Explanation

The audited financial statements for USA Ninja Challenge Franchising, LLC (the franchisor) show positive net income and healthy cash flow for 2022 and 2023. There were no 'going concern' notes or other immediate signs of financial distress in the auditor's reports. However, a significant portion of revenue is derived from equipment sales to new franchisees rather than ongoing royalties, which could pose a risk if franchise sales slow down. This specific issue is detailed further under 'Miscellaneous Risks'.

Potential Mitigations

• Your accountant should review the complete, multi-year financial statements, including all footnotes, to assess the franchisor's long-term stability and cash flow.
• Discuss the franchisor's financial health and capitalization with your financial advisor, paying close attention to their dependency on franchise fees versus ongoing royalties.
• Ask your attorney to verify if any financial performance bonds are required or in place in your state.

Explanation

The system has been growing steadily, from 15 franchised outlets at the start of 2021 to 24 by the end of 2023. While this is healthy growth, it is not so explosive as to inherently suggest that the support infrastructure is over-strained. The key risk is not the pace of growth itself, but whether the franchisor's support and systems, funded by their revenues, can adequately serve the expanding network. This appears manageable based on the provided data.

Potential Mitigations

• Asking current franchisees about the quality and responsiveness of the franchisor's support systems is an essential step your business advisor can help you prepare for.
• Your accountant can assess if the franchisor's financial statements show corresponding growth in support-related expenses and personnel.
• Seeking legal counsel to understand the specific support obligations detailed in the Franchise Agreement provides clarity on what you are contractually owed.

Explanation

The franchisor began franchising in 2015 and has grown to over 20 locations, indicating it is past the initial startup phase. Management has several years of experience operating in this specific business concept. While any system under a decade old carries more risk than a multi-generational brand, USA Ninja Challenge appears to have an established operational track record and is not a brand new, unproven system. The primary risks stem from other specific disclosure and contractual issues.

Potential Mitigations

• A business advisor can help you conduct due diligence on the management team's specific franchising and industry experience.
• Speaking with the earliest franchisees listed in Item 20 can provide valuable insight into how the system has evolved and matured.
• A thorough review of the franchisor's financial history with your accountant is important to gauge stability over its operating life.

Explanation

This risk was not identified in the FDD package. The key executives listed in Item 2 appear to have been with the company since its inception in 2015 and also have prior, related industry experience. Assessing management's true capability is still a vital part of due diligence, as experience on paper does not always translate to effective support for franchisees.

Potential Mitigations

• Engaging a business advisor to help vet the management team's reputation and track record in the franchise industry is a prudent step.
• It is crucial to speak with current and former franchisees about their direct experiences with the management team's competence and support.
• Your attorney can help you formulate specific questions for the franchisor about their management philosophy and franchisee relations.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose ownership by a private equity firm or similar investment fund. The business appears to be founder-owned. However, the Franchise Agreement allows the franchisor to sell the entire system at their discretion, so future ownership could change. This highlights the importance of understanding the assignment clauses in the agreement.

Potential Mitigations

• Having your attorney explain the 'Assignment' clause in the Franchise Agreement is crucial to understand what happens if the company is sold.
• A business advisor can help you research the current owners' long-term intentions for the company.
• It's wise to ask current franchisees about any rumors or discussions regarding a potential sale of the franchise system.

Explanation

This risk was not identified in the FDD package. The franchisor, USA Ninja Challenge Franchising, LLC, does not appear to have a parent company that guarantees its obligations or for which financial disclosure would be required. The franchisor entity itself provides audited financial statements, and the analysis rests on the health of that entity.

Potential Mitigations

• Your attorney can help you verify the corporate structure and confirm the absence of any undisclosed parent entities or guarantors.
• An accountant should confirm that the financial statements provided are for the correct legal entity offering you the franchise.
• Engaging a business advisor can help investigate if any non-disclosed affiliates play a significant role in the franchise system's operations.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor has no predecessors. The business was formed in 2015 and has operated under the current entity since then. Therefore, there is no hidden history of a prior entity's bankruptcies, litigation, or franchisee failures to investigate.

Potential Mitigations

• Although no predecessors are listed, asking early franchisees about the history of the business concept before it was franchised can be insightful; your business advisor can help frame these questions.
• Your attorney should confirm that a thorough review of the FDD reveals no references to prior business names or entities that might function as predecessors.
• An accountant reviewing the financials can confirm the lack of acquisition accounting or other signs of a recent business purchase.

Explanation

This risk was not identified in the FDD package. Item 3 states, 'No litigation is required to be disclosed in this Item.' This indicates an absence of the type of material litigation involving fraud, securities violations, or franchise law that the FTC rule requires to be reported. While positive, this does not mean no disputes exist, only that none have met the threshold for mandatory disclosure.

Potential Mitigations

• Your attorney can conduct independent searches for litigation against the franchisor that may not have met the specific disclosure requirements of Item 3.
• A business advisor should guide you to ask current and former franchisees about any past or present disputes they are aware of within the system.
• Understanding the dispute resolution process in the Franchise Agreement is vital, as your attorney will advise, should a future conflict arise.