Explanation

The franchisee turnover data disclosed in Item 20 does not indicate a high rate of cessations. Low turnover can suggest a stable system and franchisee satisfaction. However, it is still crucial to understand why any franchisee leaves the system, as this can provide insight into potential operational or financial challenges you might face.

Potential Mitigations

• Speaking with a number of former franchisees from the list in Exhibit F is a crucial step to understand their reasons for leaving.
• Your business advisor can help you compare the system's growth and turnover rates to others in the supplemental education industry.
• It's wise to have your attorney review the circumstances of any terminations or non-renewals with you.

Explanation

This risk was not identified. Best Brains has been franchising since 2013 and has over 160 outlets, indicating it is an established system. For new or unproven systems, there is a higher risk of business model flaws or inadequate support infrastructure, which can jeopardize a franchisee's investment.

Potential Mitigations

• When evaluating any franchise, it's wise to have a business advisor help you assess the franchisor's history and the maturity of their systems.
• Speaking with the earliest franchisees in a system provides valuable insight into its evolution and the franchisor's learning curve.
• Your accountant should always review financials to determine if a young franchisor is sufficiently capitalized for long-term support.

Explanation

This risk was not identified. The supplemental education industry is a well-established market with sustained demand, not a short-term trend. Investing in a fad business is risky because consumer interest can decline rapidly, leaving you with a business model that is no longer viable while your contractual obligations remain.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• Evaluate the franchisor's commitment to curriculum development and innovation to ensure they adapt to changing educational standards.
• Investigating the historical performance of similar businesses through economic cycles can provide insight into sustainability.

Explanation

This risk was not identified, as the key executives listed in Item 2 have been with Best Brains since its inception in 2011. Inexperienced management can be a significant risk, as it may lead to flawed strategies, weak support systems, and a poor understanding of franchisee needs, jeopardizing the health of the entire system.

Potential Mitigations

• A thorough review of the management team's résumés in Item 2 with a business advisor is a key due diligence step.
• When possible, asking current franchisees about their direct interactions with and confidence in the leadership team is advisable.
• Legal counsel can help you understand the implications if key, experienced managers were to leave the company.

Explanation

Best Brains does not appear to be owned by a private equity firm, according to Item 1. Private equity ownership can introduce risks, as their typical focus on short-term returns may lead to decisions that benefit investors over the long-term health of the franchisees, such as cutting support or increasing fees.

Potential Mitigations

• When a franchisor is PE-owned, it is wise to have your attorney investigate the firm's track record with other franchise brands.
• A business advisor can help assess how a PE firm's typical investment timeline might affect your long-term business goals.
• Talking to franchisees who have been through a PE acquisition can provide invaluable firsthand insight.

Explanation

This specific risk was not identified, as Item 1 explicitly states the franchisor has no parent company. Failing to disclose a parent entity that guarantees obligations or controls the franchisor can be a significant issue, as it may obscure the true financial backing and stability of the franchise system you are investing in.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1, especially if the franchisor is a newly formed entity.
• If a parent company exists and provides guarantees, an accountant should review the parent's financial statements for stability.
• Understanding the full corporate structure helps a business advisor assess where ultimate control and financial responsibility lie.

Explanation

This risk was not identified, as Item 1 states the franchisor has no predecessor. When a franchisor has acquired a system from a predecessor, it's crucial to investigate the predecessor's history for issues like litigation, bankruptcy, or high franchisee turnover, as these problems can sometimes carry over to the new ownership.

Potential Mitigations

• If a predecessor is listed in Item 1, your attorney should carefully review their litigation and bankruptcy history in Items 3 and 4.
• Speaking with long-term franchisees who operated under the predecessor can provide critical historical context.
• A business advisor can help you research the predecessor's reputation and track record in the industry.

Explanation

This risk is not present, as Item 3 discloses no litigation. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or by the franchisor against franchisees, can be a major red flag. It may indicate systemic problems, an overly aggressive franchisor, or dissatisfaction within the franchise network.

Potential Mitigations

• It is crucial for your attorney to carefully analyze any disclosed litigation in Item 3 for patterns, allegations, and outcomes.
• Independent research on court dockets, with the help of your legal counsel, can sometimes provide more context than the FDD summary.
• Discussing any disclosed litigation with current and former franchisees can offer valuable perspectives.