Ellie Mental Health, a company that once pioneered the mental health franchise model, is now facing a wave of backlash from its franchisees, who claim the company misrepresented the requirements and support they would receive.
This has left some franchise owners on the edge of financial ruin. Franchisees claim the company promised sustained backend support services and technology but delivered glitchy, slow and altogether ineffective services hindering revenue generation and collections. As a result, many franchisees are seeking redress in court, through arbitration mandated by their franchise agreements and trying break away from the Ellie system.
Ellie Mental Health has also taken legal action against franchisees who attempt to separate their clinics from the Ellie system. The company has not responded to a request for comment.
The mire of financial troubles and legal fights Ellie Mental Health finds itself in calls into question the viability of the franchise model in outpatient mental health, which sought to pair local, mission-motivated investors and clinician entrepreneurs.
“I think there’s a strong likelihood that it did initially start with good intentions, seeking to expand mental health in communities and make it a business that people could do,” Serena Chiquoine, a partner at the law firm Dady & Gardner, told Behavioral Health Business. “I’ve heard from, I would say, 70 different franchisees in this system, and all of their stories are remarkably similar with what they were told and what the reality actually was.”
Chiquoine herself represents over two dozen franchisees in various legal matters. More are represented by other attorneys at the firm.
It’s not just the franchisees in distress. Public records show Ellie faces severe financial challenges and is being buoyed up by its financial backers, the principal of which is the private equity firm Princeton Equity Group. Princeton acquired Ellie Mental Health in April 2022 in a deal valued at approximately $66 million, according to public documents. Ellie was once featured as one of the fastest-growing companies in the U.S.
Representatives of Princeton Equity Group have not responded to a request for comment.
As of August, Ellie Mental Health has updated its franchise disclosure document (FDD), a massive federally mandated disclosure about a franchisor, to state that the company faces the likelihood of failure.
“The auditor’s report on the Franchisor’s financial statements expresses substantial doubt about the Franchisor’s ability to remain in business,” the FDD, last updated in August 2025, states. “This means that the Franchisor may not have the financial resources to provide services or support to you.”
The auditor’s report shows that the company’s net loss in 2024 totaled $18.9 million and its total revenue was $21.5 million. Last year marked a continuation in terms of profitability: in 2023, the company’s net loss totaled $18.1 million.
The same report indicates that the company has largely sustained itself through cash infusions from its financial backers in 2023 and 2024.
Based on all operating activities, the company lost $40.3 million in 2024 and 2023 combined. During the same period, Ellie Mental Health, which is formally known as Ellie Fam LLC, received a net of $42.9 million from “related parties,” the company’s investors and lenders.
Including cash from financing activities, Ellie Mental Health ended 2024 in the black by $2.3 million.
Ellie Mental Health and its financial backers took an additional step to improve the company’s balance sheet.
At some point after the end of 2024, the company’s board of directors converted $40.5 million of cash due to “related parties” to additional “paid-in capital,” or converted a debt into an addition to these parties’ stake in Ellie Mental Health.
At least at the time of the auditor’s report, Ellie Mental Health’s plan to keep funding its operations received additional capital from its investors.
“Management of the Company has evaluated these conditions and determined that an infusion of cash from existing owners would alleviate this uncertainty,” the audit report states. “As a result, management has received written assurances from the existing majority owner [that it] is committed to investing the necessary funds to ensure the Company can meet all business objectives until the Company is generating sufficient cash flow.”
The problem at the core of the Ellie Mental Health controversy
Getting Ellie Mental Health back on track includes resolving its struggles in providing back-office services. And it is these many issues that have led several franchisees to act. The company has also sued a handful of franchisees who have attempted to sever their clinics from Ellie, enforcing noncompete provisions in its franchise agreements. Today, many of these disputes are in private arbitration.
Court documents and conversations with current and former franchisees indicate two primary concerns: Ellie’s back-office shared services, which franchisees claim were largely inoperable at the time, and financial projections for clinicians that franchisees describe as overly optimistic. Franchisees said these issues have led them to feeling misled by representations from Ellie Mental Health executives and their partner sales firm, Rep’M Group, that these franchises were absentee or semi-absentee investments.
In several cases, Rep’M Group has filed cross claims against Ellie Mental Health, where it too is named in litigation.
Rep’M began working with Ellie Mental Health to sell franchises in 2021. A legal document provided to BHB details that representatives of Rep’M began learning about what Ellie’s plan for back-office services would look like.
