Explanation

This risk was not identified in the FDD package, as the system appears to be shrinking rather than growing rapidly. Rapid growth can strain a franchisor's resources, potentially leading to inadequate support for new and existing franchisees. Monitoring growth rates in Item 20 against the franchisor's financial capacity in Item 21 is an important part of due diligence, as overexpansion can jeopardize the entire system's health and the support you receive.

Potential Mitigations

• Your business advisor can help assess whether a franchisor's support infrastructure is capable of handling its growth trajectory.
• Engaging with a mix of new and established franchisees can provide insight into the consistency of franchisor support.
• An accountant's review of the franchisor's financials can help determine if they are adequately capitalized for expansion.

Explanation

This risk was not identified, as the franchisor, SystemForward America, LLC (SystemForward), and its predecessors have been in this type of business for over two decades. A new or unproven system presents higher risks, including the lack of an established track record, underdeveloped support systems, and minimal brand recognition. For such systems, it is crucial to scrutinize management's experience and the company's financial capitalization to gauge its potential for long-term viability and support.

Potential Mitigations

• When evaluating a new franchise, a business advisor can help you conduct deep due diligence on the founders' industry and franchising experience.
• Speaking with the earliest franchisees is crucial to understand the real-world performance and support in an unproven system.
• For any new system, an accountant should carefully assess its capitalization and financial stability.

Explanation

The locksmith and security services industry is well-established and does not appear to be based on a temporary fad. A fad-based business carries the risk that consumer interest could decline, leaving you with a worthless business and ongoing contractual obligations. When considering any franchise, it is important to assess whether the core product or service addresses a sustainable, long-term consumer need rather than a fleeting trend.

Potential Mitigations

• Your business advisor can help research the long-term market demand and stability for any industry you consider entering.
• Asking a franchisor about its plans for innovation and adaptation can provide insight into its long-term vision.
• A financial advisor can help you assess a business model's resilience to changing trends and economic conditions.

Explanation

This risk was not identified, as the key executives listed in Item 2 appear to have extensive and long-term experience with the company, some since 2003-2004. Inexperienced management can be a significant risk, as it may lead to poor strategic decisions, inadequate franchisee support, and underdeveloped operational systems. Assessing the franchising and industry-specific track record of the management team is a critical due diligence step for any prospective franchisee.

Potential Mitigations

• A business advisor can assist in vetting the backgrounds of a franchisor's management team for relevant experience.
• Engaging with existing franchisees provides the best insight into the quality and responsiveness of management and the support team.
• When management is new to franchising, it's wise to ask if they have engaged experienced franchise consultants for guidance.

Explanation

This risk was not identified, as Item 1 does not indicate that the franchisor is owned by a private equity firm. When a franchisor is PE-owned, there can be a risk that decisions are driven by short-term investor return goals, which may not align with the long-term health of franchisees. This can sometimes manifest as reduced support, increased fees, or pressure to use affiliated vendors. Understanding the ownership structure is an important part of risk assessment.

Potential Mitigations

• If a franchisor is PE-owned, your business advisor can help research the firm's track record with other franchise systems.
• Speaking with franchisees about any changes since a PE acquisition can offer valuable insights into the new ownership's philosophy.
• Your attorney should review the Franchise Agreement for any terms that would be concerning under a PE ownership model, such as assignment rights.

Explanation

This risk was not identified, as Item 1 does not mention a parent company. If a franchisor is a subsidiary, the financial health and influence of its parent can be critical. Failure to disclose a parent company or provide its financial statements when required can obscure significant risks, such as a lack of financial backing for a thinly capitalized subsidiary. An attorney can help verify a company's corporate structure and ensure all necessary disclosures have been made.

Potential Mitigations

• Your attorney can help verify the corporate structure if you suspect an undisclosed parent company might exist.
• If a parent company guarantees obligations, it's essential to have your accountant review its financial statements.
• Understanding the full corporate structure provides a clearer picture of the financial and operational stability of the franchise system.

Explanation

The FDD discloses predecessors, The LSR Group and Sig 5 Franchise Development Corporation, and provides a history of the brand. This transparency allows for a more complete assessment of the system's lineage. When a franchisor has predecessors, it is important to review their history for any inherited issues, such as past litigation (Item 3) or high franchisee turnover (Item 20), which could indicate persistent challenges within the system.

Potential Mitigations

• Your attorney should carefully review all information disclosed about predecessors in Items 1, 3, and 4.
• Speaking with long-term franchisees who operated under the predecessor entities can provide valuable historical context.
• A business advisor can help you research the track record and reputation of any predecessor companies.

Explanation

The FDD does not disclose a pattern of franchisee-initiated litigation alleging fraud or misrepresentation. It lists one recent franchisor-initiated action to enforce its contract. A pattern of lawsuits from franchisees claiming fraud or a high volume of suits initiated by the franchisor could be a major red flag indicating systemic issues with sales practices, support, or an overly litigious culture. The absence of such a pattern here is a positive indicator.

Potential Mitigations

• Your attorney should always carefully review any litigation disclosed in Item 3 for patterns and potential red flags.
• It is wise to ask existing franchisees about the nature of their relationship with the franchisor and the general level of disputes.
• Independent research, with the help of your attorney, can sometimes uncover litigation history not required to be disclosed in the FDD.