Explanation

This risk was not identified in the FDD package. The audited financial statements provided in Exhibit E for Floors To Go, LLC (FTG) show a company with consistent profitability, positive cash flow, and a healthy balance sheet. An accountant’s review of these statements is still important for a full understanding of the franchisor's financial position and practices, such as its large distributions to the owner.

Potential Mitigations

• A franchise accountant should perform a thorough review of the franchisor's financial statements for the past three years to analyze trends.
• It is wise to discuss the franchisor's financial health and capitalization with your business advisor.
• Legal counsel can help you understand any notes or qualifications attached to the financial statements.

Explanation

This risk was not identified. Item 20 data does not show a pattern of excessively rapid growth; in fact, the system size decreased in the most recent year. While this avoids the risks of strained support systems from over-expansion, the reasons for the decrease in outlets warrant investigation as part of your due diligence.

Potential Mitigations

• Engage your accountant to review the system's growth rates in Item 20 over the last three years to understand its stability.
• When speaking with existing franchisees, a business advisor can help you formulate questions about the quality and timeliness of franchisor support.
• Your attorney should review the franchisor's obligations for support as outlined in the franchise agreement.

Explanation

This risk was not identified. According to Item 1, FTG was established in 2002 and is a mature franchise system with a long operating history. This experience reduces the risks typically associated with new or unproven franchise concepts, such as undeveloped operational systems or lack of brand recognition.

Potential Mitigations

• It is always prudent to have a business advisor help you research the franchisor's history and its track record in the industry.
• Even with a mature system, you should discuss the brand's current market position and competitiveness with existing franchisees.
• An accountant can review financial statements to confirm the stability that typically accompanies a proven system.

Explanation

This risk was not identified. The franchise operates in the floor covering and window treatment industry. This is a well-established sector of the home improvement market and is not considered a fad. The business relies on sustained consumer and commercial demand for home and building maintenance and renovation.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the home improvement and flooring industry in your local market.
• You should assess the resilience of this business model to economic downturns with your financial advisor.
• Your attorney can review the franchise agreement to understand your obligations if market trends were to change unexpectedly.

Explanation

This risk was not identified. Item 2 of the FDD shows that the franchisor's key executives have extensive and long-term experience, many having been with the company or its affiliate, Abbey Carpet, since the early 2000s. This level of experience in both the specific industry and franchising is a positive factor.

Potential Mitigations

• Even with an experienced team, it is beneficial to discuss the management's reputation and effectiveness with current franchisees.
• Your business advisor can help you verify the backgrounds of key executives.
• Consulting an attorney will help you understand how management's obligations to you are defined in the franchise agreement.

Explanation

This risk was not identified. Item 1 indicates that FTG does not have a parent company and there is no mention of private equity ownership. The business appears to be privately held by its management. This avoids the potential risks associated with private equity's focus on short-term returns over long-term system health.

Potential Mitigations

• Confirming the ownership structure with your attorney is a standard part of due diligence.
• A discussion with your business advisor can help you understand the pros and cons of different franchisor ownership structures.
• Reviewing the assignment clauses in the franchise agreement with your attorney is important to understand what happens if ownership changes in the future.

Explanation

This risk was not identified in the FDD. Item 1 states FTG has no parent company. It does disclose an affiliate, Abbey Carpet Co., Inc., and provides information about its relationship with FTG. There are no indications that a controlling parent entity has been omitted from the disclosure document.

Potential Mitigations

• Your attorney should review Item 1 and any related exhibits to confirm the disclosed corporate structure.
• It is wise to have your accountant check if the provided financial statements rely on any guarantees from undisclosed entities.
• Asking the franchisor directly about its full corporate structure can provide additional clarity.

Explanation

This risk does not appear to be present. Item 1 discloses a predecessor from which assets were acquired in 2002, over two decades ago. The FDD does not indicate any negative history, such as litigation or bankruptcy, associated with this predecessor. The significant time elapsed makes any predecessor issues unlikely to affect current operations.

Potential Mitigations

• Your franchise attorney should review the disclosures in Items 1, 3, and 4 regarding any predecessors.
• Even with a distant predecessor, discussing the system's history with long-term franchisees can provide valuable context.
• Engaging a business advisor can help you assess if any legacy systems or issues from a predecessor might still be relevant.

Explanation

This risk was not identified. Item 3 discloses a single regulatory action from 2019 regarding "no-poaching" clauses, which was common for many franchise systems at the time. The FDD states no other litigation is required to be disclosed, indicating an absence of a pattern of lawsuits from franchisees alleging fraud or other systemic issues.

Potential Mitigations

• A franchise attorney should review the litigation history in Item 3 and explain the significance of any disclosed actions.
• It's good practice to ask current and former franchisees about their experiences with disputes and the franchisor's approach to conflict resolution.
• Your business advisor can help you conduct public record searches for litigation not required to be disclosed in the FDD.