Explanation

This risk was not identified in the FDD Package. Item 20 shows no franchised outlets have operated yet, so there is no history of franchisee turnover. High turnover is a significant red flag in established systems, as it can indicate franchisee dissatisfaction, lack of profitability, or systemic problems. Continuous monitoring of these figures in future FDDs would be important if you were to become a franchisee.

Potential Mitigations

• With an established system, it would be crucial for your accountant to analyze the turnover tables in Item 20 for any negative trends.
• Asking an attorney to help you formulate questions for former franchisees is a key due diligence step to understand why they left the system.
• A business advisor can help compare a system's turnover rates against industry averages to gauge its relative health.

Explanation

This risk was not identified in the FDD Package, as the system has not yet begun selling franchises and has no growth history. In other systems, rapid growth can strain a franchisor's ability to provide adequate support, training, and quality control. This can lead to a decline in service and support for all franchisees. An investor should always watch for signs that a franchisor's support infrastructure is keeping pace with its unit growth.

Potential Mitigations

• For a growing system, your business advisor should help you question the franchisor about their plans for scaling support infrastructure.
• Interviewing a range of existing franchisees about the current quality and responsiveness of franchisor support is a valuable step.
• An accountant's review of the franchisor's financials can help assess if they have the resources to sustain rapid growth.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. When PE firms own franchisors, their typical focus on short-term returns can sometimes conflict with the long-term health of the franchisees and the brand. This may manifest as reduced support, increased fees, or a quick sale of the system.

Potential Mitigations

• In cases of PE ownership, a business advisor should research the firm's track record with other franchise brands.
• It would be wise to ask your attorney to review the franchisor's right to sell or assign the franchise system.
• Speaking with franchisees who have experienced a PE takeover can provide valuable insight into changes in the system.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly states that Steep Me LLC does not have any parent entities. In other situations, a franchisor might be a small subsidiary of a larger parent company. If the parent's financial health is not disclosed, a prospective franchisee may not have a complete picture of the overall financial stability and resources backing the franchise system.

Potential Mitigations

• Your attorney should always verify the corporate structure described in Item 1 to identify any undisclosed parent or controlling entities.
• If a parent company exists and provides a guarantee, it's crucial for your accountant to review the parent's financial statements.
• Understanding the legal and financial relationship between a franchisor and its parent is a key task for your attorney.

Explanation

This risk was not identified in the FDD Package. Item 1 states there are no predecessors. A predecessor is a company from which the franchisor acquired the business concept. When predecessors exist, it is important to investigate their history for any signs of trouble, such as litigation, bankruptcy, or high franchisee failure rates, as these issues could be inherited by the current franchisor.

Potential Mitigations

• When a predecessor is listed, your attorney should carefully review their history as disclosed in Items 1, 3, and 4.
• Independent research into a predecessor's business reputation can provide valuable context beyond the FDD's disclosures.
• A business advisor can help you formulate questions for long-term franchisees about their experience under a previous owner.

Explanation

This risk was not identified in the FDD Package. Item 3 reports no material litigation involving the franchisor, its predecessors, or its management. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or breach of contract, can be a major red flag. Similarly, a high number of suits filed by the franchisor against franchisees might indicate an overly aggressive or unsupportive corporate culture.

Potential Mitigations

• If litigation is disclosed, your attorney must carefully analyze the nature of the allegations, its current status, and any outcomes.
• It is wise to conduct independent legal research, with your attorney's help, to find details that may not be fully explained in the FDD.
• A business advisor can help you discuss any disclosed litigation with current and former franchisees to get their perspective.