Explanation

This risk was not identified in the FDD package. Item 20 data for the last three years shows no franchisee terminations, non-renewals, or cessations of business for other reasons. High franchisee turnover can be a major red flag, often indicating systemic problems such as a flawed business model, lack of profitability, or inadequate support. The absence of such turnover in this FDD, while based on a small and young system, is a positive indicator.

Potential Mitigations

• Your business advisor can help you calculate and monitor the franchise system’s turnover rates in future FDDs.
• A discussion with your attorney about the 'churn' rates disclosed in Item 20 is a vital part of due diligence.
• It is prudent to ask former franchisees, if any are listed, about their reasons for leaving the system.

Explanation

This risk was not identified. Item 20 data shows a new and small system with controlled growth, not the very rapid expansion that can strain a franchisor's resources. Rapid growth can sometimes outpace a franchisor's ability to provide adequate training, site selection assistance, and ongoing operational support to its franchisees, potentially diluting brand quality and franchisee support.

Potential Mitigations

• Your business advisor can help you evaluate if the franchisor’s support infrastructure is keeping pace with its growth plans.
• Speaking with franchisees who joined at different times can provide insight into the consistency of franchisor support.
• An accountant's review of the franchisor's financial statements can help determine if they have the capital to support continued expansion.

Explanation

This risk was not identified. The business model, providing assisted living and memory care, serves a well-established and growing demographic need. While specific business models can change, the underlying demand for senior care is not typically considered a short-term fad. A fad business is one tied to a fleeting trend, which can be risky as your long-term contractual obligations would outlast the public's interest, potentially leading to business failure.

Potential Mitigations

• Your business advisor can help you research long-term market trends for senior and memory care in your specific area.
• It is wise to assess the company’s plans for innovation and adaptation to stay competitive over the long term.
• A financial advisor can help model the business's resilience to economic shifts and changing consumer preferences.

Explanation

This risk was not identified. Item 1 of the FDD does not indicate that the franchisor is owned by a private equity firm. Such ownership can sometimes lead to a focus on short-term profitability over the long-term health of the franchise system, potentially affecting franchisee support levels, fee structures, and the overall strategic direction of the brand. A sale of the system is also a common outcome, which can create uncertainty for franchisees.

Potential Mitigations

• Your attorney can help you research the ownership structure of any franchisor to identify potential private equity involvement.
• If a franchisor is PE-owned, a business advisor can help you investigate the firm's track record with other franchise brands.
• It is prudent to review any 'Assignment by Franchisor' clauses in the Franchise Agreement with your legal counsel.

Explanation

This risk was not identified in the FDD. The franchisor discloses its affiliates but does not indicate it has a parent company. When a franchisor is a subsidiary, the financial health and influence of the parent company can be material. If a parent company's financial statements are required for a full risk assessment but are not provided, it could obscure the true financial stability and backing of the franchise system, which is a significant concern for prospective franchisees.

Potential Mitigations

• Your attorney can help you research the corporate structure to confirm the absence of an undisclosed parent company.
• An accountant's review is crucial if a parent company's financials are provided or required, especially if the franchisor is thinly capitalized.
• It is wise to ask your attorney to review any parent guarantees to understand their scope and enforceability.

Explanation

This risk was not identified, as Item 1 states the franchisor has no predecessors. A predecessor is a prior company from which the franchisor acquired the business. Failing to disclose a predecessor or downplaying their negative history (such as litigation, bankruptcy, or high franchisee failure rates) can prevent a prospective franchisee from understanding the true historical challenges and inherited issues of the franchise system, leading to an incomplete risk assessment.

Potential Mitigations

• An experienced franchise attorney can review Item 1 to ensure predecessor information, if any, is properly disclosed.
• If a predecessor exists, your business advisor can help you conduct independent research on their business history and reputation.
• Asking long-tenured franchisees about their experience under any previous ownership is a valuable due diligence step.

Explanation

This risk was not identified. Item 3 of the FDD states that no litigation is required to be disclosed. A pattern of franchisee-initiated lawsuits against the franchisor alleging fraud, misrepresentation, or breach of contract is a significant red flag. It may indicate systemic problems with the franchisor's sales practices, support obligations, or overall business model. Likewise, a high volume of lawsuits initiated by the franchisor against franchisees can suggest an overly aggressive or litigious culture.

Potential Mitigations

• Your franchise attorney should always carefully review the details of any lawsuits disclosed in Item 3.
• A business advisor can help you research the context of any disclosed litigation to better understand the underlying issues.
• It is prudent to discuss any disclosed litigation with current and former franchisees to get their perspective.