Explanation

The audited financial statements in Exhibit B show Arthur Murray International, Inc. (AMII) is profitable, with growing revenue and significant positive net worth. While total assets and equity decreased in the most recent year, this was primarily due to a large dividend payment and cashing out an insurance policy to settle a compensation agreement. The underlying operations appear financially stable, so this risk is considered low.

Potential Mitigations

• A franchise accountant should thoroughly review the franchisor's financial statements, including all footnotes and year-over-year trends, to provide an independent assessment of financial health.
• It is wise to ask your business advisor to evaluate if the franchisor's financial model relies more on ongoing royalties than initial franchise fees for its stability.
• Legal counsel can help you understand any disclosed financial risks or guarantees from parent companies.

Explanation

The franchise outlet data provided in Item 20 does not indicate a high rate of franchisee turnover. Over the past three years, the number of franchises that were terminated, ceased operation, or were not renewed has been very low relative to the total number of operating studios. This suggests a stable franchise system from a turnover perspective.

Potential Mitigations

• Your accountant can help you calculate the precise turnover rates from Item 20 data to confirm system stability.
• Contacting former franchisees listed in Exhibit F is a crucial step your business advisor can guide you through to understand their reasons for leaving.
• Your attorney should review the definitions of termination and transfer in the FDD to ensure exits are not being miscategorized.

Explanation

This specific risk was not identified in the FDD package. Franchisors experiencing very rapid growth can sometimes struggle to provide adequate support. The outlet data in Item 20 shows a pattern of slow and steady growth for the AMII system, not the kind of explosive expansion that typically raises concerns about overstretched support resources.

Potential Mitigations

• It is prudent for your business advisor to assess the franchisor's support staff size relative to the number of franchisees to gauge their capacity for future growth.
• Engage legal counsel to ensure the franchise agreement contains specific and enforceable support commitments from the franchisor.
• Your accountant should analyze the franchisor's financials to confirm they are reinvesting sufficiently in support infrastructure.

Explanation

This risk is not present. New or unproven franchise systems can carry higher risks due to a lack of track record. However, Item 1 and Item 20 show that AMII is a very mature and established franchise system, having offered franchises since 1946. This long history provides a significant track record for you to evaluate.

Potential Mitigations

• A business advisor can help you analyze the pros and cons of joining a mature system versus an emerging one.
• Even with a mature system, consulting with your attorney to review the full FDD package remains a critical step.
• Asking existing franchisees about recent system innovations can provide insight into how the mature brand stays relevant.

Explanation

This risk was not identified in the FDD package. A fad business lacks long-term consumer demand. Arthur Murray offers dance instruction, a service with a history of sustained consumer interest for many decades. While its popularity can be influenced by cultural trends, the core business is not considered a short-term fad, suggesting a more stable market foundation.

Potential Mitigations

• To gauge long-term viability, a business advisor can help you research the history and future outlook of the dance instruction industry.
• An attorney can review the franchise agreement term and renewal options to ensure they align with a long-term business plan.
• You should still develop a business plan with your accountant that accounts for fluctuations in local consumer demand.

Explanation

This risk was not identified. FDD Item 1 clearly discloses the direct parent company, AMII Acquisition, LLC, and its controlling investment firm. Failure to disclose parent companies can obscure the true financial backing of a franchisor. In this case, the ownership structure appears to be transparently disclosed as required, so this specific risk is not present.

Potential Mitigations

• Your attorney can verify the corporate structure and confirm that all relevant parent companies and affiliates have been properly disclosed.
• If a parent company guarantees the franchisor's obligations, it's essential for your accountant to review that parent's financial statements.
• Understanding the full corporate structure with a business advisor helps in assessing where ultimate control and potential risks lie.

Explanation

This risk was not identified as the FDD appears to properly disclose the franchisor's history and predecessors. A failure to disclose such history can hide past issues like bankruptcies or litigation. AMII provides a detailed corporate history in Item 1 and appropriately notes no bankruptcies in Item 4, suggesting transparency in this area.

Potential Mitigations

• An attorney can help you review Item 1 for any mention of predecessors and cross-reference with Items 3 and 4 for any associated legal or financial troubles.
• Independent research on the company and its founders, assisted by a business advisor, can sometimes uncover historical information not present in the FDD.
• Asking long-term franchisees about their experience with any previous ownership or corporate structures can provide valuable historical context.