Explanation

This risk was not identified in the FDD Package. Item 20 data shows the system is shrinking, not undergoing rapid growth. Rapid growth can be a risk because a franchisor's support systems may fail to keep pace with the needs of many new franchisees, leading to inadequate training and assistance for everyone in the system.

Potential Mitigations

• When evaluating any franchise, your accountant should analyze the rate of unit growth in Item 20 against the franchisor's financial capacity in Item 21.
• Speaking with franchisees who joined at different times can provide your business advisor with insight into whether support levels have changed over time.
• Your attorney can help assess whether the franchise agreement contains sufficient guarantees of support.

Explanation

This risk was not identified in the FDD package. Omega LLC has been franchising since 2007, as stated in Item 1. An unproven system presents higher risks because its business model may not be validated, its brand has little recognition, and its support infrastructure is likely underdeveloped, which can negatively impact your chance of success.

Potential Mitigations

• For any emerging franchise, it's wise to have a business advisor thoroughly investigate the prior industry and management experience of the leadership team.
• Your attorney should advise extra caution and may be able to negotiate more franchisee-favorable terms to offset the higher risk of a new system.
• An accountant should carefully scrutinize the capitalization of a new franchisor to assess its ability to fund its obligations.

Explanation

This risk was not identified. The supplemental education and tutoring industry, as described in Item 1, is a well-established market with consistent demand, not a business based on a short-term trend or fad. Investing in a fad business is risky because consumer interest can disappear quickly, potentially leaving you with a worthless business and long-term financial obligations.

Potential Mitigations

• Engaging a business advisor to research long-term market trends for any industry you consider entering is a crucial due diligence step.
• Your financial advisor can help you assess the business model's resilience to economic shifts and changing consumer tastes.
• Reviewing the franchisor's plans for innovation and adaptation with legal counsel can provide insight into their long-term vision.

Explanation

This risk was not identified in the FDD package. Item 2 indicates that the key executives have been with the company since 2013 or earlier, suggesting a stable management team with extensive experience specific to this brand and industry. Inexperienced leadership can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• When evaluating a franchise, it is prudent to have your business advisor research the professional backgrounds of the key executives listed in Item 2.
• Contacting existing franchisees to inquire about their experiences with the management team can offer valuable, real-world insights.
• Your attorney can help you understand the implications if there has been recent turnover in key management positions.

Explanation

This risk was not identified in the FDD. Item 1 does not indicate that the franchisor is owned by a private equity (PE) firm. PE ownership can be a risk because their typical business model may prioritize short-term returns for investors over the long-term health of franchisees, sometimes leading to increased fees or reduced support.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor should research the firm's history with other franchise brands.
• Your attorney can help you analyze contract terms related to assignment, as PE firms often have a defined timeline for selling the business.
• It is wise to discuss with existing franchisees whether they have observed changes in franchisor behavior since a PE acquisition.

Explanation

This risk was not identified in the FDD. Item 1 does not disclose a parent company structure that would require the parent's financial statements to be included. If a franchisor is a subsidiary of another company, the financial health of that parent can be material, and its absence from the FDD could hide financial instability affecting the entire system.

Potential Mitigations

• Your attorney can help determine if a parent company's financials should have been included based on FTC rules, especially if the franchisor is newly formed.
• If a parent company guarantees the franchisor's obligations, an accountant must review the parent's financial statements as carefully as the franchisor's.
• A business advisor can help investigate the complete ownership structure of the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose any predecessor entities. A predecessor is a company from which the franchisor acquired the major assets of the business. Full disclosure of a predecessor's history, including any past litigation or bankruptcies, is important for you to understand the full history and potential inherited issues of the franchise system.

Potential Mitigations

• Your attorney should always verify if a predecessor is mentioned in Item 1 and cross-reference that information with Items 3 and 4 for prior litigation or bankruptcy history.
• When a predecessor exists, speaking with long-term franchisees about their experience before the transition is a valuable due diligence step for your business advisor.
• An accountant can help analyze if the acquisition from a predecessor has materially impacted the franchisor's financial stability.

Explanation

This risk was not identified in the FDD. Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits, especially claims of fraud or breach of contract brought by other franchisees, can be a major red flag indicating systemic problems. Similarly, a high number of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious culture.

Potential Mitigations

• Always have your attorney carefully review the nature, status, and outcome of any lawsuits disclosed in Item 3.
• Your business advisor should guide you in asking current and former franchisees about any litigation or disputes they are aware of.
• Even without disclosed litigation, searching court records for the franchisor's name can sometimes reveal disputes; your attorney can assist with this.