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CrossFit tied up

by Taina Rosa | Published August 13, 2012 at 9:19 AM

The CrossFit strength and conditioning program, which mixes elements of gymnastics, weightlifting, rowing and other exercises, has gained an enthusiastic following among athletes and weekend warriors hoping to emulate the results seen by the law enforcement and military institutions that have adopted the regimen.

The company behind the program, CrossFit Inc., which former gymnast Greg Glassman started in 1995, has grown along with the system's popularity. From a single gym -- or "box," in company lingo -- in Santa Cruz, Calif., CrossFit has expanded into an entity with more than 4,000 affiliates. The company estimates that about 50 gyms become affiliated each week. The company also offers certification courses for prospective CrossFit trainers.

Such successful businesses often attract the interest of private equity firms. And, in fact, Anthos Capital LP, a growth equity firm with offices in Menlo Park, Calif., and Morristown, N.J., is interested in acquiring half of CrossFit. The problem is that the stake Anthos wants to buy belongs to Glassman's wife. Or, more accurately, his soon-to-be-ex-wife.

Anthos is trying to acquire 50% of the company, now based in Washington, for $20 million from co-founder Lauren Jenai Glassman. Glassman opposes the sale and has taken his case to CrossFit's affiliates, suggesting that the deal would ruin the relationship between the company and the gyms. His stance, and the complications presented by divorce proceedings, demonstrate that even relatively small deals can be troublesome.

The fate of the deal rests with a divorce court in Arizona's Yavapai County, which must approve the distribution of assets between the Glassmans. "Per the Arizona statutes governing divorces, once a divorce is filed through the time it is finally rendered, a preliminary injunction is in effect that limits the sale or transfer of community property without mutual agreement of the parties to the divorce or permission of the court," said a lawyer involved in the case. "As such, Lauren has filed a motion to gain court approval of the sale of her share of the community stock in CrossFit," he added.

In an interview, Glassman said that his wife's stake likely does not have the same value as his. "She may end up with shares that are worth 30% of mine. Understand this: the certification, concept, business model, our definition of fitness and health ... everything we do at CrossFit is my creation. It is all my brainchild, all of it," he said. "Lauren is a partner who stepped away from everything five years ago and resigned 2-1/2 years ago. She has had no input at all and now is coming back out of greed and revenge and wants to sell us all out."

Glassman said that CrossFit expects to make $40 million in revenue this year, about 85% of which will come from affiliation and trainer certification fees alone.

Affiliate certification, which allows boxes to use the CrossFit brand and workout program, nowadays costs $3,000 a year. If, as the company estimates, an average of 50 boxes become certified per week, certifications should bring in about $7.8 million in 2013.

Trainer certifications, meanwhile, could bring in about $23.8 million in 2013. This certification costs $1,000 per person. A quick peek at CrossFit headquarters' website reveals that the certification classes sell out the vast majority of the time, with about 33 classes every month averaging 60 students each.

In addition, the company obtains revenue from a 10-year sponsorship deal with athletic shoe brand Reebok, which even makes special CrossFit shoes, and television sports channel ESPN. The two are involved in the CrossFit Games, which could be considered CrossFit's answer to the X Games. The latest Games were held last month in California, and both the male and the female winners won $250,000 each.

Glassman said that CrossFit is a debt-free company and that it is "nicely profitable and revenue is doubling every 18 months."

Valuation of the Anthos deal is a sticky issue. Given CrossFit's revenue streams, Anthos may be undervaluing the company. An investment banker who is familiar with CrossFit management estimates that company overhead "is probably not even 50% of revenues." He added, "Assuming this deal could get done in a nonadversarial way, I'd say that $150 million would be a pretty fair valuation for the company."

But Glassman insists he is not worried about valuation. After all, the two offers he has made for Jenai Glassman's stake are about the same size as Anthos' bid.

"[Lauren] said, 'I think I can get $43 million to $45 million,' and we told her there was no way she was going to get that, it's ridiculous," Glassman said. So he made a counteroffer in which he would pay $1.5 million each year over a 15-year period, a $22.5 million offer. "Then she made a counteroffer asking for $15 million, with $3 million payable each year for five years," Glassman said. He made another counteroffer in which he would pay $17.5 million over five years with payments loaded toward the back end. For instance, under his last offer, Glassman would pay $1.5 million the first year, $2.5 million the second, $3.5 million the third, $4.5 million the fourth and $5.5 million the fifth year. Glassman believes his offers are superior to those of Anthos since the $20 million the firm would pay Jenai Glassman would be subject to a capital gains tax, while his offer would not be subject to that tax since it is the result of a divorce, he said.

