Explanation

This risk was not identified in the FDD package. Generally, high franchisee turnover, evidenced by a large number of terminations, non-renewals, or franchisor buybacks in Item 20, can indicate systemic problems such as low franchisee profitability or poor franchisor support. The data for CMIT Solutions, LLC (CMIT) does not show an unusually high rate of franchisee exits, suggesting a relatively stable system in this regard.

Potential Mitigations

• It is still prudent to have your accountant analyze the turnover tables in Item 20 for any concerning trends over the three-year period shown.
• A discussion with your business advisor about acceptable industry turnover rates for this sector can provide valuable context.
• Your attorney can help you formulate questions for current and former franchisees about their experiences and satisfaction with the system.

Explanation

This risk was not identified. Rapid system growth, visible in Item 20, can be a concern if a franchisor's support infrastructure cannot keep pace, leading to diminished service for franchisees. The data for CMIT does not indicate a rate of growth so rapid as to raise this concern. The system appears to be expanding at a moderate and sustainable pace.

Potential Mitigations

• Your business advisor can help you evaluate the franchisor's stated growth plans against their current support staff and resources.
• It is always a good practice to ask current franchisees about the quality and responsiveness of the support they receive.
• Reviewing the franchisor's financial statements with your accountant can help assess if they are investing in infrastructure to support future growth.

Explanation

This risk was not identified in the FDD package. CMIT has been offering franchises since 2010 and has a substantial number of outlets, as shown in Item 20. The system is well-established and is not considered new or unproven. An unproven system typically presents higher risks due to the lack of a track record, underdeveloped support, and minimal brand recognition.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you assess the franchisor's history and the maturity of the system.
• It is beneficial to ask long-tenured franchisees about the evolution of the brand and support systems over time.
• Your accountant can review multi-year financial data to confirm a history of stable operations for any mature franchisor.

Explanation

This risk is not present. The business model, providing IT services to small and medium-sized businesses, is a well-established and essential B2B service sector. It is not based on a fleeting trend or novelty. A fad business carries the risk of declining consumer interest, which could jeopardize your investment long before your contractual obligations end.

Potential Mitigations

• A business advisor can help you research the long-term market demand and competitive landscape for any industry you consider entering.
• You should always evaluate a franchisor’s plans for innovation and adaptation to ensure long-term relevance.
• Discussing the stability of customer demand with current franchisees provides valuable, real-world insight.

Explanation

This risk was not identified. Item 2 of the FDD indicates that the key management personnel have significant experience within the company and the industry. Inexperienced management can be a major risk, as it may lead to poor strategic decisions, weak support systems, and an inability to effectively guide the franchise network. CMIT's leadership appears to be stable and experienced.

Potential Mitigations

• When analyzing any FDD, have your business advisor review the backgrounds of the management team in Item 2.
• Always ask current franchisees about their perception of the management team's competence and vision for the system.
• Your attorney can help you research the public track record of key executives for any past business failures or litigation.

Explanation

This risk was not identified. The FDD properly discloses the parent company structure in Item 1 and includes the parent's consolidated financial statements in Item 21. Failing to disclose a parent company or its financials, when required, can obscure the true financial health and control structure of the franchise system, hiding significant risks from prospective franchisees.

Potential Mitigations

• Your attorney should always verify that the entities disclosed in Item 1 align with the financial statements provided in Item 21.
• If a franchisor is a subsidiary, consulting with an accountant is key to determining if the parent's financials are necessary for a complete risk assessment.
• Ensuring a parent company provides a guarantee if the franchisor entity is thinly capitalized is a protective measure your attorney can explore.

Explanation

This risk is not present, as Item 1 of the FDD states that the franchisor has no predecessors. When a franchisor has a predecessor, it is important to scrutinize the business history, including any past litigation or bankruptcies, as these could indicate inherited systemic issues. The absence of a predecessor simplifies this aspect of due diligence.

Potential Mitigations

• Your attorney should always confirm the predecessor disclosures in Item 1 against other information in Items 3 and 4.
• In any franchise review, it's wise to ask long-term franchisees about the history of the company and any previous ownership structures.
• A business advisor can assist in researching the history of a brand, especially if it was acquired from another company.

Explanation

This risk was not identified, as Item 3 of the FDD states there is no litigation required to be disclosed. A pattern of litigation, especially franchisee-initiated lawsuits alleging fraud or breach of contract, is a significant red flag. It can indicate deep-seated problems in the franchise relationship or the business model. The absence of such disclosures is a positive sign.

Potential Mitigations

• Even with no disclosed litigation, asking current and former franchisees about disputes or disagreements can provide valuable insight.
• Your attorney can conduct independent public record searches to see if any litigation exists that was not required to be disclosed.
• It is a good practice to understand the dispute resolution process outlined in Item 17 with your attorney.