Explanation

The franchisor, PB Franchising SPV, LLC (PB Franchising), is guaranteed by its parent, XPOF Assetco, LLC, which has positive net worth. However, the auditor's report includes an "Emphasis of Matter" paragraph noting significant related-party transactions that may affect the financials. Crucially, the parent's financial notes state that substantially all of the guarantor's assets are pledged as collateral for the ultimate parent's (Xponential Fitness, Inc.) debt, creating significant structural risk for the franchise system.

Potential Mitigations

• Your accountant must review the consolidated financial statements, paying close attention to the notes regarding related-party transactions and debt obligations.
• It is critical to have your attorney assess the implications of the franchisor's assets being used as collateral for its parent company's debt.
• Discuss the overall financial structure and its potential impact on franchisor support with a qualified business advisor.

Explanation

Item 20 data reveals a significant level of franchisee turnover. In 2023, 41 franchised studios left the system through termination, cessation, or reacquisition, alongside 98 transfers to new owners. In 2024, 23 units left the system and another 55 were transferred. Consistently high numbers of cessations and transfers can be an indicator of potential franchisee unprofitability, dissatisfaction, or other systemic issues that may not be immediately apparent from net growth figures.

Potential Mitigations

• An accountant can help you calculate the effective annual turnover rates and compare them against available industry benchmarks.
• It is highly recommended to contact a significant number of former franchisees from the lists in Item 20 to understand their reasons for leaving.
• Your attorney should help you formulate questions for former franchisees regarding their operational and financial experiences.

Explanation

The franchisor is part of a large, publicly-traded company, Xponential Fitness, Inc. This structure can lead to decisions that prioritize short-term public market performance and shareholder value over the long-term health of individual franchisees. Your franchise agreement can also be assigned to a new owner if the system is sold, potentially changing the nature of your business relationship.

Potential Mitigations

• A business advisor can help you research the parent company's reputation and its track record across its portfolio of franchise brands.
• Understanding the potential impacts of being part of a publicly-traded system requires a detailed discussion with your attorney.
• Your accountant can review the parent company's public financial filings to assess its overall business strategy and health.

Explanation

The franchisor's parent company, Xponential Fitness, Inc., along with its affiliated brands (which share management with your franchisor), entered into a Consent Order with California regulators. The order was issued to resolve an investigation that found material misrepresentations and omissions in past disclosure documents. This regulatory history concerning the franchisor's affiliated management raises significant concerns about the culture of disclosure and transparency.

Potential Mitigations

• Your attorney must review the details of the Consent Order disclosed in Item 3 and explain its potential implications for you.
• Given this history, applying extra scrutiny to all representations made by the franchisor is a wise precaution to take with your business advisor.
• Your accountant should be aware of this history when evaluating the reliability of the financial information provided.

Explanation

Item 3 discloses a significant pattern of litigation involving the franchisor's parent company, Xponential Fitness, Inc., and its affiliates. This includes multiple lawsuits from franchisees of other Xponential brands alleging fraud and misrepresentation, securities class-action lawsuits from shareholders, and a regulatory action by the state of California for disclosure violations. This extensive litigation history indicates a high level of legal and reputational risk for the overall system.

Potential Mitigations

• A thorough review of all litigation disclosed in Item 3 with your franchise attorney is essential to understand the potential risks.
• Discussing the potential impact of this litigation on brand reputation and the franchisor's financial resources with a business advisor is prudent.
• You should consider this pattern of disputes as a significant factor in your overall risk assessment.