Explanation

This risk was not identified in the FDD package. A high rate of franchisee terminations, non-renewals, or other cessations of business can be a strong indicator of systemic problems, such as a lack of profitability or poor franchisor support. It is a critical metric to evaluate when assessing the overall health and satisfaction within a franchise system.

Potential Mitigations

• With your business advisor, you should still contact a broad range of former franchisees listed in Item 20 to understand their reasons for leaving the system.
• An accountant can help you analyze the turnover data presented in Item 20 over the three-year period to identify any potential trends.
• A discussion with your franchise attorney about the definitions the franchisor uses for transfers and cessations can reveal important nuances.

Explanation

This risk was not identified in the FDD package. While growth is generally positive, extremely rapid expansion can sometimes strain a franchisor's resources, potentially leading to a decline in the quality of support, training, and site selection assistance provided to new and existing franchisees. Monitoring growth rates in Item 20 against the franchisor's resources is a key part of due diligence.

Potential Mitigations

• Engaging a business advisor to research the franchisor’s reputation for support during growth phases can provide valuable context.
• It is prudent to ask current franchisees about their experiences with the quality and timeliness of franchisor support.
• An analysis of the franchisor's financial statements with your accountant can help determine if they have the capital to support continued growth.

Explanation

This risk was not identified in the FDD package. The franchisor has been offering franchises since 2008. Newer franchise systems, while potentially innovative, carry higher risks. They may lack a proven track record, have underdeveloped support systems, and possess limited brand recognition, which can impact your ability to attract customers and achieve profitability.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you assess the franchisor's operational history and the maturity of its systems.
• It's wise to have your accountant review the financial stability of any franchisor, but especially those with a shorter operating history.
• Legal counsel can help you scrutinize the experience of the management team as detailed in Item 2.

Explanation

This risk was not identified in the FDD package. Massage and spa services represent an established industry rather than a new trend. Investing in a business based on a temporary fad can be very risky, as the entire business model may become obsolete when consumer interest fades. Prospective franchisees should always assess the long-term demand for a product or service.

Potential Mitigations

• A business advisor can help you research the long-term viability and market trends for any industry you consider entering.
• Discuss the franchisor's plans for innovation and adapting to market changes with your financial advisor.
• Your attorney can review the franchise agreement to understand your obligations if the business model needs to pivot significantly.

Explanation

This risk was not identified in the FDD package. Item 2 of the FDD details the business experience of the franchisor's key executives. A lack of relevant experience in both the specific industry and in managing a franchise system can be a significant red flag. Inexperienced leadership may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• A thorough review of the executive team's background in Item 2 with your business advisor is a crucial due diligence step.
• You should discuss the management team's competence and accessibility with current franchisees.
• Your attorney can help you assess whether the management team's experience is adequate for the franchisor's obligations.

Explanation

This risk was not identified in the FDD package. The franchisor's parent companies are disclosed in Item 1. When a franchisor is a subsidiary, especially one that is thinly capitalized, it is important for the parent company's financial information to be disclosed if it guarantees the franchisor's performance. Without this information, it can be difficult to assess the true financial backing of the franchise system.

Potential Mitigations

• An accountant should review the provided franchisor financials to determine if they appear sufficient on a standalone basis.
• It is prudent for your attorney to verify if a parent company guarantee exists and if its financials should have been included under franchise disclosure rules.
• A business advisor can help you investigate the reputation and stability of the parent company.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD requires disclosure of any predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. A failure to disclose such history, or a history that includes significant issues like bankruptcy or litigation, could conceal important information about the system's past performance and stability.

Potential Mitigations

• Your attorney should always confirm that the predecessor history section of Item 1 has been completed properly.
• If a predecessor is listed, a business advisor can help you conduct independent research into its operational and legal history.
• Asking long-tenured franchisees about their experience under any previous ownership can provide valuable insight.