Explanation

This risk was not identified as Lil' Athletes LLC is a new franchisor with no operating franchisees to date. Therefore, there is no history of franchisee turnover to analyze. Generally, high franchisee turnover is a critical warning sign that may indicate systemic problems with profitability, franchisor support, or the overall business model. It is a key metric to monitor in future FDDs as the system develops.

Potential Mitigations

• As this is a new system, speaking with the initial cohort of franchisees once they are established will be important; a business advisor can help structure these conversations.
• Your attorney should review the termination and renewal terms in Item 17 to understand your rights and obligations if you decide to leave the system.
• Discussing potential challenges with an experienced franchise consultant can provide valuable perspective on a new system's risks.

Explanation

This risk was not identified in the FDD, as the franchisor is new and has no history of franchise unit growth. Rapid expansion can strain a franchisor's ability to provide adequate support. While Item 20 projects future growth, you should monitor whether its support infrastructure, detailed in Item 11, expands accordingly to meet the needs of new franchisees.

Potential Mitigations

• In discussions with the franchisor, it is wise to inquire about their specific plans for scaling support staff and systems to match projected growth.
• A business advisor can help you assess whether the current support structure outlined in Item 11 seems adequate for the initial franchisees.
• Having your accountant review the franchisor's financial capacity in Item 21 can help determine if they have the resources to support new units.

Explanation

This risk was not identified. The business model, which offers sports instruction for young children, operates within the established and generally stable market of children's enrichment activities. While specific program elements may evolve, the core service does not appear to be based on a short-term trend or fad, suggesting a more sustainable basis for customer demand.

Potential Mitigations

• To gauge long-term viability, it is a good practice to research the local market for children's activities with a business advisor.
• Discussing the franchisor's plans for curriculum development and program innovation can provide insight into its long-term strategy.
• An analysis of demographic trends in your potential territory with a marketing professional could help forecast future demand.

Explanation

This risk was not identified. The FDD does not indicate that the franchisor is owned or controlled by a private equity firm. This type of ownership can sometimes introduce risks related to a focus on short-term returns over the long-term health of the franchise system. Based on the disclosures, this risk is not present in this franchise opportunity.

Potential Mitigations

• As part of due diligence, your attorney can verify the ownership structure of the franchisor entity to confirm there are no undisclosed controlling parties.
• It is always a good practice to understand who the ultimate decision-makers are within the franchise organization.
• A business advisor can help you understand different franchise ownership structures and their potential implications.

Explanation

This specific risk was not identified. Item 1 of the FDD clearly states that the franchisor does not have a parent company. It does appropriately disclose an affiliate company. The lack of a parent entity means your evaluation should focus entirely on the financial strength and experience of the franchisor itself, as disclosed in the FDD.

Potential Mitigations

• Your accountant should focus their review on the financial statements of the franchising entity itself, as there is no parent company to provide a financial backstop.
• It is wise to have your attorney confirm the corporate structure and the relationship with the disclosed affiliate company.
• In any franchise review, a business advisor can help assess the operational and financial viability of the standalone franchisor.

Explanation

This risk does not apply, as Item 1 of the FDD states that the franchisor has no predecessors. In cases where a franchisor has acquired the system from a previous entity, it is important to scrutinize the predecessor's history for issues like litigation or high franchisee failure rates, as these could indicate inherited systemic problems.

Potential Mitigations

• While there is no predecessor, it is still crucial to investigate the business history of the affiliate company mentioned in Item 1 with your business advisor.
• Your attorney can help you understand the distinction between a predecessor and an affiliate and why both are important in due diligence.
• Even without a predecessor, reviewing the litigation history in Item 3 for the franchisor and its management is a key step.

Explanation

This risk was not identified, as Item 3 of the FDD states there is no litigation that requires disclosure. For established systems, a pattern of lawsuits filed by franchisees alleging fraud or by the franchisor against franchisees can be a major warning sign about the health and integrity of the franchise relationship. Since the franchisor is new, no such history exists.

Potential Mitigations

• Your attorney can perform independent searches for litigation that may not have met the threshold for disclosure in Item 3.
• It is a good practice to periodically check for litigation involving the franchisor as the system grows.
• Discussing any legal disputes that current franchisees may be aware of is a key part of due diligence conversations.