Explanation

The audited financial statements for Coast to Coast Engineering Services, Inc. (Criterium) show profitability in 2023 and 2024, with positive working capital and stockholder equity. A net loss was recorded in 2022, but the overall financial trend appears positive and stable. The company's reliance on contract and project revenues over franchise fees for the majority of its income suggests a stable operational base beyond just selling franchises. No significant financial instability was identified.

Potential Mitigations

• An experienced franchise accountant should review the complete, audited financial statements, including all footnotes, to confirm the company's financial health.
• Discuss the 2022 net loss and subsequent recovery with your accountant to understand its cause and the company's resilience.
• Your accountant can help you assess the balance between operational revenue and franchise-derived revenue to gauge the franchisor's long-term focus.

Explanation

This risk was not identified in the FDD package. Item 20 data indicates slow and stable growth, with the number of franchised outlets remaining consistent over the past three years. Rapid expansion that could strain support systems does not appear to be a current risk. Maintaining quality support during any future growth phases is a key factor for franchisee success.

Potential Mitigations

• It is prudent to discuss the franchisor's future growth plans and their strategy for scaling support systems with your business advisor.
• Speaking with a range of franchisees, both new and tenured, can provide insight into the current quality of franchisor support.
• Your accountant can review the franchisor's financials to assess if they have the resources to support potential future growth.

Explanation

This risk was not identified. Criterium and its predecessor have been in the engineering inspection business since 1957 and have been franchising since 1989. Item 2 shows an experienced management team, and Item 21 financials indicate a stable, profitable company. The system is well-established with a long operational history. Therefore, the risks associated with a new or unproven franchise system do not appear to apply.

Potential Mitigations

• A business advisor can still help you evaluate the franchisor's long history and how it has adapted to market changes over time.
• It is wise to review the management team's biographies in Item 2 with your attorney to understand their specific expertise.
• Verifying the system's long-term health by speaking with long-tenured franchisees is a recommended due diligence step.

Explanation

This risk was not identified. The business of providing consulting engineering and inspection services for buildings is based on a fundamental and ongoing need for property assessment, not a short-term trend. The franchisor has a long operating history dating back to 1957, which suggests a sustainable business model rather than a fad. Long-term viability depends on factors like market demand and competition, but the core service appears stable.

Potential Mitigations

• A business advisor can help you assess the long-term demand for engineering inspection services in your specific market.
• It may be beneficial to discuss the company’s history of innovation and adaptation with the franchisor.
• Researching local market competition and economic factors with a business consultant will provide a clearer picture of demand.

Explanation

This risk was not identified in the FDD package. Item 2 details a management team with significant and relevant experience. The President has executive experience at Fortune 500 companies, the founder has over 50 years of experience in consulting engineering, and other executives have decades of experience in engineering, business development, and operations. This level of experience generally indicates a well-supported and professionally managed franchise system.

Potential Mitigations

• It is still valuable to discuss the management team's specific roles and their direct impact on franchisee support with current franchisees.
• A business advisor can help you evaluate how the executive team's background aligns with the company's strategic direction.
• Your attorney can review the information in Item 2 to confirm there are no disclosed issues related to management's history.

Explanation

This risk was not identified. Item 1 and the accompanying financial statements in Item 21 do not indicate that the franchisor is owned by a private equity firm. The company appears to be privately held by individuals involved in its operation. Therefore, risks typically associated with private equity ownership, such as a focus on short-term returns over system health, do not appear to be present.

Potential Mitigations

• Your attorney should confirm the ownership structure disclosed in Item 1 and the financial statements.
• It is always a good practice to ask the franchisor about any potential plans for sale or changes in ownership.
• Understanding the long-term vision of the current ownership can provide valuable context, a topic to discuss with your business advisor.

Explanation

This risk was not identified in the FDD package. Criterium does not disclose a parent company in Item 1, and the audited financial statements in Item 21 are for the franchisor entity, Coast to Coast Engineering Services, Inc., and its affiliate. There is no indication of a separate, controlling parent entity whose financials would be material to your investment decision. Therefore, risks associated with non-disclosure of a parent company are not present.

Potential Mitigations

• An attorney can confirm the corporate structure as disclosed in Item 1 to ensure there are no undisclosed parent entities.
• It is good practice to ask your accountant to review the scope of the audited financial statements.
• Always verify that the entity you are contracting with is the same entity whose financial information is provided.

Explanation

This risk was not identified in the FDD package. Item 1 clearly discloses the predecessor company history, including its founding in 1957 and merger into the current franchisor entity in 1989. Items 3 and 4 state there is no litigation or bankruptcy history for the franchisor or its predecessor that requires disclosure. The information provided appears to be transparent and does not suggest any hidden negative history.

Potential Mitigations

• Your attorney can help you review the predecessor information in Item 1 for completeness and clarity.
• It is a good practice to ask long-tenured franchisees about their experiences, including any transitions from a predecessor company.
• A business advisor can help you understand how the long history, including the predecessor, adds value to the brand.

Explanation

This risk was not identified. Item 3 states that there is no litigation required to be disclosed. While Item 20 notes that two confidentiality agreements have been signed as part of dispute settlements over the last three years, this does not rise to the level of a 'pattern of litigation' involving fraud or misrepresentation. The lack of disclosed lawsuits is a positive indicator for the health of the franchise system's relationships.

Potential Mitigations

• Your attorney should review Item 3 and the disclosure in Item 20 to provide a full understanding of their implications.
• It is beneficial to ask current franchisees about the nature of their relationship with the franchisor.
• Understanding the dispute resolution process outlined in Item 17 is always a prudent step, which your attorney can explain.