Explanation

This risk was not identified. The audited financial statements for BAB Systems, Inc. (BAB) in Exhibit P show consistent profitability for the last three fiscal years, with positive net income and a healthy balance sheet. The independent auditor's report is unqualified and does not contain a 'going concern' note, suggesting the franchisor is financially stable and capable of supporting its system and obligations.

Potential Mitigations

• An accountant's review of the financial statements, including footnotes and historical trends, is a crucial step in diligence.
• It is prudent to discuss the franchisor's financial health and their plans for future investment in the brand with your business advisor.
• A review of the complete FDD package with your attorney can help you understand all financial aspects of the franchise relationship.

Explanation

This risk was not identified in the FDD. Item 20 data shows the franchise system is mature and slightly shrinking, not undergoing rapid expansion. Rapid growth can be a risk because a franchisor's support systems, such as training, site selection, and operational assistance, may not keep pace with a fast-growing number of new franchisees, potentially diminishing the quality of support for everyone in the system.

Potential Mitigations

• During due diligence, it's wise to ask a franchisor about their growth plans and the infrastructure in place to support it.
• A business advisor can help evaluate if a franchisor's support capabilities align with its expansion strategy.
• Speaking with franchisees who opened at different stages of growth can provide perspective on the consistency of franchisor support.

Explanation

This risk was not identified. The disclosures in Item 1 indicate that BAB Systems, Inc. (BAB) has been franchising since 1993, making it a well-established and mature system. A new or unproven system carries higher risks because it may lack a track record of franchisee success, have underdeveloped operational procedures, and offer minimal brand recognition, all of which can affect your potential for success.

Potential Mitigations

• When evaluating any franchise, it's important for a business advisor to help you assess the franchisor’s history and the maturity of its brand.
• In any franchise investment, consulting with your accountant to review the franchisor's financial statements for signs of stability is a crucial step.
• Your attorney can help you understand the legal history and corporate structure of the franchisor as disclosed in the FDD.

Explanation

This risk does not appear to be present. The franchise operates in the bagel, sandwich, and coffee shop sector, which is a long-established and mainstream segment of the food service industry. Unlike businesses based on new trends, this concept relies on products with a history of sustained consumer demand, reducing the risk that your investment could be tied to a short-lived fad.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• When creating financial projections, your accountant should consider the stability and cyclical nature of the industry.
• Discussing the brand's strategies for innovation and staying relevant with the franchisor is a valuable part of due diligence.

Explanation

This risk was not identified. The business biographies in Item 2 show that the key executives of BAB Systems, Inc. (BAB) have extensive and long-term experience with the company, with most having been in their roles since the 1990s or early 2000s. This indicates a stable and experienced management team, which is generally a positive factor for a franchise system.

Potential Mitigations

• It is always a good practice to research the backgrounds of the key management team of any franchise you are considering.
• Speaking with current franchisees about their interactions with and perception of the management team can provide valuable insights.
• A business advisor can help you assess how the management team's experience might impact the franchise's direction and support.

Explanation

This risk was not identified. The disclosures in Item 1 do not indicate that BAB Systems, Inc. (BAB) is owned by a private equity firm. Private equity ownership can sometimes pose a risk if the firm prioritizes short-term investor returns over the long-term health of the franchise system, potentially leading to cuts in support or increases in fees. The FDD shows a more traditional corporate structure.

Potential Mitigations

• Understanding the ownership structure of a franchisor is a key piece of due diligence that your attorney can help you investigate.
• If a franchisor is owned by a private equity firm, a business advisor can help you research that firm's track record with other franchise brands.
• It is prudent to ask current franchisees if they have noticed any changes in franchisor behavior following an ownership change.

Explanation

This risk was not identified. Item 1 discloses the parent company, BAB, Inc., and the franchisor's audited financial statements are provided in Exhibit P. There is no indication that required parent company financials have been withheld. In some cases, a franchisor might be a thinly capitalized subsidiary, making the financial health of its parent company critical. Failure to disclose a parent or its financials when required can obscure significant risks about the system's true stability.

Potential Mitigations

• Your accountant should always verify that the provided financial statements are for the correct legal entity and are properly audited.
• When a parent company guarantees the franchisor's obligations, your attorney should ensure the parent's financials are provided if required.
• Always ask your attorney to review the corporate structure disclosed in Item 1 for clarity and completeness.

Explanation

This risk was not identified. Item 1 of the FDD states that BAB Systems, Inc. (BAB) has no predecessors that require disclosure. When a franchisor has a predecessor, it is important to review that entity's history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate underlying problems that may have been carried over to the current company.

Potential Mitigations

• A thorough review of Item 1 with your attorney is crucial to understand the complete history of the franchisor entity.
• If a predecessor is disclosed, your attorney can help you investigate its public records for any red flags.
• A business advisor can assist in researching the history and reputation of any predecessor companies.

Explanation

This risk was not identified, as Item 3 states, "No litigation is required to be disclosed in this Item." A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Likewise, a high number of lawsuits brought by the franchisor against franchisees might suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It is critical to have your attorney carefully review the litigation disclosures in any FDD.
• Even if no litigation is disclosed, a business advisor might recommend searching public court records for any legal disputes involving the franchisor.
• Asking current and former franchisees about their experiences with disputes can provide valuable context beyond the FDD disclosures.