Explanation

This risk was not identified in the FDD package. Rapid, uncontrolled growth can strain a franchisor's ability to provide adequate support to all franchisees. It is important to assess whether a franchisor has the infrastructure and capital to support its expansion plans, ensuring that franchisee quality and support services are not diluted as the system grows.

Potential Mitigations

• Your accountant should review the franchisor's financial statements to assess if they have the resources to support their stated growth.
• A business advisor can help you question the franchisor about their plans for scaling support infrastructure to match unit growth.
• It is wise to interview a range of existing franchisees, both new and established, about their perception of the support quality.

Explanation

This risk was not identified in the FDD package. A fad business is one tied to a fleeting trend, which can create long-term risk for a franchisee locked into a multi-year agreement. Evaluating whether a business concept serves a sustainable, long-term consumer need versus a temporary interest is a critical part of due diligence, as the franchise obligations will continue long after a potential trend fades.

Potential Mitigations

• Engaging a business advisor to research the long-term market demand for the product or service can provide valuable perspective.
• You should question the franchisor about their plans for innovation, research, and development to keep the brand relevant.
• Assessing the business model’s resilience to economic shifts and changing consumer tastes with your financial advisor is a prudent step.

Explanation

This risk was not identified in the FDD package. The executives listed in Item 2 appear to have prior experience in franchising, although primarily through a related direct mail advertising franchise. When a franchisor's management lacks deep experience in franchising specifically, it can sometimes lead to challenges in providing effective franchisee support, training, and strategic system management.

Potential Mitigations

• A business advisor can help you thoroughly vet the management team’s background and specific experience in managing a franchise system.
• Speaking with existing franchisees about the quality of support and management's understanding of their needs is highly recommended.
• It is important to determine if the franchisor has engaged experienced franchise consultants or staff to compensate for any gaps in direct experience.

Explanation

This risk was not identified in the FDD package. The franchisor is disclosed as a limited liability company and does not appear to be owned by a private equity firm. When a franchise is PE-owned, it can sometimes lead to a focus on short-term profitability and a quick exit, which may not always align with the long-term health of franchisees. This can manifest in cost-cutting on support or pressure to increase fees.

Potential Mitigations

• Should you encounter this, researching the private equity firm's track record with other franchise systems is advisable with your business advisor.
• It would be wise to ask franchisees about changes in support, fees, or culture since any potential PE acquisition.
• Your attorney can help assess the implications of the franchisor's right to sell the system.

Explanation

This risk was not identified in the FDD package. HHCI does not disclose a parent company. Failure to disclose a parent company or provide its financial statements when it guarantees the franchisor's obligations or is critical to the supply chain can obscure the true financial health and stability of the entity backing your franchise. The FTC Rule requires parent financials under certain circumstances to ensure prospective franchisees have a complete financial picture.

Potential Mitigations

• Your attorney can help you verify the franchisor's corporate structure and determine if a parent entity's financials should have been disclosed.
• If a parent company exists and provides support, your accountant should insist on reviewing their financial statements.
• Understanding any financial guarantees or support provided by a parent entity is critical, a task for your attorney and accountant.

Explanation

This risk was not identified in the FDD package. HHCI clearly discloses that it acquired the assets of its predecessor, AmeriCare Alliance, Inc., in 2013. The document appears to properly attribute the history. A failure to disclose or downplay the history of a predecessor can obscure past issues like litigation, bankruptcy, or high franchisee turnover that could still affect the system's health and reputation.

Potential Mitigations

• Your attorney should always carefully review predecessor information in Items 1, 3, and 4.
• When a predecessor exists, researching their public track record for things like franchisee complaints or news articles can be insightful.
• It's beneficial to ask long-term franchisees about their experience 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 lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems with the franchisor's business practices, disclosure integrity, or relationship with its franchisees.

Potential Mitigations

• Your attorney should always carefully review the details of any disclosed litigation.
• It's wise to ask existing franchisees if they are aware of any disputes, even those not rising to the level of disclosed litigation.
• A high volume of litigation initiated by the franchisor against franchisees could signal an overly aggressive or punitive culture, a point to discuss with your attorney.