Explanation

This risk was not identified. The audited financial statements provided for Aqua-Tots Swim School Holding LLC (Aqua-Tots LLC) show a financially healthy and stable company. For the year ended December 31, 2024, the company reported significant net income and maintained a strong balance sheet with positive equity and sufficient liquidity. Strong financials suggest the franchisor is capable of supporting its system and franchisees.

Potential Mitigations

• An accountant should review the provided audited financials, including the notes, to confirm the company's financial health and stability.
• Discuss the franchisor's financial strategy and plans for reinvesting in the brand with your business advisor.
• Ask your attorney about any state-specific financial assurance requirements, such as bonds or escrow, even if the franchisor appears stable.

Explanation

This risk was not identified in the disclosure documents. A review of the franchisee turnover data in Item 20 for the past three years indicates a stable system with very low rates of termination, non-renewal, and cessation of operations relative to the total number of franchised outlets. This suggests a generally positive relationship between the franchisor and its franchisees.

Potential Mitigations

• It is still advisable to contact a diverse sample of current and former franchisees from the list in Exhibit G to discuss their experiences.
• A discussion with your business advisor about industry-average turnover rates can provide additional context for these numbers.
• Your attorney can help you formulate questions for franchisees regarding their satisfaction with the system and franchisor support.

Explanation

The franchise system is experiencing steady growth, expanding from 108 to 132 total outlets over the past two years. While rapid growth can sometimes strain a franchisor's support systems, Aqua-Tots LLC's strong financial performance, as detailed in its audited statements, suggests it has the resources to manage this expansion. The risk of support dilution appears low given their profitability and experience.

Potential Mitigations

• In discussions with current franchisees, ask specifically if they feel the quality of franchisor support has been maintained during this growth phase.
• A business advisor can help you evaluate if the franchisor's support infrastructure, as described in Item 11, is scalable.
• Have your accountant review the financials to confirm that resources are being allocated to support as well as expansion.

Explanation

This risk was not identified. The FDD indicates that Aqua-Tots LLC has been offering franchises since 2007 and has grown to over 130 locations. The management team detailed in Item 2 possesses many years of experience within the company and the swim school industry. This demonstrates a well-established and proven franchise system, not a new or untested venture.

Potential Mitigations

• Engaging a business advisor to review the franchisor's history and market position can confirm the system's maturity.
• You should still verify the system's strength by speaking with a range of franchisees, from the newest to the most established.
• Your attorney can review the complete history presented in the FDD to ensure there are no hidden issues with predecessors or affiliates.

Explanation

This risk is not present. The business model, offering swim instruction for children, is a long-standing and established service industry based on a fundamental life skill. It is not dependent on short-term trends or fads, suggesting a stable market demand. The company's own history, dating back decades through its affiliate, supports this conclusion of long-term viability.

Potential Mitigations

• A discussion with your business advisor can help you assess the long-term demand for these services in your specific local market.
• Research local competition to understand the existing market landscape and demand.
• Review the franchisor's plans for system evolution and curriculum updates with their team to gauge their focus on long-term relevance.

Explanation

This risk was not identified. The executive biographies in Item 2 detail a management team with extensive, long-term experience directly with Aqua-Tots LLC and in the swim school industry. Several key leaders have been with the company for over a decade, indicating a stable and knowledgeable leadership team that understands both the business operations and the franchise model.

Potential Mitigations

• When speaking with the management team, you can still ask about their specific experience in supporting franchisees through various economic cycles.
• Discuss the management team's background and strategic vision with your business advisor.
• In your calls with existing franchisees, inquire about their direct experiences with the leadership team's accessibility and support.

Explanation

This risk does not appear to be present in the FDD. Item 1, which details the franchisor and any parent companies, does not indicate that Aqua-Tots LLC is owned or controlled by a private equity firm. The long tenure of the management team suggests stable, founder-led or internal ownership rather than a PE-backed structure focused on short-term exits.

Potential Mitigations

• Your attorney can conduct a corporate records search to confirm the ownership structure of the franchisor entity.
• Ask the franchisor directly about their long-term ownership plans and vision for the company.
• A business advisor can help you understand the typical differences between founder-led and PE-owned franchise systems.

Explanation

This risk was not identified. Item 1 of the FDD clearly states, "Aqua-Tots Swim School Holding LLC has no parent companies." This transparent statement indicates that the entity you are contracting with is the top-level entity for the franchise system, and there are no undisclosed parent organizations whose financial health or influence you would need to assess separately.

Potential Mitigations

• Your attorney can verify the franchisor's corporate structure to confirm the accuracy of the FDD's statement.
• An accountant should still review the provided financials for the franchisor entity itself to ensure it is adequately capitalized.
• In discussions with the franchisor, confirm that there are no other affiliated entities that will have a significant role in your franchise relationship.

Explanation

This risk was not identified. FDD Item 1 states that Aqua-Tots LLC has no predecessors. While it mentions an affiliate that was the original operating entity, the FDD does not disclose any negative history, such as litigation or bankruptcy, associated with that entity. The franchise system's lineage appears straightforward and is presented without any apparent historical issues.

Potential Mitigations

• Your attorney should still review the information on all affiliated companies mentioned in Item 1 for any potential risks.
• Ask long-tenured franchisees about the company's history and evolution to gain additional perspective.
• A business advisor can help you research the public records of any affiliated entities for further due diligence.

Explanation

This risk was not identified in the FDD. Item 3, which requires the disclosure of material litigation, states that there is no litigation that needs to be disclosed. This is a significant positive factor, as it suggests the franchisor does not have a history of major legal disputes with franchisees, regulators, or other parties concerning issues like fraud or breach of contract.

Potential Mitigations

• Your attorney can perform an independent search of public court records to verify the absence of significant litigation.
• During your due diligence calls, ask current franchisees about their awareness of any formal or informal disputes within the system.
• A discussion with your business advisor can help contextualize the importance of a clean litigation history in a franchise system.