Explanation

The FDD discloses data on franchisee exits over the past three years. Analysis of this data for terminations, non-renewals, and other cessations does not indicate an unusually high rate of franchisees leaving the system. The reported turnover rates appear to be low, which can be a positive indicator of system health and franchisee satisfaction. However, a significant number of transfers are reported, which could potentially include sales of underperforming units.

Potential Mitigations

• It is crucial to contact a representative sample of current and former franchisees, including those who transferred their business, to discuss their experiences.
• A business advisor can help you analyze the transfer numbers in the context of the overall system size to better understand churn.
• Your attorney can help you formulate insightful questions for former franchisees to understand their reasons for leaving the system.

Explanation

This risk was not identified in the FDD package. Hand and Stone has been offering franchises since 2005 and has a substantial number of operating units. A new or unproven system presents higher risks because its business model may not be validated, its brand recognition is low, and its support systems are often underdeveloped. Verifying the franchisor's history and experience is a key step in due diligence.

Potential Mitigations

• For any franchise, it's wise to have your business advisor investigate the operational history and track record of the brand.
• Consulting with an accountant to review the financial stability of the franchisor, especially for newer systems, is a critical step.
• Your attorney can help you understand the legal implications if a new franchisor fails to meet its obligations.

Explanation

This risk was not identified in the FDD package. The business concept, offering massage, facial, and spa services through a membership-based model, has been in operation for nearly two decades and appears to address a market with sustained consumer demand. Fad businesses, tied to temporary trends, pose a risk because demand can quickly disappear, leaving you with long-term contractual obligations for a business that is no longer viable.

Potential Mitigations

• A business advisor can help you research the long-term market trends for the health and wellness industry to confirm sustained demand.
• You should evaluate the franchisor’s plans for service innovation and adaptation to evolving consumer preferences.
• An accountant can help you model the financial resilience of the business under different economic scenarios.

Explanation

This risk was not identified in the FDD package. The executive team described in Item 2 has extensive prior experience in the franchise industry with well-known brands, as well as significant tenure with Hand and Stone itself. Inexperienced management can be a major risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support, jeopardizing the success of the entire system.

Potential Mitigations

• When evaluating any franchise, it is prudent to have a business advisor help you research the backgrounds of the key management team.
• Speaking with current franchisees about their direct experiences with the leadership team provides valuable, real-world insight.
• An attorney can review the franchisor's obligations in the agreement to ensure they are clearly defined, regardless of management's experience.

Explanation

This risk was not identified in the FDD package. The franchisor's parent companies are disclosed in Item 1, and the financial statements for the consolidated entity, including Hand and Stone Franchise LLC and its subsidiaries, are provided in Item 21. Failure to disclose a parent company or its financials when required can obscure the true financial health and backing of the franchise system, which is a critical piece of information for your due diligence.

Potential Mitigations

• Your accountant should always confirm that the financial statements provided represent the entity you are contracting with and any relevant parent companies.
• An attorney can help verify the corporate structure and ensure all necessary disclosures have been made under FTC rules.
• If a parent company guarantees the franchisor's obligations, it is important to review that guarantee document carefully with legal counsel.

Explanation

This risk was not identified in the FDD package. The franchisor discloses its history, including its conversion from a corporation to an LLC in 2022 following an acquisition. It also discloses relevant litigation involving its predecessor. A failure to disclose or downplay a predecessor's negative history, such as bankruptcies or significant litigation, can hide systemic issues that may still affect the franchise system today, preventing you from seeing a complete picture of the brand's past challenges.

Potential Mitigations

• In any FDD review, your attorney should pay close attention to the predecessor history disclosed in Items 1, 3, and 4.
• When a system has been acquired, asking long-term franchisees about their experience under previous ownership can provide valuable context.
• A business advisor can help you research the public records of any predecessor entities for additional information.