Explanation

This risk was not identified in the FDD package. Item 20 data does not show any franchisee terminations, non-renewals, or cessations for other reasons in the last three years. Generally, high franchisee turnover can be a major red flag, potentially indicating systemic problems such as a lack of profitability, franchisee dissatisfaction, or inadequate support from the franchisor. Analyzing these trends is a crucial part of due diligence.

Potential Mitigations

• A discussion with your business advisor to compare system growth in Item 20 with industry benchmarks can provide valuable context.
• It is still advisable to contact a representative sample of current franchisees listed in Exhibit F to inquire about their satisfaction and experiences.
• Your attorney can help you formulate questions for franchisees to gauge the health of the franchisee-franchisor relationship.

Explanation

This risk was not identified in the FDD package. The strength training concept is well-established within the broader fitness industry and does not appear to be based on a short-lived trend. However, franchisees should always consider the long-term market demand for any business concept. A business tied to a fad could face declining consumer interest, jeopardizing the investment even if contractual obligations to the franchisor remain.

Potential Mitigations

• Assessing the long-term market demand for this specific type of fitness service in your local area with a business advisor is a worthwhile exercise.
• Your own market research should evaluate the staying power of the concept against local competitors and fitness trends.
• Discussing the franchisor's strategies for innovation and adapting to market changes with them directly can provide insight into their long-term vision.

Explanation

This risk was not identified in the FDD package. The key executives of DSF LLC, as described in Item 2, have extensive experience operating the Discover Strength concept through the predecessor company, DSPFC, which has been in business since 2006. This long tenure with the specific business model mitigates the risk of inexperienced management. However, their experience is primarily in operating stores, not managing a franchise system, which is a different skill set.

Potential Mitigations

• It is beneficial to ask the management team about any franchise-specific training or consultants they have engaged to support their transition to franchisor.
• Inquiring with current franchisees about the management team's effectiveness in providing franchise-specific support can offer valuable insights.
• A business advisor can help you evaluate whether the management's operational experience translates effectively into franchise system leadership.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD does not indicate that the franchisor is owned by a private equity firm. Generally, such ownership can introduce risks where decisions might prioritize short-term investor returns over the long-term health of the franchise system. This could manifest as increased fees, reduced franchisee support, or pressure to use affiliated vendors.

Potential Mitigations

• A review of the franchisor's ownership structure and any recent changes with your attorney is always a good practice.
• Understanding the long-term goals and exit strategy of the ownership group can provide valuable context for your investment decision.
• Your business advisor can help you research the track record of any parent company or major investor if one exists.

Explanation

This risk was not identified in the FDD package. The FDD appears to properly disclose its predecessor, DSPFC, in Item 1 and provides financial statements for the franchisor entity itself. Generally, a failure to disclose a parent company or its financials (when required) could hide financial instability or other risks from a prospective franchisee, obscuring the true nature of the entity you are contracting with.

Potential Mitigations

• Your attorney should verify the corporate structure to ensure all relevant parent and affiliate companies are properly disclosed.
• An accountant should confirm that the provided financial statements are for the correct entity and meet all disclosure requirements.
• Understanding the relationships between the franchisor, its affiliates, and any parent company is a key part of due diligence.

Explanation

This risk was not identified in the FDD package. The FDD clearly discloses its predecessor, Discover Strength Personal Fitness Center, Inc. (DSPFC), in Item 1. Typically, a risk would arise if this information were incomplete or if the FDD tried to downplay a negative history associated with a predecessor, such as past litigation, bankruptcy, or high franchisee failure rates under that previous entity.

Potential Mitigations

• Your attorney should always review the predecessor information in Items 1, 3, and 4 for any red flags.
• If a predecessor exists, interviewing long-term franchisees who operated under that entity can provide valuable historical context.
• A business advisor can assist in researching the public record and reputation of any predecessor company.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, especially franchisee-initiated claims alleging fraud, misrepresentation, or breach of contract, can be a significant warning sign of systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against its franchisees might suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It is always a good practice to have your attorney conduct an independent public records search for litigation involving the franchisor, its principals, and affiliates.
• Ask current and former franchisees about their experiences with disputes and how the franchisor handles disagreements.
• Your attorney should review the dispute resolution clauses in the Franchise Agreement to understand the process should a conflict arise.