Explanation

Financial statements for Sonic Franchising LLC (Sonic) and its affiliate Sonic Industries Services LLC (SIS) are provided. While SIS appears financially strong, Sonic itself shows net income of $5.97M in 2024 but distributed $8.06M to its parent, indicating reliance on the broader corporate structure. The system's stability seems dependent on its large parent, Inspire Brands, rather than the franchisor entity alone. This structure introduces a layer of complexity to its financial standing.

Potential Mitigations

• An experienced franchise accountant should thoroughly review the financial statements for both Sonic and its affiliate, SIS, paying close attention to inter-company transactions and cash flows.
• It is wise to discuss the implications of the parent company's influence and financial structure with your business advisor.
• Your attorney can help clarify the legal relationship between Sonic, SIS, and Inspire Brands and how it might affect your franchise.

Explanation

Item 20 data for 2024 shows a total of 80 franchised outlets ceased operating or were terminated, representing about 2.5% of the locations at the start of the year. While this percentage is not exceptionally high for a large system, the absolute number of closures is notable. The category 'Ceased Operations Other Reasons' accounts for 68 of these, which could mask underlying issues that are not immediately apparent from the statistics alone.

Potential Mitigations

• You should discuss the reasons for the 68 'Ceased Operations' with the franchisor and current franchisees.
• An accountant can help you analyze the turnover rates over the last three years to identify any concerning trends.
• Contacting former franchisees listed in Exhibit E-4 with the guidance of your attorney may provide direct insight into why they left the system.

Explanation

The Sonic system is very large and mature, with over 3,000 franchised units. The data in Item 20 does not indicate excessively rapid growth that might strain support systems. Instead, the system has shown a net decrease in franchised units over the past three years. Therefore, the specific risks associated with a franchisor outgrowing its support capabilities due to rapid expansion were not identified.

Potential Mitigations

• It is still prudent to ask the franchisor about their current ratio of support staff to franchisees to ensure it is adequate for the system's size.
• A business advisor can help you review the franchisor's strategic plans for future growth and support infrastructure.
• Discussing the quality and responsiveness of current franchisor support with existing franchisees is a valuable due diligence step.

Explanation

This risk was not identified. The Sonic brand began in the 1950s and has been franchising since 1974, as disclosed in Item 1. With thousands of operating units and decades of history, it is a well-established and mature franchise system, not an unproven one. The risks associated with a new or emerging franchisor are therefore not applicable here.

Potential Mitigations

• Even with a mature system, it is important to have your attorney review the FDD for any recent, significant changes in ownership or management that could alter the system's direction.
• A business advisor can help you analyze whether the long-established brand remains relevant and competitive in today's market.
• An accountant should still carefully review the last three years of financial statements to confirm ongoing stability.

Explanation

This risk was not identified. Sonic is a long-established brand in the quick-service restaurant industry, which is a mature market sector. The business model is based on classic American drive-in food items like burgers, hot dogs, and specialty drinks. This type of business has demonstrated sustained consumer demand over many decades and is not considered to be based on a fleeting trend or fad.

Potential Mitigations

• A business advisor can help you research local competition and market trends to confirm that the Sonic concept remains a strong fit for your specific area.
• It is still wise to ask the franchisor about their research and development plans for keeping the menu and concept fresh and competitive.
• An accountant can help you analyze the financial performance of the industry to assess its long-term stability.

Explanation

This risk was not identified. Item 2 of the FDD details the business experience of Sonic's directors and officers. The management team, both at the Sonic brand level and within the parent company Inspire Brands, is comprised of individuals with extensive experience in the restaurant and franchising industries, many with long tenures at major national brands. The risks associated with an inexperienced management team do not appear to be present.

Potential Mitigations

• It is always a good practice to research the recent professional history of key executives with your business advisor.
• When speaking with current franchisees, you should inquire about their perception of the management team's competence and support for the franchise system.
• Your attorney can help you understand the corporate structure and the roles of the key executives listed in Item 2.

Explanation

This risk was not identified. Item 1 clearly discloses the parent companies, including Inspire Brands, Inc., and affiliated companies like Sonic Industries Services LLC (SIS) that provide support. Further, the FDD includes audited financial statements for both Sonic Franchising LLC and SIS in Exhibit F, providing a more complete financial picture of the entities you will be directly interacting with. There is no indication that a required parent company's financials have been omitted.

Potential Mitigations

• An accountant's review of all provided financial statements, including those of affiliates, is critical to understanding the complete financial health of the system.
• It is wise to have your attorney analyze the management agreement between Sonic and SIS to understand their respective roles and obligations.
• A business advisor can help you research the ultimate parent, Inspire Brands, to gauge the stability of the entire corporate family.

Explanation

This risk was not identified. Item 1 discloses that Sonic Franchising LLC was formed in 2011 to take over franchising from its affiliate, SIS, which had been franchising since 1974. The FDD appears to properly disclose the history and relationship between these entities. Item 3 and Item 4, which cover litigation and bankruptcy, include information related to predecessors where applicable. There are no signs that a negative history is being obscured.

Potential Mitigations

• It is a good practice to have your attorney review the corporate history in Item 1 to ensure the lineage of the franchise system is clear.
• When speaking with long-term franchisees, asking about their experience under any previous corporate structures can provide valuable context.
• A business advisor can help you research the public history of the brand to see if it aligns with the disclosures in the FDD.