Explanation

The franchise system grew from 36 to 40 units in 2024, which is not unusually rapid. This specific risk was not identified in the FDD package. However, rapid growth can sometimes strain a franchisor's ability to provide quality support, training, and resources to all franchisees. It is a factor to monitor as it can impact the level of assistance you receive and the overall health of the brand.

Potential Mitigations

• Your business advisor can help you question the franchisor about their infrastructure and plans for scaling support services to match future growth.
• It is prudent to ask current franchisees about the quality and responsiveness of the support they currently receive from the corporate office.
• Having an accountant review the franchisor's financials can help assess if they are reinvesting adequately to support system growth.

Explanation

This risk was not identified in the FDD package. City Publications Franchise Group, Inc. was formed in 2002 and has been franchising since that time, indicating a long operational history. An unproven system can present risks because its business model, brand recognition, and support structures may not be well-established, potentially leading to higher failure rates for new franchisees. This franchisor, however, appears to have significant experience.

Potential Mitigations

• Even with an established system, it is beneficial to have a business advisor help you research the brand's current market position and reputation.
• Speaking with long-term franchisees can provide insight into how the system has evolved and adapted over the years.
• Your attorney should still verify the franchisor's corporate history and status.

Explanation

This risk was not identified in the FDD package. The direct mail advertising industry is a long-established business sector, not a new or fleeting trend. A fad business carries the risk of declining consumer interest over time, which could jeopardize the long-term viability of your investment even if your contractual obligations to the franchisor continue. This business model appears to be based on a sustained market need.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the direct mail advertising industry and its position relative to digital marketing.
• Discussing the business's resilience to economic shifts and changing media trends with current franchisees is a valuable exercise.
• Engaging a marketing professional could provide insights on how the business model is adapting to modern advertising ecosystems.

Explanation

This risk was not identified in the FDD package. The key executives listed in Item 2 have extensive experience with the company, with the President having been in the role since 2002. Inexperienced management can be a risk because it may lead to flawed strategies, weak support systems, and a lack of understanding of franchisee needs. The management team for this franchise appears to be well-established and experienced within this specific business.

Potential Mitigations

• When speaking with franchisees, it is still a good practice to ask about their perception of the management team's competence and vision.
• A business advisor can help you research the professional backgrounds of key executives for a more complete picture.
• Your attorney can confirm the tenure and roles of the management team as disclosed.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is owned by a private equity firm, there can be a risk that decisions are focused on short-term profits and a quick exit strategy, rather than the long-term health of the franchise system and the success of individual franchisees.

Potential Mitigations

• A business advisor can help you research the franchisor's ownership structure to confirm it is not controlled by a private equity fund.
• It is prudent to ask long-term franchisees about any past changes in ownership and the impact those changes had on the system.
• Your attorney can help verify the corporate structure and identify the ultimate beneficial owners.

Explanation

This risk was not identified in the FDD package. Item 1 discloses an affiliate, City Publications Service, Inc., and the financial statements are presented on a combined basis, which provides transparency. A failure to disclose a parent company or provide its financials when it guarantees obligations can hide financial instability or other risks from a prospective franchisee. The disclosures here appear to be structured appropriately regarding the affiliate.

Potential Mitigations

• Your accountant should confirm that the combined financial statements properly reflect the relationship between the franchisor and its affiliate.
• It is wise to have your attorney review the description of affiliates in Item 1 to ensure the structure is clear.
• Asking current franchisees about the role the affiliate plays in their business can provide practical insight.

Explanation

This risk was not identified in the FDD package, as Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag. It may suggest significant problems with the franchisor's business practices, franchisee relationships, or the viability of the system itself. The absence of such disclosed litigation is a positive indicator.

Potential Mitigations

• An attorney can still conduct independent public record searches for litigation involving the franchisor as part of thorough due diligence.
• Asking current and former franchisees about their experiences and whether they have had significant disputes with the franchisor is a prudent step.
• Your business advisor can help you gauge the overall health of franchisee-franchisor relations within the system.