Explanation

Item 20 data from 2022-2024 shows a relatively stable system size. Over the three-year period, there were two transfers, two openings, no terminations, and one franchise that "ceased operations for other reasons." This level of turnover does not appear unusually high for a system of this size, suggesting a degree of stability among franchisees. However, the reason for the one ceased operation is not specified, which warrants further inquiry during your due diligence.

Potential Mitigations

• It is highly recommended that you contact a significant number of current and former franchisees listed in Item 20 to discuss their experiences.
• A discussion with your business advisor can help put these turnover numbers into the context of the childcare industry.
• Your attorney can help you formulate specific questions for the franchisor regarding the circumstances of the single ceased operation.

Explanation

This risk was not identified in the FDD package. The franchisor's growth appears to be slow and controlled, with only two new franchises opened over the last three years. Rapid expansion can strain a franchisor's ability to provide adequate support. When a system grows too quickly, new franchisee training, site selection assistance, and ongoing operational guidance may suffer, potentially impacting the success of individual units.

Potential Mitigations

• During discussions with existing franchisees, it is wise to ask about the quality and timeliness of the support they receive from the franchisor.
• Your accountant can review the franchisor's financial statements to assess if they have the infrastructure and capital to support their current system size.
• A business advisor can help you evaluate the franchisor's staffing levels for support personnel relative to the number of franchisees.

Explanation

The LeafSpring system has a long operating history, with predecessors dating back to 1988 and franchise offerings since 1999. The management team has significant tenure, and the franchisor provides audited financial statements and a multi-year history of franchisee performance in Item 20. Therefore, the risks associated with an unproven system are not present here. An unproven system can lack brand recognition, refined operating procedures, and adequate support, posing a higher risk to early investors.

Potential Mitigations

• Even with a proven system, it is important to have your attorney review the entire FDD and franchise agreement for any unusual terms.
• A thorough review of the franchisor's financials with your accountant is always a prudent step in due diligence.
• Speaking with long-term franchisees can provide valuable insight into the evolution and stability of the business model over time.

Explanation

This risk was not identified in the FDD package. The early childhood education and childcare industry represents a fundamental and enduring service need for many families, rather than a temporary trend. The business model, which has been in operation for decades under LeafSpring and its predecessor, demonstrates sustained market demand. A business based on a fad carries the risk that consumer interest could decline, potentially harming long-term viability even if contractual obligations remain.

Potential Mitigations

• A business advisor can help you analyze the long-term demographic and economic trends in your specific market that support demand for childcare services.
• It is still valuable to ask the franchisor and existing franchisees about how they innovate and adapt to changing educational philosophies and family needs.
• Your accountant can help you model financial scenarios based on varying enrollment levels to test the business's resilience.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives and directors at LeafSpring have extensive and long-term experience with the company, its affiliates, and its predecessor, with some tenures dating back to 2003. This indicates a stable leadership team with deep experience in both the childcare industry and the franchise system itself. Inexperienced management can be a significant risk, potentially leading to poor strategic decisions and inadequate franchisee support.

Potential Mitigations

• When speaking with franchisees, it is still a good practice to ask about their direct experiences with the management team's competence and responsiveness.
• Your attorney and business advisor can help you perform background checks or searches on key executives as part of due diligence.
• It is always recommended to thoroughly investigate the background of the people running the franchise system you are considering joining.

Explanation

This risk was not identified in the FDD package. Item 1 indicates the franchisor is a privately held limited liability company, and there is no disclosure of ownership by a private equity firm. When a franchisor is owned by a private equity fund, there can be a risk that decisions are focused on short-term investor returns rather than the long-term health of the franchisees and the brand, which can sometimes lead to increased fees or reduced support.

Potential Mitigations

• It is always prudent to ask about the long-term ownership structure and vision for the company during your due diligence.
• A business advisor can help you research the ownership history of the franchisor for any past private equity involvement.
• Your attorney should review the assignment clauses in the franchise agreement to understand what happens if the franchisor is sold in the future.

Explanation

The FDD discloses that PRISM, LLC (the franchisor) has a key affiliate, LeafSpring, LLC, which operates the model school. The franchisor's financial statements are provided and audited, and they include significant details about the financial relationship with this affiliate. Therefore, the risk of non-disclosure is not present. Failing to disclose a parent or key affiliate's financial status can hide risks related to the true financial backing and stability of the overall enterprise.

Potential Mitigations

• It is important for your accountant to carefully review the financial statements of both the franchisor and any disclosed affiliates.
• Your attorney should examine the legal relationship between the franchisor and its affiliates to understand their respective obligations to you.
• Understanding the flow of funds and dependencies between the franchisor and its affiliates is a key part of financial due diligence.

Explanation

This risk was not identified in the FDD package. Item 1 discloses the franchisor's history, including its name change from "Rainbow Station" and its relationship with its affiliate, which was converted from a corporation (RSI) to an LLC (RSL) and later renamed. This history appears transparent. Failing to disclose or obscuring negative details about a predecessor's history, such as past litigation or franchisee failures, can prevent you from having a full picture of the system's historical challenges.

Potential Mitigations

• Your attorney should still carefully review the predecessor and affiliate history disclosed in Items 1, 3, and 4.
• Speaking with long-term franchisees who operated under the predecessor name can provide valuable historical context.
• A business advisor can help you research the public records of any predecessor entities for additional information.

Explanation

This risk was not identified in the FDD package. Item 3 states, "No litigation is required to be disclosed in this Item." This indicates an absence of recent, material legal actions involving the franchisor related to the franchise relationship, fraud, or other relevant claims. A pattern of litigation, especially franchisee-initiated lawsuits alleging misrepresentation, can be a major red flag about the franchisor’s practices and system health.

Potential Mitigations

• Although no litigation is disclosed, your attorney may suggest conducting an independent search for litigation involving the franchisor as part of due diligence.
• It is always a good practice to ask current and former franchisees about any disputes they may have had with the franchisor, even if they didn't result in litigation.
• Ensure you understand the dispute resolution clauses in the franchise agreement with your attorney, in case a future conflict arises.