Explanation

The financial statements for Fitness 19 Franchising LLC (Fitness 19) indicate potential instability. The company incurred net losses in 2022 and 2023, only achieving a small profit in 2024. It has a very low net worth and was dependent on cash contributions from its members to operate in prior years. The FDD's 'Special Risks' section explicitly warns that the franchisor's financial condition calls its ability to provide services and support into question, creating significant risk for you.

Potential Mitigations

• Your accountant must conduct a thorough analysis of the audited financial statements, including all footnotes and cash flow statements, to assess the franchisor's viability.
• A discussion with your business advisor about the risks of partnering with a thinly capitalized franchisor is essential before making any commitment.
• Ask your attorney to determine if any financial assurances, like a bond or escrow, are required by your state due to the weak financials.

Explanation

While the new franchisor entity has no terminations, Exhibit E reveals that 13 franchisees of the 'Prior Franchisor' (which operates under the same brand) ceased operations in the most recent fiscal year. This represents a very high turnover rate (approximately 20%) for the overall brand system. Such a high number of cessations may indicate systemic issues, franchisee dissatisfaction, or lack of profitability within the broader Fitness 19 system, presenting a significant risk to your potential success.

Potential Mitigations

• It is critical to contact a significant number of the former franchisees listed in Exhibit E to understand why they left the system; your attorney can help prepare questions.
• Your accountant should model worst-case financial scenarios based on the possibility of systemic unprofitability.
• Discuss the high brand-level turnover and its causes directly with the franchisor, with your business advisor present to evaluate their responses.

Explanation

Fitness 19 was formed in February 2021 and began franchising in December 2021. The FDD shows a very small number of franchised and company-owned outlets have opened under this new entity. Investing in such a new and unproven franchise system carries a higher risk of business model flaws, inadequate support systems, and potential instability compared to a mature, established brand. The system's long-term viability is not yet demonstrated.

Potential Mitigations

• A business advisor should help you conduct extensive due diligence on the viability of the business model itself, separate from the franchise structure.
• Interviewing the first few franchisees is critical to understanding their early experiences with the system and its support.
• Your accountant must carefully scrutinize the franchisor's financials for signs of under-capitalization, which is common in new systems.

Explanation

The FDD discloses a complex history involving a 'Prior Franchisor' and an affiliate, 'Holdings'. This structure may obscure the full operational history and challenges of the brand. For example, Item 20 tables for the current franchisor show no franchisee cessations, but Exhibit E reveals 13 cessations under the Prior Franchisor in the last year. This history includes significant litigation and a past regulatory action, which are critical facts for you to consider.

Potential Mitigations

• Have your attorney and accountant carefully analyze all information related to the 'Prior Franchisor' and 'Holdings' to piece together the brand's complete history.
• Ask the franchisor to explain the relationship between the entities and the reasons for the new corporate structure.
• Conducting independent research on the prior entities with the help of a business advisor could reveal additional information.

Explanation

Item 3 discloses a significant history of litigation involving the franchisor's affiliates and management. These include concluded lawsuits with serious allegations such as fraud, embezzlement, breach of fiduciary duty, and operating an illegal franchise. While many are settled, a pattern of such serious legal challenges against the same management group operating the brand is a major red flag regarding the system's operational and ethical history, posing a high risk to a prospective franchisee.

Potential Mitigations

• A thorough review of the details of each disclosed litigation with your franchise attorney is absolutely essential.
• Your attorney can help assess the potential for a negative business culture and the likelihood of future disputes based on this history.
• This extensive litigation history should be a primary topic of discussion with current and former franchisees.