Explanation

This risk was not identified in the FDD package. The franchisor, BAM Franchising, Inc. (BAM), began offering franchises in 2011 and has a history of over a decade with a substantial number of operating units. A new or unproven system can pose risks due to untested business models, a lack of brand recognition, and undeveloped support structures. While this specific risk is not present, evaluating a system's maturity and track record remains a key part of due diligence.

Potential Mitigations

• When evaluating any franchise, it is beneficial to have your attorney review the franchisor’s history and experience as disclosed in Item 1.
• A business advisor can help you assess the maturity and stability of a franchise system, regardless of its age.
• Speaking with the earliest-opening franchisees can provide valuable insight into the system's evolution and the franchisor's long-term performance.

Explanation

This risk was not identified. The business model, which involves the resale of new and used LEGO® brand products, is based on a well-established and enduring toy brand with a strong collector and hobbyist market. While retail trends change, the underlying product has decades of history and sustained demand, suggesting the business is not a short-term fad. A fad business carries the risk that its popularity may decline quickly, jeopardizing your long-term investment.

Potential Mitigations

• For any investment, a business advisor can help you conduct independent market research to assess the long-term consumer demand for its products or services.
• It is wise to review the franchisor's plans for innovation and adaptation to changing market trends with a financial planner.
• An accountant can help you analyze the business model’s resilience to economic shifts and its dependency on current trends.

Explanation

This risk was not identified in the FDD package. The management team detailed in Item 2 appears to have considerable relevant experience. For example, the Chief Financial Officer has prior CFO experience at another large direct-selling company, and other executives have direct experience as franchisees within this same system. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions and inadequate support for franchisees, but that does not appear to be the case here.

Potential Mitigations

• It is always prudent to have your business advisor help you vet the backgrounds and specific industry and franchising experience of the key management team.
• Speaking with current franchisees about their perception of management's competence and responsiveness is a valuable due diligence step.
• Your attorney can help you understand the roles and responsibilities of the management team as outlined in the FDD.

Explanation

This risk was not identified. The disclosures in Item 1 do not indicate that the franchisor is owned or controlled by a private equity firm. Private equity ownership can sometimes introduce risks related to short-term profit motives over the long-term health of the franchise system. Because this structure is not present, this specific risk is not a factor. You should always understand the ownership structure of a franchisor.

Potential Mitigations

• With any franchise, your attorney should review Item 1 to identify the complete ownership structure, including any parent or holding companies.
• Researching the ownership of a franchisor can provide insight into its strategic direction and financial priorities; a business advisor can assist with this.
• If PE ownership were present, speaking with franchisees about changes since the acquisition would be a critical step for your due diligence.

Explanation

This risk was not identified in the FDD. Item 1 states there are no parent companies required to be disclosed. The financial statements provided are for BAM Franchising, Inc. (BAM) and its wholly-owned subsidiaries, which appear to be the operating entities for corporate stores. Failure to disclose a parent company can obscure the true financial backing and control of a franchise system, but that does not appear to be an issue here.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 to ensure all relevant parent and affiliate entities are identified.
• If a franchisor is a subsidiary, an accountant's review of the parent company's financials, if provided or required, is crucial.
• A business advisor can help investigate the relationships between the franchisor and any affiliated companies to assess potential risks.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD states that the franchisor has not had any predecessors in the last ten years. Hidden or problematic history with a predecessor entity could introduce unforeseen risks related to litigation, bankruptcy, or franchisee relations. Since no predecessor is disclosed, this specific risk is not applicable to this franchise offering.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any mention of predecessors and their operating history.
• If a predecessor were identified, researching their public records for litigation or bankruptcy would be a prudent step for a business advisor to undertake.
• When predecessors exist, it's beneficial to speak with long-term franchisees who operated under the previous ownership.

Explanation

This risk was not identified. Item 3 discloses a single regulatory action with the Washington State Attorney General regarding 'no-poach' clauses, which the franchisor agreed to stop using. The FDD does not disclose a pattern of litigation initiated by franchisees alleging fraud, misrepresentation, or other systemic issues. A history of such lawsuits can be a major red flag indicating potential problems with the franchisor's business practices or franchisee relations.

Potential Mitigations

• Having your attorney carefully analyze the nature, frequency, and outcomes of any litigation disclosed in Item 3 is a critical due diligence step.
• A business advisor can help you investigate public records for any additional litigation not disclosed in the FDD.
• Always ask current and former franchisees about their knowledge of any disputes within the system.