Explanation

This risk was not identified in the FDD package. While the system shows some projected growth, the rate of openings is not indicative of excessively rapid expansion that might outstrip support resources. However, rapid growth can strain a franchisor's ability to provide quality training and support. It is important to ensure the franchisor has the infrastructure to handle its growth.

Potential Mitigations

• Questioning the franchisor about their plans for scaling support infrastructure to match unit growth is a valuable step.
• Your business advisor can help you assess whether the franchisor's management team and resources are adequate for their growth targets.
• Engaging with franchisees who opened at different stages of growth can provide insight into the consistency of support.

Explanation

This risk was not identified in the FDD package. Tiger-Rock has been franchising since 2008, which suggests it is an established system, not a new or unproven one. Investing in a new franchise system can carry higher risks, including an unproven business model, minimal brand recognition, and underdeveloped support systems, which could impact your potential for success.

Potential Mitigations

• When evaluating any franchise, it's beneficial to have a business advisor help assess the franchisor's track record and system maturity.
• An accountant should always review the financial stability of the franchisor, which is particularly critical for newer systems.
• Legal counsel can help negotiate more franchisee-favorable terms to offset the higher risks associated with an unproven brand.

Explanation

This risk was not identified in the FDD package. The martial arts instruction industry has a long history and demonstrates sustained consumer demand, suggesting it is not a fad. A business based on a fad carries the risk of a sharp decline in customer interest after an initial trend passes, potentially leaving you with a failing business and long-term contractual obligations.

Potential Mitigations

• Working with a business advisor to research the long-term market trends for any industry is a key part of due diligence.
• It is prudent to assess a business model's resilience to economic shifts and changing consumer tastes with your financial advisor.
• Your attorney can help evaluate the franchise term and your obligations against the long-term viability of the business concept.

Explanation

This risk was not identified in the FDD package, as Item 1 does not indicate that a private equity firm owns the franchisor. When a PE firm owns a franchisor, there is a risk that decisions may prioritize short-term returns for investors over the long-term health of franchisees. This can sometimes lead to increased fees, reduced support, or pressure to use affiliated vendors.

Potential Mitigations

• If a franchisor is PE-owned, having a business advisor research the firm’s reputation and track record with other franchise brands is wise.
• Legal counsel should examine the franchise agreement for any clauses that make it easy for the franchisor to be sold.
• It is beneficial to ask existing franchisees about any changes they have experienced since a PE acquisition.

Explanation

This risk was not identified in the FDD package. Tiger-Rock discloses its affiliates in Item 1 and provides its own audited financial statements in Item 21. There is no indication of a parent company whose financials would be material to the investment decision. Failing to disclose a parent company or its financials, when required, can hide financial instability or other risks relevant to a prospective franchisee.

Potential Mitigations

• Your attorney can help verify a franchisor's corporate structure to ensure all relevant parent and affiliate entities are properly disclosed.
• If a parent company's guarantee is offered, it's critical to have an accountant review the parent's financial statements.
• A business advisor can help assess the operational relationship between a franchisor and its parent company.

Explanation

This risk was not identified in the FDD package. Item 1 states that Tiger-Rock does not have any predecessors. When a franchisor has predecessors, it is important to review their history for any red flags, such as litigation, bankruptcy, or high franchisee turnover. Incomplete disclosure of a predecessor's history can obscure systemic problems that may have been inherited by the current franchisor.

Potential Mitigations

• An attorney should always carefully review Item 1 for any mention of predecessors and cross-reference with Items 3 and 4.
• A business advisor can assist in researching a predecessor's public history and reputation.
• It is valuable to ask long-tenured franchisees about their experiences under any previous ownership.

Explanation

This risk was not identified in the FDD package. Item 3 states that no litigation is required to be disclosed. A pattern of litigation, especially cases initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag indicating systemic problems. Conversely, a high number of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious culture.

Potential Mitigations

• A thorough review of Item 3 with your franchise attorney is a crucial step in evaluating any FDD.
• Your attorney can perform independent searches for litigation that may not have met the disclosure threshold.
• Discussing any disclosed litigation with current and former franchisees can provide valuable context.