Explanation

This risk was not identified in the FDD package. A franchisor's financial statements can reveal its ability to provide support, invest in the brand, and remain solvent. Your accountant's review of these statements is a critical step in assessing the long-term stability of the franchise system you are considering joining. This franchisor's audited financials appear stable and do not indicate financial distress.

Potential Mitigations

• A thorough review of the franchisor's audited financial statements, including all footnotes, with your accountant is essential to assess financial health.
• Analyzing trends in revenue, profitability, and cash flow over several years with a financial advisor can reveal the stability of the business.
• Engaging a franchise attorney can help you understand any financial weakness disclosures or state-mandated protections like bonds or escrow.

Explanation

This risk was not identified, as HealthSource Chiropractic, LLC (HealthSource) began franchising in 2006. An unproven system can present risks because its business model, brand recognition, and support infrastructure are not yet well-established. This franchisor has a long operating history, which suggests a mature and tested business concept.

Potential Mitigations

• With any system, it is prudent to have your business advisor help you conduct thorough due diligence on the management team's industry and franchising experience.
• Speaking with the earliest-joining franchisees can provide insight into the system's evolution and the franchisor's long-term performance.
• An accountant can help assess a franchisor's financial stability and capitalization, which is particularly important for newer systems.

Explanation

This risk was not identified. The business model, centered on chiropractic services and physical therapy, is part of the established healthcare industry. A fad-based business carries the risk that its popularity may be short-lived, potentially leading to declining sales once consumer interest wanes. This business is based on a long-standing consumer need for healthcare services.

Potential Mitigations

• Engaging a business advisor to research the long-term market demand for any franchise's core products or services is a wise step.
• Evaluating a franchisor's stated plans for innovation and adaptation can provide insight into its long-term vision.
• A financial advisor can help you assess the sustainability of any business model beyond current trends.

Explanation

This risk was not identified in the FDD package. The executive team described in Item 2 has extensive and long-term experience in both the chiropractic industry and in managing a franchise system. Inexperienced management can be a risk if they lack the expertise to provide effective support, training, and strategic direction, which does not appear to be the case here.

Potential Mitigations

• A thorough review of the management team's background in Item 2 with your business advisor is always a crucial due diligence step.
• Asking current franchisees about their direct experiences with the management team's responsiveness and competence can provide valuable insights.
• It is useful to ask the franchisor how their management experience translates into specific support programs for franchisees.

Explanation

This risk was not identified. The FDD discloses the parent company, ZCS Holdings, Inc., in Item 1 and the ownership structure in the financial statement notes. A failure to disclose a parent company or its financials, when required, can hide financial instability or other risks. This FDD appears to meet the disclosure requirements for its corporate structure.

Potential Mitigations

• Your attorney should always verify that the franchisor's corporate structure is clearly disclosed in Item 1.
• If a parent company guarantees the franchisor's obligations, it is important to have your accountant review the parent's financial statements.
• Understanding the full corporate family and any inter-company dependencies with a business advisor is a key part of due diligence.

Explanation

This risk was not identified, as Item 1 of the FDD states that the franchisor has no predecessors. When a franchisor has acquired a system from a predecessor, it's important to investigate the predecessor's history for issues like litigation or high franchisee failure rates, as these could indicate inherited problems in the system.

Potential Mitigations

• Your attorney should always review Item 1 to identify any disclosed predecessors.
• If a predecessor is identified, conducting independent research on that entity's history with the help of a business advisor is a prudent step.
• Asking long-term franchisees about their experience under any previous ownership can provide valuable historical context.

Explanation

This risk was not identified. Item 3 does not disclose a pattern of lawsuits from franchisees alleging fraud or misrepresentation. Such a pattern can be a significant red flag indicating potential systemic problems with a franchisor's sales practices or operations. The disclosed litigation relates to past regulatory actions and an old trademark dispute, not a pattern of franchisee claims.

Potential Mitigations

• A franchise attorney should always be engaged to carefully review all litigation disclosed in Item 3 for patterns and severity.
• Understanding the difference between routine lawsuits and a pattern of franchisee-initiated fraud claims is critical, and a lawyer can provide this context.
• It is wise to ask current franchisees if they are aware of any widespread disputes, even if they haven't resulted in litigation.