Explanation

While the company began franchising in 2015, the system's growth has accelerated dramatically in the last two years, with a significant portion of the franchise system being relatively new. This presents some risk, as rapid scaling can challenge even experienced franchisors to maintain consistent support, refined systems, and brand quality across all locations.

Potential Mitigations

• In discussion with your business advisor, carefully assess the experience of the current management team in scaling a franchise system.
• Speaking with franchisees who opened at different stages of the company's growth can provide perspective on how support has evolved.
• Your accountant should review the financials to see how the company is investing in infrastructure to support this growth.

Explanation

The business operates in the boutique fitness industry, specifically focusing on Pilates. While the fitness industry is subject to changing trends, Pilates is a well-established exercise modality with a long history and sustained consumer demand. The risk of the core offering being a short-term fad appears low, though competition within the boutique fitness space is high.

Potential Mitigations

• A business advisor can help you research the local market to gauge the long-term demand for boutique Pilates studios and assess the local competition.
• Reviewing the franchisor's plans for evolving its class offerings and programming is wise to understand its strategy for staying relevant.
• Your accountant can help model the financial impact of a competitive market on your potential revenue.

Explanation

While several key executives joined the company recently, the management team detailed in Item 2 generally possesses significant prior experience in the fitness industry and with other franchise systems, including Orangetheory Fitness. This experience could be a positive factor for the system. However, its effectiveness in managing rapid growth remains a key variable for your success.

Potential Mitigations

• When speaking with current franchisees, ask about their direct interactions with and the effectiveness of the corporate management team.
• It's advisable to research the professional backgrounds of the key executives listed in Item 2.
• A business advisor can help you assess if the management team's collective experience aligns with the company's strategic challenges.

Explanation

This specific risk was not identified in the FDD package. The franchisor does not appear to be owned by a private equity firm. When a franchisor is PE-owned, there can be a risk of focus shifting to short-term investor returns rather than the long-term health of franchisees, potentially affecting support levels and fees.

Potential Mitigations

• During due diligence, it is always a good practice to ask about the franchisor's long-term ownership plans.
• Your attorney can help you understand the "Assignment" clause in the franchise agreement to see how a future sale of the company could affect you.
• A business advisor can help research the background of the franchisor's ownership to confirm their industry experience and track record.

Explanation

This risk was not identified in the FDD. Item 1 states there is no parent company, though it does disclose an IP holding affiliate, which is a common structure. Full disclosure of parent companies and their financial data is important for assessing the true financial strength backing your franchise.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and confirm the absence of any undisclosed controlling entities.
• When a franchisor is a subsidiary, an accountant should review whether the parent's financial statements are provided and if a parental guarantee is in place.
• A business advisor can help you understand the role of any disclosed affiliate companies in the franchise system.

Explanation

This risk was not identified in the FDD package, as Item 1 states the franchisor has no predecessors. A franchisor with a history of predecessors could inherit financial or operational issues, and it's important to understand that history to assess the stability and integrity of the current franchise system.

Potential Mitigations

• An attorney can help review Item 1 carefully to confirm the absence of any disclosed predecessors.
• It is still prudent to ask long-tenured franchisees if the system has operated under different ownership or names in the past.
• A business advisor can help you perform independent research on the history of the brand and its founders.

Explanation

This risk was not identified, as Item 3 states that no litigation is required to be disclosed. This is a positive indicator, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag about the franchisor's practices and the health of the system.

Potential Mitigations

• Your attorney can conduct independent public records searches to see if any non-material litigation exists that might still offer insight.
• During discussions with former franchisees, it is wise to inquire about any past disputes they may have had with the franchisor.
• A business advisor can help you assess the overall health of franchisor-franchisee relations based on your due diligence calls.