Explanation

This specific risk was not identified in the FDD package. While the system is shrinking, it is not due to overly rapid growth. Generally, a franchisor expanding too quickly may lack the capital or staff to provide adequate support to all its new units. This can lead to poor site selection, weak training, and insufficient ongoing assistance, diluting the brand's value and harming franchisee performance despite their royalty payments.

Potential Mitigations

• A business advisor can help you analyze the franchisor's growth rate in Item 20 relative to its support infrastructure described in Item 11.
• Discussing the quality and responsiveness of franchisor support with existing franchisees is a key due diligence step.
• Your accountant should review the franchisor's financial statements in Item 21 to assess if they possess the resources to support their stated growth plans.

Explanation

This risk was not identified, as the franchisor's predecessor has been franchising since 1993, indicating a long operational history. For a truly new system, there are heightened risks, as the business model may be unproven in a franchise context, support systems can be underdeveloped, and brand recognition is minimal. The franchisor's ability to effectively train and support franchisees might not be established, creating uncertainty for early adopters.

Potential Mitigations

• With any new system, it is vital to have your attorney conduct extra due diligence on the management team's experience in both the industry and in franchising.
• Your accountant should carefully scrutinize the franchisor's capitalization to ensure it can fund its growth and support obligations.
• Speaking with the very first franchisees in a new system can provide invaluable, unfiltered insights into the early challenges.

Explanation

This risk was not identified; the supplemental education industry has demonstrated long-term demand. A fad-based business is tied to a fleeting trend, posing a risk that consumer interest could disappear, leaving you with a worthless business but ongoing contractual obligations. Assessing a concept's long-term viability, beyond current popularity, is critical to avoid investing in a business with a short lifespan.

Potential Mitigations

• A business advisor can help you research the long-term market trends for the industry to gauge sustainability.
• It is wise to question the franchisor about its plans for innovation and adaptation to evolving consumer tastes.
• Your accountant can assist in modeling a worst-case scenario where demand declines after an initial trend fades.

Explanation

This risk was not identified in the FDD. The franchisor's CEO has been involved with the parent or predecessor company since 1992, and other executives have extensive industry experience. Generally, if a franchisor's management team lacks experience in franchising or their specific industry, it can lead to poor strategic decisions, inadequate franchisee support, and a higher risk of system-wide problems. Evaluating the leadership team's background is a key part of due diligence.

Potential Mitigations

• A business advisor can help you research the backgrounds of the key executives listed in Item 2.
• It's prudent to ask current franchisees about their perception of the management team's competence and support.
• Your attorney can help assess if the management team's experience is adequate for the promises made in the FDD.

Explanation

This risk was not identified, as the franchisor appears to be owned by its parent corporation, not a private equity firm. When a franchisor is owned by a private equity firm, there may be a focus on short-term profitability and a quick exit strategy. This can sometimes lead to decisions, such as cutting support staff or increasing fees, that prioritize investor returns over the long-term health of the franchise system and its franchisees.

Potential Mitigations

• If a franchisor is PE-owned, your business advisor can help you research the firm's reputation and track record with other franchise brands.
• It's essential to ask current franchisees about any changes in culture, support, or costs since a PE acquisition.
• Your attorney should review transfer clauses to understand what happens if the PE firm sells the franchise system.

Explanation

This risk was not identified. JEI Learning Centers, LLC (JEI) clearly discloses its parent companies and affiliates in Item 1 and provides combined financial statements. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger parent company. If the parent's financial statements are not provided when they are critical to understanding the system's stability (e.g., if the parent guarantees the franchisor's performance), you may have an incomplete picture of the overall financial risk.

Potential Mitigations

• Your accountant should always verify whether a parent company's financials are included and if they are necessary for a complete risk assessment.
• If a parent company provides a performance guarantee, your attorney should review the guarantee's terms and ensure it is legally binding.
• A business advisor can help you investigate the relationship and dependencies between the franchisor and its parent.

Explanation

This risk was not identified, as the FDD clearly discloses the predecessor entity, JEI Self-Learning Systems, Inc. (JSLS), and provides information on its litigation and business history. A risk exists if a franchisor fails to adequately disclose or obscures negative information about a predecessor, such as a history of franchisee failures or lawsuits. This can prevent you from having a full picture of the system's historical challenges before you invest.

Potential Mitigations

• A franchise attorney should always carefully review Item 1 for any mention of predecessors.
• If a predecessor is identified, it's wise to have your attorney review their history in Items 3 and 4 for any red flags.
• Discussing the transition from the predecessor with long-term franchisees can provide valuable historical context.