Explanation

This risk was not identified in the FDD package. The franchisor, Tippi Toes, Inc. (Tippi Toes), was founded in 2002 and began franchising in 2009, indicating it is an established system. However, investing in any new or unproven franchise system can be risky due to the lack of a long-term track record, which makes it harder to assess financial viability and the effectiveness of the franchisor's support systems.

Potential Mitigations

• When evaluating a newer franchise, it is wise to have your business advisor conduct extensive due diligence on the founders' and management's experience.
• Speaking with the earliest franchisees of a new system can provide invaluable insight into the franchisor's learning curve and support evolution.
• An accountant should carefully assess a new franchisor's capitalization to determine if it has sufficient resources to support its initial growth phase.

Explanation

This risk was not identified in the FDD package, as children's dance instruction is an established business category, not a new trend. However, some franchise concepts can be based on fads with limited long-term consumer demand. Investing in such a business is risky because your contractual obligations, such as royalty payments, will continue even if public interest in the product or service fades, potentially leading to business failure.

Potential Mitigations

• Engaging a business advisor to research the long-term market demand for a franchise concept's products or services is a prudent step.
• It is important to evaluate a franchisor's stated plans for innovation and adaptation to stay relevant beyond initial trends.
• Working with your financial advisor to consider a business model's sustainability and resilience to economic shifts can provide critical perspective.

Explanation

This risk was not identified in the FDD package. The key executives listed in Item 2 have been with Tippi Toes for over two decades, indicating significant experience. In general, inexperienced management can pose a great risk, as a team lacking deep knowledge in both the specific industry and in franchising may struggle to provide effective support, make sound strategic decisions, and maintain a healthy franchise system.

Potential Mitigations

• A thorough review of the management team's background in both the industry and franchising with a business advisor is a key due diligence step.
• When assessing a franchisor, speaking with existing franchisees about the quality of management's support provides direct insight.
• It's beneficial to ask a franchisor if they have engaged experienced franchise consultants, especially if the management team is new to franchising.

Explanation

This risk was not identified in the FDD package, as Item 1 indicates the franchisor is a privately held corporation, not one owned by a private equity firm. When a PE firm owns a franchisor, there can be a risk that decisions are driven by short-term financial targets and a defined exit timeline, which may not always align with the long-term health of franchisees and the brand.

Potential Mitigations

• It is wise for a prospective franchisee to research a private equity owner's track record with other franchise systems, with help from a business advisor.
• Speaking with franchisees who have been in a system both before and after a private equity acquisition can offer valuable perspectives on changes in support and culture.
• Your attorney should analyze any assignment clauses in the franchise agreement to understand the implications if the PE firm sells the system.

Explanation

This risk was not identified. The FDD appears to properly disclose its structure, stating in Item 1 it has no parent company but does have an affiliate that owns the trademarks. Generally, if a franchisor is a subsidiary of a larger parent company, it is important that the parent's financial status is also disclosed, especially if the parent guarantees the franchisor's obligations or is crucial to the supply chain.

Potential Mitigations

• Your attorney should verify the franchisor's corporate structure to ensure there are no undisclosed parent entities that exercise control.
• If a parent company's financials are provided, they should be reviewed by your accountant with the same rigor as the franchisor's statements.
• Understanding the legal and operational relationship between a franchisor and its parent is a task for your franchise attorney.

Explanation

This risk was not identified, as Item 1 states that Tippi Toes has no predecessor company. When a franchisor has acquired a business from a predecessor, it's vital to scrutinize the predecessor's history. Negative information, such as past litigation, bankruptcy, or high franchisee turnover under the previous ownership, can indicate inherited systemic problems that may continue to affect the franchise system you are joining.

Potential Mitigations

• Your attorney should carefully review all disclosures related to a predecessor's history in Items 1, 3, 4, and 20 of the FDD.
• Conducting independent research on a predecessor entity can sometimes uncover historical issues not prominent in the FDD; a business advisor can assist.
• Asking long-term franchisees about their experience under any previous ownership can provide valuable context.

Explanation

This risk was not identified, as Item 3 states that there is no litigation required to be disclosed. A pattern of litigation, particularly lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, is a significant red flag. It can indicate systemic problems with the franchisor's business practices or franchisee relations. Likewise, a high number of suits filed by the franchisor against franchisees can suggest an overly aggressive or unsupportive culture.

Potential Mitigations

• It is essential that your attorney carefully reviews the details of all litigation disclosed in Item 3.
• Even if no litigation is disclosed, asking current and former franchisees about any informal disputes can provide additional insight.
• A business advisor can help you research online forums and news articles for any reports of franchisee dissatisfaction or legal disputes.