Explanation

This risk was not identified in the FDD package. An unproven system can present higher risks due to a lack of established brand recognition, underdeveloped support structures, and an unverified business model. For new franchisors, it is particularly important to scrutinize the experience of the management team and the financial stability of the company, as they may have a limited track record of success to demonstrate their capabilities and long-term viability.

Potential Mitigations

• A business advisor can help you conduct extensive due diligence on the founders' and management's experience in both the specific industry and in franchising.
• Speaking with the earliest franchisees about their experiences can provide crucial insights into the system's development and support.
• An accountant should be consulted to assess the franchisor's capitalization and financial stability, which is vital for a new system.

Explanation

This risk was not identified in the FDD package, as barbecue cleaning is an established service industry. A fad business is one tied to a fleeting trend, posing a risk of failure once consumer interest wanes. It is important to assess whether a franchise concept has long-term market sustainability and is not just capitalizing on a temporary craze, as your contractual obligations will continue even if public demand for the product or service disappears.

Potential Mitigations

• Assessing long-term consumer demand for the product or service with a business advisor is a crucial step.
• Your financial advisor can help you evaluate the business model's resilience to economic downturns and shifting trends.
• Investigating the franchisor's plans for innovation and adaptation can provide insight into their long-term vision.

Explanation

This risk was not identified in the FDD package. The management team appears to have been in place since the company's inception in 2012. However, inexperienced leadership can pose a risk, as they may lack the specific skills to manage a franchise system, provide adequate support, or make sound strategic decisions, potentially affecting the entire network's performance and stability. Evaluating the franchising and industry-specific experience of key executives is a critical part of due diligence.

Potential Mitigations

• A thorough vetting of the management team's background in both the industry and franchising with a business advisor is recommended.
• Engaging with existing franchisees to inquire about the quality of support and management's responsiveness is valuable.
• Your attorney can help you ask targeted questions about the franchisor's strategies for addressing any experience gaps.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. When a franchise is PE-owned, there can be a risk that decisions are driven by short-term investor return horizons rather than the long-term health of franchisees. This could manifest as increased fees, reduced support, or a quick sale of the system, creating uncertainty for franchisees. Understanding the ownership structure is therefore an important part of risk assessment.

Potential Mitigations

• Researching a private equity firm's track record with other franchise systems they have owned can be instructive; a business advisor can assist.
• Discussing any changes in support or system direction since an acquisition with existing franchisees is crucial.
• An attorney should review the franchise agreement for terms related to the sale or assignment of the franchise system.

Explanation

This risk was not identified in the FDD package, as BFI does not appear to have a parent company. When a franchisor is a subsidiary, the failure to disclose a parent company or provide its financial statements (if required) can obscure the true financial backing and stability of the system. A thinly capitalized subsidiary may rely on a parent that is not legally obligated to provide support, creating a hidden risk for franchisees if the parent's circumstances change.

Potential Mitigations

• Your attorney can help verify the corporate structure and identify any undisclosed controlling entities.
• If a parent company provides guarantees or is a key supplier, it is important to have an accountant review their financials if available.
• Understanding the legal relationship and obligations between a franchisor and its parent is a key task for your attorney.

Explanation

This risk was not identified in the FDD package, as BFI states it has no predecessors. A franchisor's predecessor is a company from which it acquired the main assets of the business. Incomplete disclosure about a predecessor's history can hide important information about past litigation, bankruptcies, or high franchisee failure rates, preventing a prospective franchisee from understanding the system's true historical challenges and potential inherited problems.

Potential Mitigations

• Your attorney should carefully review Item 1 for any mention of predecessors and their history.
• If a system was acquired from a predecessor, conducting independent research on that entity's track record can be valuable.
• Speaking with long-term franchisees about their experience under any previous ownership is a key due diligence step.

Explanation

This risk was not identified in the FDD package, as Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against franchisees, can be a major red flag. It may suggest systemic issues with the franchisor's sales practices, support obligations, or a tendency towards aggressive and litigious enforcement of the franchise agreement.

Potential Mitigations

• It is wise for an attorney to independently search court records for litigation involving the franchisor, as not all disputes may meet the FDD's disclosure thresholds.
• Discussing the franchisor's relationship with its franchisees can provide insight into their dispute resolution approach.
• A business advisor can help you assess the overall health of franchisor-franchisee relations.