Explanation

The franchisor’s audited financial statements appear stable. They show positive and growing net income for the past three years, a healthy balance sheet with current assets exceeding current liabilities, and positive member's equity. The auditor's report from a reputable firm does not contain a “going concern” qualification, suggesting the franchisor is financially capable of supporting its obligations. This strong financial position is a positive indicator for a prospective franchisee.

Potential Mitigations

• An accountant should still review the complete financial statements, including all footnotes, to confirm this assessment and check for any subtle risks.
• It is beneficial for your business advisor to assess the sources of franchisor revenue (e.g., royalties vs. franchise fees) to understand the long-term health of the business model.
• Ask your attorney to confirm if any state has required a financial assurance like a bond, despite the positive financials.

Explanation

This risk was not identified in the FDD Package. System growth appears stable and controlled, not excessively rapid. In franchising, excessively fast growth can strain a franchisor's ability to provide adequate support, training, and resources to all franchisees, potentially diluting brand quality and franchisee support. It is a sign of a franchisor chasing franchise fees over ensuring the long-term health of its existing operators.

Potential Mitigations

• During discussions with existing franchisees, it is wise to ask about the quality and timeliness of the support they currently receive from the franchisor.
• Your business advisor can help you question the franchisor about their future growth plans and how they intend to scale support infrastructure accordingly.
• Reviewing the franchisor's staffing and support structure in Item 11 with your attorney can provide insight into their capacity for future growth.

Explanation

This risk was not identified in the FDD Package. SP Franchising LLC (SP Franchising) and its predecessors have been involved in franchising since 2005, and the system has over 100 units. A new or unproven system presents higher risks because the business model, brand recognition, and operational support have not yet withstood the test of time, which can lead to a higher probability of failure for franchisees.

Potential Mitigations

• It remains important to have your attorney review the history of the franchisor and its predecessors in Item 1 for any potential concerns.
• Engaging a business advisor to research the brand's reputation and history in the marketplace is a valuable due diligence step.
• Discussions with long-tenured franchisees can provide insight into the system's evolution and stability over time.

Explanation

This risk was not identified in the FDD Package. The large-format printing and graphics industry is an established business-to-business sector, not a concept tied to a recent or fleeting consumer trend. Investing in a fad business is risky because customer demand can disappear quickly, leaving you with a long-term franchise contract and lease obligations for a business that is no longer viable or profitable.

Potential Mitigations

• A business advisor can help you research the long-term outlook and competitive landscape of the B2B printing industry in your specific market.
• It is still prudent to ask the franchisor about their strategies for innovation and adapting to technological changes within the industry.
• Assessing the system’s resilience to economic downturns with your financial advisor provides a more complete risk profile.

Explanation

This risk was not identified in the FDD Package. Item 2 details a management team with extensive experience in franchising, the sign and graphics industry, and relevant executive roles (CEO, CFO, etc.). Inexperienced management can be a significant liability, as it may lead to poor strategic decisions, inadequate franchisee support, and underdeveloped operational systems, increasing the risk for the entire franchise network.

Potential Mitigations

• When speaking with current franchisees, you should still inquire about their direct experiences with the management team's competence and responsiveness.
• A review of the management team's tenure and prior company performance with your business advisor can provide additional context.
• Your attorney can help verify that the experience described in Item 2 aligns with the support obligations outlined in Item 11.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly discloses the parent companies, and the franchisor provides its own audited financial statements in Item 21. A failure to disclose a parent company, or withholding its financials when it guarantees the franchisor's obligations, can obscure the true financial stability and backing of the franchise system, hiding significant risks from a potential franchisee.

Potential Mitigations

• Your accountant should always verify that if a parent company's guarantee is offered, the parent's financials are also included and audited.
• It is good practice to have your attorney review the corporate structure disclosed in Item 1 to ensure all relevant entities are accounted for.
• Asking the franchisor to clarify the relationship and financial interdependence between itself and its parent entities can provide additional clarity.

Explanation

This risk was not identified in the FDD Package. The franchisor discloses two predecessors in Item 1 and provides their history. There are no bankruptcy disclosures in Item 4, and the single litigation case in Item 3 was initiated by the current franchisor, not a predecessor. Inadequate disclosure of a predecessor's history can conceal past problems, such as high failure rates or litigation, which may still affect the system's health and reputation.

Potential Mitigations

• Even with adequate disclosure, your attorney should carefully review all information related to predecessors.
• A business advisor can assist in researching the public reputation or any news articles related to the predecessor companies.
• Inquiring with long-term franchisees about their experience under any previous ownership can provide valuable historical context.

Explanation

This risk was not identified in the FDD Package. Item 3 discloses only one recent litigation case, which was initiated by SP Franchising against a franchisee for non-payment of fees and was subsequently settled. This does not represent a pattern of litigation against the franchisor by franchisees alleging fraud, nor does it show a pattern of overly aggressive litigation by the franchisor. A pattern of such lawsuits can indicate systemic problems in the franchise relationship.

Potential Mitigations

• It is always a good practice to have your attorney review the details of any disclosed litigation, no matter how routine it appears.
• You should ask the franchisor for context regarding any disclosed lawsuits to understand their perspective on the disputes.
• A business advisor can help you perform public record searches to see if any other non-disclosed or non-material litigation exists.