Explanation

This risk was not identified in the FDD package, as the franchise system is too new to have a history of franchisee turnover. Item 20 shows only one franchise has opened. High turnover in an established system can signal issues with profitability, franchisor support, or the business model itself. Close monitoring of Item 20 in future FDDs would be crucial.

Potential Mitigations

• When reviewing future FDDs, your accountant can help you analyze the turnover rates presented in Item 20.
• Engaging a business advisor to compare turnover rates against industry benchmarks is a valuable due diligence step.
• Your attorney can help you formulate questions for current and former franchisees about their experiences, which is key to understanding turnover.

Explanation

This risk was not identified in the FDD package. The HVAC industry is well-established, not typically considered a fad. A fad business is one tied to a fleeting trend, which poses a significant risk because consumer demand may disappear, leaving you with long-term contractual obligations. Evaluating the long-term market need for a product or service is a crucial part of due diligence.

Potential Mitigations

• Your business advisor can help you research the long-term market trends for any franchise concept to assess its sustainability.
• Evaluating a franchisor's plans for innovation and adaptation to market changes is a key discussion to have with your attorney.
• An accountant can help you model the financial resilience of a business in the face of changing consumer tastes.

Explanation

The FDD does not indicate that the franchisor is owned by a private equity firm. When PE firms own franchises, they may prioritize short-term returns over the long-term health of the brand and its franchisees. This can lead to increased fees, reduced support, or a quick sale of the system, creating uncertainty for franchisees.

Potential Mitigations

• A business advisor can help you research the ownership structure of any franchisor to identify potential private equity involvement.
• In any franchise, your attorney should review the franchisor's right to sell or assign the franchise system and its potential impact on you.
• It is prudent to ask other franchisees about any changes in operations or philosophy if a PE firm has acquired their system.

Explanation

This risk was not identified in the FDD package. MRCOOL LLC discloses its affiliates, and since it is a new company with weak financials, it has provided the required two years of audited financial statements. A failure to disclose a parent company or provide its financial statements when required can hide financial instability or other risks from a prospective franchisee.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1 to ensure all controlling entities are listed.
• If a parent company provides a guarantee, your accountant must review the parent's financial statements for signs of weakness.
• A business advisor can help you understand the relationships between the franchisor and its various affiliates.

Explanation

This risk was not identified in the FDD package. Item 1 states that the franchisor does not have any predecessors. When a franchisor has acquired a system from a predecessor, it is important to understand the predecessor's history, as any past issues like litigation, bankruptcy, or high franchisee turnover could indicate underlying problems with the business model that may persist.

Potential Mitigations

• Your attorney should always carefully review the predecessor information disclosed in Items 1, 3, and 4.
• When a predecessor is disclosed, a business advisor can help you research the predecessor's reputation and historical performance.
• It is always a good idea to ask long-term franchisees about their experience under any previous ownership.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no litigation against the franchisor. A pattern of litigation, especially cases brought by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag. It may indicate systemic problems within the franchise, either in its sales process, its business model, or its relationship with its franchisees.

Potential Mitigations

• It is crucial to have your attorney review the litigation history in Item 3 for any franchise you consider.
• A business advisor can help you assess whether the number and nature of lawsuits are significant for the size and age of the system.
• Even with no disclosed litigation, asking current and former franchisees about any disputes they are aware of is a prudent step.