Explanation

This risk was not identified in the FDD package. As a new franchise system that began offering franchises in 2024, there is no history of franchisee turnover to analyze in Item 20. High turnover is a significant red flag in established systems, as it can indicate problems with profitability, support, or the business model. You will be one of the first franchisees, which carries its own set of risks related to the unproven nature of the system.

Potential Mitigations

• A business advisor can help you understand the heightened risks associated with being an early franchisee in an unproven system.
• It is crucial to speak with the initial franchisees listed in Item 20 to gauge their early experiences and satisfaction.
• Your attorney should review the termination and renewal clauses in the franchise agreement to understand your future rights and obligations.

Explanation

This risk was not identified as a current issue. Item 20 data shows the system is in its initial growth phase, having added its first franchisee and several affiliate-owned stores in 2024, with more projected. While not yet "rapid" growth, any expansion for a new franchisor can strain its ability to provide adequate support. You should monitor whether the franchisor's support infrastructure keeps pace with its expansion plans.

Potential Mitigations

• Engaging a business advisor to question the franchisor about their specific plans for scaling support services is a wise step.
• Your attorney can help you understand the franchisor's contractual support obligations outlined in Item 11.
• Speaking with the first few franchisees will provide insight into the current quality and responsiveness of franchisor support.

Explanation

The business model, focused on massage and spa services, is part of an established industry rather than a short-term fad. However, any consumer-facing business can be affected by changing tastes and economic conditions. A prospective franchisee should always assess the long-term consumer demand and competitive landscape in their specific market to gauge sustainability.

Potential Mitigations

• Engaging a business advisor to research the long-term market trends for spa services in your local area is recommended.
• An accountant can help you model the financial impact of potential shifts in consumer spending.
• Discussing the franchisor's plans for service innovation and adaptation can provide insight into their long-term vision.

Explanation

This risk was not identified in the FDD package. There is no disclosure in Item 1 or elsewhere that suggests Cloud 9 or its parent company is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term profits, potentially at the expense of franchisee support and the long-term health of the brand.

Potential Mitigations

• Your attorney should always verify the ownership structure detailed in Item 1 of the FDD.
• A business advisor can help you understand the potential impacts of different ownership structures on a franchise system.
• During due diligence, asking the franchisor about their long-term vision and any plans for a future sale of the company is a prudent question.

Explanation

This risk was not identified in the FDD package. Item 1 explicitly states that the franchisor has no predecessors. In cases where a franchisor has acquired a business or its assets from a prior entity, it is important to investigate the predecessor's history for any signs of trouble, such as litigation or high franchisee turnover, which could impact the current system.

Potential Mitigations

• Your attorney should always confirm the accuracy of the predecessor information disclosed in Item 1.
• A business advisor can explain the importance of researching predecessor history when it is a factor in a franchise investment.
• When a predecessor exists, interviewing franchisees who operated under the previous ownership is a key due diligence step.

Explanation

This risk was not identified in the FDD package, as Item 3 discloses no litigation. A pattern of litigation, particularly claims of fraud or breach of contract brought by franchisees, can be a major red flag. Similarly, a high volume of lawsuits initiated by the franchisor against its franchisees may suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney should always carefully review the litigation disclosures in Item 3.
• Even with no disclosed litigation, a business advisor may recommend searching public court records for any potential legal issues involving the franchisor or its principals.
• Speaking with current and former franchisees can sometimes reveal disputes that did not escalate to formal litigation.