Mr. Garner of Dady & Garner, PC the attorney for the plaintiffs about this win. “We prevailed on negligent misrepresentation and recovered money ($400,000 not a small amount!).  Sona, which had counterclaims against the Coadys originally in the range of $7 million dollars, (later trimmed down to somewhere between $1 and $2 million dollars) recovered “nothing.”  On my scorecard, that’s a win for my team and a goose egg for the other side.  You don’t say that the team that wins the game by one run was the losing team.  It was the winner, and win we did.”  It should be noted also that Jones, Wilson, Amos, and Rose of Sona and Schwabb, II, Schmidly, and Pitt of Carousel were found “personally liable” for the monetary damages. 

The Franchise Medical Premises

One must understand the facts about Sona and what happened and the terrible effects on franchisees (Families).   The magnitude of failures is quite alarming.  The business as started had basically just laser hair removal as the only service. 

If one reads the Arbitration result (pdf) of the Sona case; which is online at the BMM site, one would have recognized that the medical premises behind the SonaConcept were not proven by any medical science.  That is, one cannot match the laser hair removal times with a known hair growth schedule.  If one accepted this Sona medical premise, then it took up to 19 months to treat hair in various parts of the body.  In truth hair all over the body is in a constant growth pattern, although at different rates for the various areas of the body.  You can basically treat hair at any time as long as the hair follicles or roots have grown back.  This is generally in four to six week intervals.   The claim was also made that franchisees could remove 93% to 97% of the hair in all individuals no matter what the skin tone or hair color in five treatments using the SonaConcept.  And that with a substance called Meladine all blonde and grey hair could be treated with lasers.    All of this was patently untrue and again not proven by any medical science.  This same story was told to literally “tens of thousands of customers under the direction of the Sona MedSpa franchisor.”  I believe some of this SonaConcept story is still being told today by unsuspecting franchisees?

What happened to the Sona Med Spa business?

The second part of the story involves the business model.  During the late October, November 2006 Arbitration there was a complete analysis presented of what happened to the 45 Sona MedSpas which existed during the tenure of Jim Amos and Heather Rose.  The failings of the Sona business model are obvious if one just looks at what happened to franchisees.  At Sona MedSpa out of 45 franchises which existed at one time or another during the Jim Amos and Heather Rose tenure the following has occurred:

• 18 have gone bankrupt, gone out of business, or changed names and are struggling to survive or been sold at fire sale prices? This includes two Sona MedSpas from 2007.  Sona Scottsdale, AZ just left the Sona system in May 2007 and is now known as NEOS MedSpa.  Their new Web site is http://www.neosmedspa.com/.  And shortly before the departure of Scottsdale, Sona Med Spa of Tampa, FLA declared bankruptcy in the February/March 2007 timeframe.  See a copy of the letter to clients from the former Sona MedSpa Tampa Medical Director about the bankruptcy and what clients should do now.

• Ten Sonas have changed hands at least once and almost all of them at "fire sale" prices? That is, these centers stayed Sona MedSpas and were sold to others.  Again from the Arbitration it was presented that many of the Sona MedSpas turned over at prices of $1 and $2 and some people had to actually pay buyers to take them.

• If one does the math this is a 62% turnover in Sona sites in approximately three years, that is, (18+10)/45 x 100.

Is this a successful franchise business which people should invest in? How does one justify that many people lost their life savings and in at least one case there was an attempted suicide? How does one explain that many of the franchisees including those in the Franchise Advisory Counsel went to Jim Amos and Heather Rose and Carousel Capital Partners' principals with detailed explanations of the medical and business facts/falsehoods and they chose to do nothing? How does one explain that Amos and Rose simply blamed the franchise operators? These were generally "extremely competent" business people, that is, former CEOs, private owners of successful companies, MacDonald's executives, high level television executives, etc. Most of these people also had advanced graduate degrees JDs. MBAs, CPAs, MDs. etc. These people worked very hard at making their Sona Med Spas succeed, and simply lost all or a significant amount of their life savings?   

Based on my own experience, I believe that “each center” lost at least $1 million before being sold, going out of business or declaring bankruptcy or changing names and trying to make a go of it.

