Explanation

This risk was not identified in the FDD package. High franchisee turnover, indicated by a large number of terminations, non-renewals, or re-acquisitions in Item 20, can be a major red flag. It often suggests systemic problems, such as franchisee unprofitability, dissatisfaction with the business model, or inadequate support from the franchisor. Analyzing these trends is a crucial part of due diligence.

Potential Mitigations

• An accountant can help you analyze the tables in Item 20 to calculate turnover rates and compare them against any available industry benchmarks.
• It is wise to contact former franchisees listed in the FDD to understand their reasons for leaving the system; your attorney can help prepare questions.
• Discussing system stability and satisfaction with a range of current franchisees is a valuable step a business advisor can help with.

Explanation

This risk was not identified in the FDD package. Gracie Barra has been franchising since 2010 and has a large number of operational units, indicating it is an established system. An unproven system presents higher risks because its business model, brand recognition, and support structures are not yet time-tested, which can lead to a higher chance of failure for new franchisees.

Potential Mitigations

• When evaluating a newer system, it is vital to have an accountant scrutinize the franchisor's capitalization and business plan.
• A business advisor can help you conduct deep due diligence on the management team's prior experience in both the industry and in franchising.
• Your attorney might be able to negotiate more franchisee-favorable terms to compensate for the higher risks associated with a new franchise.

Explanation

This risk was not identified in the FDD package. The business provides instruction in Brazilian Jiu-Jitsu, a well-established martial art with decades of history and growing mainstream popularity. Investing in a business based on a short-term trend or fad is risky because consumer interest may decline, but your long-term contractual obligations to pay royalties and other fees would remain.

Potential Mitigations

• For any franchise concept, a business advisor can help you independently research the long-term market demand for its products or services.
• It is wise to evaluate a franchisor's plans for innovation and adaptation to ensure the business can remain relevant beyond current trends.
• An accountant can help you assess a business model's resilience to shifts in consumer tastes and economic downturns.

Explanation

This risk was not identified in the FDD package. The executive team, as detailed in Item 2, has extensive and long-term experience in both the Brazilian Jiu-Jitsu industry and in managing the franchise system. Inexperienced management can be a significant risk, as it may lead to flawed strategies, weak operational systems, and inadequate franchisee support, undermining the value of the brand.

Potential Mitigations

• Your attorney should always review the executive biographies in Item 2 of the FDD to assess the depth of relevant management experience.
• A business advisor can help you frame questions for existing franchisees about their confidence in the leadership team and the quality of support they receive.
• When management is new to franchising, it is prudent to inquire if they have retained experienced franchise consultants or staff.

Explanation

This risk was not identified in the FDD package. The FDD does not indicate that the franchisor is owned by a private equity firm. When PE firms own a franchisor, their typical focus on short-term returns can sometimes lead to decisions, like cutting support staff or increasing fees, that may not align with the long-term health of franchisees' businesses.

Potential Mitigations

• Your attorney should always verify the ownership structure detailed in Item 1 of the FDD.
• If a franchisor is owned by a private equity firm, a business advisor can help you research the firm's reputation and track record with other franchise brands.
• It's beneficial to ask franchisees who have been in the system before and after a PE acquisition about any changes in culture or support.

Explanation

This risk was not identified in the FDD package. The FDD discloses a predecessor entity but does not indicate any associated negative history, such as litigation or bankruptcy. A franchisor with a problematic predecessor history could inherit unresolved issues, a damaged brand reputation, or a legacy of franchisee dissatisfaction, all of which could negatively impact your new franchise.

Potential Mitigations

• It's important for your attorney to carefully review disclosures in Items 1, 3, and 4 for any information related to predecessor entities.
• A business advisor can help you conduct independent research on a predecessor's history if one is disclosed.
• Speaking with long-term franchisees who may have operated under a predecessor entity can provide valuable historical context.

Explanation

This risk was not identified in the FDD package. Item 3 discloses a single pending lawsuit, which does not constitute a pattern. A history of multiple lawsuits filed by franchisees alleging fraud, misrepresentation, or breach of contract can be a strong indicator of systemic problems within a franchise organization and its relationship with its franchisees. Likewise, a high number of suits filed by the franchisor against franchisees can suggest an overly litigious culture.

Potential Mitigations

• Your attorney should always thoroughly analyze any legal actions disclosed in Item 3 of the FDD.
• A business advisor can assist in discussions with current and former franchisees to inquire about the franchisor's litigation history and general approach to disputes.
• Even a single lawsuit should be carefully reviewed by your attorney to understand the nature of the claims and potential implications.