Explanation

This risk was not identified in the FDD package. Hounds Mounds was incorporated in 2005 and has been franchising for over a decade, indicating it is an established system. However, investing in any new or unproven franchise system can be risky due to the lack of a track record, which makes it difficult to assess the long-term viability of the business model and the franchisor's ability to provide support.

Potential Mitigations

• For any franchise, especially a newer one, engaging a business advisor to research the founders' industry and franchising experience is a prudent step.
• An accountant should be asked to carefully scrutinize the financials of a new franchisor to ensure it is adequately capitalized.
• Speaking with the very first franchisees of a new system provides invaluable insight into the early support and system maturity.

Explanation

This risk was not identified in the FDD package, as pet waste removal is a service with ongoing consumer demand. A fad business is one based on a short-lived trend, posing a significant risk that customer interest could decline rapidly, leaving you with a failing business but still bound by a long-term franchise agreement. Assessing the long-term market need for a product or service is a critical part of due diligence.

Potential Mitigations

• A business advisor can help you conduct independent market research to assess the long-term consumer demand for the franchise's products or services.
• It is wise to evaluate a company's plans for innovation and adaptation to stay relevant beyond current trends.
• Your financial advisor can help model the business's potential resilience to economic shifts and changing consumer tastes.

Explanation

This risk was not identified in the FDD package. The key executive, Geoffry Bodle, has been with the company since its incorporation in 2005, indicating significant experience with this specific business. Inexperienced management can pose a risk if they lack a deep understanding of the industry or the specific challenges of running a franchise system, which could lead to poor strategic decisions and inadequate support for you.

Potential Mitigations

• Thoroughly vetting the background of the franchisor's key management team with your business advisor is always recommended.
• When speaking with existing franchisees, it's useful to ask about their perception of the management team's competence and the quality of support provided.
• Your attorney can help you assess if the franchisor has hired experienced franchise professionals to compensate for any gaps in leadership experience.

Explanation

The FDD does not indicate that Hounds Mounds is owned by a private equity firm. This type of ownership can present a risk because PE firms often have a shorter investment horizon. This may lead to decisions that prioritize rapid returns for investors, such as cutting franchisee support or increasing fees, over the long-term health and stability of the brand and its franchisees.

Potential Mitigations

• If a franchisor is PE-owned, a business advisor can help research the firm's track record with other franchise concepts.
• It is wise to ask franchisees who have been in the system before and after a PE acquisition about any changes in culture or support.
• Your attorney should review the assignment clause to understand how easily the franchise system can be sold to another entity.

Explanation

This risk was not identified. The FDD clearly identifies Hounds Mounds, Inc. as the franchisor and does not mention any parent companies. When a franchisor is a subsidiary of another company, the parent's financial health can be critical, especially if the franchisor itself is thinly capitalized. Failure to disclose a parent or provide its financials when required can obscure the true financial stability and backing of the franchise system.

Potential Mitigations

• Your attorney can help you verify the corporate structure and identify any undisclosed parent companies that might exert control.
• If a parent company exists and guarantees the franchisor's obligations, an accountant should review its financial statements.
• It is important to understand the full corporate structure to assess where ultimate control and financial responsibility lie.

Explanation

This risk was not identified in the FDD. Item 1 states that Hounds Mounds has no predecessors. When a franchisor has acquired the system from a predecessor, there is a risk that the FDD may not fully disclose the predecessor's negative history, such as high franchisee failure rates or litigation. A complete understanding of the system's entire history is important for assessing its stability and track record.

Potential Mitigations

• Your attorney should carefully review Item 1 of any FDD for information about predecessors.
• A business advisor can help you research the history and reputation of any predecessor entity.
• Talking to long-term franchisees who operated under a predecessor can provide crucial historical context.

Explanation

Item 3 discloses regulatory actions from 2012 and 2013 in California and Washington for selling franchises without registration. It also details a 2013 arbitration initiated by the franchisor which largely failed. While this history indicates early compliance and enforcement issues, the actions are over a decade old and there is no pattern of recent litigation disclosed. However, this history may be relevant to the company's early operational culture.

Potential Mitigations

• A thorough review of all disclosures in Item 3 with your franchise attorney is crucial to understand the context and potential implications of any past litigation.
• Engaging a business advisor to ask current franchisees about the franchisor's current relationship and dispute resolution approach is a wise step.
• Your attorney can help you understand if dated litigation reveals anything about the company's foundational business practices.