Explanation

This risk was not identified. The FDD reports no franchised outlets have been established, so there is no history of franchisee terminations, non-renewals, or other cessations. While this means no negative turnover trends exist, it also highlights the system's lack of a performance track record with independent franchisees. High turnover in other systems can indicate franchisee dissatisfaction or lack of profitability.

Potential Mitigations

• Your business advisor should help you perform enhanced due diligence on the affiliate's company-owned locations to gauge operational success.
• It is important to discuss the lack of franchisee history and its inherent risks with your franchise attorney.
• An accountant can assist in creating financial projections that account for the higher risks of being one of the first franchisees.

Explanation

This risk was not identified in the FDD package. The system is not experiencing rapid growth; rather, it is a new franchise with no operational franchised outlets and a stable number of six affiliate-owned locations. Rapid growth in other franchise systems can sometimes strain a franchisor's ability to provide adequate franchisee support.

Potential Mitigations

• Your business advisor can help you analyze the franchisor's overall business plan for future growth and support infrastructure.
• It is wise to discuss the potential future growth trajectory and its implications with your attorney.
• An accountant can help you model different growth scenarios and their potential impact on system resources.

Explanation

This risk was not identified. The business model, a 24-hour key-card fitness center, is part of an established industry segment that has existed for many years. It does not appear to be based on a short-term trend or novelty. Investing in a fad business is risky because customer interest can disappear, leaving you with a long-term contract for an obsolete concept.

Potential Mitigations

• A business advisor can help you research the long-term trends and competitive landscape of the fitness industry in your specific market.
• Review the franchisor's plans for system evolution and staying competitive with your attorney.
• Your accountant can help model the financial resilience of this business type against economic fluctuations.

Explanation

This risk was not identified in the FDD package. The franchisor, KCDC, appears to be privately owned by its founder, Craig J. Annis, with no indication of private equity involvement. Ownership by a private equity firm can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchise system.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor and its affiliates.
• It's a good practice to research the background of the ownership, whatever its structure, with the help of a business advisor.
• Understanding the franchisor's long-term vision for the brand is a key discussion to have with your attorney.

Explanation

This risk was not identified. Item 1 of the FDD explicitly states that the franchisor has no parent or predecessor. A predecessor is a company from which the franchisor acquired the major portion of its assets, and a history of predecessors can sometimes introduce risks if that history is negative or not fully disclosed.

Potential Mitigations

• Your attorney can help confirm the franchisor's corporate history and ensure there are no undisclosed predecessor entities.
• Conducting an independent background check on the franchisor and its principals is a wise step, which a business advisor can assist with.
• You should ask existing franchisees (if any become available) about their understanding of the company's history.

Explanation

This risk was not identified in the FDD package. Item 3 discloses that there is no litigation required to be reported. A pattern of litigation, particularly claims of fraud or misrepresentation brought by other franchisees, can be a major red flag indicating systemic problems within a franchise.

Potential Mitigations

• It is still advisable to have your attorney conduct an independent public records search for litigation involving the franchisor or its principals.
• A business advisor can help you perform due diligence by searching online for franchisee complaints or news articles.
• Always ask current and former franchisees about any disputes they have had with the franchisor, whether or not they resulted in formal litigation.