Explanation

The audited consolidated financial statements for the parent company of Kiddie Academy Domestic Franchising, LLC (KADF), Essential Brands, Inc., appear stable. The statements show consistent revenue growth and profitability over the past three fiscal years, with positive net worth and retained earnings. No 'going concern' notes or other significant signs of financial weakness were identified, suggesting the franchisor has the resources to support the system. This risk is considered low.

Potential Mitigations

• Your accountant should still perform a full review of the financial statements in Exhibit O, including all footnotes, to confirm this assessment.
• Ask your business advisor to help you evaluate the franchisor’s financial capacity to support its planned growth and ongoing obligations.
• Inquire with current franchisees about their perception of the franchisor's financial commitment to technology, marketing, and support.

Explanation

The franchisee turnover rates disclosed in Item 20 appear to be low. For the most recent year, 2024, four franchised outlets ceased operations out of a base of 326, which is approximately 1.2%. This low rate suggests a degree of stability in the system. However, you should consider this data in conjunction with the litigation history in Item 3 and the Financial Performance Representations in Item 19 for a complete picture.

Potential Mitigations

• Discuss the specific reasons for the small number of cessations and the larger number of transfers with current and former franchisees listed in Item 20.
• Your accountant can help you analyze the turnover data over the full three-year period to identify any concerning trends.
• Your attorney should help you frame questions for the franchisor regarding the franchisee-initiated litigation disclosed in Item 3.

Explanation

This risk was not identified. Kiddie Academy Domestic Franchising, LLC (KADF) and its predecessors have been in the educational child care business since 1981 and have been franchising since 1992, as disclosed in Item 1. The system has a long operational history and a substantial number of operating units, indicating it is a mature and proven franchise system rather than a new or unproven one.

Potential Mitigations

• Have your business advisor review the history and evolution of the brand as described in Item 1.
• Discuss the franchisor's long-term stability and brand reputation with franchisees who have been in the system for many years.
• Your accountant should review the multi-year financial statements in Item 21 for evidence of long-term operational stability.

Explanation

This risk was not identified. The business model, focused on educational child care, addresses a fundamental and long-standing societal need for working families. This is a mature industry with consistent demand, not a business based on a fleeting trend or novelty. Therefore, the risk of the business being a short-lived fad is considered low.

Potential Mitigations

• A business advisor can help you research the long-term demographic and economic trends supporting the child care industry in your specific market.
• Discuss the stability of customer demand and the business model's resilience to economic shifts with existing franchisees.
• Your accountant can help you evaluate the business model's potential for sustained profitability over the full franchise term.

Explanation

This risk was not identified. Item 2 of the FDD details the business experience of the franchisor's key management personnel. Many executives have extensive, long-term experience within the Kiddie Academy system itself, some with tenures spanning decades. This indicates a stable and deeply experienced leadership team with specific knowledge of both the child care industry and the franchise system's operations.

Potential Mitigations

• Your business advisor can help you review the backgrounds of the key personnel listed in Item 2.
• When speaking with franchisees, inquire about their direct experiences and the quality of support they receive from the management team.
• Verifying the tenures of the executive team can provide confidence in the system's stability and strategic direction.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that the franchisor, Kiddie Academy Domestic Franchising, LLC, is a subsidiary of Essential Brands, Inc. but does not state that the parent is a private equity firm. A lack of private equity ownership can sometimes suggest a focus on long-term brand health over short-term investor returns.

Potential Mitigations

• Your attorney can help you investigate the ownership structure of the parent company, Essential Brands, Inc., to confirm its status.
• A business advisor can help you understand the potential implications of different ownership structures on a franchise system.
• Discuss any known history of ownership changes and their impact on the system with long-tenured franchisees.

Explanation

This risk was not identified. Item 1 clearly discloses that the franchisor is a subsidiary of its parent company, Essential Brands, Inc. Furthermore, Item 21 and Exhibit O provide the required audited, consolidated financial statements for the parent company, along with a Guarantee of Performance. This level of disclosure provides appropriate transparency into the financial health and backing of the overall enterprise.

Potential Mitigations

• Your accountant should thoroughly review the financial statements of both the franchisor and the parent company provided in Exhibit O.
• It is important to have your attorney review the terms of the parent's Guarantee of Performance to understand its scope and limitations.
• Understanding the relationship and financial obligations between a franchisor and its parent is a key part of due diligence a business advisor can assist with.

Explanation

This risk was not identified. Item 1 provides a clear history of the franchisor's predecessors, including name changes and mergers dating back to 1990. The litigation disclosures in Item 3 also appear to include cases involving these prior entities where relevant. This transparency allows for a more complete assessment of the system's historical track record and any inherited issues.

Potential Mitigations

• Your attorney should carefully review the predecessor information to ensure a complete understanding of the company's lineage.
• When speaking with long-tenured franchisees, you can ask about their experiences under any of the predecessor companies.
• A business advisor can help you research the history of the brand and its predecessors for a broader market context.