Explanation

The audited financial statements for Los Campeones Franchising LLC (LCF LLC) in Exhibit A reveal a significant Member's Deficit (negative net worth) of ($125,976) as of year-end 2024. Additionally, Member Distributions exceeded Net Income. State regulators in North Dakota and South Dakota have required the escrow of your fees due to this financial condition. This combination indicates potential financial weakness, which could impact LCF LLC's ability to support you.

Potential Mitigations

• A thorough review of the financial statements, including all notes, with your franchise accountant is critical to assess the franchisor's stability.
• Discuss the implications of the negative net worth and the state-required escrows with your franchise attorney.
• Your business advisor can help you question the franchisor about its plans to improve its financial position and support the system.

Explanation

The data in Item 20, Table 3 reveals that the single franchise operating at the start of 2022 was reacquired by the franchisor's affiliate during that year. While new units have opened since, this represents a 100% turnover rate for the initial franchisee cohort during the three-year reporting period. Such a high rate of turnover for the earliest franchisee is a significant indicator of potential systemic issues or franchisee dissatisfaction that warrants further investigation.

Potential Mitigations

• It is imperative that you contact the former franchisee who was reacquired to understand the reasons for their exit, with guidance from your attorney.
• Your business advisor should help you question the franchisor directly about the circumstances leading to this reacquisition.
• Analyze franchisee turnover rates with your accountant to understand potential risks to the long-term viability of your own investment.

Explanation

The franchise system is growing quickly, expanding from one to five franchised units in three years. When evaluated alongside the franchisor's significant net worth deficit as shown in Item 21, this rapid growth could present a risk. A fast-growing franchisor with limited financial resources may potentially struggle to provide the necessary level of training, site support, and operational assistance to all of its new franchisees, impacting system quality.

Potential Mitigations

• Questioning the franchisor about its specific plans for scaling support infrastructure to match unit growth is a task for your business advisor.
• Engaging with a range of existing franchisees about the current quality and responsiveness of franchisor support is essential.
• Your accountant should review the franchisor's financials to assess whether they have the capital to adequately support this expansion.

Explanation

LCF LLC began offering franchises in December 2020, making it a new and relatively unproven franchise system. New systems carry inherent risks, including underdeveloped support structures, limited brand recognition, and a business model that may not have a long track record of success for franchisees. This risk is heightened by the franchisor's disclosed financial weakness and the high turnover of its initial franchisee, presenting a significant challenge for new investors.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the management team's experience in both the fitness industry and in franchising.
• Speaking with all existing franchisees listed in Item 20 is critical to understand their experiences with this emerging system.
• Given the higher risk, having your attorney attempt to negotiate more protective terms in the franchise agreement is advisable.

Explanation

The FDD discloses a complex structure where parent and affiliate companies (e.g., Los Campeones Gym, LLC) exist, own the core trademarks, and operate corporate stores. While the relationships are disclosed, the franchisor entity itself shows significant financial weakness. The financial statements of the more established parent/affiliate companies, which hold key assets, are not provided. This structure may obscure the overall financial health and resources of the enterprise backing your franchise.

Potential Mitigations

• Your accountant and attorney should carefully analyze the disclosed affiliate structure and its implications for your franchise.
• It is critical to understand which entity holds which obligations and assets, and what guarantees, if any, the parent provides.
• Asking the franchisor for financial statements of the trademark-holding affiliate could provide a clearer picture of overall stability.