Explanation

The franchisor's audited financial statements in Exhibit D show consistent profitability, a strong positive net worth, and healthy cash reserves. Financial instability was not identified. This risk is important because a financially weak franchisor may be unable to provide support, invest in the brand, or even remain in business, jeopardizing your investment.

Potential Mitigations

• Even with positive financials, having your accountant review the statements, including all notes and revenue trends, is a valuable step.
• It is wise to ask your business advisor to assess if the franchisor's financial resources are sufficient to support its network of company-owned and franchised offices.
• Your attorney can help you understand the strength of the parent company's commitment to support the franchisor's operations.

Explanation

This risk was not identified, as the data in Item 20 does not show rapid growth in the number of franchised outlets. This risk is significant because a franchisor expanding too quickly may lack the resources to provide adequate training and support to all its new franchisees, potentially harming the entire system.

Potential Mitigations

• It is still prudent to have your business advisor evaluate the franchisor's support infrastructure relative to its overall system size, including company-owned units.
• Speaking with franchisees who have joined at different times can provide insight into the consistency of franchisor support over time.
• Your accountant can assess if the franchisor's financial statements show adequate investment in support staff and infrastructure.

Explanation

This risk was not identified. Item 1 and Item 2 show that while the franchising entity was formed in 2010, the parent company has operated under the Howard Hanna brand since 1958 and the management team is highly experienced. An unproven system can be risky due to a lack of established operating procedures, brand recognition, and franchisee support.

Potential Mitigations

• A discussion with your business advisor can help you evaluate the benefits of joining a mature and established brand.
• It remains valuable to speak with long-term franchisees to understand the evolution and stability of the system over time.
• Your attorney can review the franchisor's history as disclosed in the FDD to confirm its track record.

Explanation

This risk was not identified. The FDD describes the residential real estate brokerage industry as a mature industry, not a fad. Investing in a fad business is risky because consumer demand may disappear, leaving you with a worthless business even though your contractual obligations to the franchisor continue.

Potential Mitigations

• A business advisor can help you research the long-term stability and economic trends of the residential real estate industry in your area.
• It is always a good practice to assess a business concept's resilience to economic cycles and changing consumer preferences with your financial advisor.
• Reviewing the franchisor's history with your attorney can provide context on its longevity and adaptability.

Explanation

This risk was not identified. Item 2 and Item 11 of the FDD show that the franchisor’s management team has extensive experience in both the real estate industry and in franchising. Inexperienced leadership can be a major risk, as it may lead to poor strategic decisions, inadequate franchisee support, and an unstable system.

Potential Mitigations

• It's still worthwhile to discuss the management team's background with current franchisees to get their perspective on leadership effectiveness.
• Your business advisor can help you research the public reputation and track record of the key executives.
• Understanding the stability of the management team is an important part of your due diligence process.

Explanation

This risk was not identified. Item 1 indicates the franchisor, Howard Hanna Real Estate Associates, LLC (HHREA), is a subsidiary of Hanna Holdings, Inc., which appears to be a family-controlled entity, not a private equity firm. Private equity ownership can be a risk if the firm prioritizes short-term returns over the long-term health of the franchise system.

Potential Mitigations

• Your attorney can help you confirm the ownership structure of the franchisor and its parent company.
• It is beneficial to understand the franchisor's long-term strategic vision, which a business advisor can help you assess.
• Speaking with long-term franchisees can provide insight into the consistency of the franchisor's ownership philosophy.

Explanation

This risk was not identified. Item 1 clearly discloses the parent company, Hanna Holdings, Inc. Failing to disclose a parent company can be a risk if it obscures the true financial backing or control structure of the franchise system. The franchisor's own financials are provided and show profitability, mitigating concerns.

Potential Mitigations

• Your accountant can review the provided financial statements to assess the franchisor's standalone stability.
• It is good practice to have your attorney verify the corporate structure and any guarantees or support obligations from the parent company.
• Discussing the relationship between the franchisor and its parent company with current franchisees can provide additional context.

Explanation

This risk was not identified, as Item 1 of the FDD states that the franchisor has no predecessors. A history of predecessors can sometimes obscure past problems, such as litigation, bankruptcy, or high franchisee failure rates under a previous owner, making it important to review this information carefully if it exists.

Potential Mitigations

• Your attorney can help you verify the corporate history provided in Item 1.
• It's still useful to ask long-tenured franchisees about the history of the brand and any significant changes in ownership or structure over the years.
• A business advisor can assist in researching the overall brand's history in the public domain.

Explanation

This risk was not identified, as Item 3 of the FDD states there is no litigation required to be disclosed. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or misrepresentation, can be a major red flag indicating systemic problems with the franchisor or its business model.

Potential Mitigations

• Your attorney can conduct an independent public records search to confirm the absence of significant litigation.
• It is always a good practice to ask current and former franchisees about their experiences and whether they are aware of any disputes within the system.
• Understanding the franchisor's approach to resolving conflicts is a key part of due diligence your business advisor can help with.