Explanation

This risk was not identified in the FDD package. The franchisor, The HomeTeam Inspection Service, Inc. (HomeTeam), has been in operation since 1992 and has a substantial number of franchisees, indicating it is not in a rapid, initial growth phase. However, in any system, rapid growth can strain a franchisor's ability to provide adequate support, so it remains a concept to be aware of when evaluating franchise opportunities.

Potential Mitigations

• Engaging a business advisor to research the franchisor’s reputation for support among existing franchisees is a wise step.
• An accountant should review the franchisor's financial statements to ensure they have the resources to support their current system size.
• Legal counsel can help you understand the specific support obligations outlined in the franchise agreement.

Explanation

This risk was not identified. HomeTeam was established in 1992 and, according to Item 20, has approximately 200 franchised outlets. This indicates a long-standing and mature franchise system. For prospective franchisees, an unproven system can present higher risks due to the lack of a track record, underdeveloped support systems, and minimal brand recognition, but that does not appear to be the case here.

Potential Mitigations

• It is still prudent to have your business advisor help you research the company's history and its performance through different economic cycles.
• Speaking with long-term franchisees can provide insight into how the system has evolved and adapted over time.
• Your accountant can analyze financial trends over the three years provided to confirm the system's stability.

Explanation

This risk was not identified. The home inspection industry is a well-established service sector tied to the real estate market. While market demand can fluctuate with real estate cycles, the fundamental need for home inspections is not typically considered a short-term fad. A fad business carries the risk of a rapid decline in consumer interest, potentially leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• A business advisor can help you research the long-term outlook for the home inspection industry in your local market.
• Reviewing the franchisor's plans for adapting to new technologies and market changes with your financial advisor is a sound strategy.
• An attorney can help you understand your long-term obligations under the franchise agreement.

Explanation

This risk was not identified. Item 2 shows that the key executives and management team have extensive, long-term experience with HomeTeam and within the industry. For example, the Founder has been with the company since 1992, and the Vice President since 2013. Inexperienced leadership can be a significant risk, as it may lead to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• It is still beneficial to discuss the management team's accessibility and effectiveness with current franchisees.
• A business advisor can help you assess how the leadership team's experience aligns with your own business goals.
• Your attorney can confirm that the support obligations outlined in the Franchise Agreement are robust.

Explanation

This risk was not identified in the FDD package. Item 1 and Item 2 do not indicate that the franchisor is owned by a private equity firm. This type of risk matters because PE ownership can sometimes lead to a focus on short-term profitability and a quick exit strategy, which may not always align with the long-term health of the franchise system or the individual success of franchisees.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchise you consider.
• It is always wise to ask current franchisees if they have noticed any changes in franchisor priorities or support levels over time.
• Your attorney should review the assignment clauses in the franchise agreement to understand what happens if the franchisor is sold.

Explanation

This risk was not identified. The FDD does not indicate the existence of a parent company whose financials would be material to your investment decision. This type of risk is important because if a franchisor is a thinly capitalized subsidiary, the financial health of its parent company can be crucial for the franchisor's ability to provide support and meet its obligations. The franchisor here appears to be a standalone entity.

Potential Mitigations

• An attorney can help you investigate the corporate structure of any franchisor to ensure all relevant entities are disclosed.
• An accountant should always review the provided financial statements to assess the franchisor's standalone financial strength.
• When a parent company does exist, you should ask your attorney if a parent-level guarantee of the franchisor's obligations is appropriate.

Explanation

This risk was not identified in the FDD package. Item 1 indicates that HomeTeam does not have any predecessors. When a franchisor has acquired a system from a predecessor, it is important to review the predecessor's history for any signs of trouble, such as litigation or high franchisee failure rates, as these issues could potentially carry over to the new ownership.

Potential Mitigations

• When evaluating any franchise, it's wise to ask your attorney to carefully review the predecessor history disclosed in Items 1, 3, and 4.
• A business advisor can assist in researching the public record and reputation of any predecessor entities.
• Talking to long-term franchisees who operated under a predecessor can provide invaluable historical context.

Explanation

This risk was not identified as a pattern. Item 3 discloses one past regulatory action with the state of California from 2022 regarding the registration status of its CPA, which was resolved with a penalty. The FDD does not disclose a pattern of franchisee-initiated lawsuits for fraud or misrepresentation. A history of such litigation could be a significant warning sign about a franchisor's practices and the health of its franchisee relationships.

Potential Mitigations

• A comprehensive review of Item 3 with your franchise attorney is always a critical step in due diligence.
• Engaging your attorney to conduct independent searches for litigation involving the franchisor can sometimes uncover cases not required to be disclosed.
• A business advisor can help you understand if the nature and volume of any disclosed litigation is typical for a system of this size.