Explanation

The system experienced very fast growth in fiscal years 2022 (+78 net outlets) and 2023 (+59), but growth slowed dramatically in 2024 (+10). While rapid growth can strain franchisor support, the recent slowdown combined with the high number of cessations may indicate that the system has encountered significant market or operational challenges. The primary risk has shifted from managing growth to understanding the high level of franchisee churn.

Potential Mitigations

• A business advisor can help you assess whether the market for this service is saturated or if the business model is facing new challenges.
• It is wise to question current franchisees about their perception of the system's health and future growth prospects.
• Your accountant should analyze the Item 19 FPR in light of the slowing growth and high turnover.

Explanation

This specific risk was not identified in the FDD Package. The business offers home and commercial insulation services, a long-established trade. This type of business is not typically considered a fad, as it addresses a fundamental need for energy efficiency and comfort in buildings. The risk of a business being a fad is that consumer interest can disappear quickly, leaving franchisees with a worthless investment.

Potential Mitigations

• Your business advisor can help you research the long-term stability and demand within the local construction and home renovation market.
• An attorney can review the franchise agreement to ensure your obligations do not extend beyond a reasonable business lifecycle.
• It is always prudent to consider competitive pressures and technological changes in any established industry with your business advisor.

Explanation

This specific risk was not identified in the FDD Package. Item 2 indicates that the executive team has prior experience in other franchise systems, many of which are within the parent company's (Empower Brands) portfolio. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and underdeveloped operational systems, which can jeopardize the entire franchise network.

Potential Mitigations

• Asking current franchisees about the quality and effectiveness of management's support and guidance is a valuable due diligence step.
• A business advisor can help you research the professional backgrounds and track records of the key executives listed in Item 2.
• It is beneficial to have your attorney confirm that the franchisor's support obligations are clearly defined in the Franchise Agreement.

Explanation

This specific risk was not identified in the FDD Package. Item 1 discloses the franchisor's complex parent company structure, and Item 21 provides audited financial statements and a guarantee from the parent, Outdoor Living Brands Holdco, LLC. Failure to disclose a parent company or provide its financials when required can obscure the true financial stability and backing of a franchisor, which is a significant risk for a prospective franchisee.

Potential Mitigations

• Your accountant should always confirm that if a parent company's financials are provided, they are audited and conform to GAAP.
• An attorney can help verify that the FDD properly discloses all parent companies and affiliates as required by franchise law.
• It is important to have your attorney review the terms of any parent guarantee to ensure it is unconditional and provides meaningful protection.

Explanation

The FDD discloses that Koala LLC acquired the system's assets in 2023 from a predecessor entity, Koala Franchise, LLC, which operated from 2020. While no negative history like bankruptcy or litigation is disclosed for the predecessor, the recent change in ownership introduces a degree of uncertainty. The high franchisee churn seen in Item 20 occurred under the current ownership, not the predecessor.

Potential Mitigations

• It is advisable to ask the franchisor about the reasons for the change in ownership from the predecessor entity.
• A business advisor can help you understand if the transition from the predecessor has led to significant changes in the system or support.
• Speaking with franchisees who have experience with both the old and new ownership could offer valuable perspectives.

Explanation

This specific risk was not identified in the FDD Package. Item 3 states there is no litigation that requires disclosure. A pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag indicating systemic problems. Similarly, a high number of lawsuits initiated by the franchisor against franchisees might suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your attorney can conduct independent searches for litigation involving the franchisor or its affiliates as part of due diligence.
• It is always a good practice to ask current and former franchisees about any disputes they are aware of within the system.
• A business advisor can help you assess whether any disclosed litigation points to broader issues within the franchise's operations or relationships.