Explanation

This risk was not identified in the FDD package. Item 20 data for the past three years shows zero franchisee terminations, non-renewals, or cessations of business for other reasons. High franchisee turnover is often a red flag indicating systemic problems, such as a lack of profitability or franchisee dissatisfaction. Steady growth with no reported departures is a positive sign, although the system is very young.

Potential Mitigations

• Engaging a business advisor to analyze the Item 20 tables for trends over time is a valuable step in due diligence.
• It is wise to ask current franchisees about their satisfaction and profitability during your validation calls.
• Your accountant can help you compare a franchise's turnover rates against any available industry benchmarks.

Explanation

This risk was not identified. The franchised business is centered on modular home construction and design, which is part of the broader, established residential construction industry. This type of business relies on long-term housing demand rather than a fleeting trend or novelty product, suggesting it is not a fad concept. Your success would likely depend more on execution and local market conditions than on temporary popularity.

Potential Mitigations

• A business advisor can help you research the long-term demand for modular construction in your specific local market.
• It is prudent to assess the franchisor's plans for innovation to ensure the business model remains competitive over time.
• Your financial advisor can help you evaluate the business's resilience to shifts in the housing market and economic cycles.

Explanation

This risk does not appear to be present in the FDD. Item 2 indicates that the key executives, particularly the founder and President, have substantial prior experience in the modular home construction industry through an affiliate company dating back to 2008. While franchising is more recent for them, their deep industry-specific background is a positive factor. Inexperienced management can be a major risk, leading to poor support and flawed systems.

Potential Mitigations

• It is still advisable to question current franchisees about the quality of the franchise-specific support and training they receive.
• A business advisor can help you further vet the management team's background and reputation within the construction industry.
• Confirm with the franchisor if they have engaged any experienced franchise consultants to guide their system's development.

Explanation

This risk was not identified. FDD Item 1 indicates the franchisor is a limited liability company and does not disclose any ownership by a private equity firm. The management team appears to be led by the company's founder. Therefore, the specific risks associated with private equity ownership, such as a focus on short-term returns over long-term system health, do not seem applicable here.

Potential Mitigations

• Your attorney can help you verify the ownership structure of the franchisor through a corporate records search.
• It is still useful to ask the franchisor about their long-term vision for the company and any plans for future sale or ownership changes.
• A business advisor can help you understand the pros and cons of different types of franchisor ownership structures.

Explanation

This risk was not identified in the FDD, as Item 1 clearly states that the franchisor does not have a parent company. The FTC Rule requires disclosure of parent companies and, in some cases, their financial statements if they guarantee the franchisor's performance. Since no parent company exists, this specific disclosure risk is not applicable.

Potential Mitigations

• Your attorney can confirm the franchisor's corporate structure and lack of a parent entity through public records.
• An accountant should still carefully review the disclosed affiliate relationships and the franchisor's reliance on them for financing or supplies.
• Inquire with a business advisor about the stability of key affiliates, as their health could indirectly impact the franchisor.

Explanation

This risk does not appear to be present. FDD Item 1 states clearly, "We do not have any predecessors." A predecessor is a company from which the franchisor acquired the main assets of the business. The absence of a predecessor means you do not have to worry about uncovering a hidden history of past failures, litigation, or other problems that might be associated with a prior owner of the system.

Potential Mitigations

• Your attorney can confirm the franchisor's formation history to ensure there are no undisclosed predecessors.
• A business advisor can still help you research the history and reputation of the affiliate companies mentioned in Item 1.
• It is always a good practice to ask early franchisees about the history of the system as they understand it.

Explanation

This risk was not identified, as FDD Item 3 states that there is no litigation that requires disclosure. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag about the franchisor's practices and the health of the system. The absence of such litigation is a positive indicator, though not a guarantee of a trouble-free relationship.

Potential Mitigations

• An attorney can perform an independent public records search to look for litigation that may not have met the threshold for disclosure.
• It is critical to ask current and former franchisees about their experiences and whether they have had any significant disputes with the franchisor.
• A business advisor can help you understand common areas of conflict in franchise relationships to ask about during your due diligence.