Explanation

This risk was not identified in the FDD package. Rapid, uncontrolled growth can strain a franchisor's resources, leading to inadequate franchisee support. Analyzing system growth in Item 20 against the financial capacity shown in Item 21 is crucial to ensure the franchisor can sustain its expansion and support obligations.

Potential Mitigations

• A business advisor can help you evaluate if the franchisor's support infrastructure is scalable to match its growth projections.
• It is wise to ask existing franchisees about their perception of the quality and timeliness of support as the system has grown.
• An accountant's review of the franchisor's balance sheet can provide insight into whether they have reinvested in support systems.

Explanation

This risk was not identified in the FDD package. The franchisor began operating in 2016 and franchising in 2017, giving it several years of history. Investing in a new or unproven system carries higher risks, as the business model may not be fully tested and brand recognition is minimal, requiring more thorough due diligence.

Potential Mitigations

• In any franchise offering, a business advisor should help you conduct extensive due diligence on the track record of the franchisor's management.
• Speaking with the earliest-joining franchisees can provide valuable insight into the system's evolution and the franchisor's learning curve.
• An accountant should be consulted to scrutinize the financial projections for a newer business model.

Explanation

The franchised business is a full-service health club. While the fitness industry has long-term viability, specific trends and service offerings can change. Your business plan should account for the competitive nature of the local fitness market and the potential for shifts in consumer preferences over the 10-year contract term.

Potential Mitigations

• Engaging a business advisor to research the long-term demand for this specific style of health club in your local market is recommended.
• Assess the franchisor's strategy for innovation and adaptation to evolving fitness trends to ensure long-term relevance.
• Your financial advisor can help model different scenarios based on potential shifts in consumer demand.

Explanation

The management team disclosed in Item 2 appears to have relevant experience in the fitness industry and in franchising. The Founder and CEO, Jason Markowicz, has been in his role since 2016 and is involved in numerous affiliated companies. Other executives also have experience as franchisees of this or other brands, which can be a positive indicator.

Potential Mitigations

• A business advisor can help you further vet the management team's track record and reputation within the franchise industry.
• It is still prudent to ask current franchisees about their direct experiences and the quality of support received from the leadership team.
• Your attorney can help you understand the implications of the extensive network of affiliated companies managed by the same key executives.

Explanation

This risk was not identified in the FDD package. Item 1 discloses parent companies, and Item 21 provides audited financial statements for the franchisor entity. In cases where a franchisor is a thinly capitalized subsidiary of a larger parent, the parent's financials may be crucial for assessing the true stability of the system.

Potential Mitigations

• Your attorney should always verify the corporate structure and ensure that financials for any guaranteeing parent entity are provided if required.
• An accountant should review the franchisor's own financials to assess its ability to operate independently of its parent.
• If a parent company is a key supplier, your business advisor can help evaluate the potential for conflicts of interest.

Explanation

This risk was not identified in the FDD package. Item 1 states the franchisor has no predecessors. When a franchisor acquires a business from a predecessor, it is important to scrutinize the predecessor's history in Items 3 (Litigation) and 4 (Bankruptcy), as past problems can sometimes carry over into the new system.

Potential Mitigations

• Your attorney should always carefully review any predecessor information disclosed in the FDD.
• If a system was acquired, conducting independent research on the predecessor's reputation can provide valuable context.
• Asking long-term franchisees about their experience under any previous ownership is a key due diligence step.

Explanation

Item 3 of the FDD states, "No litigation is required to be disclosed in this Item." This indicates the absence of a recent pattern of significant litigation involving the franchisor, its management, or other franchisees. This is a positive finding, as a history of lawsuits can be a major red flag about a franchise system's health and integrity.

Potential Mitigations

• While no litigation is disclosed, your attorney may still recommend conducting a public records search to confirm.
• It is always a good practice to ask current franchisees about their awareness of any formal or informal disputes within the system.
• Your attorney should review the dispute resolution clauses in the Franchise Agreement to understand how future conflicts would be handled.