Explanation

This risk was not identified. The audited financial statements for Kumon North America, Inc. (KNA) show a strong and consistently improving financial position. The company reports significant and growing net income, substantial stockholder equity, and a healthy balance sheet with current assets far exceeding current liabilities. There are no indicators of financial instability, such as a going concern note from the auditors, that would suggest a risk to their ability to support the franchise system.

Potential Mitigations

• For any franchise opportunity, having an accountant review the franchisor's audited financial statements for the past three years is a crucial due diligence step.
• A business advisor can help you assess whether a franchisor's financial health is sufficient to support its growth plans and franchisee needs.
• Your attorney should verify if any financial performance bonds or escrow accounts are required by state regulators, which can be an indicator of underlying financial weakness.

Explanation

This risk was not identified. Analysis of the data in Item 20's tables indicates a low and stable franchisee turnover rate over the last three years, approximately 2% annually. The system has also shown consistent net growth in the number of franchised outlets year over year. These figures suggest a stable and healthy franchise system rather than one experiencing significant franchisee distress or dissatisfaction. High turnover is a major red flag that is not present here.

Potential Mitigations

• Engaging a franchise attorney to analyze the numbers in Item 20, including terminations, non-renewals, and transfers, can provide a clearer picture of system health.
• A business advisor can help you contact a random sampling of current and former franchisees to discuss their experiences and reasons for leaving.
• Your accountant can help you compare the franchise's turnover rate to available industry benchmarks for a broader perspective.

Explanation

This risk was not identified. While Item 20 shows steady growth in the number of franchised outlets, the rate of growth does not appear to be excessively rapid for a system of this size and maturity. Furthermore, the financial statements in Item 21 demonstrate that KNA has substantial financial resources, suggesting it is well-equipped to manage and support its current growth trajectory without overextending its support infrastructure. This combination of controlled growth and financial strength mitigates this risk.

Potential Mitigations

• A business advisor can help you assess if a franchisor's support staff and infrastructure are growing in line with its unit expansion.
• Even with stable growth, it is wise to ask existing franchisees about the current quality and timeliness of the support they receive from the franchisor.
• Your attorney can review the franchisor's obligations for support in the Franchise Agreement to ensure they are clearly defined.

Explanation

This risk was not identified. The FDD indicates that the Kumon system is very mature and well-established. KNA has been franchising since 1994, with predecessors dating back to 1983, and the parent company has been in operation since 1958. Item 20 shows a large and stable base of over 1,600 franchised units in operation. This is not a new or unproven business concept, which significantly reduces the risks associated with an emerging franchise system.

Potential Mitigations

• For any new franchise system, it's crucial to have your attorney scrutinize the business and franchising experience of its management team in Item 2.
• A business advisor can help you evaluate the risks of investing in a young system with limited brand recognition or support history.
• An accountant should carefully review a new franchisor's financials for signs of under-capitalization.

Explanation

This risk was not identified. The business model, providing supplemental math and reading education, has a long history of sustained consumer demand. KNA's parent company has been operating since 1958, demonstrating long-term viability far beyond that of a typical fad. This is a mature business in an established educational services market, not a concept based on a fleeting trend.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• For any franchise, it is important to review with your attorney the franchise term and your obligations if the business's popularity wanes.
• Your financial advisor can help assess a business model's resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified. The executive biographies provided in Item 2 show a senior management team with extensive and long-term experience within the Kumon system. Most key executives have been with the company for decades, indicating deep familiarity with both the educational method and the franchise business model. This level of experience suggests a stable and knowledgeable leadership team.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you assess the depth and relevance of the management team's experience as listed in Item 2.
• It is wise to ask existing franchisees about their perception of the management team's competence and support.
• Your attorney can help you investigate the background of key personnel if there are any concerns.

Explanation

This risk was not identified. Item 1 clearly states that KNA is a wholly-owned subsidiary of Kumon Institute of Education Company, Ltd. (KIE), the Japanese parent company that founded the system. There is no indication of ownership by a private equity firm. This suggests a focus on the long-term health of the educational brand rather than potentially short-term financial returns often associated with PE ownership.

Potential Mitigations

• For any franchise, it's prudent to have a business advisor research the ownership structure, especially if a private equity firm is involved.
• If a PE firm is the owner, your attorney should review the assignment clauses in the Franchise Agreement to understand what happens if the system is sold.
• An accountant can analyze financials to see if a PE-owned franchisor is prioritizing fee generation over franchisee support.

Explanation

This risk was not identified. Item 1 clearly discloses the parent company, Kumon Institute of Education Company, Ltd. (KIE). The FDD provides audited, consolidated financial statements for KNA, which show it to be financially strong and profitable on its own. Therefore, under franchise disclosure rules, there is no requirement to also provide the parent company's financials, as KNA is not dependent on the parent for its financial viability.

Potential Mitigations

• Your attorney should always verify that the franchisor has properly disclosed all parent companies and affiliates in Item 1.
• If a franchisor is newly formed or financially weak, an accountant should confirm whether parent company financials are required and have been provided.
• It is important to have your attorney check if there is a parent guarantee and understand its terms if one is provided as an exhibit.

Explanation

This risk was not identified. The FDD discloses that predecessors offered franchises from 1983 to 1994, after which KNA began franchising. This history is transparent. Furthermore, Item 3 (Litigation) and Item 4 (Bankruptcy) disclose no negative legal or bankruptcy history involving these predecessors, which mitigates the risk of inheriting unresolved issues from a prior operator of the system.

Potential Mitigations

• When a franchisor has a predecessor, a franchise attorney should be engaged to scrutinize Items 1, 3, and 4 for any signs of trouble.
• A business advisor can help you find and speak with long-term franchisees who operated under the predecessor to understand the transition.
• Independent online research on a predecessor company can sometimes reveal issues not required to be in the FDD; your attorney can guide this search.

Explanation

This risk was not identified. Item 3 of the FDD explicitly states, 'No litigation is required to be disclosed in this Item.' This indicates that in the past year, there has been no material litigation involving the franchisor that would need to be reported under franchise law, such as actions involving franchise relationships, fraud, or other specified claims. This absence of disclosed litigation is a positive indicator of system stability.

Potential Mitigations

• For any FDD, your attorney should carefully review all details of any disclosed litigation in Item 3.
• A business advisor can guide you in asking current franchisees about any litigation they are aware of, even if not disclosed.
• Your attorney can conduct a public records search for litigation involving the franchisor that may not have met the specific disclosure thresholds for Item 3.