Explanation

The FDD provides financial statements for the parent guarantor, XPOF Assetco, LLC, not the franchisor directly. These statements show complex inter-company transactions, a net loss in the initial period, and a large negative retained earnings figure. The auditor's report includes an "Emphasis of Matter" highlighting this reliance, stating the financials may not represent what would be achieved if operated independently. This creates uncertainty about the entity's standalone financial health and ability to provide support.

Potential Mitigations

• An experienced franchise accountant should meticulously review the parent company's consolidated financial statements, including all notes regarding inter-company transactions and the auditor's opinion.
• It is advisable to discuss the "Emphasis of Matter" paragraph and the parent guarantee's strength with your franchise attorney.
• A financial advisor can help you assess the potential risks associated with a franchisor so deeply integrated with and reliant on its parent company.

Explanation

Item 20 data from 2024 shows a franchisee turnover rate of approximately 12.5%, with 4 closures (2 terminations, 2 ceased operations) against a starting base of 32 units. Exhibit J reveals that some of these terminations involved multiple agreements for a single franchisee that were ended before the studios even opened. This level of turnover, especially with pre-opening terminations, could indicate potential systemic issues with franchisee selection, site development, or initial support.

Potential Mitigations

• It is critical to contact former franchisees listed in Exhibit J to understand their reasons for leaving the system, with your attorney helping to frame questions.
• Your business advisor should help you analyze the turnover rate in the context of the system's rapid growth phase.
• Discuss the pre-opening terminations with the franchisor to understand the circumstances that led to those outcomes.

Explanation

The franchise system is experiencing explosive growth, expanding from 2 to 49 operating units in two years, with another 58 franchises sold but not yet open according to Item 20. Such rapid expansion can strain a franchisor's capacity to provide adequate site selection, training, and operational support to all franchisees. You may face delays or diluted support quality as the franchisor's resources are spread thin across a large number of new developing units.

Potential Mitigations

• Inquiring with both new and established franchisees about the quality and timeliness of the franchisor's support is essential for your due diligence.
• A business advisor can help you question the franchisor about their specific plans and resources for scaling support systems to match this growth.
• Your accountant should review the franchisor's financials in Item 21 to assess if investment in support infrastructure is keeping pace with sales.

Explanation

The franchisor entity was formed in March 2023 and the brand has a limited operational history in the U.S., growing from just two units at the start of 2023. The FDD explicitly highlights "Short Operating History" and a significant number of "Unopened Franchises" as special risks. Investing in a young system like this carries higher uncertainty regarding the long-term viability of the business model, brand recognition, and the franchisor's support capabilities.

Potential Mitigations

• A business advisor should help you conduct deep due diligence on the management team's experience in both fitness and franchising.
• Engage an accountant to scrutinize the financial models and assess if the business is sufficiently capitalized to support its growth.
• Speaking with the earliest franchisees to open is critical to understanding the real-world challenges and the quality of franchisor support.

Explanation

Item 3 discloses a significant pattern of litigation against the franchisor's parent, Xponential, and its affiliated brands. Notably, the "Nickle Acquisition Lawsuit" was filed by a former BFT franchisee and directly names BFT as a defendant, alleging violations of franchise law, untrue statements regarding initial investment, and fraudulent inducement. This pattern of franchisee-initiated lawsuits across the parent company's system, including one directly involving your potential brand, presents a substantial risk regarding the franchisor's sales practices and franchisee relations.

Potential Mitigations

• A franchise attorney must meticulously review the allegations in all disclosed lawsuits, particularly the one filed by the former BFT franchisee.
• It is advisable to discuss the potential implications of the ongoing securities litigation against the parent company with your financial advisor.
• Consider the litigation history a significant red flag and discuss the potential for a contentious relationship with your attorney.