Explanation

This risk was not identified in the FDD package. Item 20 tables show rapid system growth but report no terminations, non-renewals, or other cessations for the last three years. High turnover is often a key indicator of franchisee dissatisfaction or lack of profitability, so its absence in a franchise system should be confirmed through direct conversations with a wide range of current and former franchisees.

Potential Mitigations

• Speaking with a significant number of former franchisees listed in Item 20 is essential to verify the reasons for their departure.
• Your accountant can help calculate the true turnover rate by analyzing the Item 20 tables for all forms of franchisee exit.
• Engaging an attorney to help you formulate questions for former franchisees can yield more insightful information about system health.

Explanation

This specific risk was not identified in the FDD. The business model, an upscale children's hair salon, serves a consistent consumer need and is not based on a short-term trend. While market preferences can change, the core service is not typically considered a fad. A sustainable business model should demonstrate long-term demand independent of temporary popularity.

Potential Mitigations

• Analyzing the long-term market trends for children's services with your business advisor can provide insight into the model's sustainability.
• It is a good practice to evaluate the franchisor's plans for service innovation and adaptation to stay relevant over time.
• Your financial advisor can help assess the business model's resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified in the FDD package. Item 1, which details the franchisor's corporate structure, does not indicate ownership by a private equity firm. Such ownership can sometimes lead to a focus on short-term profitability over the long-term health of the franchise system, so its absence here is a neutral factor. Verifying the ownership structure is a key part of due diligence.

Potential Mitigations

• It is good practice to have your attorney confirm the ownership structure of the franchisor and identify the ultimate controlling parties.
• Researching the track record of any major corporate owner with other franchise systems can provide valuable insight.
• Speaking with franchisees about any recent changes in ownership and the resulting impact on the system is recommended.

Explanation

This risk was not identified in the FDD. Item 1 clearly discloses the parent company, Sit Still, Inc., and provides its address. The FDD appears transparent about the relationship between the franchising entity (SSF) and its parent. A failure to disclose a parent company can obscure the true financial backing and control structure of a franchise system.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1 to ensure all parent and affiliate relationships are disclosed.
• If a parent company's financial status is critical for the franchisor's viability, an accountant should confirm if their financials are required and provided.
• Understanding the legal and financial relationship between a franchisor and its parent is a key step your attorney can assist with.

Explanation

This risk was not identified in the FDD. Item 1 explicitly states that the franchisor has no predecessors. A predecessor is a company from which the franchisor acquired the business, and a history of issues with a predecessor, such as litigation or bankruptcy, could indicate underlying problems with the franchise system itself. The absence of a predecessor simplifies this aspect of due diligence.

Potential Mitigations

• Your attorney can help confirm the franchisor's history as stated in Item 1 through public records searches.
• In any franchise purchase, it's wise to ask long-tenured franchisees about the history of the brand and any prior ownership structures.
• A business advisor can help research the brand's origins to ensure no undisclosed predecessor history exists.

Explanation

This risk was not identified in the FDD package. Item 3 states there is no litigation that requires disclosure. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Likewise, a high number of lawsuits initiated by the franchisor against franchisees can suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It's a good practice for your attorney to conduct an independent search for litigation involving the franchisor, its parent, and key principals.
• Always ask current and former franchisees about any formal or informal disputes they have had with the franchisor.
• Understanding the typical level of litigation in a given industry can provide context, a task your business advisor might assist with.