Explanation

The FDD does not indicate a high rate of franchisee turnover. However, the system is very new, with only one franchisee operating as of the end of 2024. The lack of a significant operating history for franchisees means there is insufficient data to fully assess system-wide satisfaction or success rates. This lack of history is a notable risk.

Potential Mitigations

• It is critical to contact the single franchisee listed in Item 20 to discuss their experience, profitability, and the quality of franchisor support.
• Your franchise attorney can help you formulate specific questions for the franchisee to gauge potential challenges not yet reflected in turnover data.
• Engaging a business advisor can help you assess the risks of joining a system with a very limited franchisee track record.

Explanation

This risk was not identified in the FDD package. A franchisor growing too quickly may outstrip its ability to provide adequate support to franchisees. This can lead to issues with training, site selection, and ongoing assistance, potentially harming the entire system's brand and profitability. Diligent franchisee support requires significant infrastructure and capital.

Potential Mitigations

• Your business advisor can help analyze the system's growth rate in Item 20 against the franchisor's disclosed support staff in Item 2.
• When speaking with existing franchisees, it is wise to ask about the timeliness and quality of the support they currently receive.
• An accountant's review of Item 21 financials can help determine if the franchisor has the financial resources to sustain its growth.

Explanation

This risk concerning a fad business was not identified in the FDD package. Dance instruction is a well-established industry. Investing in a business tied to a short-lived trend can be dangerous, as consumer interest may disappear before you can achieve a return on your investment, leaving you with long-term contractual obligations for a business with diminished demand.

Potential Mitigations

• Independent market research, with help from a business advisor, is crucial to assess the long-term consumer demand for the services offered.
• It is important to evaluate the franchisor's plans for innovation and adaptation to stay relevant beyond initial trends.
• An accountant can assist in modeling the financial impact if initial high demand proves to be temporary.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that decisions prioritize short-term investor returns over the long-term health of the franchise system and individual franchisee profitability. This can manifest in cost-cutting on support services or pressure to use specific vendors.

Potential Mitigations

• A business advisor can help research a PE firm's reputation and track record with other franchise brands it has owned.
• It is prudent to ask current franchisees about any changes in support, fees, or culture since a PE acquisition.
• An attorney should review the franchise agreement for terms that might facilitate a quick sale of the system by a PE owner.

Explanation

This risk was not identified, as Item 1 states that Fancy Feet does not have a predecessor. When a franchisor has acquired a business from a predecessor, it's important to understand the predecessor's history. Negative information, such as prior litigation, bankruptcy, or high franchisee turnover under the previous owner, can indicate inherited systemic problems that may continue to affect the franchise system.

Potential Mitigations

• Your attorney should carefully review Item 1 for any mention of predecessors or assets acquired from other companies.
• If a predecessor exists, researching their public records and history with a business advisor is a wise step.
• Asking long-term franchisees about their experiences under any previous ownership can provide valuable context.

Explanation

Item 3 of the FDD discloses no material litigation involving the franchisor, its affiliates, or its management. A pattern of franchisee-initiated lawsuits alleging fraud, misrepresentation, or breach of contract would be a significant red flag, suggesting potential systemic issues with the franchisor's business practices or disclosure integrity. The absence of such litigation is a positive indicator, though not a guarantee of future performance.

Potential Mitigations

• Your attorney should always review Item 3 carefully for any disclosed litigation and its potential implications.
• It is still valuable to ask existing franchisees about their relationship with the franchisor and if they are aware of any disputes.
• A business advisor can help you conduct independent online searches for any news or franchisee complaints that may not be disclosed.