Explanation

Item 20 data for U.S. operations over the last three years shows very low turnover, with zero terminations or non-renewals disclosed. The system has experienced steady net growth in the number of franchised outlets. This data suggests a relatively stable franchisee base and is a positive indicator. However, this data excludes Canadian operations, where some litigation with former franchisees has occurred.

Potential Mitigations

• Your business advisor should help you contact a broad range of current and former franchisees from the lists in Item 20 to verify their satisfaction.
• Discuss the reasons for any transfers or cessations with former franchisees to ensure they were not for negative reasons.
• An accountant can help you calculate the effective turnover rate and compare it to any available industry benchmarks.

Explanation

The information in Item 20 does not indicate that the franchise system is growing at an unsustainable rate. The number of franchised outlets in the U.S. has increased steadily from 66 to 79 over the last three years. This appears to be a manageable growth pace that should not over-extend the franchisor's support capabilities, which is a positive sign for the system's stability.

Potential Mitigations

• A business advisor can help you analyze the growth trajectory in Item 20 relative to the franchisor's size and resources.
• Speaking with franchisees who opened at different times can provide insight into the consistency and quality of the franchisor's support.
• It is wise to have your accountant review the franchisor's financial statements in Item 21 to assess if they are investing in support infrastructure.

Explanation

This risk was not identified in the FDD package. The franchisor has been operating since 2001, and its predecessor began franchising in 1998. With a large number of established outlets, the system is mature and has a long operational track record. Therefore, this is not a new or unproven franchise concept, which reduces the risks typically associated with emerging brands.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you assess the maturity of the brand and its systems.
• It is important to have your accountant review the franchisor's financial history to understand its long-term performance.
• Your attorney should review the operating history of both the current franchisor and any predecessors disclosed in Item 1.

Explanation

This risk was not identified in the FDD package. The business of providing custom closets and home organization systems is a well-established segment of the broader home improvement industry. The franchisor's long history, operating since 2001, indicates sustained consumer demand rather than a short-term trend or fad, suggesting a more stable market opportunity.

Potential Mitigations

• For any business concept, a business advisor can help you research the long-term market trends and industry stability.
• It is valuable to assess the franchisor's plans for product and service innovation to ensure they remain competitive over time.
• An accountant can help you evaluate the financial resilience of the business model through different economic cycles.

Explanation

This risk was not identified in the FDD package. Item 2 shows that the franchisor's key executives have extensive and long-term experience with the company, its affiliates, and the home organization industry. For example, the Chairman/CEO and President have been in their roles since 2007 and 2001, respectively. This level of experience is a significant positive factor for system stability and operational guidance.

Potential Mitigations

• It is always prudent to have a business advisor help you research the background and track record of the key management team.
• Engaging with current franchisees can provide valuable insight into the effectiveness and competence of the leadership team.
• An attorney can help you understand any management changes and their potential impact on the franchise system.

Explanation

This risk was not identified in the FDD package. Item 1 discloses that the franchisor is a wholly owned subsidiary of a corporate parent, Home Organizers, Inc., not a private equity firm. This structure suggests a focus on long-term operations rather than the typical short-term investment horizons and exit strategies associated with private equity ownership, which can be a risk for franchisees.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor to understand their strategic priorities.
• It is beneficial to ask your attorney to review any clauses in the Franchise Agreement related to the sale or transfer of the franchise system.
• An accountant can analyze the financial relationship between a franchisor and its parent company for potential risks.

Explanation

This risk was not identified. The FDD discloses that the current franchisor acquired the assets of a predecessor, CBD-LLC, in 2001. The document does not indicate any negative history, such as litigation or bankruptcy, associated with the predecessor that would pose a current risk to you. The franchise system has been operated by the current entity for over two decades.

Potential Mitigations

• When a predecessor is disclosed, your attorney should carefully review Items 1, 3, and 4 of the FDD for any associated legal or financial issues.
• A business advisor can help you investigate the history and reputation of any predecessor company.
• It is helpful to ask long-tenured franchisees about their experience operating under any previous ownership.