Explanation

This risk was not identified in the FDD package. The audited financial statements provided in Exhibit E show Abbey Carpet Co., Inc. (Abbey) is profitable with a positive net worth. Financial instability can be a major risk, as it may affect a franchisor's ability to provide support or even remain in business, but the financials provided here appear stable.

Potential Mitigations

• It is still advisable for your accountant to conduct an independent analysis of the franchisor's financial statements and footnotes.
• A business advisor can help you understand how a franchisor's financial health impacts their ability to support franchisees long-term.
• Asking your attorney about state financial assurance requirements, like bonds or escrow, is a good practice if financials were a concern.

Explanation

This risk was not identified in the FDD package, as Item 20 data shows a net decrease in outlets over the past three years, not rapid growth. While rapid growth can strain a franchisor's ability to provide support, this system appears to be mature and is not undergoing rapid expansion.

Potential Mitigations

• A business advisor can help you assess whether a franchisor's support infrastructure is adequate for its current size and any future growth plans.
• Reviewing the franchisor's financial statements with an accountant can help determine if they have the resources to manage their system effectively.
• Speaking with existing franchisees about the current quality of support is a valuable step, which your attorney can help guide.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that Abbey has been franchising since 1971, making it a well-established and mature franchise system, not a new or unproven one. This long history reduces risks associated with unproven business models or inexperienced franchisors.

Potential Mitigations

• A business advisor can help you investigate the history and reputation of any franchise system you consider.
• For any franchise, it is wise to have an accountant review the financials for signs of stability and longevity.
• Consulting with long-term franchisees can provide insight into the system's evolution and stability, a process your attorney can assist with.

Explanation

This risk was not identified in the FDD package. The franchise operates in the floor covering industry, which is a long-established market rather than a business based on a recent or short-term trend. This suggests a lower risk of the entire business concept becoming obsolete due to shifting consumer interests.

Potential Mitigations

• For any business, it's wise to have a business advisor help you assess the long-term market demand for its products or services.
• Discussing a franchisor's plans for innovation and adaptation with them can reveal their strategy for staying relevant.
• An accountant can help you analyze the financial sustainability of a business model beyond any current trends.

Explanation

This risk was not identified in the FDD package. Item 2 discloses an executive team with extensive and long-term experience within the company and the floor covering industry. Many key personnel have been with Abbey for decades, which suggests a deep understanding of the business and franchising.

Potential Mitigations

• A thorough review of the management team's background in Item 2 with your business advisor is always a crucial step.
• Speaking with existing franchisees provides valuable insight into the competence and effectiveness of the franchisor's management team.
• Your attorney can help you understand the roles and responsibilities of the key executives as described in the FDD.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that Abbey does not have a parent company and is not owned by a private equity firm. The risk of sudden, short-term strategic shifts often associated with private equity ownership does not appear to be present here.

Potential Mitigations

• Understanding the ownership structure of any franchisor is an important piece of due diligence for your business advisor.
• It is prudent to have your attorney review Item 1 and any related exhibits to confirm the ownership structure and identify any potential risks.
• Discussing any recent ownership changes with current franchisees can provide context on the franchisor's direction.

Explanation

This risk was not identified in the FDD package. Item 1 clearly states that the franchisor does not have a parent company. The disclosure of its affiliate, Floors To Go, LLC, appears adequate. Therefore, there is no risk of masked financial instability from an undisclosed parent entity.

Potential Mitigations

• Verification of a franchisor's corporate structure and any parent or affiliate relationships is a key task for your attorney.
• If a parent company were involved, your accountant would be the right professional to review its financial statements for stability.
• A business advisor can help assess the operational impact of any parent or affiliate company on the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 discloses a predecessor related to a 1996 merger that changed the state of incorporation. This event is historical and does not appear to introduce any negative legacy issues, such as past litigation or bankruptcy, into the current franchise system.

Potential Mitigations

• Your attorney should always carefully review any disclosures in Item 1 regarding predecessors and their operational history.
• Independent research into a predecessor's history, with help from a business advisor, can uncover potential inherited issues.
• Asking long-term franchisees about their experiences under any previous ownership can provide valuable context.

Explanation

This risk was not identified in the FDD package. Item 3 discloses only a single, resolved governmental action and states no other material litigation is required to be disclosed. For a franchise system of this size and age, this represents a very clean litigation history and does not suggest a pattern of disputes with franchisees.

Potential Mitigations

• It is always prudent to have your attorney review the litigation history in Item 3 of any FDD.
• A business advisor can help you assess whether the nature of any disclosed litigation indicates systemic problems.
• Conducting independent online searches for franchisee complaints or news articles can sometimes provide additional context.