Explanation

Item 20 data does not indicate a high rate of franchisee turnover. However, the system is very new with only one franchisee, so there is not enough historical data to assess long-term stability. A stable system with low turnover is generally a positive sign, as high turnover can indicate franchisee dissatisfaction or unprofitability.

Potential Mitigations

• Your business advisor should help you contact the current franchisee listed in the FDD to discuss their experience and satisfaction.
• An accountant can help you analyze the Item 20 tables annually if you purchase the franchise to monitor system health.
• It is wise to have your attorney review the termination and renewal clauses in the franchise agreement to understand your future rights.

Explanation

This risk was not identified. Item 20 data does not show rapid growth; the system is very small and growing slowly. Uncontrolled growth can strain a franchisor's resources, potentially leading to a decline in the quality of support, training, and operational guidance provided to franchisees. This can negatively impact the entire system's performance and brand reputation.

Potential Mitigations

• In any franchise, it is wise to ask existing franchisees about the quality and timeliness of the support they receive from the franchisor.
• A business advisor can help you assess if the franchisor's support infrastructure seems adequate for its current size and projected growth.
• Your accountant should review the franchisor's financials to see if they are reinvesting in support systems.

Explanation

This risk was not identified, as the business of supplemental STEM education for children appears to be based on a durable educational need rather than a short-term trend. A business based on a fad faces the risk of a sharp decline in customer interest once the trend fades, potentially leaving you with a worthless investment and ongoing liabilities under the franchise agreement.

Potential Mitigations

• Your business advisor can help you research long-term market trends for the specific industry to gauge its stability.
• An attorney should review the franchise agreement's term length to ensure it aligns with a realistic business lifecycle.
• An accountant can help you model different revenue scenarios, including a potential decline in demand over time.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that management decisions prioritize short-term investor returns over the long-term health of the franchise system and the profitability of individual franchisees.

Potential Mitigations

• If considering a PE-owned franchise, a business advisor can help research the firm's history with other franchise brands.
• It is wise to ask franchisees of other PE-owned systems about their experiences with changes in fees, support, and company culture.
• An attorney should review assignment clauses to understand what happens if the franchisor is sold.

Explanation

This risk was not identified. Item 1 discloses an affiliate, Kids Stem Studio, Inc., which licenses the intellectual property to the franchisor. However, the franchisor does not appear to be a subsidiary of a larger, undisclosed parent company. Failing to disclose a parent company can obscure the true financial backing and stability of the franchisor, which is a material fact for your investment decision.

Potential Mitigations

• An attorney can help you verify a company's corporate structure and identify any parent companies.
• Your accountant should review any provided parent company financials as carefully as the franchisor's own statements.
• In any franchise, a business advisor can help you understand the relationships between the franchisor and its disclosed affiliates.

Explanation

This risk was not identified. Item 1 does not list any predecessors for KSS Franchising LLC. A predecessor is a company from which the franchisor acquired the major portion of its assets. When a predecessor exists, it is important to review their history for issues like litigation, bankruptcy, or high franchisee turnover, as these could indicate underlying problems with the system that may have been inherited by the current franchisor.

Potential Mitigations

• An attorney should always carefully review Item 1 for any disclosure of predecessors and their history.
• If a predecessor is listed, a business advisor can help you conduct independent research on that company's track record.
• It is prudent to ask long-term franchisees about their experiences under any previous ownership.

Explanation

This risk was not identified, as Item 3 discloses no material litigation. A pattern of lawsuits filed by franchisees against the franchisor alleging fraud or misrepresentation, or a high number of lawsuits filed by the franchisor against its franchisees, can be a major red flag. It may suggest systemic problems with the franchisor's business practices, franchisee relations, or the viability of the system itself.

Potential Mitigations

• An attorney should always be engaged to carefully review any litigation disclosed in Item 3.
• It's advisable for a business advisor to help you contact franchisees, including those who have been in disputes, to understand the context.
• Even without litigation, your attorney can help assess contractual risks that commonly lead to disputes.