Explanation

A review of the audited financial statements for 2022, 2023, and 2024 provided in Exhibit B indicates the franchisor, Real Deals, Inc. (Real Deals), is profitable with a strong positive net worth and healthy cash flow. Revenue is primarily from ongoing royalties, a positive sign. No indicators of financial instability were identified. A franchisor's financial health is critical as it suggests an ability to support franchisees and grow the brand.

Potential Mitigations

• An experienced franchise accountant should still conduct a thorough review of the franchisor's complete financial statements, including all footnotes.
• Discuss the franchisor's financial condition and plans for future investment in the system with your business advisor.
• Your accountant can help you understand the key financial metrics that indicate a franchisor's long-term stability.

Explanation

This risk was not identified in the FDD package. While the system has seen franchisee turnover, it does not appear to be growing at a rate that would outpace its support infrastructure. Rapid growth can sometimes strain a franchisor's ability to provide adequate training and support, potentially harming both new and existing franchisees. This FDD does not indicate that Real Deals is currently facing this particular issue.

Potential Mitigations

• In discussions with the franchisor, it's wise to ask about their plans for scaling support systems in tandem with future franchise sales.
• Posing questions to existing franchisees about the current quality and responsiveness of franchisor support can provide valuable insight.
• A business advisor can help you evaluate if the franchisor's support team and resources seem adequate for the current system size.

Explanation

The franchisor, Real Deals, began offering franchises in 2006 and has an operating history dating back to 2003 through a predecessor. The FDD provides over a decade of operational data and history. Therefore, this is not a new or unproven system. Investing in a new system carries higher risk due to the lack of a track record for franchisee success, brand recognition, and operational support, but that risk is not present here.

Potential Mitigations

• Reviewing the business experience of the current management team in Item 2 with your business advisor is still a prudent step.
• Even with an established system, speaking with long-term franchisees about the system's evolution and consistency of support is recommended.
• An accountant can analyze the provided historical financial data to assess long-term trends in the franchisor's performance.

Explanation

The risk that the business is a short-term fad was not identified. The market for home décor and accessories is well-established and has sustained consumer demand. While specific trends within this market change, the core business concept is not tied to a fleeting novelty. A fad business carries the risk of collapsing demand after an initial surge, leaving franchisees with a worthless investment and ongoing liabilities.

Potential Mitigations

• A business advisor can help you research the long-term stability and trends within the local home décor and retail boutique market.
• It is wise to ask the franchisor about their strategies for product sourcing, innovation, and adapting to changing consumer tastes.
• Assessing the business's resilience to economic downturns with your financial advisor can help gauge its long-term viability.

Explanation

The key executives listed in Item 2, Nate and Carie Kelsey, have been with Real Deals since 2004, indicating extensive experience with this specific business and franchise system. While some other managers are newer, the core leadership is highly experienced. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees, but that does not appear to be the case here.

Potential Mitigations

• It is still valuable to speak with current franchisees to gauge their opinion of the management team's competence and responsiveness.
• Inquiring about the roles and experience of the newer managers listed in Item 2 can provide a fuller picture of the leadership team.
• A business advisor can help you assess the overall strength and depth of the management team.

Explanation

This risk was not identified in the FDD package. Item 1 indicates Real Deals is an Idaho corporation, and there is no disclosure of ownership by a private equity firm. Private equity ownership can sometimes introduce risks related to prioritizing short-term investor returns over the long-term health of the franchise system, but this does not appear to be a factor in this case.

Potential Mitigations

• Your attorney can help you verify the corporate ownership structure and identify the ultimate beneficial owners.
• A business advisor can assist in researching the history of the franchisor's ownership to confirm there are no private equity ties.
• Understanding the ownership structure is crucial as it can influence the franchisor's long-term goals and strategy.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose any parent companies. The franchisor, Real Deals, Inc., appears to be the primary operating and franchising entity, and its own audited financial statements are provided as required. A situation where a franchisor is a thinly capitalized subsidiary of an undisclosed parent can mask financial or operational risks.

Potential Mitigations

• It is still prudent to have your attorney confirm the corporate structure and ensure there are no undisclosed parent or affiliate entities that exert significant control.
• Your accountant should review the provided financials to confirm the entity's ability to stand on its own without reliance on an un-disclosed parent.
• Always ask the franchisor directly to confirm that no other entities have a controlling interest in the company.

Explanation

This risk was not identified. The FDD in Item 1 discloses a predecessor entity, Real Deals on Home Décor, Inc., which was administratively dissolved in 2015. The franchisor provides a clear lineage. Inadequate disclosure of predecessors can hide a troubled history of litigation, bankruptcy, or franchisee failure, but the disclosure here appears to be in compliance with requirements.

Potential Mitigations

• It is still a good practice to ask long-tenured franchisees about their experience with any predecessor entities.
• Your attorney can help you verify the information provided about the predecessor through public records searches.
• A business advisor can help assess if any legacy issues from the predecessor could still impact the current franchise system.

Explanation

This risk was not identified. Item 3 states, "There is no litigation required to be disclosed in this Item." This indicates an absence of recent, material legal actions involving the franchisor related to fraud, securities violations, or franchise relationship law. A pattern of such litigation would be a major red flag about the franchisor's practices and the health of the system.

Potential Mitigations

• Your attorney can still perform an independent public records search for litigation involving the franchisor or its principals as part of due diligence.
• Asking current and former franchisees about any past or pending legal disputes is a wise precautionary measure.
• A business advisor can help you understand that a clean litigation history is a positive, but not absolute, indicator of a healthy system.