Explanation

This specific risk was not identified in the FDD package. High franchisee turnover, disclosed in FDD Item 20, is a critical indicator of potential systemic problems, such as franchisee dissatisfaction, lack of profitability, or poor franchisor support. Careful analysis of the tables in Item 20 is crucial for any prospective franchisee.

Potential Mitigations

• It is crucial to contact a significant number of former franchisees listed in Item 20 to understand their reasons for leaving the system.
• Your accountant can help you calculate the effective turnover rate from Item 20 data and compare it to industry averages.
• Discussing any concerns about franchisee turnover directly with the franchisor is a conversation your attorney can help you prepare for.

Explanation

This risk was not identified, as the provided documents indicate the company was formed in 2013 and has over a decade of operating history. For new systems, risks include an unproven business model, minimal brand recognition, and inexperienced management, which can increase the chance of business failure. It is important to verify a franchisor’s history in Item 1 of the FDD.

Potential Mitigations

• When evaluating a new system, it's wise to have a business advisor help you scrutinize the founders' industry and franchising experience.
• An accountant should be tasked with assessing the capitalization of a new franchisor to ensure it can fund its initial growth and support.
• Your attorney may be able to negotiate more franchisee-favorable terms to compensate for the higher risks of an unproven system.

Explanation

This risk was not identified in the FDD package. Residential property management is an established industry with long-term consumer demand. A fad business, in contrast, is tied to a fleeting trend and may not be viable long-term, potentially leaving you with obligations under a franchise agreement for a concept that is no longer popular.

Potential Mitigations

• A business advisor can help you research the long-term market trends and sustainability for any industry you consider entering.
• Evaluating a franchisor's plans for innovation and adaptation to changing consumer tastes is a critical step.
• Your financial advisor can help you model the business's potential resilience to economic downturns or shifts in trends.

Explanation

This risk does not appear to be present, as Item 2 indicates the executive team has several years of experience with Keyrenter or in related industries. Inexperienced management can be a significant risk, as it may lead to flawed strategies, underdeveloped support systems, and a lack of understanding of franchisee needs, potentially jeopardizing the entire system.

Potential Mitigations

• A thorough review of the management team's résumés in Item 2 with your business advisor is always a prudent step.
• It is beneficial to ask existing franchisees about their direct experiences with the management team's competence and responsiveness.
• Your attorney can help you ask targeted questions about the franchisor's strategic direction and leadership.

Explanation

The FDD package does not indicate that the franchisor is owned by a private equity firm. When this is the case, there can be a risk that decisions are driven by short-term financial targets rather than the long-term health of the brand and its franchisees. This could manifest as cuts in support, increased fees, or a rapid sale of the system.

Potential Mitigations

• If a franchisor is PE-owned, having a business advisor help you research the firm's history with other franchise brands is wise.
• Speaking with franchisees who have been with the system before and after a PE acquisition can offer valuable perspectives.
• Your attorney should analyze any clauses related to the sale or assignment of the franchise system.

Explanation

This risk was not identified in the FDD package, as Note 1 to the financial statements discloses several affiliates. A failure to disclose a parent company or its financials, when required, can hide the true financial backing and stability of the franchisor. This is especially risky if the franchisor is a new or thinly capitalized subsidiary relying on its parent for support.

Potential Mitigations

• Your attorney can help you verify a company's corporate structure to ensure all relevant parent and affiliate entities are disclosed.
• If a parent company guarantees the franchisor's obligations, an accountant should review the parent's financial statements.
• It is important to understand the legal and financial relationships between the franchisor and all its affiliates.

Explanation

The provided documents do not indicate that the franchisor has a predecessor. When a franchisor has acquired a system from a predecessor, it's important to understand that history. Any past issues, such as litigation or high franchisee failure rates under the predecessor, could be inherited by the new ownership and may indicate underlying problems with the franchise system itself.

Potential Mitigations

• Your attorney should carefully review any predecessor information disclosed in Items 1, 3, and 4 of the FDD.
• Independent research into a predecessor's public records and news archives can sometimes reveal historical issues.
• Asking long-term franchisees about their experiences under any previous ownership can provide valuable context.