Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide adequate support, training, and quality control to all franchisees. It is a potential sign that the franchisor is prioritizing expansion and franchise fee revenue over the long-term health and success of its existing operators. A sustainable growth pace is often a better indicator of a healthy franchise system.

Potential Mitigations

• In any franchise, a business advisor can help you analyze the growth trends shown in Item 20 over the past three years.
• Speaking with franchisees who joined at different times can provide insight into how support levels have changed over time.
• An accountant should review the franchisor's financials to see if investments in support infrastructure are keeping pace with unit growth.

Explanation

This risk was not identified in the FDD package, as Sign*A*Rama Inc. (SAR) has been franchising since 1987 and has a large number of outlets. For new systems, risks include an unproven business model, lack of brand recognition, and underdeveloped support structures. Prospective franchisees in such systems are pioneers, and while there can be upside, the risk of system-wide failure is significantly higher than in a mature and established brand.

Potential Mitigations

• When evaluating any franchise, it is important to review the history in Item 1 and management's experience in Item 2 with your attorney.
• A business advisor can help assess the maturity of the brand and its support systems.
• For new systems, an accountant's review of the franchisor's capitalization is critical to determine if it can survive early challenges.

Explanation

This risk was not identified, as the business of providing full-service retail signs is a well-established and mature industry, not a temporary trend. A fad business carries the risk that consumer demand may disappear quickly, leaving you with a worthless investment and ongoing liabilities under your franchise agreement and lease. It's crucial to distinguish between a lasting market need and a short-lived novelty before investing.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term demand for any franchise's products or services.
• It is prudent to ask your financial advisor to help evaluate a business model's resilience to changing consumer tastes and economic conditions.
• Your attorney should review the franchise agreement to understand your obligations if the business becomes unviable.

Explanation

This risk was not identified in the FDD package. The management team disclosed in Item 2 has extensive and long-term experience with the Signarama brand and its affiliates within the United Franchise Group. Inexperienced management can be a significant risk, as they may lack the knowledge to run a franchise system effectively, provide adequate support, or make sound strategic decisions, which can jeopardize the entire network.

Potential Mitigations

• Reviewing the executive backgrounds in Item 2 with a business advisor is a key step in evaluating any franchise opportunity.
• Contacting current franchisees to inquire about their direct experiences with the management team's competence and support is crucial.
• An attorney can help you understand the stability of the management team and any recent changes.

Explanation

This risk was not identified. Item 1 indicates the franchise is part of the United Franchise Group and appears to be family-run, not owned by a private equity firm. Private equity ownership can introduce risks, as their typical focus on short-term returns may lead to decisions that benefit investors over the long-term health of franchisees, such as cutting support, increasing fees, or forcing a quick sale of the system.

Potential Mitigations

• A business advisor can help you investigate the ownership structure of any franchisor and the track record of any parent company.
• Your attorney should analyze the franchisor's right to sell or assign the franchise agreement, as this is common with PE-owned brands.
• In any franchise, discuss with current franchisees whether there have been recent changes in ownership and the impact on the system.

Explanation

This risk was not identified. The FDD clearly states in Item 1 that SAR does not have a parent corporation and provides its own audited financial statements. When a franchisor is a subsidiary of another company, the parent's financial health can be critical. If the parent's financials are not disclosed when they should be (e.g., if they guarantee the franchisor's performance), it can hide significant financial instability or other risks from a prospective franchisee.

Potential Mitigations

• An attorney can help determine if a parent company's financials are required to be disclosed under franchise law.
• Your accountant should always review the complete financial picture, including any parent or guarantor financials that are provided.
• If a parent company exists, a business advisor can help research its reputation and stability.

Explanation

This risk was not identified. Item 1 of the FDD indicates no predecessor history. When a franchise system has been operated by a predecessor, it is important to scrutinize that history for red flags. A franchisor might acquire the assets of a failing system and present it as a new opportunity, obscuring a past record of high franchisee turnover, litigation, or financial problems that could still affect the brand's health and reputation.

Potential Mitigations

• Your attorney should carefully review Item 1 for any disclosed predecessors and assess the information provided.
• When a predecessor is involved, it is valuable to have a business advisor help you research the predecessor's history and reputation.
• Contacting franchisees who operated under the predecessor can provide invaluable, firsthand insight.