Explanation

This risk was not identified as Facialworks LLC has not had any franchised outlets open or close, according to Item 20. However, high franchisee turnover in an established system is a major red flag. It can indicate systemic issues such as lack of profitability, poor franchisor support, or an unsustainable business model. The absence of this data here means there is no track record of franchisee success or failure to evaluate.

Potential Mitigations

• When evaluating other franchise opportunities, having your accountant analyze the turnover rates in Item 20 is a critical due diligence step.
• A business advisor can help you interpret the reasons for franchisee exits by reviewing Item 20 data from other FDDs.
• Your attorney can guide you on how to question former franchisees to understand why they left a system.

Explanation

This risk is not currently present, as the franchise system is new and has no operating franchisees according to Item 20. Generally, a system that sells franchises too quickly can strain its ability to provide adequate support, training, and quality control. This can negatively affect all franchisees, even successful ones. You should monitor the pace of growth if you invest.

Potential Mitigations

• A business advisor can help you assess a franchisor's capacity to support its stated growth plans.
• Your accountant should review the franchisor's financials to see if they are reinvesting in support infrastructure as the system grows.
• Engaging with your attorney to understand the franchisor's contractual support obligations is a vital step.

Explanation

This specific risk was not identified. The business concept of facial treatments and skincare is part of the established health and wellness industry. The franchisor's affiliate has operated since 2012, suggesting a degree of sustainability beyond a short-term trend. In general, investing in a fad business carries the risk that consumer interest will decline, leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you research long-term consumer trends in any industry you consider entering.
• An accountant can help model the financial impact of potential declines in consumer demand for a specific product or service.
• Your attorney should be consulted to understand your contractual obligations if the business becomes unviable.

Explanation

This risk was not identified. The FDD indicates in Item 1 that the franchisor is a family-owned or privately-held business, not one owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that short-term financial returns are prioritized over the long-term health of the brand and its franchisees.

Potential Mitigations

• When evaluating a franchise, a business advisor can help you research the ownership structure and any history of private equity involvement.
• Should a system be acquired by a PE firm, your attorney can advise on your rights under the assignment clauses of the franchise agreement.
• Consulting with existing franchisees about any changes after a PE acquisition is a crucial due diligence step.

Explanation

This risk is not present as the franchisor is a new entity without any predecessors from which it acquired assets or the franchise system. In other cases, incomplete disclosure about a predecessor's history, such as prior litigation or bankruptcies, can obscure inherited problems with the brand or its operating model, preventing you from having a full picture of the system's historical challenges.

Potential Mitigations

• When a predecessor is disclosed, your attorney should carefully review all related information in Items 1, 3, and 4 of the FDD.
• It is wise to ask long-term franchisees about their experiences under any previous ownership.
• A business advisor can assist in researching a predecessor's public track record if one is identified in the FDD.

Explanation

This risk was not identified, as Item 3 reports no relevant litigation history involving the franchisor or its management. Generally, a pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against franchisees, can be a major red flag indicating systemic problems or an overly aggressive franchisor.

Potential Mitigations

• When evaluating franchises, a thorough review of Item 3 with your attorney is critical to understand any legal disputes.
• A business advisor can help you assess the context of any disclosed litigation and its potential impact on the franchise relationship.
• Independent online searches for news or discussions about litigation involving a franchisor can sometimes provide additional useful context.