Explanation

This risk was not identified in the FDD package. The franchisor began operations in 2012 and has over 60 units, indicating it is an established system. An unproven system can present risks because the business model, brand recognition, and support structures are not yet fully tested in the marketplace, which can increase the potential for failure.

Potential Mitigations

• When evaluating any franchise, a business advisor can help you research the franchisor's history and the maturity of its systems.
• It is wise to have your attorney review the experience of the management team as detailed in Item 2.
• An accountant can analyze Item 20 data to gauge the system's growth and stability over time.

Explanation

This risk was not identified in the FDD package. The franchised business offers payroll and human capital management services, which is a mature and established business sector with consistent demand. A fad-based business carries the risk that consumer interest may decline rapidly, potentially leaving you with a worthless business and ongoing contractual obligations long after the trend has passed.

Potential Mitigations

• Your business advisor can help you conduct market research to assess the long-term demand and sustainability of any franchise concept.
• Reviewing Item 1 and Item 11 with your attorney can provide insight into the franchisor's history and plans for future innovation.
• Discuss the industry's long-term outlook and potential disruptors with a knowledgeable business consultant.

Explanation

This risk was not identified in the FDD package. Item 2 indicates the executive team has substantial and long-term experience in the payroll services industry, with key founders having been with the company since its inception in 2012. Inexperienced management can be a significant risk, as they may lack the specific skills to run a franchise system, provide adequate support, or make sound strategic decisions.

Potential Mitigations

• Thoroughly vetting the management team's résumés in Item 2 with a business advisor is a crucial due diligence step.
• When speaking with existing franchisees, it is a good practice to ask about their direct experiences with the management team's competence and support.
• Your attorney can help you understand the roles and responsibilities of the key personnel listed.

Explanation

This risk was not identified in the FDD package. While Item 1 discloses an outside investor has purchased an interest in the parent company, it is not described as a traditional private equity firm. PE ownership can sometimes introduce a focus on short-term returns over the long-term health of the brand, potentially leading to increased fees or reduced franchisee support.

Potential Mitigations

• When a private equity firm is involved, a business advisor can help you research the firm's history with other franchise brands.
• Your attorney should review any clauses in the Franchise Agreement that permit the franchisor to be sold or assigned.
• Discussing any changes since an ownership change with existing franchisees can provide valuable insight.

Explanation

This risk was not identified in the FDD package. Item 1 discloses the parent company, Prosperity Holdings, LLC, but does not provide its financial statements, which is permissible as it does not appear to guarantee the franchisor's obligations. Failure to disclose a parent or provide its financials when required can obscure the true financial backing and stability of the franchisor.

Potential Mitigations

• Your attorney can help verify the franchisor's corporate structure and determine if parent company financials should have been required.
• An accountant should analyze the provided franchisor financials to assess if the company is a thinly capitalized subsidiary.
• If a parent guarantee is offered, it's crucial for your attorney to review its terms and the parent's financial stability.

Explanation

This risk was not identified in the FDD package, as Item 1 explicitly states that the franchisor has no predecessors. When a franchisor has predecessors, it is important to investigate their history, as any past issues such as litigation, bankruptcy, or high franchisee failure rates could indicate unresolved problems that have been carried over into the current system.

Potential Mitigations

• A franchise attorney should always carefully review Item 1 of the FDD for any mention of predecessors.
• If predecessors exist, it's wise to have your business advisor conduct independent research on their business history.
• Speaking with long-term franchisees who operated under a predecessor can provide invaluable historical context.

Explanation

This risk was not identified in the FDD package. Item 3 states there is no litigation that requires disclosure. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or breach of contract, can be a major red flag indicating systemic problems with the franchisor's practices or the franchise relationship itself.

Potential Mitigations

• Your attorney should always review Item 3 carefully for any disclosed litigation and its potential implications.
• Even with no disclosed litigation, a business advisor may recommend searching online for informal franchisee complaints or news articles.
• A clean litigation history is positive, but your attorney will advise that it is only one piece of the overall due diligence puzzle.