Explanation

This risk was not identified. The audited financial statements for Team Up Enterprises, LLC (TUE) show significant revenue and net income growth in 2023, with a strong balance sheet. Unaudited interim financials for 2024 continue to show very strong profitability and a healthy financial position. The auditor's report is unqualified, with no 'going concern' warning, suggesting TUE is financially stable and capable of supporting its franchise system.

Potential Mitigations

• Engaging an accountant to review the franchisor's financial statements, including all footnotes, is crucial to verify financial health.
• A business advisor can help you assess if the franchisor's financial stability is sufficient to provide promised support and grow the brand.
• Your attorney should confirm that the financial statements provided are audited and meet all federal and state disclosure requirements.

Explanation

This risk was not identified. Item 20 data shows a new and rapidly growing system, with five new franchises in 2022 and nine net new franchises in 2023. There was one unit that 'ceased operations' in 2023 out of 14, which is not an alarming rate for a new system. The data does not indicate a high rate of terminations, non-renewals, or other signs of systemic franchisee distress.

Potential Mitigations

• It is wise to have an accountant analyze the franchisee turnover tables in Item 20 for any negative trends over the three-year period.
• Contacting former franchisees listed in Item 20 is a critical due diligence step that your business advisor can help you prepare for.
• Your attorney can help you formulate questions for the franchisor regarding the circumstances of any franchisee departures.

Explanation

This risk was not identified. The business model, which involves selling custom sports apparel and equipment to schools, clubs, and other organizations, is based on a long-standing and established market. While specific products may change with trends, the core business is not considered a fad and has demonstrated consistent demand. Therefore, the risk of the entire business concept becoming obsolete in the short term appears low.

Potential Mitigations

• A business advisor can help you research the long-term stability and demand within the custom apparel industry.
• An analysis of local competition with a business consultant can help verify the sustainability of the market in your area.
• Discuss the franchisor's plans for product innovation and adaptation with them to gauge their long-term vision.

Explanation

This risk was not identified in the FDD. Item 1 discloses the ownership structure, which appears to be held by the founding individuals and a holding company, not a private equity firm. Private equity ownership can sometimes introduce a focus on short-term returns over the long-term health of the franchise system. The absence of this ownership structure may suggest a different set of priorities for the franchisor.

Potential Mitigations

• Your attorney can help you verify the ownership structure detailed in Item 1 through public records.
• Engaging a business advisor to research the franchisor's history can provide additional comfort regarding their ownership and strategic direction.
• Always ask the franchisor about any potential future sales of the company during your due diligence calls.

Explanation

This risk was not identified. Item 1 of the FDD properly discloses the existence of a parent company, Team Up Holdings, LLC. A failure to disclose a parent company can obscure the true financial backing or control structure of a franchise. In this case, the disclosure appears to be compliant with franchise regulations, providing transparency about the corporate structure.

Potential Mitigations

• It is good practice to have your attorney review Item 1 to confirm all required parent and affiliate companies are disclosed.
• If a parent company guarantees the franchisor's obligations, an accountant should review the parent's financial statements.
• A business advisor can help you understand the relationship and operational significance of any parent or affiliate companies.

Explanation

This risk was not identified. Item 1 of the FDD does not list any predecessor entities. A predecessor is a company from which the franchisor acquired a major part of its assets. While an affiliate operates a similar business, it is not defined as a predecessor in the FDD. Understanding predecessor history is important as it can reveal inherited issues or a track record of failure.

Potential Mitigations

• Your attorney should always review Item 1 to check for any disclosed predecessors and their history.
• A business advisor can help you research the history of the brand and its founders, even if no official predecessor is listed.
• Asking current franchisees about the history of the system can sometimes uncover relevant information about its origins.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no litigation that is required to be disclosed. A clean litigation history is a positive sign, as a pattern of lawsuits, especially from franchisees alleging fraud or breach of contract, can be a significant red flag about the franchisor's practices and the health of the system.

Potential Mitigations

• Your attorney should always carefully review Item 3 for any disclosed litigation and its potential implications.
• It can be prudent to have your attorney conduct an independent search for litigation involving the franchisor or its principals.
• A business advisor can help you ask current franchisees if they are aware of any disputes, even those not rising to the level of disclosed litigation.