Explanation

This risk was not identified in the FDD Package. Item 20 data shows the franchise system is shrinking, not undergoing rapid growth. A franchisor expanding too quickly can strain its ability to provide adequate support to new and existing franchisees. This can lead to issues with training, site selection, and ongoing operational assistance, potentially harming the entire system's health and brand reputation.

Potential Mitigations

• A business advisor can help you evaluate whether a franchisor's support infrastructure seems adequate for its current size and any future growth plans.
• In discussions with existing franchisees, it's wise to ask about the quality and timeliness of the support they receive from the franchisor.
• Your accountant can review the franchisor's financials to assess if they are reinvesting sufficiently in support systems to handle their network.

Explanation

This risk was not identified in the FDD Package. TTCFC has been offering franchises since 2005 and its management has extensive industry experience, as detailed in Items 1 and 2. An unproven system carries higher risks, as its business model, brand recognition, and support structures may not be well-established. Prospective franchisees in such systems face greater uncertainty regarding long-term viability and profitability, requiring deeper due diligence.

Potential Mitigations

• For any franchise, a business advisor can help you conduct thorough due diligence on the franchisor’s operational history and the experience of its leadership team.
• It is crucial to have your accountant review the franchisor's financial statements for signs of stability and adequate capitalization.
• An attorney should be consulted to review the FDD for any disclosures related to a lack of operating history.

Explanation

This risk was not identified in the FDD Package. The after-school tutoring industry is a long-standing and established market, not a temporary trend. Investing in a fad business is risky because consumer interest can decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations, such as royalty payments and lease commitments, even after the market has disappeared. Evaluating the long-term consumer demand for a product or service is a critical step.

Potential Mitigations

• A business advisor can help you research the long-term market trends for any industry you consider entering.
• Asking current franchisees about customer loyalty and repeat business can provide insight into the business's sustainability.
• Consulting with your accountant to model the business's resilience under different economic scenarios is a prudent measure.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key executives have extensive experience in the tutoring industry and with the franchise system, dating back to 1985 and 2005. Inexperienced management can be a significant risk, as they may lack the knowledge to provide effective training, marketing, and operational support, potentially leading to poor strategic decisions that negatively impact the entire franchise system.

Potential Mitigations

• A business advisor can help you vet the backgrounds of the key management personnel listed in Item 2 of any FDD.
• It is beneficial to speak with existing franchisees to gauge their opinion of the management team’s competence and responsiveness.
• Your attorney can review Item 11 to assess whether the described support and training programs appear robust and well-structured.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that TTCFC is owned by a private equity firm. When a franchisor is owned by a PE firm, there can be a risk that the firm's focus on short-term financial returns might lead to decisions, such as cutting franchisee support or increasing fees, that are not in the long-term best interest of the franchisees or the brand.

Potential Mitigations

• If a franchisor is owned by a private equity firm, a business advisor can help you research that firm's reputation and track record with other franchise systems.
• In such cases, speaking with franchisees who have been in the system both before and after the PE acquisition can provide valuable insights.
• Your attorney should review the Franchise Agreement for any terms that might change upon a sale of the franchise system.

Explanation

This risk was not identified in the FDD Package. TTCFC does not appear to be a subsidiary of a parent company. When a franchisor is a subsidiary, the financial health of the parent can be critical, especially if the franchisor itself is thinly capitalized or relies on the parent for support or guarantees. Failure to disclose a parent or its financials when required could conceal significant risks related to the overall stability of the enterprise.

Potential Mitigations

• An attorney can help verify a company's corporate structure to determine if a parent entity exists.
• If a parent company exists and provides a guarantee, your accountant should review the parent's financial statements.
• Your attorney should review any parent guarantee agreement to understand the scope and limitations of the support being offered.

Explanation

Item 1 discloses that TTCFC has a predecessor, The Tutoring Center, Inc., which was dissolved in 2014, and a former affiliate, iQuest Distribution, whose operations were subsumed in 2021. While no negative history is disclosed for these entities in Items 3 or 4, the existence of predecessor or related entities means your due diligence should include their history to fully understand the system's background and evolution.

Potential Mitigations

• Discuss the history and role of these predecessor and affiliate companies with the franchisor to understand their impact on the current system.
• Your attorney can help you perform public records searches for any litigation or other issues related to these past entities.
• It may be useful to ask long-tenured franchisees about their experiences with the system under its previous corporate structures.

Explanation

While Item 3 states there is no litigation to disclose, Note 11 to the financial statements reveals a lawsuit was filed against TTCFC in February 2024 and was voluntarily dismissed by the plaintiff in October 2024. Although a single dismissed lawsuit does not constitute a concerning pattern, it does indicate a past franchisee dispute escalated to legal action. This highlights the potential for conflicts within the system.

Potential Mitigations

• Your attorney should review the details of the past litigation and can advise on its potential implications.
• In your due diligence calls, you might ask other franchisees if they are aware of the circumstances surrounding this past dispute.
• A business advisor can help you assess whether the franchisor's dispute resolution processes seem effective.