Explanation

The FDD's Item 20 tables do not indicate a high rate of franchisee turnover through terminations, non-renewals, or franchisor re-acquisitions in the past three years. This is a positive indicator. However, a related risk, the high number of franchises that have been sold but are not yet open, is explicitly mentioned by the franchisor as a 'Special Risk' and should be carefully considered as a separate issue regarding system-wide opening delays.

Potential Mitigations

• Your business advisor should still recommend contacting a range of current franchisees from the list in Item 20 to discuss their operational experiences.
• It remains important to have your accountant review the full Item 20 tables for any subtle trends over the three-year period.
• In discussions with the franchisor, you could inquire about the reasons for the historically low turnover rate.

Explanation

The franchisor, Escapology, LLC, was formed in 2014 and began franchising in 2016. While not a brand-new startup, it operates in the relatively recent and evolving escape room industry. The business has a track record of several years and has grown to a considerable size. The executive team, as detailed in Item 2, appears to have relevant business and, in some cases, franchising experience. Therefore, the risks associated with a completely new or unproven system are not pronounced here.

Potential Mitigations

• Your business advisor can help you investigate the specific franchising and industry experience of the key management personnel listed in Item 2.
• When speaking with franchisees, ask about their perception of the management team's competence and the maturity of the operating systems.
• Have an attorney review the entire history of the company as described in Item 1, including its relationship with its parent companies.

Explanation

This risk was not identified in the FDD Package. Item 2 details the business experience of the key officers and directors. A prospective franchisee should evaluate whether this team has sufficient experience in both the specific industry (entertainment/escape rooms) and in managing a franchise system. Inexperienced leadership can lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• It is advisable to have your business advisor research the backgrounds of the key executives listed in Item 2 beyond what is disclosed.
• Discuss the management team's accessibility and competence with current franchisees.
• Your attorney can help you frame questions for the franchisor regarding the team's specific experience in supporting a franchise network of this size.

Explanation

This risk was not identified in the FDD Package. The franchisor properly discloses its parent companies in Item 1. Since the parent company does not appear to offer a guarantee for the franchisor's obligations, its financial statements are not required or included. However, the financial statements in Item 21 do reveal significant financial dealings with the parent company that create other risks, which are analyzed in the 'Disclosure of Franchisor's Financial Instability' and 'Miscellaneous Risks' sections.

Potential Mitigations

• Your accountant should always review Item 1 to understand the complete corporate structure, including all parent and affiliate entities.
• It is prudent for your attorney to verify whether a parent company's financials should have been included based on FTC rules, especially if the franchisor is newly formed or thinly capitalized.
• Always ask a business advisor to assess the nature and risks of any relationships between the franchisor and its parent companies.

Explanation

This risk was not identified in the FDD Package. The franchisor states in Item 1 that it does not have a predecessor company. This means the historical data presented in the FDD, such as outlet turnover in Item 20 and financial performance in Item 21, pertains directly to the current franchisor entity. This simplifies due diligence, as there is no need to investigate the track record of a prior operator.

Potential Mitigations

• A business advisor can help you verify the franchisor's historical claims by speaking with long-term franchisees.
• Your attorney should confirm that the corporate history in Item 1 is complete and does not omit entities that should have been classified as predecessors.
• An accountant reviewing the financials should ensure that the data presented reflects the entire operating history of the current entity.