Explanation

This risk was not identified in the FDD package. Rapid system growth can strain a franchisor's ability to provide quality support. While this FDD does not show excessively rapid growth, it's a factor to monitor in any franchise system.

Potential Mitigations

• With any franchise, having an accountant review financials can help assess if the franchisor has the capital to support its stated growth plans.
• A business advisor can help you evaluate if the franchisor's support staff and infrastructure are scaling appropriately with new unit openings.
• Speaking with franchisees who opened at different times can provide your attorney with insight into how support levels have changed over time.

Explanation

This risk was not identified. Winmark Corporation is a long-established franchisor, founded in 1988, with extensive experience managing multiple large, mature resale franchise brands like Plato's Closet and Once Upon A Child. The Style Encore system itself began franchising in 2013 and has a significant number of operating units. Therefore, the risks associated with a new or unproven system do not appear to apply here.

Potential Mitigations

• Even with a mature system, it's wise to have your attorney confirm there have been no recent, fundamental changes to the business model.
• A business advisor can still help you analyze trends within this specific brand to ensure it remains healthy and is not being neglected in favor of the franchisor's other concepts.
• Reviewing recent litigation and franchisee turnover with your accountant remains a key due diligence step for any system, new or old.

Explanation

This risk was not identified in the FDD package. The business model, which focuses on the resale of quality used clothing and accessories, taps into a well-established and continuously growing consumer market for value and sustainability. This market predates the franchise and is not dependent on a short-term trend, suggesting a lower risk of the business being a fad.

Potential Mitigations

• Your business advisor can help you conduct local market research to confirm sustained demand for resale retail in your specific area.
• Discussing the long-term viability and consumer trends with existing franchisees can provide valuable real-world perspective.
• An analysis of the competitive landscape, including other resale shops and online platforms, with your marketing advisor is recommended.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the key executives and directors at Winmark have extensive, long-term experience both within the company and in the franchising industry. Many have been with Winmark for over a decade, holding various progressing roles across their multiple franchise brands. This indicates a stable and seasoned leadership team.

Potential Mitigations

• Even with an experienced team, it is prudent to research the recent performance of the specific brand you are considering with your business advisor.
• A consultation with your attorney to review any recent changes in key management roles is always a sound practice.
• Speaking with current franchisees can provide insight into the quality of management and the support they provide.

Explanation

This risk was not identified in the FDD package. Winmark Corporation is a publicly traded company and does not appear to be owned by a private equity firm. The risks often associated with private equity ownership, such as a focus on short-term returns over long-term brand health, do not seem to be present here based on the ownership structure disclosed in Item 1.

Potential Mitigations

• It is always a good practice to have your attorney verify the current ownership structure of the franchisor.
• A business advisor can help you research the company's public filings and investor reports to understand its strategic priorities and financial philosophy.
• Asking long-term franchisees about their experience with the company's ownership and strategic direction over time can provide valuable context.

Explanation

This risk was not identified. Winmark Corporation does not disclose a parent company, as it is the top-level entity. It does disclose an affiliate, Winmark Capital Corporation, but states it is not involved in franchising. The provided financial statements in Exhibit C are for Winmark Corporation, the franchisor entity itself. Therefore, the risk of a hidden or undisclosed parent company with unverified financials does not appear to be present.

Potential Mitigations

• Your attorney can help verify the corporate structure and ensure there are no other controlling entities whose financials should be considered.
• Having an accountant review the provided financials is crucial to confirm they are for the correct entity and are properly audited.
• Understanding the role of any affiliates mentioned in Item 1 is a worthwhile discussion to have with your attorney.

Explanation

This risk was not identified in the FDD package. Item 1 states that Winmark has no predecessors that must be disclosed for the Style Encore franchise system. The risk of inheriting historical issues from a prior owner of the brand, such as unresolved litigation or high franchisee failure rates, does not appear to be applicable here.

Potential Mitigations

• Your attorney can help you perform due diligence to confirm the history of the brand and ensure no predecessor information has been omitted.
• Independent research into the brand's origins with a business advisor can sometimes uncover history not present in the FDD.
• Asking long-tenured franchisees about the history of the system can provide valuable informal background.

Explanation

This risk was not identified in the FDD package. Item 3 states, “No litigation is required to be disclosed in this Item.” This indicates that in the past year, there has been no material litigation involving the franchisor, its predecessors, or individuals in management that would require disclosure under franchise law, such as actions alleging fraud, franchise law violations, or significant operational disputes. The absence of such litigation is a positive indicator.

Potential Mitigations

• Your attorney can conduct independent public record searches to verify the absence of significant recent litigation.
• It is still valuable to ask current franchisees about any disputes or legal issues they are aware of within the system.
• Understanding the types of litigation that require disclosure is a key topic to discuss with your franchise attorney.