Explanation

The franchisor's parent, Certa ProPainters, Ltd. (CertaPro)'s parent, FS Brands, Inc., provides an unconditional guarantee. The audited financial statements in Exhibit B show consistent profitability, positive net worth, and a healthy balance sheet with sufficient current assets to cover current liabilities. No signs of financial instability were identified. Financial health is crucial as it impacts the franchisor's ability to support you and grow the brand.

Potential Mitigations

• Having an accountant review the audited financial statements, including all footnotes, is a standard step to verify a franchisor's financial health.
• A business advisor can help you understand how the parent company's financial stability might impact the resources available to the CertaPro brand.
• Your attorney should confirm the enforceability and scope of the parent company's guarantee of performance.

Explanation

Item 20 data for 2024 reveals a total of 12 terminations, non-renewals, and other cessations out of a starting base of 324 franchised outlets, an attrition rate of just 3.7%. This low rate suggests a stable and healthy franchise system. High franchisee turnover can be a significant red flag indicating systemic problems, franchisee dissatisfaction, or lack of profitability.

Potential Mitigations

• It is still wise to contact a diverse list of current and former franchisees from Exhibit A to discuss their experiences with the system.
• Your accountant can help you verify the turnover calculations and discuss their implications for system stability.
• Inquiring with the franchisor about the reasons for any departures, even if the number is low, can provide additional valuable context.

Explanation

This risk was not identified. The data in Item 20 shows the franchise system has been stable to slightly contracting, not expanding rapidly, over the past three years. Uncontrolled rapid growth can sometimes stretch a franchisor's resources, potentially weakening the support provided to each franchisee. A managed rate of growth is often a positive indicator for system health and support quality.

Potential Mitigations

• A conversation with your business advisor can help in interpreting system growth trends and their potential impact on support and brand value.
• Asking the franchisor about their future growth strategy can provide clarity on their priorities and plans for the system.
• Your accountant can analyze how growth or contraction trends correlate with the franchisor's financial performance.

Explanation

This risk was not identified. CertaPro is a mature franchise system, having offered franchises since 1992, as disclosed in Item 1. Investing in an established system typically carries less risk than a new one because the business model, brand recognition, and franchisee support structures are generally well-developed and proven over time.

Potential Mitigations

• It is still valuable to ask long-tenured franchisees about how the system and its support have evolved over the years.
• A business advisor can help you analyze the potential benefits and drawbacks of joining a mature versus an emerging franchise system.
• Your attorney can review the corporate history provided in Item 1 to confirm the franchisor's lineage and stability.

Explanation

This risk was not identified. The franchise operates in the painting and decorating services industry, which is a long-standing and essential service sector, not a business based on a short-term trend. The long-term viability of a business concept is a crucial consideration, as fads can disappear quickly, potentially leaving franchisees with a devalued investment.

Potential Mitigations

• A business advisor can help you research the stability and long-term trends within the professional painting services market in your specific area.
• Reviewing Item 11 for information on how the franchisor adapts to new technologies and materials can offer insight into their long-term focus.
• Discussing the competitive landscape with existing franchisees provides a real-world view of market demand.

Explanation

This risk is not present. Item 2 details a management team with extensive and long-term experience in both the painting industry and franchising. The President and CEO, for example, has been with the company since 2003. An experienced leadership team is crucial, as it directly impacts the quality of support, strategic direction, and overall stability of the franchise system.

Potential Mitigations

• It is still beneficial to discuss the management team's accessibility and effectiveness with current franchisees.
• A business advisor can help you assess the strength and depth of the executive team based on the information in Item 2.
• Researching the public profiles of key executives can provide additional context on their industry reputation.

Explanation

This risk was not identified. The franchisor clearly discloses its parent, FS Brands, Inc., and ultimate parent, FirstService Corporation, in Item 1. Furthermore, audited financial statements for the parent company, which guarantees CertaPro's performance, are provided in Exhibit B. Proper disclosure of parent companies is crucial for understanding the complete ownership structure and the true financial backing of the franchise system.

Potential Mitigations

• An accountant's review of the provided parent company financial statements remains a crucial due diligence step.
• Your attorney should confirm that the provided guarantee of performance is from the appropriate parent entity.
• It's good practice to ask the franchisor about the relationship and resource flow between them and their parent company.

Explanation

The franchisor states in Item 1 that it has no legal predecessors. This means it did not acquire the assets of another company to create the current franchise system. Understanding a franchisor's lineage is important because a history involving predecessor companies could bring inherited issues, such as past litigation or franchisee dissatisfaction, which would be important for you to know.

Potential Mitigations

• Even without legal predecessors, you can discuss the company's long-term history and evolution with established franchisees.
• Your attorney can confirm the corporate history as presented in Item 1.
• A business advisor can help you research the history of the broader brand, even if there are no legal predecessors.

Explanation

A pattern of litigation alleging fraud or misrepresentation by the franchisor was not found. Item 3 discloses two recent cases, both initiated by CertaPro to enforce its contracts against former franchisees. While any litigation warrants review, the absence of franchisee-initiated lawsuits alleging franchise law violations is a positive indicator for the health of the franchise relationship.

Potential Mitigations

• Your attorney should review the nature of any disclosed litigation, even if initiated by the franchisor, to understand its potential implications.
• You can ask the franchisor for more context regarding the disputes disclosed in Item 3.
• Discussing the franchisor's relationship with its franchisees with those listed in Exhibit A can provide insight into the potential for disputes.