Explanation

This risk was not identified in the disclosure document. Item 20 data does not indicate a high rate of franchisee terminations, non-renewals, or other cessations of business. A high turnover rate can be a major red flag, potentially signaling systemic problems like unprofitability, poor franchisor support, or a flawed business model. It is a critical indicator of the health of a franchise system and franchisee satisfaction.

Potential Mitigations

• Your business advisor can help you analyze the three-year turnover data in Item 20 to calculate the net change and churn rate.
• Engaging an attorney to help formulate questions for former franchisees is a valuable step in understanding why they left the system.
• An accountant can assist you in comparing the system's turnover rate against available industry benchmarks for context.

Explanation

The risk of excessively rapid system growth was not identified. FDD Item 20 tables show steady, but not alarmingly fast, unit growth over the past three years. Uncontrolled growth can strain a franchisor's resources, leading to a decline in the quality and availability of essential support services like training, site selection, and operational assistance for new and existing franchisees. This can negatively impact the entire system's performance and stability.

Potential Mitigations

• A business advisor can help you evaluate the franchisor's growth rate in Item 20 relative to its stated support capabilities in Item 11.
• It is wise to ask existing franchisees about their perception of the quality and timeliness of franchisor support as the system has grown.
• Your accountant can review the franchisor's financial statements to assess if they are adequately investing in infrastructure to support system growth.

Explanation

This risk was not identified. Winmark is a long-established, multi-brand franchisor that has been franchising the Play It Again Sports concept since 1988. An unproven system presents higher risks, as it may lack refined operational procedures, established brand recognition, and a history of franchisee success. The stability and support capabilities of a new franchisor are often untested, which can create significant uncertainty for early investors in the system.

Potential Mitigations

• For any franchise, a business advisor can help you research the franchisor's history and the experience of its management team in both the industry and franchising.
• It is important to have your accountant thoroughly analyze the financial statements of any franchisor, especially a new one, to assess its capitalization.
• Consulting with an attorney is crucial to understand the contractual obligations and risks, particularly when considering a newer franchise system.

Explanation

This risk was not identified in the FDD package. The business model of selling used and new sporting goods has a long history and appeals to a broad, established market, suggesting it is not a short-term trend. Investing in a business based on a fad is risky because consumer interest can decline rapidly, potentially leaving you with a worthless business while you remain bound by a long-term franchise agreement and lease.

Potential Mitigations

• A business advisor can assist you in conducting independent market research to assess the long-term consumer demand for any franchise concept.
• It is beneficial to evaluate the franchisor's stated plans for innovation and adaptation to changing market conditions.
• An accountant can help you analyze the financial resilience of a business model against economic shifts and changing trends.

Explanation

This risk was not identified in the FDD. Item 2 shows that the key executives at Winmark have extensive, long-term experience within the company and the franchising industry. Inexperienced management can be a significant liability, as they may lack the expertise to provide adequate franchisee support, manage system growth effectively, or make sound strategic decisions. This can compromise the long-term health and profitability of the entire franchise network.

Potential Mitigations

• When evaluating any franchise, it's wise to have a business advisor help you research the backgrounds of the key management personnel listed in Item 2.
• Speaking with current and former franchisees can provide valuable insight into the quality and effectiveness of the management team's support.
• An attorney can help you understand how the franchise agreement protects you if the franchisor fails to provide promised levels of support.

Explanation

This risk was not identified. Item 1 of the FDD does not indicate that Winmark is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are driven by short-term financial targets to prepare for a future sale of the company, which may not always align with the long-term health of the brand or the profitability of individual franchisees. This can sometimes lead to increased fees or reduced support.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor.
• If a franchisor is owned by a private equity firm, it is beneficial to investigate the firm's history and reputation with other franchise systems.
• Your attorney should review the franchise agreement for terms related to the sale or assignment of the franchise system.

Explanation

This risk was not identified in the disclosure document. Winmark does not disclose a parent company, as it is the top-level entity. When a franchisor is a subsidiary, the financial health and influence of its parent company can be critical. If a parent company is not disclosed, or if its required financial statements are omitted, you may lack a complete picture of the overall corporate stability and the resources backing the franchise system.

Potential Mitigations

• Your attorney can help verify the corporate structure of the franchisor as disclosed in Item 1.
• If a parent company exists and guarantees the franchisor's obligations, an accountant should review the parent's financial statements for stability.
• It is important to understand any dependencies the franchisor has on a parent company for services or financial support with help from a business advisor.

Explanation

This risk was not identified in the FDD package. Winmark does not list any predecessors in Item 1. When a franchisor has acquired a system from a predecessor, it is important that the FDD provides a complete history. An incomplete disclosure could hide past issues like high failure rates or litigation under previous ownership, preventing you from accurately assessing the system's historical challenges and long-term viability.

Potential Mitigations

• An attorney should carefully review Item 1 for any mention of predecessors and their history.
• If a system was acquired, it's beneficial to ask long-term franchisees about their experience under the previous ownership.
• A business advisor can help you research the history of a brand if it has changed hands.

Explanation

This risk was not identified in the FDD. Item 3 discloses that there is no litigation required to be disclosed. A pattern of lawsuits filed by franchisees against the franchisor, especially those alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic issues with the franchisor's sales practices, failure to meet its obligations, or general franchisee dissatisfaction, suggesting a higher-risk investment.

Potential Mitigations

• Your attorney should always carefully review the nature, status, and outcome of any lawsuits disclosed in Item 3.
• It is wise to ask current and former franchisees if they are aware of any disputes, even those not disclosed in the FDD.
• A business advisor can help you research public records for additional information on a franchisor's litigation history.