Explanation

The audited financial statements for TeamLogic, Inc. (TeamLogic) show a strong and stable financial position. The company reports consistent revenue growth, substantial net income ($8.1M in 2024), and healthy cash reserves with positive stockholder's equity. There are no indicators of financial instability, such as a going concern note or negative net worth. Therefore, this specific risk was not identified in the FDD package.

Potential Mitigations

• An experienced franchise accountant should review the franchisor's financial statements, including all footnotes and year-over-year trends.
• It is wise to assess the sources of the franchisor's revenue (e.g., royalties vs. initial fees) with your accountant to gauge system health.
• Discuss the franchisor's financial stability and plans for future investment in the brand with your business advisor.

Explanation

The data in Item 20 does not indicate a high rate of franchisee turnover. Over the past three years, the system has experienced very few terminations, non-renewals, or other cessations relative to its size. The franchise system has shown consistent net growth in the number of outlets year over year. This suggests a relatively stable franchisee base.

Potential Mitigations

• Your business advisor should help you calculate the effective annual turnover rate from the data in Item 20's tables.
• Contacting former franchisees listed in Item 20 is a crucial step to understand their reasons for leaving the system.
• A discussion with your attorney can help you formulate appropriate questions to ask current and former franchisees about system satisfaction.

Explanation

The system shows steady growth, adding a net of 29 franchised outlets in 2024. The franchisor's financial statements in Item 21 appear robust, with significant revenue and net income, suggesting they have the resources to support this expansion. This does not appear to be dangerously rapid growth that would outpace support capabilities.

Potential Mitigations

• You should discuss the quality and responsiveness of franchisor support with a range of existing franchisees, both new and established.
• Your business advisor can help you question the franchisor about their plans for scaling support infrastructure to match unit growth.
• An analysis of the franchisor's balance sheet and cash flow statement with your accountant can help verify their ability to fund support services.

Explanation

This risk is not present. TeamLogic, Inc. began franchising in 2005 and has grown to over 300 units, indicating a well-established system. The management team described in Item 2 has significant experience in franchising and the IT services industry, often with long tenures. The system is mature and not based on a fleeting fad.

Potential Mitigations

• When evaluating any franchise, it is important to conduct thorough due diligence on the management team's experience with your business advisor.
• For newer systems, speaking with the very first franchisees is critical to understand the franchisor's learning curve and support evolution.
• Your accountant should carefully review the financials of any new or unproven franchisor to assess their capitalization and long-term viability.

Explanation

The risk of this being a fad business appears low. The franchise provides outsourced IT managed services to small and medium-sized businesses, a sector with sustained and growing demand. This is a core business need rather than a consumer trend. The franchisor's long history since 2005 further supports the long-term viability of the business model.

Potential Mitigations

• Assessing the long-term market demand for any business's products or services with a business advisor is a critical due diligence step.
• It is prudent to evaluate a franchisor’s plans for innovation and adaptation to stay ahead of market changes and competition.
• Your financial advisor can help you consider the business model's resilience to economic shifts and technological advancements.

Explanation

This risk was not identified. The executives and directors listed in Item 2 have extensive backgrounds in the franchise industry and/or the IT services sector. Many key personnel have long tenures with TeamLogic or its parent company, Franchise Services, Inc., indicating a stable and experienced leadership team.

Potential Mitigations

• Thoroughly vetting the management team's background is a key part of due diligence; a business advisor can help you with this.
• Speaking with existing franchisees about the quality of management's support and strategic direction provides valuable insight.
• Reviewing management's experience in both the specific industry and in managing a franchise system is crucial for any opportunity.

Explanation

This risk is not identified, as TeamLogic does not appear to be owned by a private equity firm. It is owned by Franchise Services, Inc., a long-standing company in the franchise industry. However, the Franchise Agreement does grant the franchisor the right to assign the contract to any successor, which is a standard but important term to note.

Potential Mitigations

• Understanding the ownership structure of any franchisor is an important step; a business advisor can help research the parent company.
• It is important to discuss with franchisees what changes, if any, have occurred after a change in ownership.
• Your attorney should review any clauses that permit the franchisor to sell or assign the franchise system and explain the potential implications.

Explanation

This risk is not present. Item 1 clearly discloses the parent company, Franchise Services, Inc., and the ultimate parent, KOAH, Inc. However, the FDD does not contain financial statements for the parent companies. Given that TeamLogic itself shows strong, audited financials, this omission is less critical than it would be for a thinly capitalized subsidiary.

Potential Mitigations

• Your attorney should verify if state law requires parent company financials based on the specific circumstances.
• An accountant can help you assess if the franchisor's own financials are strong enough to stand on their own without a parent guarantee.
• In cases where a parent company guarantees the franchisor's obligations, you should insist on reviewing their financial statements.

Explanation

This risk was not identified. Item 1 states that TeamLogic has no predecessors. Therefore, there is no predecessor history to obscure or analyze for potential inherited problems, litigation, or bankruptcy issues.

Potential Mitigations

• It is still a good practice to have your attorney review Item 1 carefully to confirm the absence of any disclosed predecessors.
• When a predecessor does exist, researching their history for litigation or franchisee complaints can be a vital part of due diligence.
• Your business advisor can help you question long-term franchisees about their experiences under any previous ownership.

Explanation

This risk appears low. Item 3 discloses a single regulatory consent order with California from 2024 for a past failure to have salesperson disclosures on file, which was resolved with an $8,000 penalty. There is no pattern of franchisee-initiated litigation alleging fraud or misrepresentation, nor an unusually high volume of litigation initiated by the franchisor against its franchisees.

Potential Mitigations

• Your attorney should review the details of any disclosed litigation or regulatory action to assess its significance.
• It is wise to consider a pattern of franchisee lawsuits alleging fraud or a high number of franchisor lawsuits against franchisees as a major red flag.
• Independent legal research, with help from your attorney, can sometimes uncover litigation not required to be disclosed in Item 3.