Explanation

The audited financial statements for Sport Clips, Inc. (SCI) for the years ending 2022, 2023, and 2024 were reviewed. They show consistent revenue, positive net income, and a healthy balance sheet with positive stockholders' equity. No indicators of financial instability, such as a going concern note from the auditors, were found. Therefore, this specific risk was not identified in the FDD package. A strong franchisor is better able to support its franchisees.

Potential Mitigations

• Your accountant should independently review the franchisor's complete audited financial statements, including all footnotes, to form their own opinion on financial stability.
• A business advisor can help you assess if the franchisor's financial strength is sufficient to support its planned growth and system initiatives.
• Ask your attorney to confirm that the financial statements provided are audited and comply with all disclosure requirements.

Explanation

This risk was not identified. Item 20 shows that the franchise system has been growing at a stable and controlled pace over the last three years, not exhibiting the explosive growth that can sometimes strain a franchisor's support systems. A measured growth rate is generally a positive indicator, suggesting the franchisor can adequately support its new and existing franchisees. Rapid growth without commensurate investment in support infrastructure can negatively impact franchisee success.

Potential Mitigations

• Your business advisor can help you evaluate if the franchisor's support staff and infrastructure, as described in Item 11, appear adequate for the current system size.
• Asking current franchisees about the quality and timeliness of support can provide insight into whether the franchisor is keeping pace with system needs.
• An accountant should review the franchisor's financial statements to assess if they are reinvesting sufficiently to support their network.

Explanation

This risk was not identified. SCI has been franchising since November 1995 and has a very large, established system with over 1,750 franchised units. Item 2 shows that its management team has extensive experience in the industry and in franchising. The system is mature and well-established, which typically reduces the risks associated with unproven business models or inexperienced leadership that are common with new franchise systems.

Potential Mitigations

• A business advisor can still help you evaluate the long-term viability and market position of this mature brand against newer competitors.
• Engaging with a range of franchisees, both new and long-tenured, can provide a comprehensive view of the system's evolution and current health.
• Your attorney should review the FDD for any recent changes in ownership or strategy that might affect this established system.

Explanation

This risk was not identified. The Sport Clips concept, offering haircuts in a sports-themed environment, has been operating since 1993. The size and longevity of the franchise system, as detailed in Items 1 and 20, demonstrate a history of sustained consumer demand. While market trends can change, the core service of haircutting is a fundamental consumer need, suggesting the business model is not based on a short-term fad.

Potential Mitigations

• A business advisor can help you conduct local market research to confirm that the Sport Clips concept is a strong fit for your specific area's demographics.
• It is wise to discuss the brand's local market strength and customer loyalty with existing franchisees in your region.
• Reviewing the franchisor's marketing plans in Item 11 can offer insight into how they plan to maintain brand relevance in the future.

Explanation

This risk was not identified in the FDD. Item 2 lists the business experience of SCI's directors and principal officers, showing that the key management team has many years of experience in both the hair care industry and in franchising specifically. The long tenure of several key executives suggests a stable and knowledgeable leadership team, which is a positive factor for a franchise system.

Potential Mitigations

• Engaging a business advisor to review the backgrounds of the management team can provide an independent perspective on their qualifications.
• Asking current franchisees about their direct experiences and the quality of leadership from the management team can be very insightful.
• Your attorney should verify if there have been any recent, significant changes in key management not yet reflected in the FDD.

Explanation

This risk was not identified. Item 1 of the FDD does not indicate that SCI is owned by a private equity firm. The company appears to be privately held by its founders and key personnel. Therefore, the specific risks associated with a private equity ownership model, such as a focus on short-term returns over long-term system health, do not appear to be present here.

Potential Mitigations

• Your attorney can help you confirm the ownership structure of the franchisor through a review of corporate records.
• A business advisor can help you assess the franchisor's long-term strategic plans, regardless of ownership structure.
• It is still important to review the assignment clause in the Franchise Agreement with your attorney to understand who could own the system in the future.

Explanation

This risk was not identified. SCI clearly discloses its affiliate companies in Item 1, such as the entities that hold the trademarks. The franchisor itself appears to be the primary operating entity, and its audited financial statements are provided in Item 21. There is no indication of a thinly capitalized subsidiary structure or a situation where a parent company's financials would be required for a complete risk assessment but have been withheld.

Potential Mitigations

• Your accountant should review the consolidated financial statements to understand the financial relationship between the franchisor and its disclosed affiliates.
• An attorney can verify if the disclosed corporate structure seems complete and if any guarantees from parent companies are involved or necessary.
• Asking the franchisor to explain the role of each affiliate mentioned in Item 1 can provide additional clarity.

Explanation

This risk was not identified. Item 1 of the FDD states that there are no predecessors that are required to be disclosed. This indicates that SCI is the original franchisor of the system and did not acquire it from a prior entity. Therefore, there is no hidden history of predecessor litigation, bankruptcy, or franchisee turnover to be concerned about, simplifying the due diligence process in this area.

Potential Mitigations

• Your attorney can confirm the franchisor's corporate history to ensure there are no undisclosed predecessor entities.
• A business advisor can help you focus your due diligence on the direct history and track record of the current franchisor.
• Speaking with long-term franchisees can still provide valuable historical context about the system's evolution.

Explanation

A review of Item 3 reveals one material civil action in the last fiscal year. However, this action was initiated *by* SCI against a franchisee for operational defaults and was settled. There is no disclosed pattern of litigation filed *against* the franchisor by franchisees alleging fraud, misrepresentation, or other systemic issues. The absence of such franchisee-initiated lawsuits is a positive indicator, though you should still consider the franchisor's approach to enforcement.

Potential Mitigations

• A full review of the details of any litigation mentioned in Item 3 with your attorney is recommended to understand the context.
• Inquiring with current franchisees about their perception of the franchisor's relationship with its network can provide valuable insight.
• Your attorney can conduct a public records search to see if any other relevant litigation exists that may not have required disclosure.