Explanation

This risk was not identified in the FDD package. Item 20 shows that N3 has not had any active franchisees, so there is no history of franchisee turnover. However, high turnover rates in a franchise system can be a major warning sign of systemic problems, such as lack of profitability, poor franchisor support, or an unsustainable business model. It is a critical metric for assessing the health of a mature franchise system.

Potential Mitigations

• Your business advisor should explain how to analyze franchisee turnover data in Item 20 for future due diligence.
• Understanding the typical reasons for franchisee exits, such as terminations versus transfers, is something your franchise attorney can help you interpret.
• It is wise to have your accountant help you calculate the annual percentage of churn when reviewing FDDs for established systems.

Explanation

This risk was not identified in the FDD package. As a new franchisor with no existing franchisees, N3 is not currently experiencing rapid growth. For other franchise systems, very fast expansion can be a risk if it outpaces the franchisor's ability to provide adequate training and support to all units. This can lead to a decline in service quality and franchisee dissatisfaction, which can harm the brand and your investment.

Potential Mitigations

• Engage a business advisor to assess whether a franchisor's support infrastructure is scalable to match its growth projections.
• In any franchise review, it's beneficial to ask your accountant to analyze whether the franchisor's financial resources can sustain its expansion plans.
• Your attorney can help you question existing franchisees about the quality and timeliness of support during periods of growth.

Explanation

This risk was not identified in the FDD package. The business model, digital out-of-home advertising, is part of an established and growing sector of the advertising industry. A fad business, in contrast, is tied to a fleeting trend, posing a risk that consumer demand could disappear, leaving you with a worthless business and ongoing contractual obligations. Assessing the long-term sustainability of consumer demand is a key part of franchise due diligence.

Potential Mitigations

• A business advisor can help you research industry trends to differentiate between a sustainable business model and a short-term fad.
• Reviewing a franchisor's plans for innovation and adaptation in Item 11 with your attorney can provide insight into their long-term vision.
• For any business concept, it's wise to have an accountant help you model its potential performance under various economic conditions.

Explanation

This risk was not identified in the FDD package. Item 1 indicates N3 is owned by a corporate parent, Evergreen Digital Media Corp., not a private equity firm. Private equity ownership can sometimes introduce risks, as their focus may be on short-term financial returns rather than the long-term health of the franchisees and the brand. This can sometimes lead to increased fees, reduced support, or a quick sale of the franchise system.

Potential Mitigations

• Engaging a business advisor to research the ownership structure of any franchisor is a key due diligence step.
• Your attorney should review the assignment clauses in the Franchise Agreement to understand your rights if the system is sold.
• If a franchisor is PE-owned, speaking with franchisees about changes since the acquisition is an important step.

Explanation

This risk was not identified in the FDD package. Item 1 does not disclose any predecessors for N3. When a franchisor has a predecessor, it is important to scrutinize that entity's history, as it can reveal inherited issues with the brand, operating system, or franchisee relationships. A lack of disclosure or downplaying of negative history from a predecessor can obscure the true background of the franchise system you are evaluating.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any mention of predecessors and their history.
• If a predecessor exists, researching their history of litigation in Item 3 and bankruptcy in Item 4 is crucial.
• A business advisor can help you investigate the reputation of a predecessor system by speaking with long-term franchisees.

Explanation

This risk was not identified in the FDD package. Item 3 discloses no litigation involving the franchisor. A pattern of litigation, particularly lawsuits brought by franchisees alleging fraud, misrepresentation, or breach of contract, can be a significant red flag. It may indicate systemic problems within the franchise, dissatisfaction among franchisees, or questionable practices by the franchisor. Conversely, a high number of suits brought by the franchisor against franchisees could suggest an overly aggressive relationship.

Potential Mitigations

• It is critical to have your attorney carefully review any litigation disclosed in Item 3 to understand the nature of the claims.
• Your business advisor can help you assess whether the number and type of lawsuits are unusual for a system of its size and age.
• If litigation is present, speaking with franchisees involved can provide valuable, firsthand insight.