Explanation

This specific risk was not identified in the FDD package. Item 20 indicates that as of the end of 2024, there are no franchised outlets operating, so no franchisee turnover data is available. High turnover in an established system can be a red flag, potentially indicating issues with profitability, franchisor support, or the business model itself. Close monitoring of this data in future FDDs would be crucial for evaluating system health.

Potential Mitigations

• For any franchise system, a careful review of Item 20 tables with an accountant is essential to calculate the annual turnover rate.
• Speaking with former franchisees listed in the FDD is a crucial step your business advisor can guide you through to understand why they left.
• Your attorney should help you ask the franchisor direct questions to explain the reasons behind any significant number of terminations or non-renewals.

Explanation

This risk was not identified in the FDD package, as it is a new franchise system with zero operating franchisees as of the FDD's issuance date. In other systems, rapid growth can strain a franchisor's ability to provide adequate support, training, and site selection assistance. This can negatively affect both new and existing franchisees. A prospective franchisee should evaluate if a franchisor's support infrastructure is scaling in line with its unit growth.

Potential Mitigations

• With any rapidly growing system, it's important to ask the franchisor about their plans for scaling support infrastructure; a business advisor can help assess this.
• Engaging with a mix of new and established franchisees can provide insight into whether support levels have remained consistent during growth.
• An accountant should review the franchisor's financial statements to determine if they are reinvesting sufficiently in support systems to match expansion.

Explanation

This risk was not identified. Children's swim instruction is a well-established and enduring service industry, not typically considered a fad. A fad business is one based on a short-term trend that can lead to a rapid decline in consumer interest, leaving you with a long-term contract for a business with dwindling demand. Evaluating the long-term market need for any product or service is a key part of due diligence.

Potential Mitigations

• Before investing in any franchise, it's wise to research the long-term market trends and sustainability of the industry with a business advisor.
• Assessing the franchisor's plans for innovation and adaptation to market changes is a prudent step your business advisor can help with.
• Your financial advisor can help model the business's potential resilience to economic shifts and changing consumer tastes.

Explanation

This specific risk was not identified in the FDD. The franchisor clearly discloses its parent companies, up to the ultimate parent and guarantor, UA Holdings, LLC. The audited financial statements for this ultimate parent company are also provided in Exhibit H, which is consistent with regulatory requirements for a system where the parent's stability and guarantee are material to the franchisee's investment decision. Failure to provide such information can be a major red flag.

Potential Mitigations

• An attorney should always verify that the parent companies listed in Item 1 are fully disclosed, especially if the direct franchisor is a new or thinly capitalized entity.
• If a parent company guarantees the franchisor's performance, it is crucial that your accountant reviews the parent's financial statements.
• Your business advisor can help you understand the relationships and dependencies between the franchisor and its parent entities.

Explanation

This risk was not identified. Item 1 describes the history of the Water Wings brand, which involved converting existing corporate entities into new LLCs under the current ownership structure. While these are technically predecessors, the FDD appears to properly disclose this history. The more significant risk is not an undisclosed past but the newness of the franchising entity itself. In other cases, a failure to disclose a troubled history with a predecessor can be a major red flag.

Potential Mitigations

• A thorough review of Item 1 with your attorney is important to understand the full history of the brand and any predecessor companies.
• Independent research on any named predecessor companies can sometimes reveal issues not fully detailed in the FDD; a business advisor may assist.
• If possible, speaking with long-term employees or contacts familiar with the brand's history can provide additional context.