Explanation

The franchise turnover rates disclosed in Item 20 do not appear to be high. A low turnover rate can suggest a stable system with generally satisfied franchisees. However, it's always important to understand the reasons behind any unit closures or transfers, as this data provides insight into the challenges franchisees may face within the system.

Potential Mitigations

• Speaking with several current and former franchisees from the lists provided in the FDD is a critical step in your due diligence.
• A discussion with your business advisor can help you formulate key questions about franchisee satisfaction and profitability.
• Your attorney should help you understand the context of any franchisor re-acquisitions of franchisee locations.

Explanation

This risk was not identified, as the franchisor has been offering franchises since 2010 and has a substantial number of operating units. An unproven system can be risky due to a lack of established brand recognition, untested operational procedures, and potentially unstable support structures. A mature system generally offers more predictability and a more developed support network.

Potential Mitigations

• It is still wise to have a business advisor help you evaluate the franchisor's history and the experience of its management team.
• Even in established systems, consulting with your accountant to review the franchisor's multi-year financial performance is a key due diligence step.
• Your attorney can help investigate any significant changes in ownership or strategy that might affect the system's stability.

Explanation

The business model, which involves leasing studio space to salon and wellness professionals, is based in the well-established beauty services industry and is not considered a fad. Investing in a fad business carries the risk that consumer interest could decline rapidly, leaving you with a long-term franchise contract for a business with dwindling demand.

Potential Mitigations

• Engaging a business advisor to research the long-term trends and competitive landscape in the salon suite industry is a prudent step.
• You should assess the local demand for this type of service in your proposed market with a real estate professional.
• Discussing the business model's resilience to economic shifts with a financial advisor can provide valuable insights.

Explanation

The management team described in Item 2 appears to have extensive and relevant experience in both the salon industry and in franchising. An inexperienced management team can be a significant risk, as they may lack the skills to provide effective support, manage system growth, or make sound strategic decisions, potentially jeopardizing your investment.

Potential Mitigations

• A business advisor can help you independently verify the backgrounds and track records of the key executives listed.
• It remains valuable to ask current franchisees about their direct experiences and the quality of support they receive from the management team.
• Your attorney can research if there has been any recent, significant turnover in key management positions.

Explanation

This risk was not identified, as the franchisor clearly discloses its parent company in Item 1. In some situations, a franchisor's failure to disclose a parent company or provide its financial statements can obscure the true financial stability and control structure of the franchise system. This can be particularly risky if the franchisor entity itself is thinly capitalized and relies on the parent for support.

Potential Mitigations

• It is good practice to have your accountant review the franchisor's financials to assess whether it appears to be a well-capitalized entity on its own.
• Your attorney can help you understand the relationship between the franchisor and its parent company.
• A business advisor can help you research the parent company to understand its overall business activities and reputation.

Explanation

The franchisor does not disclose any predecessors in Item 1. When a franchisor has predecessors, it is important to review their history for any signs of trouble, such as litigation, bankruptcy, or high franchisee failure rates. A lack of predecessor history means the analysis focuses solely on the current franchising entity's track record.

Potential Mitigations

• A review of the franchisor's own history of litigation (Item 3) and franchisee turnover (Item 20) with your attorney is still a critical step.
• Your accountant should analyze the franchisor's financial statements over the past three years for any negative trends.
• Speaking with long-term franchisees about the system's history and evolution can provide valuable context.

Explanation

The FDD does not disclose a pattern of litigation involving claims of fraud or misrepresentation from franchisees. A history of such lawsuits can be a major red flag, potentially indicating systemic problems with the franchisor's sales practices or business model. The disclosed regulatory action regarding "no-poach" clauses appears to have been resolved.

Potential Mitigations

• Your attorney should still review the details of any disclosed litigation to understand its implications.
• It's advisable to have a business advisor help you conduct public record searches for any litigation that may not have been required to be disclosed.
• Asking current and former franchisees about their experiences and any disputes they may have had is a crucial due diligence step.