Explanation

The audited financial statements for MMI Business Brokers, LLC (Sunbelt) do not indicate financial instability. The company has shown consistent profitability over the past three fiscal years, with growing net income. Although Member's Equity decreased significantly in fiscal year 2024, this was due to a large, one-time member distribution related to an inter-company balance, not an operating loss. The company remains solvent and profitable, suggesting it can meet its obligations.

Potential Mitigations

• An accountant should review the financial statement footnotes, particularly regarding the large 2024 member distribution, to confirm the nature of the transaction.
• Engage your accountant to monitor the franchisor's financial health in future FDDs you receive to ensure stability continues.
• Discuss the franchisor's reinvestment plans with them, given the significant distribution of capital from the company.

Explanation

This risk was not identified in the FDD package. While the system shows steady growth, it does not appear to be expanding at a rate that would suggest its support infrastructure is overstretched. Uncontrolled growth can strain a franchisor's ability to provide quality training, site selection assistance, and ongoing support. Maintaining a manageable growth pace is important for system health.

Potential Mitigations

• A discussion with your business advisor can help assess if the franchisor's current support staff and systems are adequate for its existing and planned franchisees.
• Ask current franchisees about their experiences with the quality and responsiveness of franchisor support.
• Your accountant can review the franchisor's financial statements to evaluate their investment in support infrastructure relative to their growth.

Explanation

This risk was not identified. Sunbelt has been franchising since its predecessor began operations, and the current franchisor entity was formed in 2005. Key personnel have extensive experience, and the system has over 100 operating units. The business model is established, not new or unproven. A new system carries higher risks due to a lack of a track record, unrefined support systems, and minimal brand recognition.

Potential Mitigations

• Even with an established system, it is wise to have your business advisor help you research the brand's current market position and competitive landscape.
• Consult with your attorney to understand the history of the franchisor, including any predecessors and their track records.
• Reviewing the franchisor's financials with your accountant can provide insight into the stability of even a mature system.

Explanation

The business model is business brokerage, which is an established professional service industry. It is not tied to a short-term trend or novelty. Therefore, the risk of the business being a fad is low. Investing in a fad business is risky because consumer demand may disappear, leaving you with a long-term contract for a business with no market.

Potential Mitigations

• Your business advisor can help you analyze the long-term demand for business brokerage services in your specific market.
• In discussions with the franchisor, inquire about their strategies for adapting to changes in the M&A and small business markets.
• It is prudent to review the business's resilience to economic cycles with your financial advisor.

Explanation

This risk was not identified. The key personnel listed in Item 2, such as President Brian Knoderer and the CEO of the management company, Ben Davies, have significant experience in the business brokerage industry and with the Sunbelt system, dating back to 2014 and 2015 respectively. Inexperienced management can pose a risk by providing inadequate support or making poor strategic decisions.

Potential Mitigations

• Even with experienced leaders, it is beneficial to speak with current franchisees about their direct experiences with the management team's support and guidance.
• A business advisor can help you research the reputation of the key executives within the broader franchising and business brokerage communities.
• Your attorney should confirm that the management team's roles and responsibilities are clearly defined.

Explanation

This risk was not identified in the FDD package. The ownership structure described in Item 1 involves several entities, including Marathon Management Services, but does not state it is a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profits over the long-term health of the brand and its franchisees. This might manifest as reduced support, increased fees, or a quick sale of the system.

Potential Mitigations

• It is wise to have your attorney clarify the complete ownership structure and identify the ultimate controlling parties.
• Inquire with current franchisees if they have experienced any significant changes in franchisor philosophy or support levels recently.
• Your business advisor can help you research the history and typical operating strategy of the parent companies involved.

Explanation

This risk was not identified. Item 1 clearly discloses the parent company, SB Administrative Services, Inc., and the ultimate parent, Marathon Management Services II, LLC. It also discloses the management company, Marathon Management Services, LLC. The FDD includes the audited financials for the franchisor entity, MMI Business Brokers, LLC. Hiding a parent company's identity or failing to provide its required financials can obscure the true financial backing and stability of the franchisor.

Potential Mitigations

• Your accountant should review the complex corporate structure and the related-party transactions described in the financial statement footnotes.
• Confirm with your attorney that all necessary disclosures regarding parent and affiliate companies appear to have been made.
• Inquire about the specific roles and responsibilities of each entity in the corporate structure to understand who provides support and holds obligations.

Explanation

This risk was not identified. Item 1 discloses that the franchisor acquired the assets of a Predecessor, Sunbelt Business Brokers Network, LLC, in 2006. Items 3 and 4 report no material litigation or bankruptcy for the current franchisor. A history of issues with a predecessor could indicate inherited systemic problems for a new franchisee.

Potential Mitigations

• It's a good practice to ask long-term franchisees about their experiences under any previous ownership or predecessor entities.
• Your business advisor could help conduct public records research on the predecessor entity for any unreported issues.
• A discussion with your attorney can clarify any obligations that may have been assumed from the predecessor.

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 an absence of recent, material legal actions involving the franchisor related to fraud, contract violations, or franchise law. A pattern of such litigation would be a significant red flag about the franchisor's practices and system health.

Potential Mitigations

• An attorney can still conduct independent searches of court records as a final due diligence step to look for any non-material or recently filed litigation.
• Asking current and former franchisees about any past or pending disputes is a valuable part of due diligence.
• Your business advisor can research online forums and news articles for any reports of franchisee disputes.