Explanation

A review of the audited financial statements in Exhibit N for fiscal years 2022 through 2024 indicates that Crunch Franchising, LLC (Crunch) appears to be financially stable. The company shows consistent revenue growth and profitability, with positive net income and substantial member's equity. While past performance is no guarantee of future results, these financials do not suggest an immediate risk of franchisor instability.

Potential Mitigations

• Engage an experienced franchise accountant to independently review the franchisor's financial statements, including all footnotes and the auditor's report.
• Discuss the franchisor's financial health and its ability to support the system with your financial advisor.
• Your business advisor should help you assess whether the franchisor's financial strength is sufficient to provide the support and services promised in the FDD.

Explanation

The franchisee turnover rates, as calculated from the data in Item 20 for the past three years, appear to be relatively low. The number of terminations, non-renewals, and other cessations is small compared to the total number of operating units and the system's growth rate. While high turnover can be a significant red flag for systemic issues, the data presented here does not indicate this is a current problem for the franchise.

Potential Mitigations

• It is crucial to contact a significant number of current and former franchisees listed in Item 20 to understand their experiences and reasons for leaving.
• Your business advisor can help you analyze the turnover data for any hidden trends or concerning patterns.
• Ask your attorney to help you formulate questions for the franchisor regarding the circumstances of any franchisee departures.

Explanation

This risk was not identified in the FDD Package. The franchisor, Crunch, began franchising in 2010 and has a substantial number of operating units, indicating it is an established system. An unproven system can present higher risks due to a lack of a track record, underdeveloped support, and minimal brand recognition. Always evaluate the franchisor's history and experience.

Potential Mitigations

• Engaging a business advisor to research the franchisor's history and the track record of its management team is a valuable step.
• A thorough review of the franchisor's financial statements with your accountant can help assess the stability of even an established system.
• Your attorney can help you understand the legal implications of investing in any franchise, regardless of its age.

Explanation

This risk was not identified in the FDD Package. The general health club market is well-established and does not appear to be based on a short-term trend or fad. However, investing in any business requires an assessment of its long-term consumer demand. A business model tied to a fad can face declining sales once consumer interest wanes, even if your contractual obligations remain.

Potential Mitigations

• Consult with a business advisor to conduct independent market research on the long-term demand for health and fitness services.
• It is wise to evaluate the franchisor's commitment to innovation and system evolution to stay relevant in a competitive market.
• An analysis with your financial advisor of the business model's resilience to economic shifts can provide additional insight.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key managers and officers of the franchisor have extensive experience in the health club and franchise industries. Inexperienced leadership can pose a significant risk, as it may lead to poor strategic decisions, inadequate support for franchisees, and a higher potential for system-wide problems. It is always important to vet the team leading the franchise system.

Potential Mitigations

• A business advisor can help you research the backgrounds and track records of the franchisor's key management personnel.
• Speaking with current franchisees about their perception of the management team's competence and support is a crucial due diligence step.
• Your attorney can help you understand how the experience of the management team might impact the franchisor's ability to fulfill its contractual obligations.

Explanation

This risk was not identified in the FDD Package. Item 1 discloses the parent companies, Crunch Holdings, LLC and Champion TopCo, LP. The franchisor's financials in Item 21 are audited and appear robust, and the relationship with the parent seems to be clearly disclosed. In some cases, franchisors may be thinly capitalized subsidiaries, making the financial health of an undisclosed or under-disclosed parent company critical to the system's viability.

Potential Mitigations

• Your accountant should always review the franchisor's financials, including any parent company guarantees or financial statements if provided.
• It is wise to have your attorney verify the corporate structure and the relationships between the franchisor and any parent entities.
• A business advisor can help you understand the potential risks associated with complex corporate parent structures.

Explanation

This risk was not identified in the FDD Package. Item 1 states the franchisor has no predecessors. The document does mention that an affiliate purchased some health clubs out of a bankruptcy in 2009, but Crunch Franchising, LLC itself was formed in 2009 and has no direct predecessor. In situations with predecessors, it is important to review their history for issues like litigation or bankruptcy that could carry over or indicate systemic problems.

Potential Mitigations

• Your attorney should always review Item 1 carefully for any mention of predecessors and their business history.
• If a predecessor is identified, a business advisor can assist in researching their public track record and reputation.
• Speaking with long-term franchisees who may have operated under a predecessor can provide valuable historical context.