Months after his latest offer, Glassman said, Jenai Glassman notified him that Anthos had offered $20 million and that she would not consider his offer.

She could not be reached for comment.

Either way, Glassman opposes the sale of Jenai Glassman'ss stake to Anthos, no matter how much the firm offers. "Selling to private equity or venture capital is something Lauren and I had promised the staff we would never do," he said.

"In front of me and my key staff ... [Anthos managing partner Bryan Kelly] outlined a plan that gets us out of our Reebok contract ... partner with an apparel company and get affiliates to sell supplements. He told us there were billions of dollars to be made and that we could put [health products retailer] GNC out of business. That's what he told us. We listened aghast," Glassman said.

Kelly maintains that his words are being taken out of context and insists there are no plans to change CrossFit's business model.

In a letter that Glassman posted on the official CrossFit message board, he expressed his views to affiliates. "Make no mistake about it, Anthos wants an equity share of CrossFit in order to gain control of the affiliates," he wrote. "I stand squarely in the way. From the start, our promise to the affiliates has been to minimize rent extraction while providing the best education, protection, and brand development possible ... The Anthos approach is short-term, rapacious, dishonest, entirely destructive of our culture, and toxic to the affiliates."

Following this warning, some affiliates have expressed fears that Anthos would force them to sell products or change the affiliate model -- under which they are allowed to run their establishments without interference from CrossFit -- to one of a franchised system. As the model stands today, affiliates just pay an annual fee, and run their boxes as they see fit.

Anthos, meanwhile, insists that it has no intention of changing CrossFit's or its affiliates' business models. "We are a noncontrol investor. We don't own over 50% in any company we invest in. Our strategy is to be a supportive investor," said Kelly, who added that he has been doing CrossFit workouts for two years. "Some of the claims being made are ludicrous," he added, saying that the firm's investment in CrossFit will be "long term."

Despite the controversy, Kelly said he is excited to work with Glassman, whom he describes as a visionary. "We believe that in the very near future, there will be millions of CrossFitters. This is a company with a very clear growth trajectory," he added.

Gabriel Leydon, co-founder of Machine Zone Inc., one of Anthos' portfolio companies, defended the firm. "I've read many comments on the CrossFit message boards regarding Anthos. Based on our experience, the notion that Anthos would ever tell us or any of the companies in which they invest what to do or cause us to change how we run our business is not how Anthos operates." He added that the firm "helped us develop long-term strategic plans, build our board of directors, recruit top talent, create financial controls and meet thought leaders."

Palo Alto, Calif.-based Machine Zone, a game developer for mobile applications, raised $5.3 million in Series A funding in 2011 from Anthos and Baseline Ventures, according to company information.

The president of another Anthos portfolio company, who did not want to be identified, also defended the firm. "[Anthos] said when they invested in our company that they had no intention in interfering with our business. They wanted management to continue to run it. And that is what happened," she said.

She also said Anthos' partners made themselves available to advise the company at the board level and to provide guidance on strategic, financing and other matters critical to its growth. "Specifically, they have helped us, at our request, to complete acquisitions, raise debt financing, evaluate new business lines, develop long-term strategic plans, recruit management talent, and implement financial controls," she added.

Anthos is committed to getting the CrossFit deal done, but it risks facing a lot of backlash from affiliates, which threaten to leave the CrossFit brand. One of the sources believes that 50% to 75% of affiliates could dump the CrossFit brand and jump on whatever new brand Glassman comes up with. That would strip the company from a hefty revenue stream.

On the other hand, CrossFit could retain the partnerships with Reebok and ESPN, which are giving the brand visibility worldwide, although Glassman insists Kelly wants to breach the contract with Reebok.

But in the end, if Anthos does gain the stake it covets, the dust could settle and business could proceed as usual. After all, this is not the first controversy to hit CrossFit. When CrossFit welcomed Reebok as a sponsor, it was common to see CrossFitters claim this would be the end of CrossFit. The big difference is that while CrossFit headquarters embraced Reebok, it is not cozying up to Anthos and is intent on preventing the firm from taking a stake in the company.

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Tags: Anthos Capital LP | CrossFit Inc. | M&A

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