Explanation

This risk was not identified. The audited financial statements in Item 21 and Exhibit E indicate Great Clips, Inc. (Great Clips) is financially stable, with consistent profitability and positive shareholder equity over the past three years. Generally, weak franchisor financials can signal an inability to support franchisees, invest in the brand, or even remain in business, so reviewing them is a crucial step for any prospective franchisee.

Potential Mitigations

• An experienced franchise accountant should thoroughly review the franchisor's financials, including all footnotes and comparative data, to confirm financial health.
• It is wise to have your business advisor assess whether the franchisor's financial model appears sustainable based on its revenue sources and growth.
• Consulting with your attorney regarding any state-mandated financial assurances, such as bonds or escrow, can clarify protections in case of franchisor failure.

Explanation

This risk was not identified in the FDD. The data presented in Item 20, Table 3, shows a very low rate of franchisee terminations, non-renewals, and other cessations relative to the large system size. A high turnover rate can be a major red flag, potentially indicating systemic issues such as unprofitability or poor franchisor support, so this low rate is a positive indicator for system stability.

Potential Mitigations

• Engaging a business advisor to analyze the franchisee turnover data in Item 20 is important to confirm system health.
• You should still contact former franchisees from the list in the FDD to understand their reasons for leaving the system.
• Your accountant can help you calculate the percentage of turnover for the past three years to compare against industry benchmarks.

Explanation

While the franchisor's support systems appear robust for its current size, the FDD discloses plans to open 90 new franchised outlets in the next fiscal year. Such continued expansion, while positive, carries a risk that support infrastructure for training, site selection, and operations could become strained. You should verify that the franchisor has concrete plans and sufficient resources to scale its support services to maintain quality for all franchisees, both new and existing.

Potential Mitigations

• It is important to ask the franchisor about their specific plans for scaling support staff and infrastructure to match the projected growth.
• A business advisor can help you assess if the franchisor's growth plans seem sustainable or overly ambitious.
• Speaking with franchisees in rapidly growing markets can provide insight into the current quality of franchisor support.

Explanation

This risk was not identified. Great Clips, Inc. (Great Clips) is a very mature and established franchise system, having started franchising in 1983 with over 4,400 current locations. An unproven system presents a higher risk due to a lack of brand recognition, an un-tested business model, and potentially inexperienced management. The long operational history and large size of the Great Clips system mitigates this specific concern.

Potential Mitigations

• Even with a mature system, an accountant should review the franchisor's financial statements to verify its current stability and performance.
• Talking to a mix of new and veteran franchisees with help from your business advisor can provide a well-rounded view of the system's health.
• An attorney can help you understand the full scope of support and obligations detailed in the franchise agreement.

Explanation

This risk is not considered significant for this franchise. The business model, focused on providing affordable and convenient haircuts, serves a persistent consumer need rather than a temporary trend. While styles change, the fundamental demand for haircare services is stable. The long history of Great Clips, Inc. (Great Clips) since 1982 further suggests the business model has sustained durability and is not a fad.

Potential Mitigations

• A business advisor can help you analyze the local market to confirm that the demand for this type of value-priced salon service remains strong.
• It is still wise to discuss the long-term industry outlook and competitive landscape with your financial advisor.
• In your business plan, account for local competition from both similar chains and independent salons.

Explanation

This risk was not identified. Item 2 of the FDD shows that the executive team at Great Clips, Inc. (Great Clips) possesses extensive and long-term experience both within the company and the broader haircare and franchising industries. Inexperienced management can be a significant risk, often leading to inadequate franchisee support and poor strategic decisions. The stability and depth of experience detailed in the FDD mitigates this concern.

Potential Mitigations

• It is still prudent to review the management team's biographies in Item 2 with your business advisor.
• When speaking with current franchisees, you should inquire about their perception of the management team's competence and support.
• Your attorney can help you confirm if there have been any recent, significant changes in key leadership not yet reflected in the FDD.

Explanation

This risk was not identified. Item 1 of the FDD indicates that Great Clips, Inc. (Great Clips) is not owned by a private equity firm. This type of ownership can sometimes introduce risks related to short-term profit motives over the long-term health of the brand, such as cuts in franchisee support or rapid fee increases. The absence of private equity ownership in this case means those specific risks are not present.

Potential Mitigations

• It is still advisable to have your attorney review Item 1 and the corporate structure to understand who owns and controls the franchisor.
• Your business advisor can help you research the franchisor's ownership history for any past private equity involvement.
• Franchisee interviews can provide insight into the current ownership's philosophy and relationship with franchisees.

Explanation

This risk was not identified. The FDD clearly states in Item 1 that Great Clips, Inc. (Great Clips) has no parent company. In some franchise systems, the franchisor entity is a subsidiary of a larger parent corporation. If that were the case, the financial health and strategic direction of the parent could significantly impact the franchise, making disclosure of the parent's information crucial for a complete risk assessment.

Potential Mitigations

• Your attorney should always confirm the corporate structure detailed in Item 1 to ensure there are no undisclosed parent or affiliate entities.
• If a parent company were involved, it would be crucial for your accountant to review its financial statements for a complete picture of system stability.
• Engaging a business advisor to research the franchisor's corporate history can provide additional context and peace of mind.

Explanation

This risk was not identified. Item 1 of the FDD states that Great Clips, Inc. (Great Clips) has no predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. When a predecessor exists, it is important to review its history for potential issues like litigation or bankruptcy, as these could reflect on the stability and integrity of the business you are considering buying into.

Potential Mitigations

• Your franchise attorney should always verify the predecessor disclosures in Item 1.
• Even without a predecessor, it is wise to have a business advisor help you research the early history of the franchisor for context.
• Reviewing the business experience of the founders and key executives in Item 2 can provide insight into the company's origins.

Explanation

This risk was not identified in the FDD. Item 3 states that no litigation is required to be disclosed. A pattern of litigation, particularly lawsuits initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag about the franchisor's practices and the health of the franchise relationship. The absence of such disclosures in this FDD is a positive indicator.

Potential Mitigations

• You should have your attorney confirm that no material litigation is listed in Item 3 of the FDD.
• It is still a good practice to ask current and former franchisees about their experiences with disputes and dispute resolution.
• A business advisor can help you conduct online searches for any news or reports of litigation that may not have been required to be disclosed.