If you do the math, this means approximately $28,000,000 was lost by various families.  This is a true American business tragedy.

So why did the Sona MedSpa businesses fail.  Or in some cases they have been renamed and radically changed; and owners are struggling to survive.  Well the following represent some of the major reasons.  In the initial sale of Sona MedSpa franchises all numbers were represented to prospective franchisees on a cash basis. In the Sona Med Spa UFOC (pdf, p. 200) you will see cash sales numbers for several existing corporate owned stores and franchisees. On the next page you will see expense numbers for corporate owned stores at various sales levels. Yes, there are warning footnotes; but everyone was told this is what they could expect. Accrual accounting was only mentioned as something you used for tax purposes. During the tenure of Dennis Jones et al and Amos and Rose cash results was all that was ever talked about. Indeed, the Sona franchisor royalties came out of these cash based numbers upfront before the services had been rendered.

This “purported” superior process called the SonaConcept took 12 to 19 months to complete. Packages of five treatments with a purported 93% to 97% success were sold to consumers. The consumers who complained about lack of results were told by franchisees, which had been told by Sona the franchisor that they really needed to see the process through and be sure that their treatments matched Sona’s known hair growth schedule. By the time 12 months or more had gone by the franchisee found themselves locked in to a huge unfunded consumer liability based on previous five treatment packages sold. In addition, the consumers demanded more treatments, because five treatments simply did not work in almost all cases. The only way to fund this mounting liability was to sell more laser hair removal first time clients.   The latter required very large spending on marketing and promotion.

There was a chorus of early franchisee complaints (litigation, attorney general actions) against Sona the franchisor. Despite this fact, the Sona franchisor would sell more franchises. Amos, and Rose made these sales on the recommendations of the seeming “fantastic” cash flow success of “new” franchisees early in their tenure, that is, open less than 12 months. As mentioned Sona the franchisor advocated running the business on a cash basis with little regard to GAAP (Generally Accepted Accounting Practices) accepted accrual based accounting, where funds would have been reserved for future treatments. Eventually, all franchisees found that the expenses of running the business exceeded both the cash and of course the accrual revenues from the business. There simply was no money to be reserved to cover future services. The only way franchisees supported their businesses was by adding new lasers and in some cases building new or buying defunct/troubled Sona MedSpa centers; and by adding more first time clients. Eventually though this deck of cards crashed, as franchisees ran out of money.

Lessons Learned for Franchisees: What can be done to prevent the Sona situations from happening in the future?

It is only by means of the Media raising this issue of franchise failure, the large franchisee associations involvement (hopefully like IFA), and government intervention to change the regulations; that the problems with lack of franchisor regulation can be resolved. Currently franchisors have "carte blanche" to put anything they want in a UFOC document without protections for the unsuspecting buyer. The rules are so loose that this franchise industry is now in many ways analogous to the US Stock Market in the late 1920s, that is, there were many reputable companies like Ford, General Electric, RCA, and General Motors; but there were also many suspect companies selling their stocks without a great amount of regulation. In a similar fashion you have the Franchisors like McDonalds, Burger Kings, KFC, etc. who are highly reputable franchises; and then you have many others who are suspect or outright fraudulent. The rules are laid out by the US Securities and Exchange Commission which control the way stock is offered. All the statements made in public and private stock offerings must be fully supported by documentation or expert testimony/sign off, prior to publication. These rules are even enforced more with the advent of Sarbannes Oxley rules since the Enron debacle.

Why can’t some of these same rules be applied to regulate the franchise industry and their offerings?

The franchise industry needs to act to prevent the Sona MedSpas; and franchisees should not be used as a source of capital to prove a franchise concept.    Franchisees should not be “churned,” as franchise models are perfected. The franchisees are not a source of venture capital.  They bought into the concept of a proven business model.   I knew many of the Sona franchisees personally and these are smart, sincere wonderful people (Families).  Their business failures were each a tragedy to me.

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Further readings:

• Back in the Saddle (Franchise Times)
• Sona Medspa: A Franchisee's Tale (Part 1 of this story)