Explanation

The FDD does not indicate financial instability. The franchisor's performance is guaranteed by its parent, Suite Management Franchising, LLC (SMF), whose audited financial statements in Exhibit J show positive net income, retained earnings, and substantial assets. Financial stability is crucial as it underpins the franchisor's ability to provide support and grow the brand.

Potential Mitigations

• An experienced franchise accountant should still review the guarantor's financials, including all footnotes and cash flow statements, to confirm financial health.
• It is wise to have your accountant assess the balance sheet, paying attention to the high value of intangible assets and goodwill.
• A business advisor can help you understand the implications of the multi-layered parent and private equity ownership structure.

Explanation

The franchisee turnover rates disclosed in Item 20 are very low, with only one termination and no non-renewals or other cessations in 2024 out of a base of 275 franchised outlets. Low turnover can be a positive indicator of franchisee satisfaction and system health. High turnover can be a major red flag for systemic problems.

Potential Mitigations

• You should still contact a random sample of current and former franchisees listed in Exhibit I to discuss their experiences and satisfaction.
• Asking franchisees about their profitability and relationship with the franchisor can provide valuable context beyond the numbers; your business advisor can help prepare questions.
• A discussion with your attorney about any confidentiality clauses mentioned in Item 20 is also recommended.

Explanation

The franchise system has experienced steady growth, as shown in Item 20, but not at a rate that appears dangerously rapid for a well-established system with a large parent company. While very fast growth can sometimes strain a franchisor's support resources, the disclosed growth rate here seems manageable and is supported by a financially stable parent organization.

Potential Mitigations

• It is prudent to ask current franchisees, particularly those who opened recently, about the quality and timeliness of the support they received from the franchisor.
• Your business advisor can help you formulate questions to gauge if support systems are keeping pace with growth.
• Your accountant can analyze the parent company's financials to confirm resources are adequate for supporting the expanding system.

Explanation

This franchise system is not new or unproven. Item 1 indicates that SMF has been franchising since 2012, and Item 20 shows a large, established system with over 300 locations. Investing in a new system carries higher risks due to potentially unproven business models and support infrastructure, a concern not applicable here.

Potential Mitigations

• Even with an established system, speaking with franchisees who have been in the system for various lengths of time is a valuable step for due diligence.
• Engaging a business advisor to research the brand's reputation and market position can provide additional confidence.
• Your attorney can review the history disclosed in Item 1 for any potential concerns.

Explanation

The business model of leasing salon suites to beauty professionals is an established concept within the beauty industry, not a temporary fad. The franchisor's long operating history and the large system size suggest sustained market demand. A fad-based business poses a risk of declining consumer interest over the long term of the franchise agreement.

Potential Mitigations

• A business advisor can help you research the long-term trends in the salon and beauty industry to confirm the model's sustainability.
• You should analyze the local competitive landscape for similar salon suite concepts with a real estate professional.
• Discussing the business model's resilience to economic shifts with your financial advisor is also recommended.

Explanation

This risk was not identified. The management team detailed in Item 2 possesses extensive and relevant experience in franchising with large, established brands. Inexperienced management can be a significant risk to a franchise system, but the leadership team here appears to be well-qualified to manage a large franchise network.

Potential Mitigations

• You can research the professional backgrounds of the key executives listed in Item 2 online to further verify their experience and track record.
• When speaking with current franchisees, it is useful to ask about their direct interactions with and confidence in the corporate leadership team.
• A business advisor can help you assess the overall strength of the management team.

Explanation

This risk was not identified in the FDD. Item 1 clearly identifies the parent companies, and Item 21 provides that the ultimate parent, Propelled Brands Franchising, LLC, provides a full financial performance guaranty. The parent's audited financial statements are included as Exhibit J. Proper disclosure of parent companies is important for assessing the true financial backing of the franchisor.

Potential Mitigations

• It is still valuable for your accountant to review the provided parent company financials and the terms of the performance guarantee.
• Your attorney should confirm the corporate structure and the legal enforceability of the parent guarantee.
• A business advisor can help investigate the reputation and operational history of the parent company and its other franchise brands.

Explanation

This risk was not identified in the FDD. Item 1 does not disclose any predecessors for Suite Management Franchising, LLC. The litigation and bankruptcy histories detailed in Items 3 and 4 relate to former employers of management personnel, not to a predecessor of the franchisor. A negative history with a predecessor can sometimes indicate inherited systemic problems.

Potential Mitigations

• Your attorney should carefully review Item 1 to confirm the absence of any predecessor entities.
• Conducting independent online searches for the franchise brand's history can sometimes uncover information about prior ownership structures; a business advisor may assist.
• When speaking with long-term franchisees, you can inquire about the history of the brand and any previous ownership.

Explanation

The FDD does not disclose a pattern of litigation against SMF involving claims of fraud, misrepresentation, or franchise law violations. Item 3 notes one past suit involving former directors of an unrelated company and states the franchisor is not currently a party to any material litigation. A history of such lawsuits can be a serious warning sign about a franchisor's practices.

Potential Mitigations

• Your attorney can confirm the absence of significant litigation by conducting independent public record searches for the franchisor and its parent companies.
• Asking current and former franchisees about any past or present disputes, even those not rising to the level of litigation, can provide valuable insight.
• You should always have your legal counsel carefully review the litigation section of any FDD you consider.