Explanation

This risk was not identified in the FDD package. Rapid system growth can be a concern if a franchisor's support infrastructure cannot keep pace, potentially leading to a decline in the quality of service provided to franchisees. The data in Item 20 for this franchise indicates a system that is contracting, not growing rapidly.

Potential Mitigations

• Reviewing a franchisor's growth plans and their corresponding investment in support staff and systems with your business advisor is a prudent step.
• Your accountant can assess if the franchisor's financial statements show sufficient resources to support projected growth.
• Asking existing franchisees about the quality and timeliness of support during periods of growth can provide valuable real-world insight.

Explanation

This risk was not identified in the FDD package. The business model, which combines kickboxing, strength training, and nutrition, is a well-established concept within the fitness industry and does not appear to be based on a new or fleeting trend. A fad business carries the risk of declining consumer interest over time, which could jeopardize the long-term viability of your investment.

Potential Mitigations

• A business advisor can help you research the long-term market demand and historical resilience of the industry segment.
• It is wise to evaluate a franchisor’s commitment to innovation and brand evolution to ensure it can adapt to changing consumer tastes.
• An accountant can help you model the financial impact of potential declines in demand if the business were trend-dependent.

Explanation

This risk is considered low. While FFB is new to managing the Farrell's brand, Item 2 shows that its key executives have extensive experience in the fitness industry. Furthermore, the founder of the original Farrell's system has been retained as President of FFB. This continuity of leadership and industry expertise may mitigate some of the risks typically associated with a change in franchisor management.

Potential Mitigations

• Engaging a business advisor to help you vet the backgrounds of the entire management team is a valuable exercise.
• Discussing the management's vision and strategy for the brand directly with the franchisor can provide important clarity.
• Inquiring with existing franchisees about their interactions with and confidence in the new leadership team is recommended.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is owned by a limited liability company, not a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profitability over the long-term health of franchisees, potentially through increased fees or reduced support.

Potential Mitigations

• Your business advisor can help you research the ownership structure of any franchisor to understand its potential impact on strategy.
• If a franchisor is PE-owned, speaking with franchisees about their experiences since the acquisition is crucial.
• An attorney should review the franchise agreement for terms that might change upon a future sale of the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 clearly discloses the parent company, Max Transformation Holdings, LLC, and the FDD includes the audited financial statements for the franchisor entity, Fit Franchise Brands, LLC. In some cases, a failure to disclose a parent company or its financials could obscure the true financial health and backing of the franchise system.

Potential Mitigations

• Your attorney should always verify that the franchisor has properly disclosed all required parent and affiliate entities in Item 1.
• If a parent company guarantees the franchisor's obligations, your accountant should confirm that the parent's financials are included and properly audited.
• Understanding the complete corporate structure with a business advisor helps in assessing the overall stability of the franchisor.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A pattern of litigation, particularly lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems within a franchise.

Potential Mitigations

• Your attorney should always carefully review Item 3 for any disclosed litigation and assess its potential impact.
• Even without disclosed litigation, asking current and former franchisees about their disputes or satisfaction with the franchisor is a key part of due diligence.
• A business advisor can help you research public records for any litigation that may not have been required to be disclosed.