Explanation

This risk was not identified in the FDD Package. Rapid, uncontrolled growth can strain a franchisor's ability to provide adequate support to its franchisees. A system expanding too quickly may lack the infrastructure for proper training, site selection assistance, and ongoing operational guidance, potentially harming the entire brand.

Potential Mitigations

• Analyzing the rate of new openings versus terminations in Item 20 with an accountant can provide insight into the system's growth trajectory.
• A business advisor can help you evaluate if the franchisor's support staff and systems, as described in Item 11, are sufficient for its size.
• Discussing the quality and timeliness of support with both new and established franchisees can be a key part of your due diligence.

Explanation

This risk was not identified in the FDD Package. The swimming pool construction industry is well-established and not based on a short-term trend or fad. A fad-based business carries the risk that consumer interest could decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you research the long-term market demand and historical resilience of the industry.
• When evaluating any franchise, consider its adaptability to changing consumer tastes and economic conditions with your financial advisor.
• Your attorney can help review the franchise agreement for flexibility in products and services to adapt to market shifts.

Explanation

This risk was not identified in the FDD Package. The key executives listed in Item 2 have extensive experience in the pool construction industry and with the California Pools brand. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, weak support systems, and a lack of understanding of franchisee challenges.

Potential Mitigations

• A thorough review of the biographies in Item 2 with a business advisor is a good first step in any franchise evaluation.
• Speaking with current franchisees is a practical way to gauge the competence and effectiveness of the franchisor's leadership team.
• Your attorney can help you understand the contractual obligations of the franchisor, which may not be dependent on management's experience level.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that the franchisor is owned or controlled by a private equity firm. Private equity ownership can sometimes lead to a focus on short-term profitability and a quick exit, which may not align with the long-term health of franchisees' businesses.

Potential Mitigations

• Your attorney can help you investigate the franchisor's ownership structure and any history of being bought or sold.
• Talking to long-term franchisees can reveal how the system has changed under different ownership structures.
• A business advisor can help you research the track record of any parent company or major investor in the franchise space.

Explanation

This risk was not identified in the FDD Package. The franchisor appears to disclose its affiliate relationships in Item 1. Failing to disclose a parent company, especially one that guarantees the franchisor's obligations or exercises significant control, can obscure the true financial backing and stability of the franchise system.

Potential Mitigations

• Your attorney should verify the corporate structure and ensure all relevant entities and their roles are clearly disclosed in Item 1.
• If a parent company guarantee is provided, it is crucial for your accountant to review the parent's financial statements for stability.
• Discussing the role of any affiliated companies with current franchisees can provide practical insight into their impact on the business.

Explanation

This risk was not identified in the FDD Package. Item 1 describes the franchisor's history and its relationship with an affiliate, but does not disclose a formal 'predecessor' entity from which it acquired the business. Undisclosed or problematic predecessor history could hide past failures, litigation, or other issues relevant to your investment decision.

Potential Mitigations

• Engaging an attorney to review the franchisor's corporate history as disclosed in Item 1 is a crucial due diligence step.
• A business advisor can assist in researching public records for information about companies previously associated with the franchisor or its executives.
• Asking long-term franchisees or employees about the history of the brand can often uncover valuable information.

Explanation

This risk was not identified in the FDD Package. Item 3 states that there is no litigation that requires disclosure. A pattern of litigation, particularly lawsuits brought by franchisees alleging fraud or breach of contract, can be a major red flag indicating systemic problems within a franchise.

Potential Mitigations

• Your attorney should always carefully review the disclosures in Item 3 for any signs of recurring legal disputes.
• Even with no disclosed litigation, speaking with former franchisees can sometimes reveal information about past disputes that were settled confidentially.
• A business advisor can help you research public court records for any litigation involving the franchisor that may not have met the threshold for disclosure.