Explanation

The FDD discloses a relatively low rate of franchisee turnover. Over the past three years, the system, which has around 32-34 franchised units, has experienced zero terminations or non-renewals and only two units that “Ceased Operations.” This suggests a degree of stability within the franchisee base. While still a factor to monitor, this does not appear to be a high-risk area based on the provided data.

Potential Mitigations

• Contacting a diverse group of current and former franchisees listed in Item 20 is a crucial step to verify the reasons for any departures.
• Your business advisor can help you analyze the Item 20 tables to calculate the precise turnover percentage and compare it to industry averages.
• In discussions with franchisees, it is prudent to ask about their satisfaction and profitability to understand the story behind the numbers.

Explanation

This risk was not identified in the FDD Package. Rapid system growth can sometimes strain a franchisor's ability to provide adequate support, training, and quality control to all franchisees. It is a potential concern when a franchisor prioritizes expansion speed over building a sustainable support infrastructure. Based on Item 20 data, Lemon Tree LLC is not undergoing a period of rapid expansion.

Potential Mitigations

• A business advisor can help you evaluate if a franchisor's support systems are scalable to handle their projected growth.
• Reviewing the franchisor's financial statements with an accountant can reveal if they are reinvesting in support infrastructure.
• Inquiring with both new and established franchisees provides insight into the consistency and quality of the franchisor's support over time.

Explanation

This risk was not identified in the FDD Package. The business model, which provides affordable family hair care services, operates within a well-established and continuously existing market rather than being based on a recent or novel trend. Fad businesses carry the risk that consumer interest may decline rapidly, potentially harming the long-term viability of your investment even as your contractual obligations continue.

Potential Mitigations

• It is wise to have a business advisor help you conduct independent market research to confirm long-term consumer demand for the services offered.
• Evaluating a franchisor's stated plans for research and development can provide insight into their strategy for long-term market relevance.
• An accountant can help you model the business's potential resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified in the FDD Package. Item 2 indicates that the key personnel, such as President Jonathan Shaw, have extensive experience in the salon industry and franchising, dating back to 1999 and 2009 respectively. Other executives also have prior franchise system experience. This level of experience generally reduces risks associated with unproven management and underdeveloped support systems.

Potential Mitigations

• Engaging a business advisor to help you thoroughly vet the backgrounds of the entire management team is a valuable due diligence step.
• It is always prudent to speak with existing franchisees to confirm that the management team's experience translates into effective support and leadership.
• Your attorney can help you understand the roles and responsibilities of the key executives as described in the FDD.

Explanation

This risk was not identified in the FDD Package. Item 1 does not indicate that Lemon Tree LLC is owned by a private equity firm. This type of ownership can sometimes introduce risks related to a focus on short-term returns over the long-term health of the franchise system, potentially leading to increased fees, reduced support, or a quick sale of the company.

Potential Mitigations

• A business advisor can help you research a private equity owner's track record with other franchise systems.
• Consulting with your attorney is important to understand the implications of the franchisor's right to sell or assign the franchise system.
• It is wise to ask existing franchisees about any changes they have experienced since a private equity acquisition.

Explanation

This risk was not identified in the FDD Package. Item 1 clearly states that Lemon Tree LLC has no predecessors. A predecessor is a company from which the franchisor acquired a major portion of its assets. A history with predecessors can sometimes introduce risks if that history includes issues like litigation or franchisee failures that are not fully transparent in the current FDD.

Potential Mitigations

• An attorney should always be engaged to carefully review Item 1 of the FDD for any mention of predecessors.
• If a predecessor is identified, a business advisor can assist in researching the predecessor's public records and history.
• Asking long-term franchisees about their experiences under any previous ownership can provide valuable context.

Explanation

This risk was not identified in the FDD Package. Item 3 states, “No litigation is required to be disclosed in this Item.” The absence of a pattern of lawsuits filed by franchisees alleging fraud or by the franchisor against franchisees is a positive indicator. It suggests a lower likelihood of systemic business problems or an overly litigious relationship between the franchisor and its franchisees.

Potential Mitigations

• Your attorney should always be asked to conduct an independent public records search for litigation involving the franchisor, as some cases may not meet the criteria for disclosure.
• Discussing the franchisor's relationship with its franchisees with current and former operators can provide context beyond the FDD.
• Understanding the dispute resolution process outlined in Item 17 with your attorney is crucial for any potential future disagreements.