Explanation

The franchisee turnover rates appear to be low. Based on the data in Item 20 for the years 2022-2024, the number of terminations, non-renewals, and other cessations is small relative to the total number of operating franchises. High turnover can be a red flag for systemic problems, such as lack of profitability or poor franchisor support, but that specific risk is not indicated by the data provided in this FDD package.

Potential Mitigations

• You should still contact former franchisees listed in Exhibit B to understand their reasons for leaving the system.
• A discussion with your business advisor can help you interpret the provided Item 20 data in the context of industry norms.
• Your accountant can help you model different scenarios to understand the financial breaking points that might lead a franchisee to leave.

Explanation

Item 20 tables show steady growth, adding 17-22 franchised outlets per year. The system is expanding at a controlled pace, not one that appears dangerously rapid. The franchisor's financial statements in Item 21 do not suggest that its resources are overstretched by this growth. Therefore, the risk of support quality degrading due to excessively fast expansion does not appear to be present in this FDD package.

Potential Mitigations

• A conversation with your business advisor can help assess if the franchisor's support infrastructure is adequate for its current growth rate.
• It is wise to ask both new and established franchisees about their perception of the quality and timeliness of franchisor support.
• Your attorney should confirm that the franchisor's obligations for support are clearly defined in the Franchise Agreement.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one tied to a fleeting trend with limited long-term consumer demand. While any business has risks, the core offering of STEAM-based educational programs for children aligns with a durable and growing sector of the economy. Assessing whether a specific business concept has lasting appeal is a key part of due diligence for any prospective franchisee.

Potential Mitigations

• A business advisor can help you conduct independent market research to evaluate the long-term demand for STEAM-based children's programming.
• It would be beneficial to ask the franchisor about their plans for curriculum development and innovation to keep the concept fresh.
• Discuss the business's resilience to economic shifts and changing educational trends with current franchisees.

Explanation

This risk was not identified in the FDD package. The executives listed in Item 2 appear to have significant and relevant experience. For example, the CEO founded the concept in 2002 and has operated it since, and other officers have long tenures with the company and experience in education or operating their own franchises. Inexperienced management can be a major risk, but the backgrounds disclosed here suggest a stable and experienced leadership team.

Potential Mitigations

• It is still worthwhile to ask current franchisees about their direct experiences with the management team's competence and support.
• A review of the leadership team's background with your business advisor can provide additional context and assurance.
• Your attorney can help you formulate questions for the franchisor about management's long-term vision for the system.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that Challenge Island Global, LLC is owned by a private equity firm. This type of ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchise system. Since this ownership structure is not present, this specific risk does not apply.

Potential Mitigations

• Your attorney should always verify the ownership structure detailed in Item 1 during the due diligence process.
• Understanding the ownership of the franchisor helps in assessing its long-term strategic goals, a topic to discuss with a business advisor.
• Asking the franchisor about any potential future sale of the company can provide insight into long-term stability.

Explanation

This risk was not identified in the FDD package. Item 1 discloses affiliates, such as Kidsplorations, LLC and Challenge Island IP Holdings, LLC, but does not mention a parent company. The franchisor, Challenge Island Global, LLC, appears to be the primary entity, and its financial statements are provided. There is no indication of a thinly capitalized subsidiary relying on an undisclosed parent, which would be a significant concern.

Potential Mitigations

• Your attorney should review the corporate structure described in Item 1 to confirm there are no undisclosed parent entities with significant control.
• An accountant's review of the provided financial statements can help determine if the franchisor is adequately capitalized on its own.
• It's good practice to ask the franchisor to confirm its full ownership structure in writing.

Explanation

The FDD discloses that CI Franchise Company, LLC is a predecessor. Item 3 discloses that this predecessor was involved in a regulatory action with the Commonwealth of Virginia in 2016 for selling franchises while not properly registered, resulting in fines and a temporary injunction. While this occurred with a predecessor entity and was settled long ago, it is a part of the system's history that a prospective franchisee should be aware of.

Potential Mitigations

• Your attorney should review the details of the predecessor's past litigation to understand its relevance to the current franchisor's operations.
• Discuss with your business advisor how the current management and compliance systems may have changed since the predecessor's time.
• You can ask current, long-term franchisees if they have any knowledge or experience related to the predecessor entity.