Explanation

The franchisor’s audited financials show significant net losses in 2023 and 2024. These are primarily due to very large non-cash amortization expenses related to a recent acquisition and may not reflect operational health. Cash flow from operations appears positive, and the company has substantial member's equity. While the losses on the income statement are notable, they do not appear to indicate underlying operational instability at this time.

Potential Mitigations

• Have your accountant analyze the financial statements, focusing on cash flow from operations versus net income to understand the impact of non-cash expenses.
• A discussion with your financial advisor is needed to assess the long-term strategy of the parent private equity firm and its potential impact on the franchisor.
• Your attorney should confirm if any financial performance bonds are required by state regulators due to the franchisor's financial presentation.

Explanation

This risk was not identified in the FDD package. The data presented in Item 20 tables shows very low rates of termination, non-renewal, and other cessations of franchised outlets over the past three years. Low turnover can be an indicator of a healthy franchise system and general franchisee satisfaction. A prospective franchisee should still verify this by speaking with current and former franchisees to understand their experiences within the system.

Potential Mitigations

• To confirm the positive trends seen in the data, speaking with current and former franchisees listed in Item 20 is a crucial due diligence step.
• Your business advisor can help you formulate questions for these franchisees regarding their satisfaction and profitability.
• During franchisee calls, you might ask about their perception of system health and support, which an attorney can help you frame appropriately.

Explanation

This risk was not identified. Hand and Stone Franchise LLC (HSF) has been franchising since 2005 and, as per Item 20, has a large, established system with over 500 operating outlets. The business model is well-established in the marketplace. Therefore, the risks associated with an unproven or new franchise system are not applicable here. A mature system can offer benefits like brand recognition and developed operational procedures.

Potential Mitigations

• When evaluating any franchise, it's wise to have your business advisor help you assess the maturity of the system and its position within the industry.
• You should still speak with long-term franchisees to understand how the system has evolved over time.
• Your accountant can review historical financial data to confirm the stability that a mature system often provides.

Explanation

This risk was not identified in the FDD package. The business model, offering massage and facial spa services, operates within the well-established health and wellness industry. This sector has a long history of consumer demand. The risk of the core business concept being a short-lived fad is considered low. Sustainable demand is a key factor for the long-term viability of your potential investment.

Potential Mitigations

• A business advisor can help you research the long-term trends and competitive landscape within the local health and wellness market.
• Even in an established industry, consulting with your financial advisor to assess the model’s resilience to economic downturns is a prudent step.
• You might discuss the brand's strategies for staying current and competitive with existing franchisees.

Explanation

This risk was not identified. Item 2 of the FDD lists the franchisor's executive team, who possess extensive and relevant experience in managing large, well-known franchise systems such as Planet Fitness, European Wax Center, and Jersey Mike's. The management team appears to have significant prior experience in both the specific industry and in franchising, which can be a positive factor for system leadership and support.

Potential Mitigations

• Even with an experienced team, it's beneficial to ask current franchisees about their direct experiences with management's responsiveness and strategic direction.
• A business advisor can help you further research the track record and reputation of the key executives listed in Item 2.
• Your attorney can confirm that there are no undisclosed legal issues related to management's prior business dealings.

Explanation

This risk was not identified in the FDD package. Item 1 provides a clear description of the corporate structure, identifying Hand and Stone Franchise LLC's (HSF) parent companies up to the controlling private equity firm, Harvest Partners LP. There does not appear to be any attempt to obscure the ownership structure. The necessary financial statements are also included in the document.

Potential Mitigations

• As a standard practice, your attorney should review the corporate structure disclosed in Item 1 to ensure it is clear and complete.
• An accountant should confirm that the financial statements provided are for the correct entity and meet all disclosure requirements.
• A business advisor can help you understand the relationships between the franchisor and its various affiliates.

Explanation

This risk was not identified. The FDD's Item 1 clearly discloses the predecessor entity, Hand and Stone Franchise Corp., and the date of the corporate conversion. The document includes financial statements and litigation history that span the predecessor and current entity, providing a continuous view of the system's history. There are no apparent signs of obscured negative history related to the predecessor.

Potential Mitigations

• Have your franchise attorney review the disclosures in Items 1, 3, and 4 to confirm the predecessor's history is adequately presented.
• You should discuss the transition from the predecessor with long-term franchisees to understand if any issues carried over.
• Your accountant can verify that the financial statements properly reflect the transition from the predecessor entity.

Explanation

This risk was not identified. Item 3 discloses one past arbitration from 2017 involving the predecessor franchisor. The claims included fraud and misrepresentation, but the matter was settled in 2018. A single, settled case from several years ago does not constitute a pattern of litigation that would suggest systemic problems. The FDD discloses no other such lawsuits.

Potential Mitigations

• Your attorney should still review the details of the disclosed litigation in Item 3 to understand the nature of the dispute.
• When speaking with franchisees, it is wise to ask about their general perception of the franchisor's relationship with its franchisees.
• A business advisor can help you search public records for any other litigation that may not have required disclosure.