Explanation

The franchisor, RPM Summit Group, LLC (RPM), appears to be financially stable. Audited financial statements in Item 21 show consistent, strong net income over the past three years. While members' equity has declined, this is due to shareholder distributions exceeding net income, not operating losses. The business model does not appear to be overly reliant on initial franchise fees for revenue. The overall financial health does not present a significant risk.

Potential Mitigations

• Your accountant should review the complete, audited financial statements and accompanying notes to confirm this assessment of financial stability.
• Ask your business advisor to discuss the franchisor's policy on distributions and its strategy for retaining earnings for future system growth.
• Inquire with your accountant about the health of the balance sheet, particularly the ratio of current assets to current liabilities.

Explanation

This risk was not identified in the FDD package. The franchisor has been offering franchises since 2010 and has over 100 outlets, indicating it is an established system. An unproven system carries higher risks because its business model, brand recognition, and support structures are not yet time-tested, which can lead to a higher potential for failure.

Potential Mitigations

• A business advisor can still help you assess the maturity of the franchise system relative to its direct competitors.
• Your attorney should review the franchisor's history in Item 1 to confirm its experience and operational track record.
• Speaking with long-term franchisees can provide insight into the system's evolution and stability over time.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives have been with the company since 2010 or 2012, indicating a long tenure and significant experience with this specific franchise system. Inexperienced management can be a major risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support.

Potential Mitigations

• A business advisor can still help you 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 the management team's competence and support.
• Your attorney should verify that the experience described in Item 2 aligns with the company history in Item 1.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that the franchisor is owned by a private equity firm. Franchisors owned by PE firms may prioritize short-term returns for investors over the long-term health of franchisees, which can sometimes lead to increased fees, reduced support, or a quick sale of the entire system.

Potential Mitigations

• Your attorney should always confirm the ownership structure detailed in Item 1 of the FDD.
• A business advisor can help you research the ownership of any affiliated companies to ensure there are no hidden controlling entities.
• When speaking to other franchisees, it is always wise to ask if they are aware of any pending sales or changes in ownership.

Explanation

This risk was not identified in the FDD package. RPM appears to be the primary entity, and no parent company is mentioned. When a franchisor is a subsidiary, the financial health and influence of the parent company can be critical, and the failure to disclose a parent or provide its financial statements can obscure significant risks to a potential franchisee.

Potential Mitigations

• Your attorney should always verify the franchisor's corporate structure as disclosed in Item 1.
• An accountant can help assess if the franchisor's own financial statements appear robust enough to stand on their own without parent support.
• Inquiries with a business advisor can help determine if the franchisor is part of a larger, undisclosed corporate family.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor has no predecessors. A predecessor's history is important because it can reveal inherited problems, such as past litigation or high franchisee failure rates, that might still affect the current franchise system and your potential investment.

Potential Mitigations

• Your attorney should always confirm the statements made in Item 1 regarding predecessors.
• A business advisor can assist in researching the company's history to ensure no prior entities have been omitted.
• Speaking with the longest-tenured franchisees can provide insight into the true history of the brand and its management.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, especially franchisee-initiated claims of fraud or misrepresentation, is a significant red flag that can indicate systemic problems with a franchisor's business practices, disclosure integrity, or overall franchisee relations.

Potential Mitigations

• Your attorney should independently search court records for any litigation involving the franchisor or its principals as part of due diligence.
• Ask current and former franchisees if they are aware of any legal disputes within the system.
• A business advisor can help research online forums and news articles for reports of franchisee dissatisfaction or legal conflicts.