Explanation

This risk was not identified in the FDD Package. A fad business is one tied to a fleeting trend, posing a risk of declining demand after the initial excitement fades. Even if the trend ends, your contractual obligations, such as royalty payments, would continue. Assessing the long-term, sustainable consumer demand for the business's products or services is a crucial part of due diligence before making an investment in any franchise.

Potential Mitigations

• Engage a business advisor to research the industry and determine if the products and services meet a long-term consumer need or are based on a short-term trend.
• You should independently evaluate the business model's resilience to shifts in consumer preferences and economic changes.
• Review with your attorney the franchisor's contractual obligations for research and development to gauge their commitment to evolving the business model.

Explanation

This risk was not identified in the FDD Package. FDD Item 2 discloses the business experience of the franchisor's key executives. A lack of direct experience in the specific industry or in franchising can be a significant risk, as it may suggest the management team cannot provide adequate support or strategic direction. It is generally preferable for leadership to have a proven track record relevant to the business you are considering investing in.

Potential Mitigations

• A business advisor can help you review the backgrounds of the key management team members detailed in Item 2.
• It is important to discuss the management team's capabilities and vision with current franchisees.
• If you have concerns, your attorney can help you formulate questions for the franchisor about how they compensate for any experience gaps.

Explanation

This risk was not identified in the FDD Package. The franchisor is not disclosed as being owned by a private equity firm. When a franchisor is owned by a PE firm, there can be a risk that management decisions prioritize short-term returns for investors over the long-term health of the franchisees and the brand. This can sometimes manifest as cuts in support, pressure to use specific vendors, or a focus on rapid franchise sales.

Potential Mitigations

• If a franchisor were owned by a private equity firm, your business advisor could help you research the firm’s reputation and track record with other franchise systems.
• Consulting with your attorney would be important to understand any terms related to the sale or assignment of the franchise system.
• It is always wise to speak with existing franchisees about their experience with the ownership and management team.

Explanation

This risk was not identified in the FDD Package. Item 1 of the FDD does not indicate the existence of a parent company. When a franchisor is a subsidiary, it is important to assess the financial strength and commitment of the parent, especially if the franchisor entity itself is thinly capitalized. Failure to disclose a parent or provide its financials when required can obscure a complete picture of the system's backing and stability.

Potential Mitigations

• Your attorney can help you verify the franchisor's corporate structure and determine if any undisclosed parent entities exist.
• An accountant should review the provided financial statements to assess if the franchisor is adequately capitalized on its own.
• If a parent company were involved, discussing its role and commitment with your business advisor would be prudent.

Explanation

HomeSmiles LLC discloses that its affiliate and predecessor, Home Smiles, Inc., previously offered franchises from January 2019 to March 2020. The FDD appears to properly disclose this history and provides combined outlet information. This history is important as it indicates the system's operational track record is slightly longer than the franchisor entity's existence, though it also means you must evaluate the performance and stability across this transition period.

Potential Mitigations

• Your attorney should review the disclosures in Items 1, 3, 4, and 20 for any concerning history related to the predecessor entity.
• When speaking with franchisees, ask those who have been in the system the longest about their experiences under the predecessor.
• An accountant can help you analyze any financial data or outlet statistics that span both the predecessor and current franchisor's operating periods.

Explanation

This risk was not identified in the FDD Package. Item 3 of the FDD indicates no litigation is required to be disclosed. A pattern of lawsuits, especially those initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag indicating systemic problems. Likewise, a high number of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious relationship.

Potential Mitigations

• It is a positive sign that no litigation is disclosed, but your attorney can still perform a public records search for any litigation not meeting the disclosure threshold.
• Speaking with former franchisees can provide insight into any past disputes that did not result in formal litigation.
• Always consult your business advisor to assess the overall health of the franchisor-franchisee relationship based on your due diligence.