Explanation

This specific risk was not identified in the FDD Package. Rapid, unsupported growth can strain a franchisor's ability to provide adequate training and support. A system that sells franchises faster than it can build its support infrastructure may leave new franchisees without the guidance they paid for, potentially leading to operational struggles and higher failure rates. Slow, steady growth is often a sign of a more stable, well-managed franchise system.

Potential Mitigations

• A business advisor can help you analyze the growth trajectory shown in Item 20 to ensure it appears sustainable.
• Speaking with franchisees who opened at different times can provide insight into whether the quality of support has changed as the system grew.
• Your accountant can review the franchisor's financial statements to determine if they are investing in infrastructure to support new units.

Explanation

This specific risk was not identified in the FDD Package. A fad business is one based on a short-lived trend, which can be very risky for a franchisee who is locked into a long-term agreement. While the initial excitement can generate sales, demand can quickly disappear, leaving the franchisee with a worthless business but ongoing obligations like rent and royalty payments. A sustainable franchise should be based on a product or service with long-term consumer demand.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term demand for the franchise's products or services.
• Question the franchisor on their strategies for innovation and adapting to changing consumer tastes.
• Analyzing the business's resilience to economic downturns with your financial advisor is a crucial step.

Explanation

This specific risk was not identified in the FDD Package. Item 2 indicates that the franchisor's key personnel have significant prior experience in operating similar fitness businesses. Franchisor inexperience can be a major risk, as it may lead to underdeveloped support systems, ineffective marketing, and poor strategic decisions. When evaluating a franchise, it's important that the management team has a proven track record not only in the specific industry but also in managing a franchise system.

Potential Mitigations

• It is wise to have a business advisor help you research the backgrounds of the franchisor's key management personnel.
• Speaking with current franchisees can provide valuable insight into their perception of the management team's competence and vision.
• Your attorney can help you understand the experience levels disclosed in Item 2 of the FDD.

Explanation

This specific risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned by a private equity firm. When a PE firm owns a franchisor, its goal is typically to grow the company and sell it within a few years. This can sometimes lead to decisions that favor short-term profits, such as cutting franchisee support or increasing fees, over the long-term health of the brand and its franchisees.

Potential Mitigations

• A business advisor can help you research the ownership structure of the franchisor.
• If a private equity firm is involved, it is prudent to investigate its reputation and track record with other franchise systems it has owned.
• Your attorney should review transfer and assignment clauses in the franchise agreement to understand what happens if the franchisor is sold.

Explanation

This specific risk was not identified in the FDD Package. Item 1 properly discloses the existence of a parent company, Destiny Faith, LLC. A failure to disclose a parent or controlling entity can be a major red flag, as it may hide the true financial backing or decision-making structure of the franchise. If a franchisor is a thinly capitalized subsidiary, the financial statements of the parent company may be essential for a complete risk assessment.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1.
• If a parent company exists and provides a guarantee, your accountant must review the parent's financial statements.
• Understanding the relationship and any obligations between the franchisor and its parent is a key part of due diligence your attorney can assist with.

Explanation

This risk is present but appears low. The FDD discloses that the franchisor previously operated under the name “Journey 333” and is now transitioning to “Impact-X Performance.” While this is a form of predecessor activity, it seems to be a rebranding effort rather than an acquisition of a troubled system. The change is disclosed transparently, and data from the prior brand is included in the FDD, which helps mitigate the risk of hidden historical problems.

Potential Mitigations

• A business advisor can help you research the reasons behind the rebranding and its reception in the market.
• Discuss the transition with franchisees who operated under the previous brand name to understand its impact.
• Your attorney should confirm that all historical data, such as outlet information in Item 20, properly accounts for the predecessor brand.

Explanation

This specific risk was not identified in the FDD Package. Item 3 discloses no material litigation. A pattern of lawsuits, especially those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, is a significant red flag. It can indicate systemic problems with the franchisor’s business practices or franchisee relationships. Likewise, a high number of lawsuits initiated by the franchisor against its franchisees could suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney should always carefully review any litigation disclosed in Item 3 for patterns and implications.
• Independent research, with the help of a business advisor, can sometimes uncover litigation not yet disclosed in the FDD.
• Asking current and former franchisees about their experiences with disputes is a critical due diligence step.