Explanation

This risk was not identified in the FDD package. The Item 20 tables show zero terminations, non-renewals, or re-acquisitions for the past three years. Generally, high franchisee turnover can be a major red flag, potentially indicating systemic problems such as a lack of profitability, poor franchisor support, or an unsustainable business model. It is a critical metric for assessing the long-term health and viability of a franchise system.

Potential Mitigations

• Your business advisor should still recommend contacting a broad range of current franchisees from the list in Exhibit E to discuss their satisfaction and profitability.
• An attorney can help you understand the definitions the franchisor uses in Item 20, as these can sometimes obscure the true rate of unit exits.
• Always have your accountant compare the number of operating outlets to the number of exits to calculate the annual turnover rate.

Explanation

This specific risk was not identified in the FDD. Item 2 shows that while the founder may have been new to franchising, the current executive team includes a President, SVP of Operations, and other key personnel with extensive prior experience at other major franchise systems like Sky Zone and Xponential Fitness. Inexperienced management can be a significant risk, as it may lead to underdeveloped systems, inadequate support, and poor strategic decisions.

Potential Mitigations

• It is still prudent to interview current franchisees about their direct experiences with the management team's competence and responsiveness.
• A business advisor can help you research the track record of the executives at their prior franchise companies.
• Your attorney should confirm that key personnel are subject to employment agreements to ensure management stability.

Explanation

This risk was not identified in the FDD package. Item 1 discloses the ownership structure, which appears to be a series of privately held LLCs, with no indication of private equity (PE) ownership. Generally, PE ownership can introduce risks related to a focus on short-term returns over the long-term health of the system, which could lead to increased fees, reduced support, or a quick sale of the company.

Potential Mitigations

• Your attorney can help you confirm the ownership structure and identify the ultimate beneficial owners to ensure there is no hidden PE involvement.
• Engaging a business advisor to research the ownership group's history and reputation is a valuable due diligence step.
• An accountant can analyze the franchisor's financial strategy for signs of aggressive, short-term profit-taking typical of some PE firms.

Explanation

This risk was not identified in the provided FDD. Item 1 of the FDD explicitly states, "We do not have any predecessors." Generally, undisclosed or problematic history with predecessor entities can hide systemic issues, past failures, or litigation that could be relevant to a prospective franchisee's decision. The franchisor's statement that none exist eliminates this particular concern.

Potential Mitigations

• Your attorney can perform independent public record searches to verify the franchisor's statement about having no predecessors.
• Asking long-tenured employees or the earliest franchisees about the history of the brand can sometimes uncover informal predecessor entities.
• A business advisor can help research the background of the founders to see if they operated a similar business under a different name prior to this.

Explanation

This risk was not identified. Item 3 discloses one lawsuit, but it is against the company's founder related to his other business interests, and importantly, The NOW Franchise, LLC is not a party to the action. The FDD reports no other litigation that would indicate a pattern of disputes with franchisees, such as claims of fraud or misrepresentation. A pattern of such litigation is a major red flag in a franchise system.

Potential Mitigations

• Your attorney can conduct an independent search of court records to verify that no other material litigation exists.
• It is still valuable to ask current and former franchisees about any disputes they may have had, even if they didn't result in litigation.
• A business advisor can help you assess the nature of any disclosed litigation and its potential impact on the franchise system.