Explanation

This risk was not identified in the FDD. Item 20 data shows a very low rate of franchisee turnover, with only one termination and one non-renewal out of a system of over 400 stores in the most recent year. Generally, high turnover can signal franchisee dissatisfaction or lack of profitability, so it is an important metric to analyze when evaluating a franchise system.

Potential Mitigations

• When reviewing any FDD, it is advisable to have your accountant calculate the turnover rate from Item 20 data.
• Contacting former franchisees listed in the FDD is a crucial due diligence step your business advisor can help you prepare for.
• Your attorney can help you understand the definitions a franchisor uses for categories like 'ceased operations' versus 'transferred'.

Explanation

This risk was not identified. Item 20 data indicates the franchise system is experiencing steady, controlled growth rather than rapid expansion that might strain support resources. In general, a prospective franchisee should be cautious of systems expanding too quickly, as it can sometimes lead to inadequate franchisee support, training, and quality control.

Potential Mitigations

• Assessing the ratio of franchisor support staff to the number of franchise units is a worthwhile exercise to do with your business advisor.
• Your accountant can review a franchisor's financials to see if investments in support infrastructure are keeping pace with system growth.
• It is wise to ask existing franchisees about the quality and responsiveness of the franchisor's support system.

Explanation

This risk was not identified. The FDD indicates in Item 1 that the Once Upon A Child franchise system has been operating for over 30 years, making it a well-established and mature brand. With new systems, there is often higher risk associated with unproven business models, a lack of brand recognition, and developing support structures.

Potential Mitigations

• For any franchise, a thorough review of the franchisor's history and business experience in Item 1 is a crucial step to perform with your attorney.
• A business advisor can help you research the track record of any new or emerging franchise system.
• Your accountant can analyze the financials of a new franchisor to assess its capitalization and long-term viability.

Explanation

This risk does not appear to be present. The business model, focused on reselling used children's apparel and goods, is part of a well-established retail sector with sustained consumer demand. Fad businesses are often tied to fleeting trends and can pose a significant risk if consumer interest wanes, leaving you with a long-term contract for a short-term concept.

Potential Mitigations

• Working with a business advisor to research the long-term market trends for any industry is a valuable part of due diligence.
• It's prudent to evaluate a concept's resilience to economic shifts and changing consumer tastes with your financial advisor.
• Always ask a franchisor about their plans for future innovation and concept evolution.

Explanation

This risk was not identified. The executive biographies in Item 2 show a senior management team with extensive, long-term experience within both the franchising industry and Winmark's specific brands. When considering a franchise, it is important to verify that the leadership has relevant experience, as inexperienced management can lead to poor strategic decisions and inadequate support.

Potential Mitigations

• A close review of management biographies in Item 2 of any FDD is an important step to take with your business advisor.
• Asking existing franchisees about their confidence in the management team provides valuable insight.
• Your attorney can help you research the public track record of key executives.

Explanation

This risk was not identified. Item 1 indicates the franchisor, Winmark, is a publicly held company and does not appear to be controlled by a private equity firm. This type of ownership can sometimes introduce risks related to short-term profit motives over the long-term health of the brand, so it's a factor to consider in due diligence.

Potential Mitigations

• If a franchisor is owned by a private equity firm, researching the firm's history with other franchise brands is an important task for your business advisor.
• Your attorney should analyze the franchisor's right to sell the system and its potential impact on your agreement.
• It is wise to ask current franchisees about any changes in culture or support since a private equity acquisition.

Explanation

This risk was not identified as Item 1 clearly states the franchisor has no parent company. In cases where a franchisor is a subsidiary of a larger corporation, it is important to understand the parent's financial health and influence, as this can affect the stability and support provided to franchisees.

Potential Mitigations

• Your attorney should verify the corporate structure described in Item 1 to ensure there are no undisclosed parent or controlling entities.
• When a parent company exists, it is important for your accountant to review its financial statements, if provided.
• Discuss with your attorney whether a guarantee from a parent company is necessary if the franchisor subsidiary appears thinly capitalized.

Explanation

This risk was not identified, as Item 1 states there are no predecessors that require disclosure. When a franchise system has been acquired from a prior owner, it is important to investigate the predecessor's history for any signs of trouble, such as litigation or high franchisee turnover, which could carry over to the new ownership.

Potential Mitigations

• A careful review of Item 1 of any FDD with your attorney will clarify if the franchisor has any disclosed predecessors.
• If predecessors exist, a business advisor can help you research their historical performance and reputation.
• Asking long-term franchisees about their experience under previous ownership can provide valuable context.

Explanation

This risk was not identified. Item 3 states that there is no litigation that requires disclosure. A pattern of litigation, especially cases brought by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems within a franchise. The absence of such litigation is a positive indicator.

Potential Mitigations

• Reviewing Item 3 of any FDD with your attorney is a critical step to identify any history of disputes.
• Even if no litigation is disclosed, your attorney can conduct independent searches for legal disputes involving the franchisor.
• Asking current and former franchisees about their experiences with disputes can provide insight beyond the FDD.