Recounting discussions with then-CEO Erin Pash, the document states, “Ms. Pash represented that Ellie’s ability to offer back-office services was a key differentiating factor in Ellie’s business model and that this was at the center of its business model, allowing franchisees to be absentee owners.”
Rep’M Group, which had no prior experience with mental health services, states that it relied on the representations made by Pash and other executives at the company.
“These representations concerning the above-described back-office support services or shared services made by Ms. Pash were made with reckless disregard for the truth,” the document states. “It became clear that Ellie could not provide the shared services on a national level as it had originally represented to Rep’M. Had Rep’M known about Ellie’s inability to provide and support such services, Rep’M would not have entered into [contracts] with Ellie.”
Rep’M Group claims that it has been harmed by association, resulting in a loss of potential business and suffering reputational damage.
Ellie Mental Health has previously acknowledged that the company largely failed to deliver on its promises when it came to shared services and that franchisees have suffered.
The company’s current CEO, Michael DiMarco, has said he had spent most of 2024, when he was an advisor to the company’s leadership, trying to get shared services fixed. He was named CEO and succeeded Pash near the end of January 2025.
“Okay, granted, shared services failed on support,” DiMarco said, according to a recording of the meeting reviewed by BHB. “We’re trying to make it better; we’re doing a lot of things. … And we’re seeing some improvement across the board — too little too late for a lot of people.”
At a different point in the meeting, DiMarco also said that he was aware of what many franchisees were thinking about when they joined with Ellie Mental Health and pushed back that those assumptions should not have even been seen as correct.
“I’m hearing the pain. I’m hearing it loud and clear,” DiMarco said. “People went into this thinking this was an absentee owner model for five hours a week, this was a plug and play, you’re going to break even in six months, that it’s pretty straightforward, and it’s nothing like that at all.
“Health care is nothing like that.”
Challenges in court
In a handful of cases, franchisees have attempted to leave the Ellie Mental Health system and operate their own clinics independently, taking on their own back-office functions. Some had proceeded to do so even before making a break from Ellie in an attempt to stem major losses, several court documents show. Within the Ellie model, franchisees were already responsible for securing their own real estate, payer contracts and employees, according to the franchisees BHB spoke with.
Ellie Mental Health has repeatedly maintained in state and federal court that such a move is a violation of the noncompete clauses of their franchise agreements. In such cases, the company is seeking to enjoin these clinics to protect their interests, specifically their goodwill in the community and their proprietary processes.
Most recently, Ellie Mental Health sued a franchisee who originally signed on to develop three areas in California; they opened one location in Redwood City. The suit was filed in Minnesota state court on Oct. 13. Among other things, the company requests that the court issue injunctions and restraining orders against the franchisee.
The complaint states that franchisees receive significant training and support regarding the Ellie Mental Health system, as well as other valuable insights on how to start and run outpatient mental health clinics. This knowledge, they argue, is so valuable that rogue clinics would make it “exceedingly difficult, if not impossible, for Ellie Fam to retain and refranchise market areas occupied by unfair competitors because [of] the head start they obtained from Ellie Fam.”
“The non-competes are so critical to the Ellie Mental Health System that Ellie Fam has never allowed a franchisee to buy out of, waive, or not comply with a non-compete. The continued success and growth of the Ellie Mental Health System relies on Ellie Fam’s enforcement of its franchise agreements’ restrictive covenants and protection of its intellectual property.”
This belief runs deep in the company’s leadership. DiMarco told a franchisee that the Ellie model is more centered around how to start and grow clinics.
“It’s not like we’ve got some huge brand equity today in the marketplace,” DiMarco said. “It’s a super fragmented healthcare market; Ellie’s one of many. So you’re not buying into the brand, like you’d be buying into the McDonald’s brand or something. You’re buying the know-how and then the support.”
No action has been taken by the court in this case as of the writing of this article.
Ellie Mental Health has sought injunctive relief in other legal venues. In a Minnesota federal court, Ellie Mental Health sued a franchisee operating in Hilliard, Ohio, and in Lexington, Kentucky. In that case, the judge denied Ellie’s motion to enjoin the franchisee.
While the court acknowledged that it did not have a complete record, it found that there was a likelihood that Ellie Mental Health might succeed on its claims of violations of the franchise agreement’s noncompete clauses. However, the order ultimately didn’t weigh the franchisee’s responses at all, saying that the franchise agreement requires franchisees’ legal claims had to be heard in arbitration.
