Explanation

This risk was not identified. The audited financial statements for HB Franchises, LLC (HB LLC) show positive and growing net worth and profitability over the past two years. Assessing a franchisor's financial health is crucial because a struggling franchisor may be unable to provide promised support, invest in brand development, or even remain in business, which could jeopardize your entire investment.

Potential Mitigations

• Having an accountant review the audited financial statements, including all footnotes, is a crucial step to confirm the financial health of the franchisor.
• Engaging a business advisor can help you understand the implications of the franchisor's financial performance on their ability to support franchisees.
• Your attorney should verify that the financial statements comply with all federal and state disclosure requirements.

Explanation

This risk was not identified in the FDD. Item 20 data shows a low rate of terminations and non-renewals over the past three years for a system of this size, suggesting franchisee stability. High turnover can be a major red flag, potentially indicating systemic problems like franchisee unprofitability, dissatisfaction, or poor franchisor support, so its absence here is a positive indicator.

Potential Mitigations

• A discussion with your accountant to analyze the outlet turnover data in Item 20 can provide a clearer picture of system health.
• It is advisable to contact a sample of current and former franchisees from the lists provided to understand their experiences and reasons for leaving.
• Your attorney can help you formulate appropriate questions to ask former franchisees to gauge the reasons for the high number of transfers.

Explanation

This specific risk was not identified. The system shows stable to slightly negative net growth in the most recent year, not the kind of rapid expansion that often strains a franchisor's resources. When a franchisor grows too quickly, they may not be able to provide adequate training, site selection assistance, or ongoing operational support to all of their new franchisees, potentially harming the entire system.

Potential Mitigations

• To understand a franchisor's capacity for support, have your business advisor help you evaluate their staffing and infrastructure relative to system size.
• Speaking with both new and established franchisees can provide insight into whether support levels have changed over time.
• An accountant's review of the franchisor's spending on franchisee support services can be an indicator of their commitment to the system.

Explanation

This risk is not present. While HB LLC was formed in 2017, it acquired a long-standing system from its predecessor, which began in 1983. Management has extensive experience with the Heaven's Best brand. An unproven system is risky because its business model may not be viable, brand recognition is minimal, and operational support may be underdeveloped, increasing the potential for failure.

Potential Mitigations

• A business advisor can help you assess the operational history and track record of the brand, even under previous ownership.
• Thoroughly vetting the management team's experience in both the specific industry and in franchising is a key due diligence step.
• Speaking with franchisees who have been with the system through the ownership change can provide valuable historical context.

Explanation

This risk appears to be low. The carpet and upholstery cleaning industry has been established for many decades, indicating sustained consumer demand rather than being a temporary fad. A business based on a fad carries a high risk of failure once public interest wanes, potentially leaving you with a worthless business and ongoing contractual obligations to the franchisor.

Potential Mitigations

• A business advisor can help you research the long-term market trends for the specific industry to confirm its stability.
• Investigating the resilience of the cleaning industry during various economic cycles can provide insight into its long-term viability.
• Evaluating the franchisor's plans for innovation and adaptation with your business advisor can help gauge their preparedness for market shifts.

Explanation

This risk is not present. Item 2 and Exhibit H show that the key individuals managing HB LLC have many years, and in some cases decades, of experience specifically with the Heaven's Best brand and in the cleaning industry. Inexperienced management is a significant risk because it can lead to poor strategic decisions, weak operational systems, and inadequate franchisee support, ultimately jeopardizing your investment.

Potential Mitigations

• A thorough review of the executive biographies in Item 2 with a business advisor is a good first step in assessing management's qualifications.
• It is wise to verify management's reputation and experience by speaking with a range of current and former franchisees.
• Your attorney can help you confirm the business experience claims made in the disclosure document through public record searches.

Explanation

This risk was not identified in the FDD. Item 1 indicates HB LLC is privately owned by its managers and does not mention any private equity ownership. Private equity ownership can be a risk because investment firms may prioritize short-term profits and a quick exit over the long-term health of the brand and the success of individual franchisees, sometimes leading to cuts in support or increases in fees.

Potential Mitigations

• Your attorney can help you research the franchisor's ownership structure to confirm who ultimately controls the company.
• If private equity were involved, a business advisor could help you research the firm's track record with other franchise systems.
• Understanding the ownership structure is key to anticipating the long-term strategic direction of the franchise, a task for your business advisor.

Explanation

This risk was not identified. HB LLC does not appear to have a parent company. Failure to disclose a parent company, especially one that guarantees the franchisor's obligations or is a key supplier, can obscure the true financial stability and control structure of the franchise system. A complete picture of the corporate family is necessary for a full risk assessment.

Potential Mitigations

• An attorney can verify the franchisor's corporate structure to ensure there are no undisclosed parent or controlling entities.
• If a parent company existed, an accountant would need to review its financial statements to assess the overall health of the enterprise.
• Understanding the full corporate structure helps a business advisor determine where key decisions are made and where financial support originates.

Explanation

This risk is not present. HB LLC clearly discloses its predecessor, M-CO, Inc., and provides its history. Critically, Items 3 and 4 disclose no material litigation or bankruptcy for the predecessor. Incomplete or negative history of a predecessor can hide inherited problems, such as past franchisee failures or legal disputes, which could affect the current system's health and reputation.

Potential Mitigations

• Your attorney should always carefully review any predecessor information disclosed in Items 1, 3, and 4 of the FDD.
• Speaking with long-term franchisees who operated under the predecessor can provide valuable insights into the system's history and evolution.
• A business advisor can help you assess how the transition from the predecessor might have impacted the brand and franchisee relationships.

Explanation

This risk was not identified in the FDD. Item 3 for both HB LLC and its master franchisees discloses no material litigation that would require reporting. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or misrepresentation, is a significant red flag. It can indicate deep-seated problems with the franchisor's business practices, disclosure integrity, or franchisee support, suggesting a potentially contentious and difficult relationship.

Potential Mitigations

• It is critical for your attorney to review Item 3 for any disclosed litigation and assess its potential impact on the franchise system.
• Even without disclosed litigation, a business advisor can help you search public records for legal disputes involving the franchisor or its principals.
• Discussing any past or present disputes with current and former franchisees can provide context that isn't available in the FDD.