Explanation

This risk was not identified in the FDD package. Item 20 data indicates the franchise system is shrinking or stagnant, not undergoing rapid growth that might strain support services. Rapid growth can be a risk because a franchisor's support infrastructure may not keep pace with the needs of a quickly expanding franchisee base, potentially leading to inadequate training, field support, and other assistance for which you pay royalties.

Potential Mitigations

• A business advisor can help you evaluate whether the system's current size and growth rate align with your investment goals.
• Understanding the franchisor's future growth plans should be part of your discussion with your franchise attorney.
• An accountant can help assess if the franchisor's financial capacity could support future growth if their plans change.

Explanation

This risk was not identified. The business of purchasing accounts receivable from real estate sales commissions is a niche but established financial service. It is not dependent on a short-term trend or novelty. The long-term viability of this business is tied to the real estate market cycle rather than a temporary fad, which can provide a more stable, albeit cyclical, demand for your services.

Potential Mitigations

• A discussion with your business advisor can help you understand the long-term trends and cycles in the real estate and financial services industries.
• Your accountant can assist in creating financial models that account for potential fluctuations in the real estate market.
• Seeking legal counsel regarding the regulatory landscape for factoring businesses is advisable for long-term planning.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executive, John L. Stedman, has been with the company since its formation in 1994 and has been involved in the same type of business with an affiliate since 1992. This extensive and long-term experience in both the specific industry and in franchising is a positive factor, suggesting a deep understanding of the business operations.

Potential Mitigations

• It is still wise to discuss the management team's background and strategic vision with a business advisor.
• Your franchise attorney can help you formulate questions for the franchisor regarding their long-term plans for the system.
• Engaging with current franchisees can provide insight into their perception of the management team's effectiveness.

Explanation

This risk does not appear to be present. Item 1 of the FDD, which details the franchisor and any parent companies, does not indicate that the franchisor is owned by a private equity firm. Ownership by private equity can sometimes introduce risks related to short-term profit motives over the long-term health of the franchise system, so its absence can be a neutral or positive factor.

Potential Mitigations

• Your attorney can help you verify the corporate ownership structure of the franchisor.
• A business advisor can discuss the potential pros and cons of different ownership structures in franchise systems.
• During franchisee interviews, you can inquire if there have been any recent ownership changes or rumors of a sale.

Explanation

This risk was not identified. Item 1 of the FDD clearly states, "We have no parents, predecessors or affiliates required to be disclosed in this Item." This indicates the franchisor entity presented is the top-level entity in the franchise structure, and its financial statements in Item 21 are meant to stand on their own without reliance on an undisclosed parent company.

Potential Mitigations

• Verifying the franchisor's corporate structure and standing with the help of your attorney is a good due diligence step.
• Your accountant's review of the provided financial statements will help confirm if the franchisor appears to be a standalone, sufficiently capitalized entity.
• A business advisor can help you assess the risks and benefits of dealing with a franchisor that is not part of a larger corporate family.

Explanation

This risk does not appear to be present. Item 1 of the FDD states, "We have no parents, predecessors or affiliates required to be disclosed in this Item." This indicates there is no predecessor history that requires disclosure under franchise law, meaning you are not inheriting potential risks from a prior operator of the system.

Potential Mitigations

• Your franchise attorney can confirm that the disclosures in Item 1 meet legal requirements.
• Asking long-term franchisees about the history of the brand can provide additional context, which your business advisor can help you assess.
• Independent research on the brand's history can sometimes uncover information not required to be in the FDD.

Explanation

This risk was not identified in the FDD package. Item 3, which requires disclosure of material litigation, states, "No litigation is required to be disclosed in this Item." The absence of a pattern of litigation against the franchisor, particularly claims of fraud or breach of contract from other franchisees, is a positive indicator and reduces a key area of risk.

Potential Mitigations

• Your attorney can conduct independent public record searches to verify the absence of significant litigation.
• A business advisor can help you formulate questions for current and former franchisees about any disputes they may have had.
• It is still prudent to have your attorney review the entire FDD for any terms that could commonly lead to disputes.