Explanation

This risk was not identified. The financial statements in Exhibit B, audited by Turner & Patat, PC, show positive net income, a strong balance sheet, and substantial cash reserves. SmallBizPros, Inc. d/b/a PADGETT BUSINESS SERVICES (Padgett) appears financially stable, with no 'going concern' notes or other red flags that would suggest an inability to provide ongoing support to its franchisees.

Potential Mitigations

• An accountant should review the franchisor's full audited financial statements to confirm financial health and ability to support the system.
• Discuss the company's financial strategy and plans for reinvestment with your business advisor.
• Your attorney can help you understand any financial performance representations and their relationship to the franchisor's overall stability.

Explanation

This risk was not identified. A review of Item 20 data for the past three fiscal years indicates low franchisee turnover rates. The number of terminations and other cessations of operation is not significant relative to the total number of franchises in the system. The data suggests a stable franchise network.

Potential Mitigations

• It is still valuable to contact a number of current and former franchisees from the lists in Exhibits E and F to discuss their experiences.
• Your attorney can help you frame questions for former franchisees to understand their reasons for leaving the system.
• A business advisor can help you compare these turnover rates to available industry benchmarks for context.

Explanation

This risk was not identified in the FDD. Item 20 data shows that the franchise system has been stable, and even slightly contracted in size over the last three years, rather than experiencing rapid growth. This suggests the franchisor's resources are not likely to be strained by supporting a large influx of new, inexperienced franchisees.

Potential Mitigations

• Discuss the franchisor's long-term growth plans with them directly to understand their strategy for system expansion.
• Your business advisor can help you assess whether the current level of support detailed in Item 11 is appropriate for the system's size.
• Reviewing the franchisor's financial statements with your accountant can provide insight into their capacity for future growth.

Explanation

This risk does not apply. Item 1 indicates that Padgett and its predecessors have been franchising for decades, since 1988 and 1966 respectively. The FDD shows a long operational history and a mature system with extensive experience, rather than an unproven or new franchise concept.

Potential Mitigations

• Even with a mature system, it's wise to speak with long-tenured franchisees to understand the system's evolution and the franchisor's adaptability over time.
• Your attorney should review the history of the franchisor and any predecessors as disclosed in Item 1.
• A business advisor can help you evaluate how a mature brand competes in the current market.

Explanation

The risk of this being a fad business appears low. The franchise provides fundamental business services, including tax preparation, payroll, and accounting, for which there is a consistent and long-term market demand. This is not a business model based on a fleeting trend or novelty.

Potential Mitigations

• A business advisor can help you research the long-term demand and competitive landscape for small business accounting and tax services in your target market.
• Discuss the franchisor's strategies for adapting to technological changes in the accounting industry, such as AI and automation.
• Reviewing Item 11 with your attorney can provide insight into the franchisor's commitment to ongoing development.

Explanation

This risk was not identified. Item 2 and Item 11 detail a management and training team with extensive, long-term experience in the franchise system and the accounting industry. Many key executives have been with the company for decades, indicating a stable and knowledgeable leadership team.

Potential Mitigations

• It can be beneficial to research the professional backgrounds of the key executives listed in Item 2.
• When speaking with current franchisees, you can inquire about their direct experiences with and perceptions of the leadership team.
• A business advisor can help you assess the strength and depth of the management team.

Explanation

There is no indication in Item 1 or elsewhere in the FDD that the franchisor is owned or controlled by a private equity firm. The leadership appears to be comprised of long-tenured individuals, suggesting a different ownership structure and potentially different strategic priorities than a typical PE-backed company.

Potential Mitigations

• Your attorney can verify the corporate ownership structure and identify the ultimate controlling parties of the franchisor.
• In discussions with the franchisor, you may inquire about their long-term ownership plans and vision for the company.
• A business advisor can help you understand the potential pros and cons of different types of franchisor ownership structures.

Explanation

The risk of a non-disclosed parent company appears low. Item 1 clearly identifies the franchising entity and its affiliates. The franchisor provides its own audited financial statements in Item 21, and there is no indication that it is a thinly capitalized subsidiary of a larger, undisclosed entity whose financials would be material to your decision.

Potential Mitigations

• Your attorney can conduct a corporate search to confirm the ownership structure and ensure no material parent companies are omitted.
• When reviewing the financial statements with an accountant, you can assess the level of inter-company transactions with the disclosed affiliates.
• It's useful to ask the franchisor to explain the relationship and operational roles of all affiliated companies mentioned in Item 1.

Explanation

This risk was not identified. Item 1 discloses the existence of a predecessor entity from which the current franchisor acquired the system. However, the FDD does not indicate any negative history, such as litigation or bankruptcy, associated with this predecessor in Items 3 and 4. The transition appears to have occurred decades ago.

Potential Mitigations

• You can ask the franchisor for more details about the transition from the predecessor.
• Speaking with very long-tenured franchisees, if any are available from the Item 20 list, might provide historical context.
• Your attorney can review the predecessor disclosures and advise on any potential implications.

Explanation

No pattern of litigation was identified. Item 3 of the FDD states there is no litigation that requires disclosure. While the notes to the financial statements detail a past lawsuit with a former executive which was resolved in the franchisor's favor, this does not represent a pattern of disputes with franchisees alleging fraud, misrepresentation, or other systemic issues.

Potential Mitigations

• It is still advisable for your attorney to conduct an independent search for any litigation involving the franchisor that may not have met the criteria for disclosure in Item 3.
• You can ask current franchisees about the general nature of their relationship with the franchisor and if disputes are common.
• Understanding the dispute resolution clauses in Item 17 with your attorney is important for any potential future disagreement.