Explanation

The financial statements of the guarantor, XPOF Assetco, LLC, disclose that it has advanced over $155 million to its parent company with no plan for repayment. This significant, ongoing cash extraction from the entity guaranteeing the franchisor's obligations creates a substantial risk. It could impair the guarantor's ability to provide financial support or fulfill its duties to you, potentially prioritizing its parent's needs over the health of the franchise system.

Potential Mitigations

• A franchise accountant should analyze the guarantor's financial statements, including the notes on related party transactions and cash flow, to assess its true financial capacity.
• It is wise to have your attorney review the terms of the parent company guarantee (Exhibit D) to understand its scope and limitations.
• Discuss the implications of this cash transfer practice on franchisor support with your business advisor and existing franchisees.

Explanation

The FDD explicitly warns of a high turnover rate, stating that more than 42% of outlets were terminated, reacquired, or ceased operations in the last three years. The data in Item 20 tables confirms this, showing a net decline in franchised locations in both 2023 and 2024. Such a high rate of franchisee failure and exit is a critical red flag, suggesting potential systemic issues with the business model's profitability, franchisee satisfaction, or franchisor support.

Potential Mitigations

• Your business advisor should help you contact a significant number of former franchisees from the list in Exhibit J to understand their reasons for leaving.
• An accountant needs to use this high turnover rate to create highly conservative financial projections for your potential business.
• Discuss the specific causes of this turnover and the franchisor's steps to address it directly with your attorney.

Explanation

The risk of rapid growth straining franchisor resources appears to have already materialized, as evidenced by the high franchisee turnover rates disclosed in Item 20. While the system has grown in the past, it is now contracting, with total exits significantly outnumbering openings in the last two years. This suggests that the support infrastructure may be insufficient to sustain its franchisee base, a critical risk for new and existing operators who rely on that support.

Potential Mitigations

• Inquiring with current franchisees about the quality and responsiveness of the support they receive is a crucial step.
• Your business advisor can help you assess the franchisor's current staffing and resources for franchisee support relative to the system's needs.
• Understanding the franchisor's strategy to stabilize the system and improve support should be a key discussion point with your attorney.

Explanation

The franchisor, CycleBar Franchising SPV, LLC (CycleBar SPV), was formed in March 2023 and has a limited operating history, which is noted as a 'Special Risk'. Although the brand has been franchising since 2015 under a predecessor, this specific legal entity is new. The recent corporate reorganization, coupled with a high rate of franchisee turnover and litigation, indicates that the system, under its current structure, may present higher risks than a system with a longer, more stable operating history.

Potential Mitigations

• A thorough review of the predecessor's history in Items 1, 3, and 4 with your attorney is critical to understand the system's past performance.
• Your accountant should carefully analyze the provided financial statements for the new entity and its guarantor to assess financial stability.
• Discussing the impact of the reorganization on franchisee support with operators who have been in the system before and after March 2023 is advisable.

Explanation

The franchisor is ultimately controlled by a publicly-traded company, Xponential Fitness, Inc., which functions similarly to a private equity owner by managing a portfolio of brands. This structure may lead to decisions that prioritize shareholder value or the performance of other brands over the long-term health of the CycleBar system. The Franchise Agreement also permits the franchisor to sell or assign its rights without your consent, adding a layer of uncertainty about future ownership.

Potential Mitigations

• Your business advisor should help you research Xponential's track record across all its brands, not just CycleBar.
• Speaking with franchisees from other Xponential brands could provide insight into the parent company's management style and priorities.
• Have your attorney explain the implications of the assignment clause and the potential impact of a future sale of the franchise system.

Explanation

The FDD discloses that the current franchisor acquired the system from a predecessor, CycleBar Franchising, LLC, in 2023. This history is relevant, as the system experienced significant litigation and high franchisee turnover under the predecessor's management, issues which appear to be ongoing. You are effectively inheriting the legacy and potential reputational issues of the prior operator, which could impact your business.

Potential Mitigations

• Your attorney should carefully review all disclosures related to the predecessor in Items 1, 3, 4, and 20.
• It is valuable to speak with franchisees who operated under both the predecessor and the current franchisor to understand what has changed.
• Consider how the predecessor's history might affect brand perception in your local market with help from your business advisor.

Explanation

Item 3 discloses an extensive and concerning pattern of litigation. Multiple lawsuits have been filed by franchisees against the franchisor and its affiliates, alleging fraud, misrepresentation, and violations of franchise laws. Furthermore, the franchisor's parent entered into a Consent Order with California regulators for material misrepresentations in its FDDs. This history suggests significant disputes and dissatisfaction within the system and represents a major risk regarding the franchisor's practices and disclosure integrity.

Potential Mitigations

• A thorough review of every litigation summary in Item 3 with your franchise attorney is absolutely essential.
• It is imperative that your attorney explain the implications of the California Consent Order and the allegations of fraud and misrepresentation.
• Treating this extensive litigation history as a critical red flag when making your investment decision is a prudent approach to discuss with your business advisor.