Explanation

The financial statements for Image Studios Franchise, LLC (Image Studios) are for a partial year as the entity was formed in 2024. For this period, they show profitability and a healthy balance sheet. However, the company is new, having acquired an existing system. The primary risk is the limited operating history of this specific entity, not financial instability based on the provided statements. An accountant's review of the predecessor's performance, if available, would provide more context.

Potential Mitigations

• Engage an accountant to thoroughly review the audited financial statements, including all footnotes and the new entity's capitalization.
• Discuss the business transition from the predecessor and the continuity of the management team with your business advisor.
• Your attorney should confirm if any financial assurances, like bonds or escrow, are required by your state due to the new entity structure.

Explanation

While the IMAGE Studios system has been operating since 2015, the current franchisor entity was formed in February 2024 and acquired the system in March 2024. The management team appears to have continuity from the predecessor, which mitigates this risk. However, you are contracting with a very new corporate entity, which presents some inherent uncertainty regarding its operational and financial management style, even with experienced personnel at the helm.

Potential Mitigations

• A business advisor can help you investigate the track record and reputation of the continuing management team members listed in Item 2.
• Your attorney should review the asset purchase agreement between the new franchisor and its predecessor, if available, to understand the transition.
• Discuss with existing franchisees whether they have noticed any changes in support or operations since the new corporate entity took over.

Explanation

This risk was not identified in the FDD package. The salon suite or 'salon mall' concept is an established business model within the beauty industry, not a temporary trend. This model caters to a structural shift where beauty professionals seek to operate their own small businesses without the overhead of a traditional salon. The franchisor's predecessor has been operating this system since 2015, indicating a degree of market longevity and sustained demand.

Potential Mitigations

• It is wise to have a business advisor help you research the long-term stability and competitive landscape of the salon suite industry in your specific market.
• An accountant can help you model the financial resilience of this business type under various economic conditions.
• To assess long-term viability, you should discuss the evolution of the industry with experienced salon professionals.

Explanation

This risk was not identified in the FDD package. The management team detailed in Item 2 appears to have significant and relevant experience. Key executives have been with the IMAGE Studios brand, through its predecessor, for many years. For instance, the Founder and CEO has been in his role since 2014, and other key personnel have multi-year tenures with the company and prior experience in relevant fields like franchise development and operations.

Potential Mitigations

• A business advisor can still assist you in performing independent due diligence on the backgrounds of the key executives listed in Item 2.
• When speaking with existing franchisees, it is useful to ask about their direct experiences and the quality of support they receive from the management team.
• Your attorney can help you verify the professional histories of the leadership team through publicly available resources.

Explanation

This risk was not identified in the FDD package. Item 1 discloses the parent company as IMAGE Studios HOLDCO, LLC. There is no indication in the FDD that this parent or the franchisor itself is owned or controlled by a private equity firm. The management team appears to be comprised of the founders and long-term executives rather than representatives of an investment fund, suggesting a different ownership structure and potentially different strategic priorities.

Potential Mitigations

• Your attorney can help you research the ownership structure of the franchisor and its parent company to confirm the absence of private equity involvement.
• It's good practice to ask the franchisor directly about their long-term strategic plans and ownership structure during your due diligence.
• A business advisor can help you understand the potential pros and cons of different types of franchisor ownership structures.

Explanation

This risk was not identified in the FDD package. The franchisor properly discloses its parent company, IMAGE Studios HOLDCO, LLC, in Item 1. While the parent company's financials are not provided, the franchisor itself has provided audited financial statements. Given that the franchisor entity appears to be adequately capitalized with over $20 million in equity, the absence of the parent's financials does not represent a significant risk of obscuring financial weakness.

Potential Mitigations

• Your attorney should review the roles and responsibilities between the parent and the franchisor as described in Item 1.
• It is wise for your accountant to analyze the franchisor's own audited financials to assess its ability to meet its obligations to you.
• You could ask the franchisor about the financial health of the parent company, although they are not obligated to provide details beyond the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 of the FDD clearly identifies the predecessor entity, Image Studios 360 Franchise, LLC, and discloses that the current franchisor acquired the system from this entity in March 2024. Items 3 and 4 state there is no litigation or bankruptcy history to disclose for the franchisor or its predecessor. The history appears to be presented without issue.

Potential Mitigations

• Asking your attorney to review all disclosures related to the predecessor entity is a prudent step.
• When speaking with long-term franchisees, inquire about their experience under the predecessor's management to identify any historical issues.
• A business advisor can help you search public records or news archives for any additional information on the predecessor company.

Explanation

This risk was not identified in the FDD package. Item 3 of the FDD explicitly states, 'No litigation is required to be disclosed in this Item.' This indicates there are no pending or recent lawsuits involving the franchisor, its predecessor, or its management that meet the criteria for disclosure, which typically includes claims of fraud, misrepresentation, or franchise law violations. The absence of such disclosures is a positive indicator.

Potential Mitigations

• Your attorney can conduct an independent search of court records to verify the absence of significant litigation.
• It is still valuable to ask current and former franchisees if they are aware of any disputes, even those not rising to the level of disclosed litigation.
• Maintaining open communication and a positive relationship with the franchisor can help preemptively resolve disputes, a strategy your business advisor can help develop.