Explanation

The risk of high franchisee turnover was not identified, as Item 20 data shows no franchisee terminations, non-renewals, or cessations in the past three years. However, with only one operating franchisee, this data is not statistically significant. High turnover can signal systemic problems like lack of profitability or poor support, so it remains a critical area for due diligence in any franchise opportunity.

Potential Mitigations

• When evaluating any franchise, it is critical to have your accountant analyze the turnover rates in Item 20 over the full three-year period.
• Speaking with former franchisees from the list in Item 20 is a vital due diligence step; your business advisor can help you prepare questions.
• Your attorney should help you understand the difference between transfers, terminations, and non-renewals, as these categories can be used to obscure franchisee failure.

Explanation

The management team described in Item 2 appears to have relevant business and franchising experience. The CEO has operated multi-unit franchises in other systems, and the VP of Franchise Development has experience selling licenses for other wellness brands. This specific risk of an entirely inexperienced management team was not identified. However, the franchisor entity itself is still very young and has limited experience managing this specific franchise system.

Potential Mitigations

• It is always wise to have a business advisor help you research the specific track record of the key executives listed in Item 2.
• Speaking with current franchisees about their direct experiences with the management team's support and strategic direction is recommended.
• Your attorney can help you formulate questions for the franchisor about the management team's vision for overcoming current financial challenges.

Explanation

This risk was not identified in the FDD. Item 1 indicates the franchisor is owned by Hydralive Holdings, LLC, and does not disclose any ownership by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profitability over the long-term health of the franchise system, potentially affecting franchisee support and fees. Since this is not the case here, this specific risk is not present.

Potential Mitigations

• When evaluating any franchise, it is prudent to have your attorney research the ownership structure of the franchisor for any private equity involvement.
• A business advisor can help you investigate a private equity firm's track record with other franchise systems if one is involved.
• It is wise to ask current franchisees about any changes in franchisor behavior if a private equity firm acquires the system.

Explanation

Item 1 identifies K & B Wellness Group, LLC as a predecessor. However, Items 3 and 4 state there is no litigation or bankruptcy history to disclose for the franchisor or its predecessors. While the disclosure appears to meet requirements, you should be aware that the system's operational history began under this different entity. Any issues that arose under the predecessor that did not result in litigation may not be visible in the FDD.

Potential Mitigations

• A business advisor can help you conduct independent research, such as online searches, for any news or franchisee complaints related to the predecessor entity.
• When speaking with franchisees, it can be useful to ask about their experiences under any previous ownership or corporate structure.
• Your attorney can confirm that the disclosures regarding the predecessor are complete as required by law.

Explanation

This risk was not identified. Item 3 of the FDD states, “No litigation is required to be disclosed in this disclosure document.” This indicates there is no history of material litigation involving the franchisor, its predecessors, or its management that would require disclosure. A pattern of litigation, particularly claims of fraud or breach of contract brought by other franchisees, can be a major red flag in other franchise systems.

Potential Mitigations

• It is always prudent for your attorney to conduct an independent search for litigation involving the franchisor, as the FDD disclosure has specific materiality thresholds.
• Discussing any past or current disputes with existing and former franchisees is a recommended part of due diligence.
• A business advisor can help you understand that a clean litigation history is positive but not a guarantee of future performance.