Explanation

The franchisor, Lil' Kickers Inc. (Lil' Kickers), appears financially stable. The audited financial statements in Item 21 show consistent profitability over the last three years and a healthy balance sheet with positive and growing stockholder equity. The auditor's report is unqualified and does not contain a 'going concern' warning. However, Note 2 reveals a significant contingent liability related to a debt guarantee for a related party, which is addressed in the Miscellaneous Risks section.

Potential Mitigations

• Your accountant should review the provided financial statements, including all footnotes, to form an independent opinion on the franchisor's financial health.
• Discuss the nature and potential impact of any large contingent liabilities, such as the debt guarantee mentioned in Note 2, with your attorney and accountant.
• Ask a business advisor to help you assess if the franchisor's financial condition is strong enough to provide promised support and withstand market downturns.

Explanation

This risk was not identified. Analysis of the franchisee turnover data in Item 20's tables for the past three years indicates a relatively low and stable rate of negative exits (terminations, non-renewals, and other cessations). The number of outlets ceasing operations is not high relative to the overall system size. This suggests a degree of franchisee stability within the system. High turnover can be a red flag for systemic problems, so its absence here is a positive indicator.

Potential Mitigations

• With your accountant's help, you should still calculate the annual turnover rates from Item 20 data to confirm this assessment for yourself.
• Engaging a business advisor can help you frame questions for current and former franchisees about their experiences and satisfaction levels.
• It is wise to consult your attorney about any patterns in the Item 20 data that might suggest underlying issues, even with low turnover.

Explanation

The franchisor has been operating since 2007 and shows steady, not overly rapid, growth in Item 20. The financial statements in Item 21 appear solid, suggesting they have the resources to support their current size and moderate growth. While rapid expansion can strain a franchisor's ability to provide adequate support, this does not appear to be a significant risk here, as the system's growth seems measured and backed by an experienced management team.

Potential Mitigations

• Your business advisor can help you evaluate if the franchisor's support infrastructure, as described in Item 11, is adequate for the current system size.
• When speaking with franchisees, ask newer operators about the quality and timeliness of the support they received during their launch.
• An accountant's review of the financials can help confirm if the franchisor is reinvesting sufficiently in support systems to maintain quality.

Explanation

This risk is not present. The franchise system has been operating for over 15 years, and its management team, as described in Item 2, has significant long-term experience with the brand and in the industry. Item 20 shows a substantial number of existing franchise outlets, indicating a well-established system. New or unproven systems carry higher risks related to unverified business models and inexperienced leadership, which do not appear to be factors here.

Potential Mitigations

• A business advisor can help you assess the value and maturity of the operating systems described in Item 11.
• During your due diligence calls, ask long-tenured franchisees about the evolution and stability of the business model over time.
• Have your attorney review the franchise history in Item 1 to confirm there are no hidden red flags related to predecessors or system changes.

Explanation

The business model, focused on children's soccer programs, has been in operation since 1999. This longevity suggests it is not a short-term fad but rather serves a sustained market for youth sports and child development activities. The risk of the business being a fad is therefore considered low. Fad-based businesses can face collapse when trends change, but this concept appears to have enduring appeal.

Potential Mitigations

• A business advisor can help you research the long-term trends in the youth sports and child enrichment industries to validate market stability.
• Ask existing franchisees about local demand, competition, and customer retention to gauge the business's staying power in different markets.
• Review the franchisor's plans for curriculum development and program evolution in Item 11 to assess their strategy for remaining relevant.

Explanation

This risk was not identified. The key executives listed in Item 2 have extensive, long-term experience with the Lil' Kickers brand, its predecessor Arena Sports, and the franchising industry, with most serving in their roles for over a decade. This level of management stability and experience is a positive factor, as it reduces risks associated with unproven leadership, weak support systems, or poor strategic decisions that can affect new franchisees.

Potential Mitigations

• A business advisor can help you formulate questions for the management team to further gauge their strategic vision for the company.
• When speaking with franchisees, inquire about their direct experiences with the leadership team and the quality of support they provide.
• An attorney can help verify that the experience claimed in Item 2 aligns with the support obligations outlined in Item 11.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that Lil' Kickers Inc. is owned or controlled by a private equity firm. The franchisor appears to have a stable ownership structure connected to its long-term parent/predecessor, Arena Sports. Therefore, risks often associated with PE ownership, such as a focus on short-term returns over long-term system health or a quick resale of the brand, do not seem to be present here.

Potential Mitigations

• During due diligence, you can ask the franchisor about their long-term ownership plans and vision for the brand, with guidance from your business advisor.
• Your attorney can help you investigate the corporate structure to confirm the ownership details provided in Item 1.
• Ask long-term franchisees about their perspective on the stability and philosophy of the ownership and management team.

Explanation

This risk is not present. Item 1 clearly identifies Arena Sports, Inc. as a predecessor and affiliate and explains the history of the relationship. The FDD appears transparent about the system's lineage. Furthermore, Items 3 and 4 disclose no negative history (litigation or bankruptcy) for either the current franchisor or its predecessor. This transparency and clean history reduce the risk of inheriting unforeseen problems from the past.

Potential Mitigations

• Have your attorney review the predecessor information in Item 1 to ensure the historical connections are clear.
• It is good practice to ask long-tenured franchisees about their experiences under both the current franchisor and the predecessor, Arena Sports.
• A business advisor can help you research the public reputation of both the franchisor and its predecessor company.

Explanation

This risk was not identified. Item 3 of the FDD states, "No litigation is required to be disclosed in this Item." This is a positive finding, as a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. The absence of such disclosed litigation suggests a more stable and less contentious relationship between the franchisor and its franchisees.

Potential Mitigations

• An attorney can perform independent searches for litigation that may not have met the specific disclosure thresholds for Item 3.
• When speaking with current and former franchisees, it is still prudent to ask about any disputes they are aware of within the system.
• A business advisor can help you research the franchisor's general reputation in the franchise community.