Explanation

The audited financial statements for Big Frog Custom T-Shirts, Inc. (Big Frog) show positive net income for 2022, 2023, and 2024, and positive stockholders' equity. The company appears solvent and profitable based on the provided statements. The financial statements do not contain any 'going concern' notes from the auditor, which is a positive indicator. This suggests the franchisor has the financial resources to support its obligations.

Potential Mitigations

• Your accountant should conduct a thorough review of the complete, audited financial statements and accompanying notes to independently verify financial health.
• Ask your accountant to analyze the franchisor's reliance on franchise fees versus ongoing royalties for its revenue.
• It is wise to have a financial advisor assess the franchisor’s cash flow and balance sheet for long-term stability trends.

Explanation

This risk was not identified in the FDD package. Item 20 data does not indicate excessively rapid growth; rather, the system has been stable to slightly shrinking in recent years. While this avoids the risks of overstretched support systems, it may raise different questions about system growth potential.

Potential Mitigations

• Discuss the franchisor's strategic growth plans for the next five years with your business advisor to understand the long-term vision.
• Ask your accountant to review the franchisor's financials to see if they are investing in franchise development and support.
• Consulting with your attorney about any development rights is important if you plan to expand.

Explanation

Big Frog began offering franchises in 2008 and its key executives have been with the company for many years, some since its inception. This indicates a well-established system with an experienced management team, not an unproven startup. Therefore, the specific risks associated with a new or unproven franchise system do not appear to be present.

Potential Mitigations

• A business advisor can help you research the company's reputation and history within the franchise industry over its many years of operation.
• Speaking with long-term franchisees can provide insight into how the system has evolved and matured over time.
• Your accountant can review historical financial statements to assess the system's long-term performance and stability.

Explanation

The custom apparel and t-shirt printing business is a well-established market, not one based on a recent or fleeting trend. While market demands can change, the core service has sustained demand from various customer segments like schools, businesses, and events. This suggests the business model has long-term viability and is not a temporary fad.

Potential Mitigations

• Engage a business advisor to research the local market for custom apparel and assess the long-term demand in your area.
• Discuss the franchisor's strategies for innovation and adaptation to changing printing technologies and fashion trends.
• Your financial advisor can help you evaluate the business model's resilience to economic shifts and competition.

Explanation

The management team described in Item 2 appears to have extensive experience. The President/CEO and COO have been with the company since 2008. Other key personnel, including a former franchisee, also have significant industry or franchise experience. This experienced leadership team suggests a lower risk of mismanagement or inadequate support due to a lack of franchising knowledge.

Potential Mitigations

• A business advisor can help you perform background research on the key executives listed in Item 2 to verify their track record.
• When speaking with current franchisees, specifically inquire about their perception of the management team's competence and support.
• Your attorney can review the FDD for any past litigation or bankruptcy involving the key executives (Items 3 & 4).

Explanation

This specific risk was not identified in the FDD package. There is no disclosure in Item 1 or elsewhere that Big Frog is owned or controlled by a private equity firm. The company appears to be privately held by its founders and management. Therefore, risks associated with short-term PE profit motives are not applicable here.

Potential Mitigations

• It is still prudent to ask your attorney to verify the ownership structure of the franchisor entity.
• A business advisor can help research the company's history for any past ownership changes or affiliations.
• Discussing the company's long-term vision with management can provide insight into their philosophy, regardless of ownership structure.

Explanation

This specific risk was not identified in the FDD package. Big Frog discloses in Item 1 that it does not have any parent entities. The financial statements provided in Item 21 are for the franchisor entity itself. Therefore, there are no concerns about undisclosed parent companies or missing financial statements from a controlling entity.

Potential Mitigations

• Your attorney should always confirm the corporate structure and ensure no undisclosed affiliated entities exert significant control.
• Your accountant should verify that the provided financial statements are for the correct legal entity offering the franchise.
• In any franchise, a business advisor can help you understand all the companies involved in the supply chain.

Explanation

This specific risk was not identified in the FDD package. Item 1 states that the franchisor has no predecessors. The business was established in 2008 and began franchising the same year under the current corporate entity. Therefore, there are no concerns related to a hidden or negative history from a prior company.

Potential Mitigations

• A business advisor can help you research the company's history to confirm its origins and lack of predecessors.
• When speaking with long-term franchisees, you can inquire about the early history of the franchise system.
• Your attorney can confirm the franchisor's corporate registration and history to ensure accuracy.