Explanation

This risk was not identified in the FDD Package. As a new franchise system with no disclosed operating history in Item 20, there is no data on franchisee turnover. While this lack of history is a risk in itself, a pattern of high turnover has not been established. High turnover can be a major indicator of systemic problems, such as unprofitability or poor franchisor support, so it is a critical metric to watch in future FDDs.

Potential Mitigations

• When data becomes available, having an accountant analyze franchisee turnover rates against industry benchmarks is a key diligence step.
• Once franchisees exist, your business advisor should guide you in contacting a broad sample to gauge satisfaction.
• Your attorney can help you understand the different categories of turnover disclosed in Item 20.

Explanation

This risk was not identified in the FDD Package. Item 20 shows projected growth but, as a new system, there is no history of actual rapid expansion. Uncontrolled growth can strain a franchisor's ability to provide adequate support, training, and quality control. This could dilute brand value and leave you without the assistance you need, despite paying royalties. Evaluating a franchisor’s infrastructure against its growth is a crucial piece of due diligence for any franchise.

Potential Mitigations

• It is wise to have your business advisor evaluate a franchisor's support infrastructure in relation to its growth plans.
• An accountant should review a franchisor's financial capacity to fund the staff and resources needed for expansion.
• Consulting with your attorney can help clarify the franchisor's contractual support obligations during periods of growth.

Explanation

This risk was not identified in the FDD Package. The business focuses on cleaning and exchanging grease filters for commercial kitchens, a business-to-business service tied to the established food service industry. This type of ancillary service is a recurring need for a large market and does not appear to be based on a short-term trend or fad. A business tied to a fad carries the risk of collapsing when consumer interest wanes, leaving you with a long-term contract for a defunct concept.

Potential Mitigations

• A business advisor can help you research the long-term demand and market stability for any franchise concept's core services.
• Assessing a business's resilience to economic cycles with your financial advisor is a prudent step.
• Your attorney can review how the franchise agreement might restrict your ability to adapt if the primary business model falters.

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. Such ownership can sometimes lead to a focus on short-term profitability and a quick exit strategy over the long-term health of the brand and the success of individual franchisees. This could manifest as increased fees, reduced support, or a sale of the system to a new owner with a different philosophy.

Potential Mitigations

• For any franchise, your business advisor can help you investigate the ownership structure and its potential impact.
• Asking your attorney to review the franchisor's rights to sell or assign the franchise agreement is a critical step.
• Speaking with existing franchisees can provide insight into how ownership changes have affected the system.

Explanation

This risk was not identified in the FDD Package. The franchisor's corporate structure as described in Item 1 does not suggest the existence of an undisclosed parent company whose financial information would be material to your decision. In cases where a franchisor is a thinly capitalized subsidiary, the financial health of a parent company can be critical, and its omission would be a major disclosure issue.

Potential Mitigations

• An accountant can help you analyze a franchisor's balance sheet to determine if it appears adequately capitalized on its own.
• Your attorney can help you understand the relationships between a franchisor and any affiliates or parent companies disclosed in Item 1.
• If a parent company guarantees the franchisor's performance, ensure your attorney confirms the guarantee is a formal, attached exhibit.

Explanation

This risk was not identified in the FDD Package. Item 1 discloses a predecessor entity, but because this is a new franchise offering converting from a dealership model, there is no negative franchise-related history such as litigation or franchisee turnover to report. A problematic history with a predecessor could indicate unresolved systemic issues that might carry over to the new franchise system.

Potential Mitigations

• Your attorney should always carefully review any disclosed predecessor information in Items 1, 3, and 4.
• Independent research into a predecessor's business reputation can be a useful step, which your business advisor may assist with.
• Asking a franchisor how they have addressed any issues inherited from a predecessor can provide valuable insight.

Explanation

This risk was not identified in the FDD Package. Item 3 discloses no history of litigation against the franchisor or its principals involving claims of fraud, misrepresentation, or franchise law violations. A pattern of such lawsuits, particularly those initiated by franchisees, can be a significant red flag indicating potential systemic problems with the franchisor's sales practices, support, or business model.

Potential Mitigations

• A franchise attorney should always be engaged to carefully review any litigation disclosed in Item 3.
• Understanding the nature of claims, not just the quantity of lawsuits, is critical, a task for which legal counsel is essential.
• Your attorney can also conduct independent searches for litigation that may not have been disclosed.