Explanation

This risk was not identified in the FDD package. An unproven franchise system can be risky due to the lack of a long-term track record, minimal brand recognition, and potentially underdeveloped support systems. Prospective franchisees in such systems face higher uncertainty regarding the business model's viability and the franchisor's ability to provide effective, long-term support. Careful due diligence on the management team's experience is crucial in these situations.

Potential Mitigations

• A business advisor can help you research the franchisor's history and the experience of its key executives in both the specific industry and in franchising.
• If available, speaking with the earliest franchisees in the system is essential to gauge the franchisor's performance and support evolution.
• Your accountant should carefully vet the financial stability and capitalization of any new or unproven franchisor.

Explanation

This risk was not identified in the FDD package. A "fad" business is one based on a short-term trend rather than sustained consumer demand. Investing in such a franchise is risky because your long-term contractual obligations, including royalty payments, will continue even if public interest in the product or service declines sharply. This can lead to significant financial loss and business failure once the trend passes, leaving you with a devalued investment.

Potential Mitigations

• It is wise to conduct independent market research with a business advisor to assess the long-term consumer demand for the products or services offered.
• Your financial advisor can help you evaluate the business model's resilience to economic shifts and changing consumer tastes.
• Reviewing the franchisor's plans for innovation and adaptation in Item 11 can provide insight into their long-term vision.

Explanation

This risk was not identified in the FDD package, as the management team appears to have extensive experience in the real estate industry. When franchisor management lacks experience in franchising or their specific industry, it can lead to significant problems. These may include weak support systems, poor strategic decisions, and an inability to effectively guide franchisees, increasing the risk of operational challenges and even failure for the franchisee.

Potential Mitigations

• A thorough review of the management team's biographies in Item 2 with a business advisor is crucial to assess their relevant experience.
• It is beneficial to ask current franchisees about their direct experiences with the management team's competence and support.
• Your attorney can help you ask targeted questions about the franchisor's strategies for overcoming any experience gaps.

Explanation

This risk was not identified in the FDD package, as the franchisor does not appear to be owned by a private equity firm. When a franchisor is PE-owned, there can be a focus on short-term returns, which may lead to increased fees, reduced franchisee support, or pressure to use specific vendors. This can sometimes prioritize investor profits over the long-term health of the franchise system and its individual franchisees.

Potential Mitigations

• A business advisor can help research a private equity firm's history with other franchise brands if applicable.
• Discussing any changes in the franchise system since a PE acquisition with current franchisees can provide valuable insight.
• Your attorney should carefully review assignment clauses in the Franchise Agreement to understand the implications of a future sale.

Explanation

The FDD discloses that HomeSmart International, LLC is a subsidiary of HomeSmart Holdings, Inc. and that the parent company guarantees the franchisor's performance. The parent company's audited financial statements are provided. Therefore, the risk of non-disclosure is not present. Proper disclosure of a parent company is crucial for assessing the overall financial strength and stability backing the franchise system, especially if the franchisor entity itself is thinly capitalized.

Potential Mitigations

• Your accountant should review the financial statements of both the franchisor and any parent company to get a complete picture of financial health.
• It is important for your attorney to examine the terms of any parent guarantee to understand its scope and enforceability.
• A business advisor can help you understand the corporate structure and the potential influence of the parent company on the franchise.

Explanation

This risk was not identified in the FDD package. A franchisor's predecessor is a prior entity from which it acquired the business. Failing to disclose or providing incomplete information about a predecessor's history, including any past litigation, bankruptcy, or high franchisee turnover, can obscure significant historical problems with the system. This prevents you from making a fully informed decision about the stability and track record of the franchise you are buying into.

Potential Mitigations

• It is wise for your attorney to carefully review Item 1 for any mention of predecessors and cross-reference with Items 3, 4, and 20.
• A business advisor can assist in researching a predecessor's public records and history for any red flags.
• Speaking with long-term franchisees who may have operated under a predecessor can provide invaluable historical context.