Explanation

This specific risk was not identified in the FDD Package. The Item 20 tables show zero terminations, non-renewals, or franchisor re-acquisitions of franchised outlets over the last three years. Generally, high franchisee turnover can be a significant red flag, suggesting potential issues with the business model's profitability, franchisor support, or overall franchisee satisfaction. A stable system with low turnover is a positive indicator for prospective franchisees.

Potential Mitigations

• Your business advisor should still recommend contacting a range of current franchisees from the list in Item 20 to discuss their satisfaction with the system.
• An accountant can help you analyze the growth patterns in Item 20 to understand the pace of expansion.
• It is wise to have your attorney review the Item 20 data for any subtle red flags or unusual classifications.

Explanation

This specific risk was not identified in the FDD Package. The executives listed in Item 2 appear to have several years of direct experience operating affiliate-owned Ultimate Ninjas locations prior to launching the franchise. In general, inexperienced management can be a significant risk, as it may lead to weak support systems, poor strategic decisions, and an inability to effectively guide franchisees. The apparent operational experience of this team is a positive factor.

Potential Mitigations

• A thorough review of the management team's background in both the industry and in franchising is always a prudent step for a business advisor to assist with.
• Inquire with current franchisees about their perception of the management team's competence and the quality of support provided.
• Your attorney can help you research the public records of key executives for any undisclosed issues.

Explanation

This specific risk was not identified in the FDD Package. Item 1 and the accompanying financial statements do not indicate that the franchisor is owned or controlled by a private equity firm. When PE firms own a franchise, there can be a risk that short-term financial goals and a planned exit strategy may take priority over the long-term health of the brand and the individual success of franchisees.

Potential Mitigations

• It is always a good practice to have your attorney confirm the ownership structure of the franchisor entity.
• Researching the background of the primary owners can provide valuable context, a task a business advisor might assist with.
• Understand the franchisor's rights to sell or assign the franchise system, which your attorney can explain.

Explanation

This specific risk was not identified in the FDD Package. The franchisor does not appear to have a parent company. If a franchisor is a subsidiary of a larger parent company, it is important that the parent company is properly disclosed. The financial health of a parent can be crucial, especially if it guarantees the franchisor's obligations or is a key supplier, and its financials may be required for a full risk assessment.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 to ensure there are no undisclosed parent entities.
• If a parent company were involved, an accountant's review of its financial statements would be critical.
• Understanding any financial guarantees from a parent company is a key step your attorney would take.

Explanation

This specific risk was not identified in the FDD Package. Item 1 of the FDD indicates that the franchisor has no predecessors. When a franchise system has a history involving predecessor companies, it's vital to examine that history for any signs of trouble, such as litigation, bankruptcy, or high franchisee turnover. A clean slate with no predecessor history simplifies due diligence but also means the operating history is limited to the current entity.

Potential Mitigations

• Your attorney should confirm that the franchisor has not acquired assets from or continued the business of a prior entity that should have been disclosed.
• Even without predecessors, a business advisor should help you research the full history of the brand and its founders.
• Discuss the franchisor's origins with early franchisees to understand the complete history of the concept.

Explanation

This specific risk was not identified in the FDD Package. Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. Similarly, a high volume of franchisor-initiated litigation against franchisees may suggest an overly aggressive or punitive system. The absence of such litigation is a positive indicator.

Potential Mitigations

• It is still prudent to have your attorney conduct an independent search for any litigation involving the franchisor or its principals that may not have met the threshold for disclosure.
• When speaking with former franchisees, you can ask about any disputes they may have had, with guidance from your business advisor.
• Reviewing the default and termination clauses in the Franchise Agreement with your attorney can reveal how the franchisor might handle disputes.