Explanation

This risk was not identified, as HOS is a new franchisor with no operating franchise history in Item 20. For established systems, high franchisee turnover (terminations, non-renewals, or closures) is a critical red flag. It can indicate systemic problems, such as a lack of profitability, poor franchisor support, or an unsustainable business model. Careful analysis of Item 20 data is crucial in evaluating a mature franchise.

Potential Mitigations

• When evaluating an established system, it is crucial for your accountant to analyze the turnover rates in Item 20 over the past three years.
• Speaking with former franchisees from the list in Item 20 is a vital due diligence step that your business advisor can help you prepare for.
• An experienced franchise attorney can help you understand the different categories of franchisee departures listed in Item 20.

Explanation

This risk was not identified in the FDD package, as Item 20 shows no franchise sales yet. In other systems, rapid growth can be a concern if it outpaces the franchisor's ability to provide adequate support. A franchisor's infrastructure for training, site selection, and ongoing operational assistance must scale with the number of franchisees to maintain quality and franchisee satisfaction, which requires significant financial and human capital.

Potential Mitigations

• For a rapidly growing system, a discussion with your business advisor about the franchisor's support infrastructure scalability is important.
• It is prudent to ask a wide range of existing franchisees about the current quality and responsiveness of franchisor support.
• Your accountant should review the financials of a fast-growing franchisor to assess if they have the resources to sustain their expansion.

Explanation

This risk was not identified in the FDD. The business model, offering salon and tattoo suites for rent, is a well-established concept in the commercial real estate and beauty services sector. It does not appear to be based on a short-term trend or fad. A fad business carries the risk that consumer interest could decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations.

Potential Mitigations

• When evaluating any franchise, it's wise to have a business advisor help you research the long-term market demand for its products or services.
• Understanding a business concept's resilience to economic downturns and changing consumer tastes is a key discussion to have with your financial advisor.
• Your attorney can review the agreement to see if it allows for operational pivots if market trends do shift.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that HOS is owned or controlled by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are driven by short-term financial targets for investors, rather than the long-term health of the brand and its franchisees. This can sometimes manifest as reduced support, increased fees, or a quick sale of the system.

Potential Mitigations

• If a franchisor is PE-owned, researching the firm's history with other franchise brands can provide valuable insight; a business advisor can assist with this.
• Your attorney should review the assignment clause in the Franchise Agreement to understand your rights if the system is sold.
• It is beneficial to ask franchisees of a PE-owned system about any changes they have experienced since the acquisition.

Explanation

This risk was not identified in the FDD package. HOS discloses an affiliate in Item 1 but does not appear to have a parent company. When a franchisor is a subsidiary of a larger parent company, it is important to understand the parent's role and financial stability, especially if the franchisor itself is thinly capitalized or relies on the parent for support or guarantees. Full transparency requires disclosure of the parent and, in some cases, its financial statements.

Potential Mitigations

• Your accountant should always review the financial statements of any parent company that guarantees the franchisor's performance.
• Understanding the legal and financial relationship between a franchisor and its parent is a critical task for your attorney.
• A business advisor can help assess the operational impact of a parent company on the franchise system's strategy and support.

Explanation

This risk was not identified in the FDD package. HOS is a new entity and does not disclose any predecessors in Item 1. When a franchise system has been acquired from a predecessor, it is important to review the predecessor's history regarding litigation, bankruptcy, and franchisee turnover. This information provides a more complete picture of the system's historical challenges and health, which may not be fully reflected in the current franchisor's own records.

Potential Mitigations

• When a predecessor is disclosed, it is important that your attorney carefully reviews their history in Items 1, 3, and 4.
• Independent research into a predecessor's reputation and track record can uncover valuable information; a business advisor can help guide this process.
• Speaking with long-term franchisees who operated under the predecessor can provide direct insight into the system's evolution and inherited issues.

Explanation

This risk was not identified in the FDD package, as Item 3 discloses no litigation history for this new franchisor. For other systems, a pattern of lawsuits filed by franchisees alleging fraud or misrepresentation, or a high number of suits filed by the franchisor against franchisees, can be a major red flag. It may suggest systemic problems with disclosure, franchisee relations, or the viability of the business model itself.

Potential Mitigations

• It is critical for your attorney to review any litigation disclosed in Item 3 to understand the nature of the claims and their outcomes.
• A business advisor can help you assess whether the volume and type of litigation are normal for a system of that size and age.
• Contacting franchisees involved in past litigation, if possible, can provide invaluable firsthand accounts.