Explanation

While the number of franchised outlets has grown steadily, Item 19 reveals that systemwide sales growth has slowed dramatically in recent years, with 0% growth reported for 2023. This suggests that the addition of new units is not translating into overall system revenue growth, which could indicate market saturation or performance issues with new and existing franchises. This disconnect between unit growth and sales growth presents a potential risk to the system's overall health.

Potential Mitigations

• Engaging a business advisor to question the franchisor about the reasons for the stalled systemwide sales growth is recommended.
• Your accountant can help you model financial scenarios that account for minimal to no organic growth in the system.
• It is prudent to discuss this trend with a significant number of existing franchisees to gauge their perspective on market conditions.

Explanation

This specific risk was not identified in the FDD Package. A new or unproven franchise system can present higher risks due to the lack of a long-term performance track record, underdeveloped support systems, and minimal brand recognition. Evaluating the franchisor's history and the maturity of the system is a key step in due diligence.

Potential Mitigations

• A thorough review of Item 1 and Item 20 with your business advisor helps establish the franchisor's operating history.
• In any franchise, an accountant should help you assess the financial stability shown in Item 21, which is especially important for younger systems.
• Consulting with franchisees who have been with the system for a long time can provide valuable insight into its evolution.

Explanation

This specific risk was not identified in the FDD Package. The business of swimming pool cleaning and maintenance is a well-established service industry. A "fad" business is one tied to a short-lived trend, which can be risky because long-term franchise obligations may outlast consumer interest. Evaluating a concept's long-term market viability is crucial.

Potential Mitigations

• A business advisor can help you research the long-term market demand for any franchise's products or services.
• Assessing the franchisor's plans for innovation and adaptation to changing consumer tastes is a wise step.
• Your accountant can assist in modeling the financial impact of potential declines in demand for a trendy product.

Explanation

This specific risk was not identified in the FDD Package. The franchisor's management team appears to have considerable experience in both the pool service industry and franchising, as detailed in Item 2. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, weak operational systems, and inadequate franchisee support.

Potential Mitigations

• Reviewing the executive biographies in Item 2 of any FDD with your business advisor is a critical due diligence step.
• Discussing the quality and responsiveness of management with current franchisees provides real-world insight.
• An attorney can help you understand how the experience level of the management team might impact the franchisor's ability to fulfill its contractual obligations.

Explanation

This specific risk was not identified in the FDD Package. The corporate structure, including parent and affiliated companies, is disclosed in Item 1. It is a legal requirement to disclose parent companies, and their financial statements may also be required if they guarantee the franchisor's performance. A failure to do so would obscure the true financial backing and stability of the system.

Potential Mitigations

• An attorney should always confirm that the corporate structure disclosed in Item 1 is complete and transparent.
• If a parent company guarantees performance, your accountant must review their financial statements provided in Item 21.
• Understanding the relationships between the franchisor and its affiliates with your business advisor is key to assessing potential conflicts.

Explanation

This specific risk was not identified in the FDD Package. The FDD discloses a predecessor entity but does not indicate any negative history associated with it. When a franchisor acquires a system, it's important to understand the predecessor's history regarding litigation, bankruptcy, or franchisee turnover, as these issues can carry over to the new ownership and affect the system's health.

Potential Mitigations

• Careful review of Items 1, 3, 4, and 20 with your attorney can reveal important details about a predecessor's history.
• A business advisor can help you conduct independent research on a predecessor entity if one is disclosed.
• Speaking with franchisees who operated under the predecessor can provide invaluable historical context.

Explanation

Item 3 discloses one arbitration action initiated by the franchisor against a franchisee for breach of contract and enforcement of post-termination obligations. While any litigation is a point of interest, a single, franchisor-initiated action for contract enforcement does not represent a pattern of franchisee-led lawsuits alleging fraud or systemic problems, which would be a more significant concern. You should still consider the nature of the dispute and the franchisor's enforcement posture.

Potential Mitigations

• Your attorney should review the nature of any disclosed litigation to assess the franchisor's relationship with its franchisees.
• A business advisor can help you research public records for any litigation that may not be disclosed in Item 3.
• It is important to ask current franchisees about their perception of the franchisor's tendency to resolve disputes through litigation.