Explanation

The franchisor’s audited financial statements in Item 21 do not indicate immediate financial instability, as the company is profitable with a positive net worth. However, the statements show a consistent pattern of distributing most or all of its net income to its members. This practice could potentially limit the capital available for reinvestment into the franchise system, support services, and brand development over the long term.

Potential Mitigations

• An accountant should review the financial statements, paying close attention to cash flow and the high level of distributions to members.
• It is wise to ask the franchisor about their capital reserves and plans for system reinvestment with the help of your business advisor.
• Understanding the franchisor's long-term financial strategy is an important discussion to have with your financial advisor.

Explanation

The data provided in Item 20 does not indicate a high rate of franchisee turnover through terminations, non-renewals, or other cessations. Low turnover can be a positive sign of franchisee satisfaction and profitability. However, you should still verify the health of the system by speaking with a wide range of current and former franchisees, as turnover statistics can sometimes be presented in a way that masks underlying issues.

Potential Mitigations

• It's still crucial to contact a broad sample of current and former franchisees from the lists in the FDD to discuss their experiences.
• Your business advisor can help you prepare questions to gauge satisfaction, profitability, and the franchisor relationship.
• An attorney can help you understand the context of any transfers listed, as these can sometimes mask distressed sales.

Explanation

The business operates in the competitive and recreational cheerleading and dance industry. While this is an established market, its popularity can be subject to trends, particularly in specific disciplines of cheer and dance. You should assess the long-term, sustained demand for these specific services in your local market to ensure the business model is not reliant on a short-term trend that could fade, potentially impacting long-term viability.

Potential Mitigations

• Engaging a business advisor to research the long-term market demand for competitive cheer and dance training in your specific area is advisable.
• It is wise to evaluate the franchisor's plans for innovation and adaptation to stay relevant as trends change.
• Your financial advisor can help assess the business model's resilience to shifts in consumer interests and economic downturns.

Explanation

This specific risk was not identified. Item 2 indicates that the key individuals managing the franchise system have extensive, long-term experience within the CHEER ATHLETICS brand and the cheerleading industry, with involvement dating back to the 1990s for several managers. Generally, a lack of management experience in franchising, even with industry expertise, can create risks related to inadequate franchisee support and unproven systems.

Potential Mitigations

• It is still beneficial to discuss the quality and responsiveness of management support with current franchisees.
• A business advisor can help you assess how the management team's experience translates into effective support for franchisees.
• Your attorney should review any clauses in the Franchise Agreement that outline the specific support obligations of the franchisor.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of franchisees, potentially leading to increased fees or reduced support.

Potential Mitigations

• It is prudent to verify the ownership structure with your attorney to confirm the absence of PE involvement.
• A business advisor can help research the franchisor's ownership history for any past private equity influence.
• Understanding the ownership philosophy is important; discussing long-term goals with the franchisor is always a good practice.

Explanation

This risk was not identified in the FDD. Item 1 clearly discloses the franchisor's parent, CA-Brands, and explains its history, including its prior sale of franchises and ownership of affiliate gyms. In some cases, franchisors may not fully disclose the history of predecessor entities, which can hide past issues like litigation or high franchisee failure rates.

Potential Mitigations

• Even with disclosure, it is wise to have your business advisor conduct independent research on the history of the parent and predecessor entities.
• Talking to the earliest franchisees on the Item 20 list can provide valuable insight into the system's history.
• Your attorney can help you understand the implications of the system's transition from company-owned to franchised operations.