Explanation

The data presented in the Item 20 tables does not indicate a high rate of franchisee turnover through termination, non-renewal, or cessation of business. However, a footnote on page 50 mentions a "mutual termination" of an Area Representative agreement that is not reflected as a termination in the tables. High turnover can be a primary indicator of systemic problems, so understanding the true departure rate is crucial.

Potential Mitigations

• Speaking with a range of current and former Area Representatives listed in Exhibit D is crucial for a complete picture of system satisfaction.
• A business advisor can help you formulate questions for the franchisor regarding the circumstances of any franchisee departures.
• Your attorney should help you understand the difference between a disclosed termination and other forms of franchisee exit.

Explanation

This risk was not identified. FYZICAL began offering Unit Franchises in 2013 and Area Representative franchises in 2015, and has grown to a substantial size. A new or unproven system presents higher risks due to a lack of established brand recognition, untested operational models, and potentially underdeveloped support systems. Verifying the track record and experience of management is key when evaluating such an opportunity.

Potential Mitigations

• With any franchise, especially a newer one, consulting a business advisor to research the management team's experience is important.
• An accountant should be engaged to scrutinize the financial stability and capitalization of any emerging franchisor.
• Thoroughly questioning the earliest-joining franchisees about their experiences provides valuable insight your attorney can help you gather.

Explanation

This risk was not identified. The business is in the physical therapy and wellness sector, which is a large, established industry. A business based on a short-term fad presents a significant risk because your long-term contractual obligations remain even if consumer interest disappears. Evaluating the long-term market need for a franchise's core products or services, independent of current trends, is a critical step in due diligence.

Potential Mitigations

• A business advisor can help you conduct market research to assess the long-term demand for the core services offered.
• Reviewing the franchisor's plans for innovation and adaptation with a business consultant can reveal their strategy for staying relevant.
• Your accountant can help model the business's potential performance under different economic scenarios.

Explanation

This risk was not identified in the FDD. The executive team described in Item 2 appears to have significant prior experience in franchising and related industries. Inexperienced management can be a major liability for a franchise system, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support. Assessing the depth and relevance of the leadership team's background is a key part of franchisee due diligence.

Potential Mitigations

• It is always prudent to have a business advisor help you research the backgrounds of the key executives listed in Item 2.
• Discussions with current franchisees can provide valuable insight into their perception of the management team's competence and vision.
• Your attorney can help you formulate questions about management's long-term strategy for the franchise system.

Explanation

This risk was not identified. FYZICAL discloses its parent company in Item 1. When a franchisor is a subsidiary, it's crucial that the parent company's financial information is also disclosed if the parent guarantees the franchisor's performance or is essential to its operations. Without this, a prospective franchisee may have an incomplete picture of the overall financial health and backing of the system they are joining.

Potential Mitigations

• An attorney should always verify the corporate structure to understand the relationship between the franchisor and any parent entities.
• If a parent company provides a guarantee, your accountant should review its financial statements with the same rigor as the franchisor's.
• It is wise to ask your attorney to clarify the legal and financial implications of any parent guarantees or support obligations.

Explanation

This risk was not identified. The FDD states in Item 1 that the company has no predecessor. When a franchisor has acquired a business from a predecessor, it's vital to scrutinize that history. Negative information, such as prior litigation, bankruptcy, or high franchisee failure rates under the previous owner, could be an indicator of underlying systemic issues that may still affect the franchise system today.

Potential Mitigations

• Your attorney can help you investigate the history of any disclosed predecessor entity for potential red flags.
• Contacting franchisees who operated under a predecessor can provide valuable historical context on the system's evolution.
• A business advisor can assist in researching public records and news archives for information on predecessor companies.