Explanation

This risk was not identified. The audited financial statements in Item 21 indicate American Poolplayers Association, Inc. (APA) is consistently profitable with a strong balance sheet and positive net worth. A franchisor's financial stability is important as it suggests it can support franchisees and invest in the brand.

Potential Mitigations

• Your accountant should always perform a thorough review of the franchisor’s financial statements, including footnotes, to assess its long-term health.
• Engaging a business advisor to evaluate the franchisor's business model can provide insight into its sustainability.
• An attorney can help you understand any disclosed financial risks and their potential implications for your investment.

Explanation

This risk was not identified. The franchisee turnover rates disclosed in Item 20 appear to be very low for a system of this size, which suggests a stable franchise network. High turnover can be a warning sign of systemic problems, such as franchisee unprofitability or poor franchisor support.

Potential Mitigations

• Always cross-reference Item 20 data with direct feedback by contacting current and former franchisees from the provided lists.
• Your business advisor can help you analyze turnover rates in the context of the specific industry and the franchise system's age.
• Consulting with an attorney is wise to understand the potential reasons behind any disclosed franchisee exits.

Explanation

This risk was not identified. Item 20 data shows steady, manageable growth in the number of franchised outlets over the past three years, not the kind of explosive growth that might strain support systems. Rapid expansion can sometimes risk diluting the quality of franchisor support for all franchisees.

Potential Mitigations

• It is still prudent to ask the franchisor about their future growth plans and how they intend to scale support systems.
• Discuss the quality and responsiveness of franchisor support with existing franchisees, with help from your business advisor.
• Your accountant can review financial statements to assess if the franchisor is investing adequately in support infrastructure.

Explanation

This risk was not identified. APA was founded in 1981 and has been franchising since 1982, indicating a long-established and proven franchise system. A new or unproven system can present higher risks due to a lack of brand recognition and untested operational procedures.

Potential Mitigations

• When evaluating any franchise, it is beneficial to have a business advisor assess the franchisor's history and track record.
• An attorney can help you review the experience of the management team as disclosed in Item 2.
• Speaking with long-term franchisees can provide valuable insight into the system's evolution and stability.

Explanation

This risk was not identified. The business of operating amateur pool leagues has a long history of consumer demand and is not tied to a recent, fleeting trend. A business based on a fad carries a high risk of failure once consumer interest wanes, even if your contractual obligations continue.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term demand for any franchise's products or services.
• You should evaluate the franchisor's plans for innovation and adaptation to stay relevant in the market.
• Your accountant can help you model the financial impact of potential shifts in consumer trends.

Explanation

Item 2 indicates that the key executives and directors have extensive, long-term experience with APA, most having been with the company for decades in various roles. This level of experience generally reduces the risk associated with inexperienced management, which can lead to poor support and strategic errors.

Potential Mitigations

• It is always a good practice to research the backgrounds of the key management team members listed in Item 2.
• Discussing the quality and effectiveness of the management team with current franchisees is a key part of due diligence.
• A business advisor can help you assess whether the management team's experience aligns with the company's strategic direction.

Explanation

This risk was not identified. Item 1 indicates that APA is a privately held corporation, not owned by a private equity firm. Private equity ownership can sometimes introduce a focus on short-term returns, which may not always align with the long-term health of franchisees.

Potential Mitigations

• Your attorney should always help you understand the ownership structure of the franchisor as disclosed in Item 1.
• If a franchisor is owned by a private equity firm, a business advisor can help you research the firm's track record with other franchise systems.
• It's wise to ask current franchisees about any changes in the system following an acquisition.

Explanation

This risk was not identified. Item 1 clearly identifies APA's corporate structure and does not indicate a parent company structure that would obscure the true financial backing of the system. In some franchises, a thinly capitalized subsidiary might be the franchisor, making the parent company's financial health critical information.

Potential Mitigations

• An attorney can help you verify the franchisor's corporate structure and identify any parent companies.
• If a parent company exists and guarantees the franchisor's obligations, your accountant should insist on reviewing its financial statements.
• Understanding the full corporate structure is vital to assessing the true source of financial and operational support.

Explanation

This risk was not identified. Item 1 states that the franchisor has no predecessors. In cases where a franchisor has acquired a business, it is important to understand the history of that predecessor, as it could reveal past issues with the system, such as litigation or high franchisee failure rates.

Potential Mitigations

• Your attorney should carefully review Item 1 for any mention of predecessors.
• If a predecessor exists, a business advisor can assist in researching its history and reputation.
• Inquiring with long-term franchisees about their experience under any previous ownership can provide valuable context.

Explanation

This risk was not identified. Item 3 discloses only one past lawsuit, which appears to be an isolated incident rather than a pattern of litigation against the franchisor. A pattern of lawsuits, especially those alleging fraud or misrepresentation, can be a significant red flag about a franchisor's practices.

Potential Mitigations

• Your attorney should always carefully review the nature and outcomes of all litigation disclosed in Item 3.
• It is a good practice to ask existing franchisees about their awareness of any legal disputes within the system.
• A high volume of franchisor-initiated lawsuits against franchisees can also be a warning sign, which your attorney can help you assess.