Explanation

This risk was not identified in the FDD package. High franchisee turnover, often revealed in Item 20, can be a major red flag indicating systemic problems like unprofitability or poor support. This FDD, however, shows a low rate of terminations and cessations, suggesting a stable franchise system from a turnover perspective.

Potential Mitigations

• Even with low disclosed turnover, having your attorney help formulate questions for former franchisees is a valuable part of due diligence.
• Developing a strong business plan with your accountant can help you prepare for the operational challenges that cause others to fail.
• A business advisor can help you interpret the context behind any franchisee transfers listed in Item 20, as these can sometimes mask distressed sales.

Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support. The data in Item 20 indicates that Winmark is experiencing steady, manageable growth for a mature system, not the explosive expansion that would raise concerns about overstretched resources.

Potential Mitigations

• It is still wise to ask current franchisees about the quality and timeliness of support with help from your business advisor.
• An accountant's review of the franchisor's financial statements can confirm they are investing in support infrastructure to match growth.
• Your attorney can help clarify the franchisor's contractual support obligations outlined in Item 11.

Explanation

This risk was not identified in the FDD package. An unproven system presents higher risks. However, Item 1 shows that Plato's Closet has been franchising since 1999 and is part of a large, multi-brand corporation with extensive history. This is a mature and well-established franchise system, not a new or unproven venture.

Potential Mitigations

• Engaging a business advisor to analyze the brand's long-term market position and competitive landscape is still beneficial.
• Reviewing the management team's extensive experience in Item 2 with your attorney can provide additional confidence in their leadership.
• An accountant can analyze the multi-year financial data in Item 21 to assess the system's long-term financial performance.

Explanation

This risk was not identified in the FDD package. The business model, focused on the resale of brand-name teen and young adult clothing, is a well-established and growing segment of the retail market rather than a temporary trend. This suggests a greater potential for long-term consumer demand and sustainability.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the second-hand retail industry in your specific market.
• Discussing the business's resilience to economic shifts with current franchisees provides valuable, real-world insight.
• Your financial advisor can help model different economic scenarios to test the durability of your business plan.

Explanation

This risk was not identified in the FDD package. Inexperienced leadership can pose a significant threat to a franchise system. However, the executive profiles in Item 2 detail a management team with extensive, long-term experience within Winmark and the franchising industry, suggesting stable and knowledgeable leadership.

Potential Mitigations

• Even with an experienced team, it is useful to ask current franchisees about their direct interactions and the quality of support they receive from management.
• A business advisor can help you research the public reputation and track record of the key executives listed.
• Your attorney can review the executives' litigation and bankruptcy history in Items 3 and 4 for any potential concerns.

Explanation

This risk was not identified in the FDD package. There is no indication in Item 1 that the franchisor is owned or controlled by a private equity firm. Winmark Corporation appears to be a publicly-traded entity, which involves different governance and strategic priorities than a typical PE-owned company.

Potential Mitigations

• A business advisor can help you confirm the corporate structure and identify the ultimate controlling parties of the franchisor.
• Your attorney can review the Franchise Agreement for any clauses that might be typical of a PE-owned franchisor, such as unusually aggressive exit-related terms.
• An accountant's review of the shareholder equity section in the financial statements can provide further insight into the ownership structure.

Explanation

This risk was not identified in the FDD package. Winmark Corporation is disclosed as the franchisor, and its audited consolidated financial statements are provided. There is no indication of a separate, controlling parent company whose information has been withheld.

Potential Mitigations

• Your attorney can verify the corporate structure to ensure there are no undisclosed parent entities with significant control.
• It is always good practice to have your accountant review the provided financial statements for any notes about related-party transactions or guarantees.
• A business advisor can help research the company's public filings to confirm its corporate structure.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that Winmark has undergone name changes in its history but does not disclose any predecessors from which it acquired the business. Therefore, there are no concerns related to a hidden or problematic history from a prior operator of the franchise system.

Potential Mitigations

• Your attorney can confirm the corporate history described in Item 1 through public records.
• A business advisor can help you research the brand's history to ensure no other entities were involved in its development.
• Asking long-tenured franchisees about the company's history can provide additional comfort and background.

Explanation

This risk was not identified in the FDD package. A pattern of litigation against a franchisor can be a serious warning sign. However, Item 3 of this FDD states that there is no litigation that requires disclosure, which is a positive indicator for a prospective franchisee.

Potential Mitigations

• It is still prudent to conduct independent online searches for any news reports or legal actions involving the franchisor, as your attorney may suggest.
• Asking current and former franchisees about their experiences with disputes can provide insight beyond formal disclosures.
• Your attorney can help you understand the types of disputes that are common in franchising, even if none are disclosed here.