Explanation

This risk was not identified in the FDD Package. Rapid system growth can strain a franchisor's ability to provide adequate support to all franchisees. If a franchisor's support infrastructure does not keep pace with its unit growth, new and existing franchisees may experience a decline in the quality of training, marketing, and operational assistance, potentially harming their business performance and the brand's reputation. This is not a concern here, as the system has seen a slight decline in unit count.

Potential Mitigations

• As a general practice, a business advisor can help you evaluate a franchisor's growth plans against their support infrastructure.
• It is wise to have your accountant review a franchisor's financials to assess if they are reinvesting in support systems.
• Your attorney can review the franchisor's contractual support obligations to ensure they are specific and enforceable.

Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a short-lived trend, which can lead to a sharp decline in customer demand after the initial hype fades. Investing in a fad franchise is risky because you may be left with long-term contractual obligations, such as royalty payments and lease commitments, for a business that is no longer viable. The business coaching industry is an established professional services sector, not typically considered a fad.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for a franchise's products or services.
• Reviewing a franchisor's history of innovation and product development in Item 11 with your business advisor can reveal their adaptability.
• An accountant can help you model the financial risks if revenue were to decline due to shifting consumer trends.

Explanation

This risk was not identified in the FDD Package. Franchisor management lacking experience in their specific industry or in franchising can be a significant liability. Inexperience can lead to poor strategic decisions, underdeveloped support systems, ineffective marketing, and an inability to guide franchisees through challenges. Item 2 of the FDD, which outlines the background of the key executives, is the primary source for assessing this risk. The management of BUJI appears to have extensive experience with the ActionCOACH system.

Potential Mitigations

• It is prudent to have a business advisor help you research the backgrounds of the key executives listed in Item 2.
• Speaking with current and former franchisees can provide direct insight into the management team's competence and effectiveness.
• Your attorney can help you understand the implications if the backgrounds of key personnel listed in Item 2 seem thin.

Explanation

This risk was not identified in the FDD Package. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy rather than the long-term health of the brand and its franchisees. This can sometimes lead to reduced support, increased fees, or pressure to cut costs in ways that harm franchisee profitability. Item 1 of the FDD should be reviewed to understand the franchisor's ownership structure.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help you research the firm's reputation and track record with other franchise brands.
• Your attorney should review assignment clauses in the Franchise Agreement to understand what happens if the system is sold.
• Discussing any changes since a PE acquisition with existing franchisees can provide valuable insights.

Explanation

This risk was not identified in the FDD Package. If a franchisor is a subsidiary of a larger parent company, FTC rules may require the disclosure of the parent company's financial statements, especially if the franchisor is newly formed or thinly capitalized, or if the parent guarantees performance. Failing to provide these can hide the true financial stability backing the franchise system. The FDD appears to properly disclose the relationship with its affiliate guarantor and provides its financials.

Potential Mitigations

• Your attorney should verify the corporate structure and ensure that financials for any relevant parent or guarantor entity are properly disclosed.
• An accountant should review any provided parent company financials to assess the overall financial health of the consolidated enterprise.
• A business advisor can help determine if the franchisor entity appears to be a thinly capitalized shell company.

Explanation

This risk was not identified in the FDD Package. A franchisor's predecessor is a company from which it acquired the rights to the franchise system. It is important to review the history of predecessors, including their litigation (Item 3), bankruptcy (Item 4), and franchisee turnover history, as this can reveal inherited problems or a legacy of poor performance within the system. This FDD clearly discloses the role of ACNA and does not indicate any problematic predecessor history.

Potential Mitigations

• An attorney should carefully review Items 1, 3, and 4 for any disclosures related to predecessors.
• If a predecessor is identified, a business advisor can assist with independent research into that company's history and reputation.
• Questioning long-term franchisees about their experience under any previous ownership can provide valuable historical context.

Explanation

This risk was not identified in the FDD Package. A pattern of litigation against the franchisor by franchisees, particularly for claims like fraud or misrepresentation as disclosed in Item 3, can be a major red flag. It may suggest systemic problems in the franchise relationship, poor support, or deceptive sales practices. While two past legal actions involving the national franchisor are disclosed, they do not appear to constitute a significant pattern of franchisee-initiated fraud claims.

Potential Mitigations

• It is always wise to have a franchise attorney review the details of any litigation disclosed in Item 3.
• A business advisor can help you research the context of any legal disputes to understand the underlying issues.
• Contacting franchisees (both current and former) can provide perspective on the franchisor's relationship with its network.