Explanation

This risk was not identified in the FDD Package. Rapid system growth can strain a franchisor's resources, potentially leading to inadequate support for franchisees. It's important to assess whether a franchisor's support infrastructure is scaling appropriately with its unit growth to ensure new and existing franchisees receive the assistance they need to succeed.

Potential Mitigations

• Your business advisor can help evaluate if the franchisor’s growth rate is sustainable and supported by adequate infrastructure.
• It is wise to ask existing franchisees about the quality and timeliness of the support they currently receive from the franchisor.
• An accountant should review the franchisor's financial statements to assess if they are investing sufficiently in support systems to match growth.

Explanation

This risk was not identified in the FDD Package. A business concept tied to a fleeting trend can be risky, as consumer interest may decline, leaving you with a long-term contract for a business with diminished demand. Evaluating whether a franchise offers a product or service with sustainable, long-term market appeal, rather than one capitalizing on a temporary fad, is a crucial part of due diligence.

Potential Mitigations

• Researching the long-term market trends for the specific industry with a business advisor is a prudent step.
• It is beneficial to evaluate the franchisor's commitment to innovation and adaptation to changing consumer tastes.
• Your financial advisor can help assess the business model’s resilience to economic shifts and changing trends.

Explanation

This risk was not identified in the FDD Package. Item 2 discloses that the key executives have prior experience in the fitness and franchise industries. Inexperienced management can be a significant risk, as it may lead to weak support systems, poor strategic decisions, and an inability to effectively guide franchisees. Assessing the depth and relevance of the leadership team's background is a critical due diligence step.

Potential Mitigations

• Your business advisor should still help you vet the entire management team’s background and track record.
• Engaging with current franchisees to gauge their confidence in the leadership team's capabilities is a valuable exercise.
• Consulting with an attorney to ensure the franchise agreement contains strong and specific support obligations is advisable.

Explanation

This risk was not identified in the FDD Package, as Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a focus on short-term returns which may not align with the long-term health of franchisees. This can manifest as increased fees, reduced support, or a quick sale of the entire system.

Potential Mitigations

• If dealing with a PE-owned franchisor, it's wise to have a business advisor research the firm's history with other franchise brands.
• Discussing any changes in franchisor behavior since a PE acquisition with current franchisees can provide valuable insight.
• Your attorney should review the assignment clause in the franchise agreement to understand your rights if the system is sold.

Explanation

The franchisor discloses multiple affiliates under the 'Relentless' brand name, but no parent company. The financials provided are for ISI Franchise International, Inc. itself. A risk can arise if a franchisor is a thinly capitalized subsidiary of a larger parent whose financials are not disclosed, as this can obscure the true financial health and backing of the system. In this case, the franchisor appears to be the primary entity.

Potential Mitigations

• Your accountant should confirm that the provided financial statements are for the correct corporate entity signing the franchise agreement.
• It is important to have your attorney verify the roles and obligations of all affiliated entities mentioned in the FDD.
• A business advisor can help you understand the relationships between the franchisor and its affiliates.

Explanation

This risk was not identified in the FDD Package, as Item 1 states the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the business concept. A history of predecessors can sometimes indicate instability or previous issues with the franchise system, so the absence of any predecessors is generally a positive sign, suggesting a consistent operational history under the current management.

Potential Mitigations

• It is still prudent to confirm with your attorney that the information in Item 1 is complete and transparent.
• A business advisor can help you research the franchisor's own history for any signs of restructuring that might be similar to having a predecessor.
• You should discuss the company's founding and history with long-term franchisees to corroborate the information in the FDD.