Explanation

Financial statements for Alair Enterprises USA, Inc. (Alair Homes) appear strong, with growing revenue and positive net income. However, the notes disclose an economic dependence on an affiliated Canadian entity, Alair Canada Ltd., for the core intellectual property and system processes. A significant portion of revenue is also paid to this affiliate as royalties. This structure could pose a risk to long-term stability if that relationship changes.

Potential Mitigations

• An accountant should analyze the franchisor's financial statements, including the notes detailing related-party transactions and economic dependencies.
• Discuss the relationship between Alair Homes and its Canadian affiliate with your attorney to understand the stability of the intellectual property license.
• A business advisor can help assess the long-term risks associated with a franchisor's reliance on affiliated entities for core functions.

Explanation

Item 20 data for Alair Homes Master Franchises does not indicate a high rate of turnover. In the most recent full fiscal year, there were no reported terminations, non-renewals, or cessations of operation. Low turnover can be a positive sign of franchisee satisfaction and system health. However, you should still conduct your own due diligence by speaking with current and former franchisees.

Potential Mitigations

• Speaking with a representative sample of current franchisees from the list in Exhibit I is a crucial step in your due diligence.
• Your business advisor can help you formulate questions for franchisees about their satisfaction and the franchisor's support.
• An accountant can help you review the Item 20 tables over the full three-year period to identify any past trends.

Explanation

The growth of the Master Franchise system, as detailed in Item 20, does not appear to be excessively rapid. A controlled growth rate can be a positive indicator, suggesting the franchisor may have sufficient resources to support its franchisees. Rapid, unsupported growth can sometimes strain a franchisor's ability to provide adequate training and assistance.

Potential Mitigations

• During your discussions with current franchisees, asking about the quality and timeliness of franchisor support is a good practice.
• Your business advisor can help you analyze the growth trajectory in relation to the franchisor's size and resources.
• Reviewing the franchisor's financials with your accountant can provide insight into their capacity for supporting future growth.

Explanation

This risk was not identified. Alair Homes has been offering Master Franchises in the U.S. since 2013, and its Canadian affiliate began in 2012, indicating over a decade of operational history. Investing in a new or unproven system carries higher risks because the business model, brand recognition, and support systems may not be fully developed or tested in the market.

Potential Mitigations

• It is always wise to ask your business advisor to help you assess the maturity and track record of any franchise system.
• Engaging an attorney to review the franchisor's history as disclosed in Item 1 is a fundamental due diligence step.
• Discuss the system's evolution and market position with long-standing franchisees.

Explanation

The business model, focused on custom home building and renovations, is part of a well-established, fundamental industry and does not appear to be a fad. Fad-based businesses can be risky investments as they are tied to fleeting trends, which could lead to a sharp decline in consumer demand, potentially jeopardizing the long-term viability of the franchise even if contractual obligations remain.

Potential Mitigations

• A discussion with your business advisor can help evaluate the long-term demand and competitive landscape for any industry.
• Your own research into local market trends for home building and renovation can provide valuable context.
• An accountant can help you model the financial resilience of the business to economic cycles.

Explanation

The management team detailed in Item 2 appears to have considerable experience with the Alair Homes brand and within the industry, with key executives having been with the company for many years. Inexperienced leadership can pose a risk to a franchise system, as it may lead to challenges in providing effective support, training, and strategic direction.

Potential Mitigations

• It is still valuable to research the backgrounds of key executives mentioned in Item 2 using professional networking sites or other public sources.
• Asking current franchisees about their confidence in the leadership team is a key due diligence step, which your business advisor can guide.
• Your attorney can review Item 2 for any concerning gaps in management's franchising or industry experience.

Explanation

Item 1 does not indicate that the franchisor is owned by a private equity firm. This type of ownership can sometimes introduce risks, as PE firms may prioritize short-term returns for their investors over the long-term health of franchisees. This could potentially lead to increased fees, reduced support, or a quick sale of the franchise system.

Potential Mitigations

• Your attorney should always confirm the ownership structure disclosed in Item 1.
• Understanding who controls the franchisor helps in assessing the strategic direction and long-term stability of the system, a task for your business advisor.
• Discussing any ownership changes with existing franchisees can provide valuable insight.

Explanation

This risk was not identified. The FDD discloses a predecessor entity in Item 1 and includes relevant information about it in other sections like Item 3 (Litigation). In some cases, franchisors may have a history with predecessor companies that includes significant problems, such as high failure rates or litigation, which, if not fully disclosed, can hide historical weaknesses of the franchise system.

Potential Mitigations

• An attorney can help you carefully review the disclosures in Items 1, 3, and 4 for any information related to predecessor entities.
• Independent research on any named predecessor entities can sometimes uncover additional information; your business advisor might assist.
• Asking long-tenured franchisees about their experience under any previous ownership or corporate structure can be insightful.

Explanation

Item 3 discloses two litigation cases involving the franchisor's Canadian affiliate. These cases appear to stem from disputes between subcontractors and franchisees, where third parties are attempting to hold the franchisor liable. While this does not represent a pattern of franchisees suing for fraud, it does highlight potential brand risks and the possibility of being drawn into disputes related to the actions of your future unit franchisees.

Potential Mitigations

• Your attorney must review the details of all litigation in Item 3 to assess the nature of the claims and potential risks.
• Discussing the franchisor's litigation history with current franchisees can provide context on how the company handles disputes.
• An insurance broker should be consulted to ensure you have adequate coverage for third-party claims arising from your business operations.