Explanation

This risk was not identified in the FDD package. The audited financial statements for STC Franchising, LLC (STC) show it is highly profitable, with over $5.6 million in net income for 2024 and a healthy balance sheet. Strong financial performance suggests the franchisor has the resources to support its obligations. Financial stability is crucial as it underpins the franchisor's ability to invest in the brand and support franchisees.

Potential Mitigations

• An experienced franchise accountant should still review the complete financial statements, including all footnotes and the auditor's report.
• Discussing the franchisor's financial strategy and reinvestment plans with your business advisor can provide additional insight into long-term stability.
• Your accountant can help you understand the relationship between the franchisor's financials and those of its parent company.

Explanation

This risk was not identified in the FDD package. The data in Item 20 shows very low franchisee turnover. For example, in 2024, only 3 franchises were terminated and none ceased operations for other reasons, representing a churn rate of less than 2% of the system. Low turnover often indicates a stable system and general franchisee satisfaction, which is a positive sign for a prospective owner.

Potential Mitigations

• Contacting a diverse sample of current franchisees listed in Item 20 is still a prudent step to confirm satisfaction levels; your business advisor can help guide these conversations.
• Ask your attorney to help you frame questions for former franchisees to understand their specific reasons for leaving the system.
• Your accountant can help you analyze the three-year trend data in Item 20 to confirm the consistency of the low turnover rates.

Explanation

This risk was not identified in the FDD package. The data in Item 20 shows that the franchise system size is stable, with a net change of only one additional unit over the last three years (from 253 total units at the start of 2022 to 252 at the end of 2024). This lack of rapid growth suggests the franchisor's resources are not being strained by over-expansion, which can be a positive indicator for support quality.

Potential Mitigations

• Your business advisor can help you discuss the franchisor's strategic growth plans to understand their future vision for the brand.
• Engage a franchise attorney to review the Area Development Agreement to understand your own development obligations and timelines.
• Speaking with franchisees in both new and mature markets can provide insight into how support levels are maintained across the system.

Explanation

This risk was not identified in the FDD package. The franchisor, STC, began offering franchises in 2007 and the system includes over 160 franchised outlets. This indicates a mature and well-established franchise system, not a new or unproven one. Investing in an established system can reduce some risks associated with new ventures, as the business model and support structures are typically more developed and tested in the marketplace.

Potential Mitigations

• Your business advisor should still help you assess the brand's current market position and long-term viability, even for an established system.
• A review of the system's history and any significant changes over time with your franchise attorney is recommended.
• Discussing the evolution of the brand and support with long-tenured franchisees can provide valuable historical context.

Explanation

This risk was not identified in the FDD package. The indoor tanning industry has been established for decades. Furthermore, Item 1 shows that STC is actively expanding its business model to include a range of wellness and spa services like hydromassage, sauna, and cryotherapy. This diversification suggests an adaptive strategy aimed at long-term market relevance beyond a single trend, reducing the risk that the business is a short-lived fad.

Potential Mitigations

• Engage a business advisor to research the long-term consumer demand and competitive landscape for both tanning and the newer wellness services offered.
• It is wise to discuss the company's research and development strategy with the franchisor to understand how they plan to continue evolving the brand.
• Your financial advisor can help model the potential impact of market shifts on your business's revenue streams.

Explanation

This risk was not identified in the FDD package. The executive team detailed in Item 2 possesses extensive and long-term experience with the Sun Tan City brand. Several key members, including the CEO, have been with the company for over 15 years. This level of industry and brand-specific experience in management is a positive indicator for stable leadership and knowledgeable system support, which is a significant benefit for franchisees.

Potential Mitigations

• Your business advisor can still help you research the professional backgrounds of the key management team members for a complete picture.
• It remains valuable to ask current franchisees about their direct experiences with the management team's accessibility and support.
• A discussion with your attorney about the disclosed CEO succession plan can provide clarity on future leadership.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that STC is a wholly-owned subsidiary of STC Consolidated Operations, LLC, and does not mention any ownership by a private equity firm. The long tenure of the management team suggests stable, internal ownership rather than control by a financial firm focused on short-term returns. This can often lead to a greater focus on the long-term health of the franchise system.

Potential Mitigations

• Your attorney can help you verify the corporate structure and ownership of the franchisor and its parent company.
• It may be beneficial to discuss the company's long-term ownership and strategic vision with your business advisor.
• Asking the franchisor directly about their capital structure and future ownership plans can provide additional clarity.

Explanation

This risk was not identified in the FDD package. STC clearly discloses its parent company, STC Consolidated Operations, LLC, in Item 1. While parent company financials are not provided, the FDD includes strong, audited financial statements for the franchisor entity itself, which is compliant with disclosure rules. Providing these healthy financials directly gives you a clear view of the entity you are contracting with, reducing the risk of hidden financial weaknesses at the parent level.

Potential Mitigations

• Your accountant should review the provided franchisor financials and the footnotes explaining the parent-subsidiary relationship.
• It is important to have your attorney review any guarantees or support obligations mentioned between the parent and the franchisor.
• Clarifying the specific roles and responsibilities of the parent versus the franchisor with your business advisor is a prudent step.

Explanation

This risk was not identified in the FDD package. The franchisor discloses in Item 1 that it has no predecessors. Items 3 and 4 further confirm a clean history with no disclosed litigation or bankruptcies involving predecessors. This absence of a complex or troubled history from prior entities can indicate a more stable and straightforward business background, which is a positive factor for a prospective franchisee to consider.

Potential Mitigations

• Your attorney should still verify the information in the FDD regarding the company's formation and history.
• Asking long-tenured franchisees about the history of the brand can sometimes reveal additional context.
• A business advisor can assist you in researching the brand's public history to confirm the absence of undisclosed predecessor issues.

Explanation

This risk was not identified in the FDD package. Item 3 explicitly states, "No litigation is required to be disclosed in this item." The absence of a history of significant lawsuits, particularly those initiated by other franchisees alleging fraud or breach of contract, is a strong positive indicator. It suggests a healthier franchisor-franchisee relationship and a lower likelihood of systemic problems within the franchise network.

Potential Mitigations

• An attorney can still conduct an independent search of public court records to confirm the absence of litigation.
• Asking current and former franchisees about their experiences and any past disputes is a valuable part of due diligence.
• Your business advisor can help you assess the overall health of franchisor-franchisee relations through these conversations.