Explanation

This risk was not identified. The audited financial statements for C.T. Franchising Systems, Inc. (CTFSI) in Exhibit C show a strong and improving financial position, with consistent profitability and growth in revenue and equity over the last three years. This financial stability suggests CTFSI has the resources to support its franchisees and grow the system. However, a strong financial past does not guarantee future performance.

Potential Mitigations

• An accountant should review the franchisor's complete audited financial statements, including all notes, to confirm financial health.
• Discuss the franchisor's financial stability and plans for future investment in the system with your business advisor.
• It is wise to ask your attorney about any parent company guarantees or other financial assurances, even when financials appear strong.

Explanation

This risk was not identified. According to Item 1, CTFSI has been franchising since 2006 and, as per Item 20, had 372 franchised outlets at the end of 2024. A long operating history with a substantial number of units indicates a mature and established system, which generally reduces risks associated with unproven business models or operational systems. A new system would present more uncertainty.

Potential Mitigations

• Even with an established system, it is beneficial to have a business advisor help you research its history and market reputation.
• An accountant can analyze multi-year financial and outlet data (Items 21 and 20) to confirm a stable track record.
• Consulting with long-term franchisees can provide insight into how the system has evolved over time.

Explanation

This risk was not identified. The business model, which focuses on senior relocation, downsizing, and estate sales, is tied to long-term demographic trends of an aging population. This suggests a sustainable market need rather than a short-term or fleeting fad. A business based on a fad could face a rapid decline in consumer interest, jeopardizing your investment after the trend passes.

Potential Mitigations

• It is prudent to conduct your own market research with a business advisor to confirm the long-term demand for these services in your area.
• An accountant can help you analyze if the business model is resilient to economic fluctuations, regardless of its core market.
• Ask the franchisor about their plans for future service development to ensure they are not solely reliant on one trend.

Explanation

This risk was not identified. The biographical information in Item 2 indicates that the key executives at CTFSI have extensive and long-term experience with the company and its affiliates, with many serving in leadership roles for over a decade. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• It is still worthwhile to ask current franchisees about their direct experiences with the management team's competence and accessibility.
• A business advisor can help you independently research the reputation and track record of the key executives in the franchise industry.
• During discussions with the franchisor, you should assess the professionalism and knowledge of the management team firsthand.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that CTFSI is owned by a private equity firm. Private equity ownership can sometimes introduce risks related to a focus on short-term returns over the long-term health of the system. The ownership structure appears to be a standard corporation, suggesting management's focus may be more aligned with the system's ongoing operational success.

Potential Mitigations

• You should still ask the franchisor about any potential plans to sell the company in the near future.
• A franchise attorney can help you review the assignment clauses in the Franchise Agreement to understand your rights if the company is sold.
• Consulting a business advisor to research the ownership history can provide additional peace of mind.

Explanation

This risk was not identified. Item 1 of the FDD clearly states, 'We do not have any parents or predecessors.' The franchisor, CTFSI, presents its own audited financial statements. When a franchisor is a subsidiary, the failure to disclose a parent company or its financials (if it guarantees obligations) can hide financial weaknesses and create risk for the franchisee.

Potential Mitigations

• A franchise attorney can confirm the corporate structure to ensure there are no undisclosed parent entities with significant control.
• It is good practice for your accountant to verify that the provided financial statements are for the correct legal entity offering the franchise.
• Always ask your attorney to check for any guarantees from affiliate companies that might affect the overall financial picture.

Explanation

This risk was not identified. Item 1 explicitly states, 'We do not have any parents or predecessors.' While it mentions a company with similar ownership operated a similar business previously, it is not defined as a legal predecessor from which CTFSI acquired assets. Undisclosed or problematic predecessor history could hide past failures or litigation relevant to the system's health.

Potential Mitigations

• Your franchise attorney should confirm the legal history of the franchisor and its brand to ensure no predecessor issues are overlooked.
• A business advisor can help you research the history of the brand and its founders for a more complete picture.
• Posing questions to long-tenured franchisees about the brand's history can uncover valuable information.