Explanation

The audited financial statements in Exhibit P do not indicate financial instability. The franchisor, BAB Systems, Inc. (BAB), reports consistent net income and positive stockholders' equity. While strong financials do not guarantee success, they suggest BAB has the resources to support its system. You should always have your accountant review the full financial statements and footnotes to confirm this assessment.

Potential Mitigations

• A thorough review of the complete, audited financial statements and footnotes with your accountant is essential to verify financial health.
• It is wise to have a financial advisor assess the franchisor’s balance sheet, particularly the ratio of liabilities to assets, to gauge its solvency.
• Engaging an attorney to confirm the franchisor is in good standing and meets state financial requirements provides an additional layer of security.

Explanation

This risk was not identified in the FDD. The data in Item 20 shows the franchise system has been shrinking over the last three years, not undergoing rapid expansion. While this avoids the risks associated with outpacing support capabilities, a shrinking system presents its own set of challenges regarding brand health and market presence that you should evaluate carefully.

Potential Mitigations

• A business advisor can help you research the franchisor’s growth strategy to understand its plans for future development and support.
• When interviewing existing franchisees, ask about the quality and responsiveness of the support they receive from the franchisor's corporate team.
• Legal counsel should review the franchisor's contractual support obligations to ensure they are clearly defined and adequate.

Explanation

This risk does not appear to be present. Item 1 of the FDD indicates that BAB has been offering My Favorite Muffin franchises since 1998, demonstrating a long operational history. An established system may have more refined processes and brand recognition, but this does not eliminate the need for thorough due diligence on its current health and performance.

Potential Mitigations

• Verifying the system's current health by speaking with a range of franchisees is a prudent step your business advisor can facilitate.
• Your attorney should still review all documents for terms that may be outdated or unfavorable despite the system's age.
• An accountant can analyze recent financial trends to ensure the mature system is not in a state of decline.

Explanation

The business concept, centered on staple items like muffins, bagels, and coffee, does not appear to be a fad. These products have a long history of sustained consumer demand. Therefore, the risk of the entire business concept becoming obsolete due to a passing trend seems low. The key challenge will likely be competition within this mature market segment rather than the concept's viability.

Potential Mitigations

• A business advisor can help you conduct a thorough market analysis to assess local competition and long-term demand.
• In discussions with the franchisor, inquire about their strategies for innovation and keeping the brand relevant over time.
• When speaking with existing franchisees, ask how they adapt to local competition and evolving consumer tastes.

Explanation

This risk is not present. Item 2 shows that the key executives, including the President/CEO and General Counsel, have been with BAB since the 1990s. This long tenure indicates a management team with extensive experience in this specific franchise system, which can provide operational stability and deep institutional knowledge. This level of experience is a positive factor for a prospective franchisee.

Potential Mitigations

• It is still beneficial to research the professional backgrounds of the management team listed in Item 2 with your business advisor.
• During due diligence calls, ask current franchisees about their direct experiences and the quality of their interactions with the leadership team.
• An attorney can confirm there are no undisclosed legal issues related to management that might affect the company.

Explanation

This risk does not appear to be a factor. The FDD's description of the corporate structure in Item 1 does not indicate that the franchisor or its parent company, BAB, Inc., is owned or controlled by a private equity firm. Therefore, risks specifically associated with short-term, investor-driven decision-making that can sometimes accompany PE ownership may not be a primary concern here.

Potential Mitigations

• A business advisor can help you research the ownership structure of the parent company, BAB, Inc., to confirm its status.
• Your attorney should verify that there are no undisclosed controlling entities that could influence the franchisor's long-term strategy.
• Ask current franchisees if there have been any recent ownership changes or shifts in management philosophy.

Explanation

The FDD discloses the parent company, BAB, Inc., but only provides the financial statements for the subsidiary franchisor entity, BAB Systems, Inc. While this may be compliant with disclosure rules, your financial visibility is limited to the subsidiary. The overall health and stability of the parent company, which ultimately controls the franchisor and owns the trademarks, remains partially obscured without its financials.

Potential Mitigations

• An accountant should review the provided subsidiary financials and consider the potential risks of not having the parent company's statements.
• Investigating public filings for the parent company, BAB, Inc., with a financial advisor could provide the missing financial insight.
• Your attorney can help you inquire about the financial dependencies between the parent and the franchisor subsidiary.

Explanation

This risk is not present, as the franchisor explicitly states in Item 1 that it has no predecessors requiring disclosure under franchise law. This indicates the business history presented is that of the current operating entity. This simplifies due diligence, as there are no prior corporate structures whose history of litigation or bankruptcy would need to be investigated.

Potential Mitigations

• Asking long-tenured franchisees about the company's history can sometimes reveal informal changes in ownership or strategy not captured in official disclosures.
• A business advisor can help you research the brand's history online to ensure no significant information has been overlooked.
• Your attorney can confirm that the lack of disclosed predecessors aligns with corporate records.

Explanation

This risk was not identified. Item 3 of the FDD states that no litigation is required to be disclosed. This is a positive indicator, as it suggests the franchisor is not currently involved in, nor has it recently settled, material legal disputes with franchisees, suppliers, or regulators regarding issues like fraud, contract violations, or statutory non-compliance.

Potential Mitigations

• It is still prudent for your attorney to conduct a public records search for litigation involving the franchisor that may not have met the threshold for disclosure.
• When speaking with former franchisees, you should inquire if any unresolved disputes contributed to their departure.
• A business advisor can help you search for online discussions or news articles related to franchisee satisfaction or disputes.