Explanation

The franchisor’s audited financial statements in Exhibit A show a history of profitability, positive net worth, and healthy cash flow. No signs of financial instability like persistent losses or negative equity were identified. Financial health is important as it suggests the franchisor has the resources to support its franchisees and grow the brand.

Potential Mitigations

• A franchise accountant should still conduct a thorough review of the financial statements, including all footnotes, to provide a professional opinion.
• Understanding the franchisor's main revenue sources (e.g., royalties vs. initial fees) with your accountant can offer insight into the system's long-term sustainability.
• It is prudent to discuss the franchisor's financial strategy and plans for reinvesting in the brand with your business advisor.

Explanation

This risk was not identified in the FDD package. Monkee's Franchising, LLC (Monkee's) began franchising in 2012 and has 57 franchised outlets, indicating it is an established system. An unproven system can be risky due to the lack of a track record, underdeveloped support systems, and minimal brand recognition, potentially leading to a higher failure rate.

Potential Mitigations

• When evaluating any franchise, it is wise for a business advisor to help you assess the franchisor's history and the maturity of their systems.
• Your accountant can review the financial stability of even established franchisors to ensure they are on solid ground.
• Legal counsel should always be engaged to review the agreements, regardless of the franchisor's age.

Explanation

This risk was not identified. The franchise operates in the established retail sector of women's apparel and accessories, which is not considered a fad. Investing in a fad business is risky because consumer interest can decline rapidly, potentially leaving you with a failing business and long-term contractual obligations after the trend has passed.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for any franchise's products or services.
• It is important to evaluate a franchisor's plans for innovation and adaptation to stay relevant in the market.
• An accountant should assist in modeling the financial resilience of the business in various economic scenarios.

Explanation

This risk was not identified. Item 2 indicates that the key executives and managing members have extensive experience with the Monkee's brand and in the retail industry, some dating back to 2000. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and a higher potential for system-wide problems.

Potential Mitigations

• For any franchise, a business advisor can help you thoroughly vet the management team’s background in both the industry and in franchising.
• Speaking with existing franchisees is a key way to gauge the competence and responsiveness of the franchisor's leadership team.
• Your attorney can help you understand the contractual obligations for support, regardless of management's experience level.

Explanation

This risk was not identified. The FDD does not indicate that the franchisor is owned by a private equity firm. Private equity ownership can be a risk because investment decisions may prioritize short-term returns for investors over the long-term health of the franchise system and the profitability of individual franchisees, sometimes leading to cost-cutting in support.

Potential Mitigations

• A business advisor can help research the ownership structure of any franchisor, including the track record of any parent or private equity firm.
• It's beneficial to ask franchisees about any changes in system direction or support levels following an ownership change.
• Your attorney should review the assignment clause in the franchise agreement to understand what happens if the franchisor is sold.

Explanation

This risk was not identified. Item 1 clearly states that the franchisor has a subsidiary (its predecessor) but no parent company. Failing to disclose a parent company can be a risk, as it may obscure the ultimate financial control and stability of the franchisor, especially if the franchising entity itself is thinly capitalized and relies on its parent for support.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and identify any undisclosed controlling entities.
• If a parent company does exist and provides a guarantee, an accountant should review its financial statements for stability.
• Understanding the full corporate structure is a key piece of due diligence a business advisor can assist with.

Explanation

Item 1 discloses a predecessor entity and is transparent that prior license sales may have constituted franchise sales. This proactive disclosure is positive. The FDD also notes one lawsuit involving the predecessor. While the history appears straightforward and not hidden, any franchise with a predecessor carries historical context that could impact the current operations and brand reputation.

Potential Mitigations

• Engaging an attorney to review the disclosed history of the predecessor in Items 1 and 3 is a prudent step.
• Discussing the transition from the predecessor with long-term franchisees can provide valuable insight into the system's evolution.
• Your business advisor can help you assess if any inherited issues from the predecessor could still affect the franchise system.

Explanation

This risk was not identified. Item 3 of the FDD discloses only a single, settled lawsuit from 2018. This does not represent a pattern of litigation, which would be a significant red flag. A pattern of suits against a franchisor, especially for fraud or misrepresentation, can indicate deep systemic problems and a contentious relationship with its franchisees.

Potential Mitigations

• Having an attorney review the litigation history in Item 3 of any FDD is a critical due diligence step.
• It is wise to conduct independent online searches for news articles or other information about litigation involving the franchisor.
• A business advisor would recommend speaking with current franchisees to ask about the franchisor's general relationship with the network.