The court also disregarded Ellie Mental Health’s claims that it would suffer irreparable harm while the clinic continued its operations. It also dismissed claims that allowing franchisees to selectively engage with Ellie’s system or leave altogether would harm the franchise system.
“Yet the evidence before the Court suggests that not only was Ellie falling short in its billing support, but it was permitting franchisees to opt out of its ‘unique’ system and instead utilize third-party billing vendors,” the order reads.
The order also states: “Imagine a bakery franchisor that pitched itself to putative franchisees based on its unique recipes — and later allowed franchisees to use third-party recipes. By doing so, the franchisor sanctioned franchisees opting out of what was supposed to be the franchise system’s value‐add. A similar dynamic is at play here.”
Even if Ellie Mental Health were to win out on all of the key considerations of an injunction, the interest of the public, in this case, patients, would trump all other considerations, the judge said.
“The public interest factor is clear: granting the injunction would harm patients needing mental health care,” the order states.
This case is now in arbitration and therefore outside of the public’s view.
Losses mount
Many franchises suing Ellie Mental Health are doing so in cross-claims in matters initiated by Ellie. Others are taking action on their own. But all come back to or include a common contention: Ellie failed so badly in providing what it promised that the franchise agreements are void.
Even if all the systems were operational, generating profits within the Ellie Mental Health system would have proved difficult. In presentations to prospective franchisees, the company demonstrated its financial models that clinics that were owned and operated by Ellie Mental Health were operating with a 20% profit margin. These clinics had been in operation for about a decade and were used as the basis for pro formas for franchisees. Multiple franchisees told BHB that the underlying rates in Minnesota, specifically at those clinics, were higher than state average rates and much higher than many rates with individual health plans. Further, the Minnesota clinics and programs include much higher utilization of self-pay patients that were able to pay higher rates than health plans.
On top of all that, franchisees’ continued royalty, marketing and other fees were seen by franchisees as rather high. Fees varied based on the clinic. Those whom BHB reached reported that fees for services and marketing ranged from 15% to 18%.
“They want more than 17 cents of every dollar. For what? They haven’t done anything, and we’re bleeding cash, and they’re not fixing anything,” one franchisee with locations in the Midwest told BHB.
A franchisee on the West Coast reported that they lost about $450,000 at their locations.
Another franchisee in the Midwest said that they have lost their life savings while managing their Ellie Mental Health clinics and have over $400,000 in loans they have to contend with. While they won’t go bankrupt, that was a real possibility.
“I was going to retire next year. Now, I’m struggling to hang on,” the franchisee said.
With the presentation of relatively quick turns toward profitability and the low involvement of franchisees, this franchisee had planned to maintain their day job and run clinics on the side. But for the last two years, this person has gone without pay and dedicated their days to addressing the challenges of the clinics.
This franchisee had been communicating with various Ellie Mental Health representatives, asking for guidance and help and, eventually, accommodations to lessen the financial burden of paying into the Ellie Mental Health system. What little accommodations were allowed were not nearly enough.
The pain of daily operations and the possibility of financial doom for both the franchisee and the clinic motivated them to try to break away from Ellie Mental Health. The franchisee exercised a provision of the franchise agreement that requires a 30-day notice and demand to cure breaches of the agreement before cancellation of the agreement. The franchisee is now being sued by Ellie Mental Health.
A review of federal documents shows that seven franchisees have filed for bankruptcy in the last two years.
Viability of franchising in mental health
Outpatient mental health providers generally operate on thin margins. While some organizations that have scale and sophistication are able to command rates that are higher than average, these organizations are the exception in the relatively immature and fragmented behavioral health space.
The franchisees expressed a mix of opinions on whether or not such a franchise model is viable. Some suggest that it could be if other services were considered (such as psychiatric services), if fees were lower, and if the collective scale of franchise locations were leveraged for higher rates. And even if the different legal entities of the franchises couldn’t collectively bargain, more assistance to push up rates through negotiation would go a long way to assisting franchisees, most of whom have never engaged in such talks before. Most franchisees were either businesspeople from other segments of the economy or mental clinicians.
One franchisee told a representative of the company, according to a recording reviewed by BHB: “It was, ‘Take anything you can get, just get people through the door, sign every contract regardless of the amount.’ We did just that. And now that’s not sustainable.”
Chiquoine, who focuses her practice on franchise law, said that there is a place for the franchise model in the marketplace.
“I don’t want to say that it can’t work; I think it could work,” Chiquoine said. “If it was well thought out and thoughtfully planned and scaled appropriately, I think it could work.”