Explanation

The franchisor, BODY20 Global USA, LLC (BODY20 Global), shows significant financial weakness. The 2023 audited financial statements reveal a net loss of over $1.8 million and a negative net worth of nearly $200,000, meaning liabilities exceed assets. The company also has negative cash flow from operations. This financial condition may impair BODY20 Global's ability to support you, grow the brand, or even remain in business, posing a direct risk to your investment.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the franchisor's financial statements, including the negative equity and operating losses.
• A business advisor can help you assess if the franchisor has sufficient capital to fund its operations and support obligations without relying on new franchise sales.
• Discuss the implications of these financial weaknesses and the potential need for a financial assurance bond with your franchise attorney.

Explanation

Item 20 data indicates a very high rate of franchisee turnover. In 2023, four of the fourteen franchises that started the year were either terminated or ceased operations, representing an attrition rate of approximately 28.5%. Such a high rate is a significant red flag that may suggest systemic problems, franchisee dissatisfaction, or potential issues with the business model's profitability or sustainability, which could affect your own chances of success.

Potential Mitigations

• It is critical to contact a significant number of current and former franchisees from the list in Exhibit F to discuss their experiences and reasons for leaving.
• Your accountant should help you analyze the turnover data across all three years provided to identify any persistent negative trends.
• A franchise attorney can help you frame questions for the franchisor regarding the high number of terminations and ceased operations.

Explanation

The franchise system is undergoing explosive growth, expanding from 14 to 45 franchised units in 2023. While growth can be positive, such rapid expansion, when combined with the franchisor's disclosed financial instability (negative net worth and a large operating loss), presents a significant risk. The franchisor's resources may be stretched too thin, potentially compromising its ability to provide you with adequate training, site selection assistance, and ongoing operational support.

Potential Mitigations

• Engaging a business advisor to question the franchisor on how they are scaling support infrastructure to match this rapid growth is essential.
• Your accountant should review the financial statements to assess if the company has the capital to sustain this growth and its support obligations.
• In discussions with current franchisees, specifically ask about the quality and responsiveness of franchisor support during this growth period.

Explanation

The franchisor describes the market for its core offering, electro muscle stimulation (EMS) technology, as "newly emerging and not well developed throughout the United States." While the franchisor has been operating for several years, investing in a business model centered on an unproven market segment carries inherent risk. The long-term consumer demand and sustainability for EMS-based fitness studios is not yet established, which could impact your studio's viability.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for EMS fitness in your specific area.
• It is wise to evaluate the business model's resilience to changing fitness trends and economic conditions with your financial advisor.
• Question the franchisor about their research and development plans to evolve the business model beyond the initial EMS offering.

Explanation

Item 1 discloses a parent company, BODY20 Holdings, LLC, but its financial statements are not provided in Item 21. Given the franchisor's disclosed financial instability (negative net worth and significant operating losses), the financial health of the parent company is a material fact for assessing the overall stability of the system. Without the parent's financials, you cannot fully evaluate the backing and resources available to the franchisor, creating a significant information gap.

Potential Mitigations

• Your accountant should carefully evaluate the franchisor's standalone financials and note the absence of parent company data as a significant risk.
• It is critical to ask your attorney whether state law might require the parent's financial disclosure under these circumstances.
• You should ask the franchisor directly for the parent company's financials to assess the overall health of the enterprise.