Explanation

This risk was not identified in the FDD Package. Item 20 shows no history of franchisee turnover because VP Holdings is a new franchisor with no operating franchisees to date. High turnover is a significant red flag in established systems, as it may signal underlying problems with profitability, support, or the business model itself. A prospective franchisee should monitor this data in future FDDs.

Potential Mitigations

• Your business advisor should explain how to calculate and interpret franchisee turnover rates for future due diligence.
• An accountant can help you understand the potential financial implications if a system shows high franchisee failure rates in the future.
• When evaluating other franchise opportunities, your attorney can help you formulate questions for former franchisees about why they left the system.

Explanation

This risk was not identified in the FDD Package, as Item 20 indicates no franchises have opened yet. Rapid system growth can become a risk if a franchisor's support infrastructure, such as training and field support staff, does not expand in tandem with the number of new units. This can lead to a decline in the quality of support for all franchisees, impacting their operational success.

Potential Mitigations

• Engaging a business advisor can help you assess a franchisor's capacity to manage growth by reviewing their staffing and support systems.
• Your accountant should analyze a franchisor's financials to determine if they are reinvesting in support infrastructure.
• Should you consider a rapidly growing system in the future, your attorney can help you question them about their plans for scaling support.

Explanation

This risk was not identified in the FDD Package. The business, a fitness studio, operates in a well-established and mature industry, not one based on a short-term trend or fad. A fad business carries the risk that consumer interest could decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations long after the trend has passed. This concept appears to be grounded in a more stable market.

Potential Mitigations

• For any business concept, it is wise to have a business advisor help you research its long-term market demand and sustainability.
• Your accountant can assist in modeling the financial impact of potential shifts in consumer trends on your investment.
• Legal counsel can review the franchise agreement to determine your obligations if the business becomes unviable due to market changes.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. When PE firms own a franchise, their typical focus on short-term returns and a planned exit strategy can sometimes lead to decisions that may not align with the long-term health of the franchisees, such as cutting support services or increasing fees.

Potential Mitigations

• Your attorney can help you research the ownership structure of any franchisor you consider to identify potential private equity involvement.
• If a franchisor is PE-backed, a business advisor can help you research the firm's reputation and track record with other franchise brands.
• Speaking with franchisees in other systems owned by the same PE firm can provide valuable insight.

Explanation

This risk was not identified in the FDD Package. Item 1 states that the franchisor has no parent company. When a franchisor is a subsidiary, especially a new or thinly capitalized one, the financial strength and stability of its parent company become crucial. Without the parent's financial statements, a prospective franchisee may have an incomplete picture of the overall financial health and backing of the franchise system.

Potential Mitigations

• Your attorney should always confirm the corporate structure outlined in Item 1 to ensure all parent entities are disclosed.
• If a parent company exists and provides guarantees, an accountant should review its financial statements for stability.
• A business advisor can help you understand the potential influence a parent company might have on the franchisor's operations.

Explanation

This risk was not identified in the FDD Package, as Item 1 states there is no predecessor. A predecessor is a company from which the franchisor acquired the main assets of the business. Full disclosure of a predecessor's history, including any litigation or bankruptcy, is important because it can reveal inherited issues or a troubled past for the franchise system that might not be apparent when looking only at the current franchisor.

Potential Mitigations

• When reviewing an FDD, your attorney should carefully check Item 1 for any mention of predecessors.
• If a predecessor is identified, a business advisor can help you research its history and reputation.
• An accountant can analyze how the acquisition from a predecessor may have impacted the current franchisor's financial position.

Explanation

This risk was not identified in the FDD Package. Item 3 discloses no material litigation involving the franchisor. A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may suggest systemic problems within the franchise, dissatisfaction among franchisees, or questionable practices by the franchisor, warranting careful investigation.

Potential Mitigations

• It is crucial to have your attorney carefully analyze any litigation disclosed in Item 3 of an FDD.
• A business advisor can help you understand the potential operational impacts of ongoing legal disputes on the franchisor.
• If litigation is present, speaking with the franchisees involved can provide valuable, firsthand insight into the nature of the disputes.