Explanation

This risk was not identified in the FDD package. Item 20 data does not show a high rate of franchisee terminations, non-renewals, or other cessations. However, a high turnover rate is a critical indicator of potential systemic problems, such as lack of profitability or poor franchisor support. The system is currently too new to have meaningful turnover data, which is its own risk related to being an unproven system.

Potential Mitigations

• As the system grows, your business advisor should help you monitor future FDDs for any negative trends in franchisee turnover.
• Developing a strong relationship with other franchisees can provide early warnings of any systemic issues that might lead to future turnover.
• An accountant can help you model different scenarios to understand the financial pressure points that could lead to failure.

Explanation

This risk was not identified in the FDD package. The business model, a baseball and softball training academy, caters to a well-established youth and amateur sports market. While market dynamics can change, the core services do not appear to be based on a short-term or fleeting trend. A fad business can be risky because long-term consumer demand may disappear, leaving you with contractual obligations.

Potential Mitigations

• Engage a business advisor to research the long-term trends and competitive landscape for youth sports training in your specific market.
• Discuss the franchisor's strategy for innovation and adaptation to keep the services relevant over the 10-year contract term.
• Your accountant can help you model the financial impact of potential shifts in consumer demand for these types of athletic services.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. When a franchise is PE-owned, there can be a risk that short-term financial goals are prioritized over the long-term health of the brand and its franchisees. This can sometimes lead to increased fees, reduced support, or a quick sale of the system.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor through public records.
• Engaging a business advisor to research the franchisor's ownership history can provide valuable context.
• Understanding the franchisor's long-term vision for the brand is a key due diligence step, regardless of ownership structure.

Explanation

This risk was not identified in the FDD package. Item 1 discloses an operating affiliate, Athletes HQ, Inc., and a separate affiliate offering other franchises, BAB Systems, Inc. The FDD appears to properly disclose the relevant parent and affiliate entities. Failing to disclose a parent company or provide its financial statements when required can obscure the true financial backing and stability of the franchisor, creating a significant hidden risk for a prospective franchisee.

Potential Mitigations

• Your attorney can review the corporate structure disclosed in Item 1 to ensure it appears complete.
• An accountant should analyze the relationship and any transactions between the franchisor and its disclosed affiliates.
• A business advisor can help you understand the roles each affiliated entity plays within the overall system.

Explanation

This risk was not identified in the FDD package. AHQ Systems states in Item 1 that it has no predecessors. Hidden or inadequately disclosed predecessor history can be a significant risk, as it might conceal past failures, litigation, or franchisee turnover under a previous owner. A clean slate, as presented here, means the evaluation must focus entirely on the current entity's short history.

Potential Mitigations

• Your attorney can help verify the franchisor's statement about having no predecessors through corporate records searches.
• A business advisor can assist in researching the history of the brand and its founders to uncover any prior related business activities.
• In the absence of a predecessor, focus due diligence efforts on the current management's direct experience and financial stability.

Explanation

This risk was not identified in the FDD package. Item 3 states that there is no litigation required to be disclosed. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or breach of contract, is a major red flag indicating potential systemic problems with a franchisor. The absence of such litigation is a positive sign, although the system's youth means there has been little time for disputes to arise.

Potential Mitigations

• Your attorney can perform independent searches for litigation that may not have been disclosed in Item 3.
• Asking current and former franchisees about their experiences and any disputes they may have had is a crucial due diligence step.
• A business advisor can help you research online forums and news articles for any mention of disputes involving the franchisor.