Explanation

This risk was not identified in the FDD package. Item 20 tables show a stable franchise system with a low number of terminations or other cessations over the past three years. Generally, high franchisee turnover can be a major red flag, potentially indicating systemic problems, franchisee dissatisfaction, or lack of profitability within a franchise system. It is a critical area for due diligence for any franchise opportunity.

Potential Mitigations

• It is always wise to ask a business advisor to help calculate and analyze the turnover rates from Item 20 for any franchise you consider.
• Consulting with a significant number of current and former franchisees from the lists in Exhibit T is a crucial step your attorney can help you prepare for.
• An accountant can help you understand the context of the numbers provided in Item 20.

Explanation

The data in Item 20 does not indicate rapid system growth; rather, the number of franchised and company-owned outlets has remained relatively stable over the past three years. This specific risk, where a franchisor's growth outpaces its ability to provide adequate support, does not appear to be a concern here. Fast growth can sometimes strain a franchisor's support systems, impacting franchisees.

Potential Mitigations

• When evaluating a franchise, discussing the franchisor's growth plans and their capacity to support new units with a business advisor is a valuable exercise.
• Asking existing franchisees about the quality and timeliness of support with help from your attorney can provide insight into a franchisor's capabilities.
• An accountant's review of the franchisor's financials can help assess if they have the resources to support their stated growth plans.

Explanation

This risk is not present. Coit is a long-established company, with business history since 1950 and franchise operations since the 1960s, as detailed in Item 1. An unproven system is a significant risk because it may lack a refined business model, established brand recognition, and experienced support infrastructure, all of which appear to be in place here.

Potential Mitigations

• For any franchise, it is important to have your attorney review the franchisor's history and corporate structure in Item 1.
• A business advisor can help you assess the maturity and stability of any franchise system you consider.
• Speaking with long-standing franchisees can provide valuable perspective on the evolution and stability of the brand.

Explanation

The services offered by Coit, such as carpet, upholstery, and air duct cleaning, as well as disaster restoration, are established and have long-term market demand. This does not appear to be a fad business. Investing in a fad concept is risky because consumer interest can quickly disappear, leaving you with a potentially unviable business and long-term contractual obligations.

Potential Mitigations

• A business advisor can help you conduct market research to assess the long-term demand for any product or service in your local area.
• Reviewing a franchisor's plans for service innovation and adaptation in Item 11 with your accountant is a useful step.
• It is always prudent to consider a business's resilience to economic shifts with your financial advisor.

Explanation

This risk is not present. Item 2 details a management team with extensive, long-term experience both within the Coit system and the broader industry. Inexperienced leadership can pose a risk to a franchise system, potentially leading to poor strategic decisions or inadequate franchisee support. This does not appear to be a concern here based on the disclosures.

Potential Mitigations

• For any franchise opportunity, it is critical to have your attorney and business advisor review the management team's background in Item 2.
• Asking existing franchisees about their confidence in the current leadership team is a key part of due diligence.
• A business advisor can help you research the professional reputation of key executives.

Explanation

This risk was not identified in the FDD, as Item 1 indicates the franchisor does not have a parent company and the ownership structure does not suggest private equity involvement. Private equity ownership can sometimes introduce risks related to short-term profit motives over long-term system health. This does not appear to be a factor in this opportunity.

Potential Mitigations

• Your attorney should always help you understand the ownership structure of the franchisor as disclosed in Item 1.
• If a franchisor is owned by a private equity firm, it is wise to have a business advisor research the firm's history with other franchise brands.
• Discussing any changes in system philosophy since an ownership change with franchisees is a critical due diligence step.

Explanation

This risk is not present. The franchisor clearly states in Item 1 that it has no parent company. When a franchisor is a subsidiary, the financial health and influence of the parent company can be a significant factor. Failure to disclose a parent company or provide its required financial statements when necessary can obscure the true financial backing and risks of a franchise system.

Potential Mitigations

• It is important for your attorney to review Item 1 to understand the franchisor's corporate structure and any parent or affiliate relationships.
• If a parent company exists and guarantees the franchisor's obligations, your accountant should ensure their financials are provided and reviewed.
• A business advisor can help research any named parent company to understand its stability and business practices.

Explanation

The FDD discloses no recent predecessor entities from which Coit acquired its assets, as noted in Item 1. The history traces directly back to the company's founder. Therefore, risks associated with an undisclosed or problematic history from a recent predecessor are not applicable. It is generally important to understand a system's full history, as unresolved issues from a predecessor can sometimes carry over to a new franchisor.

Potential Mitigations

• Your attorney should always review the predecessor disclosures in Items 1, 3, and 4 of any FDD.
• When a system has been acquired from a predecessor, your business advisor can help you research the predecessor's track record.
• Speaking with long-term franchisees can reveal important history about the system's evolution under different ownership.

Explanation

This risk was not identified, as Item 3 of the FDD states there is no litigation that requires disclosure. A pattern of franchisee-initiated lawsuits alleging fraud or misrepresentation, or a high volume of franchisor-initiated suits against franchisees, can be a significant warning sign of systemic problems. The absence of such disclosed litigation is a positive indicator for this franchise.

Potential Mitigations

• It is crucial for your attorney to carefully review any disclosed litigation in Item 3 of an FDD.
• A business advisor can help you research court records for litigation that may not have been disclosed if there are other red flags.
• Always ask current and former franchisees about their experiences with disputes and the legal system with the franchisor.