Explanation

This specific risk was not identified in the FDD Package. The franchise system is not experiencing rapid growth; in fact, it has been stagnant or shrinking over the last two years. However, if a franchisor expands too quickly, its support systems for training, site selection, and operations can become strained, potentially leaving you without adequate assistance.

Potential Mitigations

• When evaluating any franchise, it's wise for your accountant to compare the rate of unit growth in Item 20 with the franchisor's financial resources in Item 21.
• A discussion with your business advisor about the franchisor's infrastructure for supporting its franchisees is a valuable part of due diligence.
• Legal counsel can help you understand the franchisor's contractual support obligations outlined in Item 11.

Explanation

This risk was not identified. ARF has been offering franchises since 1991 and has an established system with a long operational history. An unproven system is a significant risk because the business model may not be viable, brand recognition is minimal, and the franchisor may lack the experience to provide effective support, increasing the chances of failure.

Potential Mitigations

• When considering a newer franchise, a business advisor can help you scrutinize the prior industry and franchising experience of the management team in Item 2.
• It's important to have an accountant review the financial statements of a young franchisor to assess its capitalization and financial stability.
• Your attorney should advise on negotiating more favorable terms to offset the higher risk of an unproven system.

Explanation

This specific risk was not identified in the FDD Package. The AR Homes® brand operates in the residential home construction industry, which is a long-established sector. A business based on a fad carries the risk that consumer interest may disappear, leaving you with a worthless business but still bound by a long-term franchise agreement and its financial obligations.

Potential Mitigations

• For any franchise concept, your business advisor can help you research the long-term consumer demand and market trends for its products or services.
• It's prudent to have your accountant model the financial viability of the business under various market conditions, not just during peak trends.
• Legal counsel can review the franchise agreement term to ensure you understand your long-term commitment.

Explanation

This risk was not identified. Item 2 indicates that the franchisor's management team has extensive experience in the home building industry and with the franchise system itself. Inexperienced management can be a major risk, as they may lack the knowledge to provide effective support, training, and strategic direction, potentially harming the entire system.

Potential Mitigations

• A thorough review of the executive biographies in Item 2 with a business advisor is a crucial step in evaluating any franchise opportunity.
• Contacting current franchisees to inquire about their direct experiences with the management team's competence and support is a valuable due diligence step.
• An accountant can help assess if the company's financial performance aligns with the purported experience of its leadership team.

Explanation

This risk was not identified. The FDD properly discloses the parent company, AR Family Holdings, LLC, in Item 1. When a franchisor is a subsidiary, failing to disclose the parent or provide its financial statements (if it guarantees the franchisor's obligations) can hide significant risks. Without this information, you cannot fully assess the financial strength and stability backing the franchise system.

Potential Mitigations

• Your attorney should always verify that the franchisor has fully disclosed its parent companies and affiliates as required in Item 1.
• An accountant should confirm if the parent's financial statements are required and, if so, review them for signs of financial weakness or instability.
• A business advisor can help investigate the reputation and track record of any parent company involved in a franchise system.

Explanation

This risk was not identified in the FDD Package. ARF states in Item 1 that it has no predecessors. A franchisor with a history of predecessors could be hiding past issues, such as high failure rates or litigation under a previous name. Understanding the full history of the system is vital to assessing its stability and the franchisor's track record.

Potential Mitigations

• It is important for your attorney to review Item 1 for any disclosed predecessors and investigate their history.
• A business advisor can help you research public records and news archives for information on any predecessor companies.
• Speaking with long-tenured franchisees can often reveal valuable insights into the system's history under previous ownership.