Explanation

This risk was not identified. The audited financial statements provided in Exhibit B show that Discovery Map International, Inc. (DMI) has positive and growing stockholder's equity, increasing revenues, and consistent profitability. The financial statements appear stable and do not indicate an inability for DMI to support its franchisees.

Potential Mitigations

• It is always a good practice to have your accountant review a franchisor's financial statements for the last three years to assess overall financial health.
• A discussion with your accountant about the franchisor's revenue sources, such as the balance between initial fees and ongoing royalties, can provide insight into system sustainability.
• A financial advisor can help you understand the implications of a franchisor's debt and cash flow on their ability to support you long-term.

Explanation

This risk was not identified. An analysis of the franchisee outlet data in Item 20 does not show a high rate of turnover. The number of terminations, non-renewals, and other cessations over the past three years appears relatively low compared to the total number of operating units, suggesting general system stability.

Potential Mitigations

• Your business advisor should help you calculate the annual turnover rate from Item 20 data and compare it to any available industry benchmarks.
• It's crucial to contact a representative sample of former franchisees listed in Exhibit D to understand their reasons for leaving the system.
• Your attorney can help you formulate questions for former franchisees to better understand their experiences.

Explanation

This risk was not identified. The data presented in Item 20 indicates that the franchise system is experiencing stable and modest growth, not the kind of rapid expansion that might overstretch the franchisor's support capabilities. This suggests a measured approach to system development.

Potential Mitigations

• A business advisor can help you analyze the franchisor's growth rate in Item 20 in the context of their support staff and infrastructure.
• Discussing the franchisor’s capacity for supporting new franchisees with both new and established operators is a key due diligence step.
• An accountant should review the franchisor's financials to confirm they have the resources allocated to support their projected growth.

Explanation

This risk was not identified. According to Item 1, the franchise system's origins date back to 1993, and Item 20 shows a mature system with over 100 operating franchises. This long history and established franchisee base indicate that this is a proven system, not a new or untested one.

Potential Mitigations

• Engaging a business advisor to research the franchisor's history and brand reputation within the industry is a valuable step.
• It's wise to contact some of the longest-operating franchisees listed in Exhibit D to learn about their long-term experience with the system.
• Your accountant can assess the financial maturity of the system by reviewing several years of financial statements.

Explanation

This risk was not identified. The business model, centered on creating and selling advertising on printed tourist maps, is a traditional and long-established form of media. While subject to competition from digital alternatives, the core concept is not considered a short-lived fad.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for this type of product in your target area.
• Discuss the franchisor's strategies for innovation and adapting to digital competition with current franchisees.
• It is prudent to evaluate how the business model might perform during different economic cycles with your financial advisor.

Explanation

This risk was not identified. Item 2 shows that the franchisor's key executives are very experienced. The President has been with the company since 2005 and other key personnel have many years of experience with the system. This demonstrates stable and knowledgeable leadership.

Potential Mitigations

• Your business advisor can help you research the backgrounds of the franchisor's key management team members.
• Asking current franchisees about their opinion of the management team's competence and support is an important part of due diligence.
• Legal counsel can help you understand any management-related disclosures in Item 2 of the FDD.

Explanation

This risk was not identified. The FDD does not indicate that the franchisor is owned or controlled by a private equity firm. Disclosures in Item 1 suggest the company is privately held by its management, which often aligns with long-term system health over short-term returns.

Potential Mitigations

• Understanding the ownership structure of the franchisor is a key piece of due diligence that your attorney can help you investigate.
• A business advisor can research whether the franchisor has a history of being bought and sold, which can indicate ownership stability.
• It is wise to ask current franchisees if they have experienced any significant changes in franchisor philosophy or support due to ownership shifts.

Explanation

This risk was not identified. Item 1 of the FDD clearly states that the franchisor does not have a parent company. The franchisor's corporate structure appears straightforward and is properly disclosed.

Potential Mitigations

• Your attorney should verify the corporate structure and ensure there are no undisclosed parent companies or controlling entities.
• If a franchisor is a subsidiary, an accountant should review the parent company's financial statements if provided or required.
• A business advisor can help you understand the implications of a parent-subsidiary relationship on the franchise system.

Explanation

This risk was not identified. The FDD discloses the franchisor's predecessors in Item 1. A review of Items 3 and 4 shows no disclosures of litigation or bankruptcy related to these predecessors, suggesting a clean operational history was transferred to the current franchisor.

Potential Mitigations

• Your attorney should carefully review the disclosures about any predecessors in Items 1, 3, and 4.
• It can be beneficial to have a business advisor help research the history and reputation of any predecessor companies.
• Asking long-term franchisees about their experience under any previous ownership can provide valuable insights.

Explanation

This risk was not identified. Item 3 of the FDD states, "No litigation information is required to be disclosed in this Item." This indicates there have been no recent lawsuits meeting the federal disclosure requirements, which is a positive factor for a prospective franchisee.

Potential Mitigations

• An attorney should always review Item 3 to understand the nature and frequency of any disclosed litigation.
• If litigation is disclosed, discussing the cases with your attorney is crucial to assess their potential impact on the franchise system.
• Even with no disclosed litigation, asking current franchisees about any disputes they are aware of can provide additional context.