Explanation

This risk was not identified in the FDD package. The audited financial statements for SCA Franchising Corporation (SCA FC) in Item 21 show consistent profitability and a strong balance sheet with substantial positive stockholders' equity from 2022 through 2024. Financial instability risk generally concerns a franchisor's ability to support its franchisees, and in this case, the provided financials appear stable.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements, including footnotes and the auditor's report, for any signs of weakness.
• Understanding trends in revenue sources, such as a heavy reliance on initial franchise fees versus ongoing royalties, is something your accountant can help assess.
• Your attorney should verify if any financial performance bonds or escrow accounts are required by state regulators, which can offer some protection.

Explanation

This risk was not identified. FDD Item 20 data indicates the franchise system has been shrinking, not growing rapidly. Rapid growth can strain a franchisor's ability to provide adequate support to its franchisees. Since this system is contracting, the risks associated with over-expansion are not currently present.

Potential Mitigations

• Your accountant can analyze Item 20 data to assess the system's growth trajectory and compare it to the franchisor's financial capacity in Item 21.
• Engaging a business advisor to question the franchisor about their future growth plans and how they intend to scale support is a valuable step.
• Speaking with existing franchisees about the current quality and timeliness of franchisor support provides direct insight.

Explanation

This risk was not identified. SCA FC was incorporated in 2007, and its affiliate has been in the appraisal business since 1979. The FDD shows a long history of franchising with a substantial number of outlets. Therefore, this is not a new or unproven system. The primary risks appear to relate to its high turnover and challenging business model rather than a lack of operational history.

Potential Mitigations

• When evaluating any franchise, your business advisor should help you assess the franchisor's history and the track record of its operating units.
• A review of the management team's experience in both the specific industry and in franchising is a critical due diligence step.
• Your accountant should review the financial statements to ensure the company has a stable financial history, not just a recent start-up.

Explanation

This risk was not identified. The business provides vehicle property damage appraisal services for insurance companies, which is an established and integral part of the insurance and automotive repair industries. This is not a business model based on a fleeting trend or fad, suggesting a stable underlying demand for its services.

Potential Mitigations

• Your business advisor can help you conduct market research to assess the long-term demand and stability of the industry.
• Evaluating the franchisor's plans for innovation and adaptation to industry changes is a wise step for any long-term investment.
• Consulting with a financial advisor is important to consider the business's resilience to economic cycles and shifts in consumer behavior.

Explanation

This risk was not identified. FDD Item 2 details the business experience of the key executives, who appear to have substantial and long-term experience with SCA FC and its affiliates within the appraisal industry. For instance, the President and CFO have been with the company since its formation in 2007. Lack of relevant management experience does not appear to be a risk factor.

Potential Mitigations

• A thorough review of the backgrounds of the management team in FDD Item 2 is a crucial step in due diligence.
• Asking existing franchisees about their direct experiences with the management team can provide valuable insight into their competence and supportiveness.
• Your business advisor can help assess whether the management's skills align with the franchise system's needs.

Explanation

This risk was not identified. FDD Item 1 provides information about the franchisor and its affiliates, and there is no indication that the company is owned by a private equity firm. Private equity ownership can sometimes introduce risks related to short-term profit motives over the long-term health of the system. This does not appear to be a concern here.

Potential Mitigations

• Your attorney can help investigate the franchisor's ownership structure to identify any potential influence from investment firms.
• Researching a private equity firm's history with other franchise brands can provide insight into their management style.
• Speaking with franchisees who have experienced a transition to private equity ownership can reveal potential challenges.

Explanation

This risk was not identified. FDD Item 1 clearly discloses the parent and affiliate companies, and the audited financial statements for SCA FC are provided in Item 21. There is no indication that a required parent company's financial information has been omitted. The corporate structure appears to be transparently disclosed.

Potential Mitigations

• Your attorney should verify the corporate structure and ensure that financials for any guaranteeing parent entity are included if required.
• An accountant can help assess the financial health of both the franchisor and any parent or affiliate company disclosed.
• Understanding the legal and financial relationships between the franchisor and its parent company is crucial for risk assessment.

Explanation

This risk was not identified. FDD Item 1 does not disclose any predecessors from which SCA FC acquired its assets or that previously offered franchises for this system. Therefore, risks associated with a negative predecessor history are not applicable to this FDD.

Potential Mitigations

• Your attorney should always review Item 1 carefully for any mention of predecessors.
• If predecessors are mentioned, independent research into their litigation and bankruptcy history can uncover hidden risks.
• Asking long-term franchisees about their experience under any previous ownership is a valuable due diligence step.

Explanation

This risk was not identified. FDD Item 3 discloses a single litigation from 2015 involving a franchisee, which alleged fraud and breach of contract. This case was settled amicably with no admission of liability. A single, settled case from nearly a decade ago does not constitute a pattern of litigation that would suggest systemic problems.

Potential Mitigations

• Your attorney should always review FDD Item 3 for any history of litigation, paying close attention to the nature and frequency of claims.
• A pattern of lawsuits from franchisees alleging fraud or misrepresentation is a significant red flag that a business advisor should help you evaluate.
• Independent research on court dockets can sometimes provide more context than the FDD's summary of litigation.