Explanation

The financial statements for the parent, FS Brands, Inc., which guarantees the franchisor's performance, appear stable. The statements for 2023 and 2024 show consistent revenue, positive net income, and growing retained earnings with no 'going concern' notes. While direct financials for the franchisor, Floorcoverings International, Ltd. (FCI), are not provided, the parent company's robust financial health and formal guarantee significantly reduce the risk of franchisor instability.

Potential Mitigations

• A franchise accountant should review the parent company's financial statements, including footnotes, to independently assess its financial strength and ability to support the system.
• Discuss the nature and strength of the parent company's performance guarantee with your attorney.
• It is wise to ask the franchisor about its own specific profitability and how it uses its financial resources to support franchisees.

Explanation

The franchise system has demonstrated steady, manageable growth over the past three years, adding a net of 18 to 37 units annually. This rate of expansion does not appear to be dangerously rapid, and the parent company's financial statements suggest it possesses sufficient resources to support this growth. Therefore, the risk of support systems being overwhelmed due to hyper-expansion seems low.

Potential Mitigations

• To confirm the quality of support during growth, speaking with franchisees who joined at different times can provide valuable perspective.
• Asking the franchisor about their specific plans for scaling training and support infrastructure is a sensible step your business advisor can help with.
• Your accountant can assess the parent company's financials to confirm that investments in support are keeping pace with system growth.

Explanation

This risk was not identified in the FDD Package. The franchisor, FCI, has been offering franchises since 1998, indicating a long operational history and a well-established system. New or unproven franchise systems can carry higher risks due to untested business models and support structures, but that does not appear to be the case here.

Potential Mitigations

• Even with an established system, it's beneficial to have a business advisor help you research the brand's current market position and recent evolution.
• Speaking with long-term franchisees can provide your attorney with insights into how the system has adapted and supported its operators over time.
• An accountant can review historical financial performance data, if available, to gauge the system's long-term stability.

Explanation

This risk was not identified in the FDD Package. The business operates in the floor covering industry, which is a mature and established market rather than one based on a short-term trend or fad. Fad-based businesses can pose a risk as their long-term consumer demand is uncertain, potentially leaving franchisees with a worthless investment once public interest declines.

Potential Mitigations

• A business advisor can help you conduct independent market research to confirm the long-term stability and demand in the flooring industry.
• Discussing the franchisor's strategies for innovation and staying competitive with existing franchisees can offer valuable long-term perspective.
• Your financial advisor can help assess the business model's resilience to economic cycles and shifting consumer tastes.

Explanation

This risk was not identified in the FDD Package. The executive team described in Item 2 has significant and long-term experience within the franchise system and the broader industry. For instance, the President and CEO has been in his role since 2005. This level of experience suggests a stable leadership team with a deep understanding of the business and franchising.

Potential Mitigations

• When speaking with current franchisees, it is still a good practice to inquire about their perception of the management team's competence and support.
• A business advisor can help you research the public reputation and track record of the key executives.
• During your own discussions with the franchisor, you can assess the management team's strategic vision and commitment to franchisee success.

Explanation

This risk was not identified in the FDD Package. FCI is owned by FS Brands, Inc., which is a subsidiary of FirstService Corporation, a publicly-traded company. This structure is different from a typical private equity model that often focuses on short-term returns and a quick exit. The parent company appears to be a large, stable organization in the services sector, which may provide more stability.

Potential Mitigations

• Your financial advisor should research the parent company's public filings and track record with its other subsidiary franchise brands.
• It is still beneficial to ask current franchisees about any changes in operations or support that have resulted from the corporate ownership structure.
• Understanding the parent company's long-term strategy for its franchise holdings can provide important context; your business advisor can assist with this.

Explanation

This risk was not identified in the FDD Package. The FDD clearly discloses the franchisor's parent companies, FS Brands, Inc. and FirstService Corporation. Furthermore, the audited financial statements for the parent, FS Brands, Inc., are provided as Exhibit G, and a formal Guarantee of Performance from FS Brands, Inc. is included as Exhibit K. This level of transparency is a positive indicator.

Potential Mitigations

• Having an accountant review the parent company's financial statements is crucial for a complete understanding of the system's financial backing.
• Your attorney should analyze the terms of the Guarantee of Performance to confirm the extent of the parent's obligations.
• You might ask the franchisor to explain the relationship and flow of support between the parent company and its franchisees.

Explanation

This risk was not identified in the FDD Package. Item 1 explicitly states that the franchisor does not have any predecessors that require disclosure. This means you are dealing with the original and continuous franchising entity, which simplifies due diligence as there is no hidden history from a prior company to investigate.

Potential Mitigations

• Your attorney can conduct a corporate records search to confirm the franchisor's history and lack of predecessors.
• Asking long-term franchisees about the history of the company can provide additional comfort regarding the franchisor's background.
• A business advisor can help you verify that the brand and system have not been part of other franchise systems under different names.

Explanation

Item 3 discloses four lawsuits involving the franchisor in the last year. While three are for collection of fees from franchisees, one is more serious, involving a former franchisee who has filed a counterclaim alleging breach of contract and fraud. Although the franchisor states the claim is without merit, a fraud allegation warrants attention. However, given the system's size of over 280 units, this does not represent a significant pattern of litigation.

Potential Mitigations

• Your attorney should carefully review the details of the pending litigation involving the fraud counterclaim.
• You should discuss the nature of franchisor-franchisee disputes with current and former franchisees to gauge the franchisor's litigation tendencies.
• It may be possible for your attorney to research the court dockets for the disclosed cases to get more information on the specific allegations.