Explanation

This specific risk was not identified in the FDD Package. Item 20 shows that as a new franchisor, there were no franchised outlets in operation during the last three years, and therefore no turnover data exists. High franchisee turnover is generally a significant red flag, as it can indicate systemic problems such as a lack of profitability, poor franchisor support, or an unsustainable business model. Careful analysis of Item 20 is crucial when evaluating an established system.

Potential Mitigations

• For any established franchise, your accountant should help you calculate the annual turnover rate from Item 20 data.
• Contacting former franchisees listed in the FDD to understand their reasons for leaving is a critical due diligence step recommended by business advisors.
• A franchise attorney can help you interpret the nuances of Item 20 data, such as the distinction between transfers and terminations.

Explanation

As a new system, The Sports Bra Franchise LLC (TSB Franchise) has no operating franchisees, but Item 20 projects four new openings in the next fiscal year. While this is not yet rapid growth, it represents the beginning of its expansion. Given the franchisor's limited operating history and stated financial weakness, this planned growth could potentially strain its ability to provide adequate support to its initial group of franchisees. Your experience may be directly affected by their capacity to manage this growth.

Potential Mitigations

• In discussions with the franchisor, inquire about their specific plans for scaling their support staff and systems to match the projected growth.
• Working with a business advisor to monitor the franchisor's growth and support capacity during your first year can provide valuable insight.
• An accountant can help you review future financial statements from the franchisor to see if their financial health improves alongside their growth.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes lead to a focus on short-term profitability and a quick exit strategy over the long-term health of the brand and its franchisees. It's a factor worth noting when it appears in an FDD, as it can influence the franchisor's culture, fee structures, and support levels.

Potential Mitigations

• When evaluating a franchise owned by a private equity firm, your business advisor should help you research the firm’s reputation and track record with other franchise systems.
• Speaking with franchisees who have been with a system before and after a private equity acquisition can provide valuable insight.
• Your attorney should carefully review assignment clauses to understand what happens if the franchisor is sold.

Explanation

This risk was not identified in the FDD Package, as Item 1 explicitly states that the franchisor has no predecessors. In cases where a franchisor has acquired the system from a predecessor, it is important to review the history of that predecessor, including any litigation or bankruptcy history. This history can provide important context about the health and stability of the system you are buying into.

Potential Mitigations

• For a system with a predecessor, your attorney should carefully examine the disclosures in Items 1, 3, and 4 for any red flags.
• Independent research into a predecessor's history through news articles or online searches can be a valuable task for your business advisor.
• Speaking with franchisees who operated under the predecessor can provide firsthand accounts of the system's history.

Explanation

This risk was not identified in the FDD Package, as Item 3 discloses no litigation. A pattern of litigation, especially claims of fraud or misrepresentation brought by other franchisees, is a major red flag. Similarly, a high number of lawsuits initiated by the franchisor against its franchisees can suggest an overly aggressive or unsupportive culture. Reviewing Item 3 is a critical step in assessing the health and integrity of a franchise relationship.

Potential Mitigations

• Your attorney should always be consulted to analyze the nature, frequency, and outcomes of any litigation disclosed in Item 3.
• For any disclosed cases, it's wise to ask your attorney if further research into court records is possible to get more context.
• Speaking with franchisees about any disclosed litigation can provide an on-the-ground perspective that complements the formal disclosure.