Explanation

The audited financial statements for Seal King, Incorporated (Seal King) show consistent revenue, positive net income, and a healthy balance sheet with positive equity. The auditor's report is unqualified and contains no 'going concern' language. These factors indicate financial stability and an apparent ability for Seal King to meet its obligations to support franchisees. This specific risk was therefore not identified.

Potential Mitigations

• Your accountant should still conduct a thorough review of the franchisor's financial statements, including footnotes, to form an independent opinion.
• A business advisor can help you assess how the franchisor's financial health compares to others in the industry.
• Engage your attorney to understand any financial obligations a parent company might have, if one existed.

Explanation

Item 20 data tables for the past three years show a very stable franchise system. There were zero terminations, non-renewals, or cessations of operation for other reasons reported during this period. The total number of franchised outlets has remained constant at 23. This indicates a low level of franchisee distress or departure from the system, which is a positive sign.

Potential Mitigations

• Speaking with current and former franchisees, with guidance from your business advisor, can provide qualitative context behind the stable numbers.
• Your accountant should review the franchisee transfer data to assess if sales are occurring at fair market value.
• It is wise to have your attorney inquire about the circumstances surrounding any franchisee transfers.

Explanation

This specific risk was not identified in the FDD package. While rapid growth can strain a franchisor's support systems, Item 20 data shows that the Seal King system size has been stable, not growing rapidly, over the past three years. The franchisor's financial statements in Item 21 appear capable of supporting the current system size. This suggests the risk of overstretched resources due to rapid expansion is low.

Potential Mitigations

• Discussing the quality and consistency of support with a range of current franchisees can validate these findings.
• Your business advisor can help you evaluate the franchisor's capacity for providing support as outlined in Item 11.
• It is useful to ask your accountant to review financial statements for signs of investment in franchisee support infrastructure.

Explanation

This specific risk was not identified. The FDD package indicates Seal King has been in business since 1991 and began franchising in 1997. The principal, Benjamin Nelson, has been with the company since its inception. Item 20 shows a stable system with many long-term operators, and Item 21 financials appear healthy. This demonstrates a long track record and an established, proven business model.

Potential Mitigations

• Engaging a business advisor to research the company's reputation and history in the marketplace is still a prudent step.
• Speaking with long-tenured franchisees can provide valuable insight into the system's evolution and stability.
• Your attorney can help verify the business history and management experience as disclosed in the FDD.

Explanation

The business of driveway and asphalt sealcoating is a long-established maintenance service with consistent demand, particularly in regions with harsh weather. While specific products or application methods may evolve, the core need for asphalt maintenance is not typically considered a short-term trend or fad. This suggests the business has long-term market viability. Therefore, this risk was not identified.

Potential Mitigations

• A business advisor can help you research local market demand and the competitive landscape for sealcoating services.
• Discussing the seasonality and long-term customer demand with existing franchisees can provide practical insights.
• Your accountant can help you model the financial impact of seasonal business cycles on your cash flow.

Explanation

This specific risk was not identified in the FDD. Item 2 indicates that the President and CEO, Benjamin Nelson, founded Seal King in 1991 and has operated the business continuously since that time. This demonstrates extensive, long-term experience in both the specific industry and in managing this particular franchise system. The stability of the system, as shown in Item 20, further supports the conclusion that management is experienced.

Potential Mitigations

• Interviewing current franchisees about their perception of management's competence and support is a valuable due diligence step.
• Your business advisor can help you assess the overall strength and depth of the franchisor's management team.
• It is always wise to ask your attorney to review the backgrounds of key personnel for any undisclosed concerns.

Explanation

This risk was not identified in the FDD package. Item 1 discloses that the franchisor is owned by an individual, Benjamin Nelson, not a private equity firm. Therefore, the specific risks associated with PE ownership, such as a focus on short-term returns over long-term brand health or a planned exit strategy, do not appear to be present here.

Potential Mitigations

• It is still beneficial to have your attorney confirm the corporate ownership structure and identify all controlling parties.
• A business advisor can help you understand the pros and cons of being part of a privately-held versus PE-owned franchise system.
• Discussing the long-term vision for the company with the owner can provide valuable insights.

Explanation

This specific risk was not identified in the FDD. Item 1 does not indicate the existence of a parent company for Seal King. The franchisor entity, Seal King, Incorporated, appears to be the primary operating and franchising entity, and its audited financial statements are provided in Item 21 as required. There is no indication of a hidden or undisclosed parent whose financials would be material to your decision.

Potential Mitigations

• Your attorney should still verify the corporate structure to confirm the absence of any undisclosed parent or controlling entity.
• An accountant can help you assess whether the provided financials are sufficient to evaluate the complete financial picture of the franchise offer.
• Asking the franchisor directly about any and all affiliated entities is a good due diligence practice.

Explanation

This risk was not identified in the FDD. Item 1 states that Seal King has no predecessors, meaning it did not acquire the business or its assets from another company. The company was started in 1991 and incorporated under the same leadership that exists today. Therefore, there are no concerns about undisclosed negative history from a prior owner of the system.

Potential Mitigations

• A business advisor can still conduct independent research on the company's long history to ensure no other entities were involved.
• Your attorney can perform a corporate records search to verify the history of the company as disclosed.
• Asking long-term franchisees about the company's history can provide additional confirmation.

Explanation

This risk was not identified. Item 3 of the FDD explicitly states, 'No litigation is required to be disclosed in this Item.' This indicates an absence of recent or ongoing material litigation involving the franchisor, its predecessors, or key personnel, particularly concerning claims of fraud, misrepresentation, or violations of franchise law. This lack of litigation is a positive indicator for the health and integrity of the franchise system.

Potential Mitigations

• Your attorney can conduct independent searches for litigation history to verify the FDD's disclosure.
• It is still valuable to ask current and former franchisees if they are aware of any disputes, even if they did not result in formal litigation.
• A business advisor can help you research the franchisor's general reputation within the industry.