Explanation

This risk was not identified in the FDD Package. Rapid, uncontrolled growth can strain a franchisor's resources, leading to inadequate support for franchisees. It is important to evaluate if the franchisor's support infrastructure, as detailed in Item 11, is capable of keeping pace with the rate of new franchise sales shown in Item 20. A sustainable growth rate is often a sign of a well-managed franchise system.

Potential Mitigations

• A business advisor can help you analyze the growth data in Item 20 relative to the support staff and resources described in Items 2 and 11.
• Speaking with franchisees who opened at different times can provide insight into whether support levels have remained consistent during growth.
• Your accountant should review the franchisor's financial statements to assess if they are reinvesting in infrastructure to support expansion.

Explanation

This risk was not identified in the FDD Package. A fad business is tied to a fleeting trend, which can pose a risk to long-term viability after public interest wanes. It is important to assess whether the products or services offered meet a sustainable, long-term consumer need or if they are based on a short-lived novelty. A franchisee's contractual obligations continue even if the business concept becomes obsolete.

Potential Mitigations

• Engaging a business advisor to conduct independent market research on the long-term demand for the services is recommended.
• Review the franchisor's history of innovation and plans for future development in Item 11 with your business advisor.
• An accountant can help you model the financial risks if customer demand were to decrease significantly after an initial trend period.

Explanation

This risk was not identified in the FDD Package. The franchisor is owned by its members, not a private equity firm. When a franchisor is owned by a private equity firm, there can be a focus on short-term profitability and a quick exit strategy, which may not align with the long-term health of the franchisees. This can sometimes lead to increased fees, reduced support, or pressure to conform to new standards designed to make the system more attractive for resale.

Potential Mitigations

• Should you encounter a PE-owned franchisor, a business advisor can help you research the firm’s reputation and history with other franchise brands.
• Your attorney would need to review the assignment clause in the Franchise Agreement to understand what happens if the system is sold.
• Speaking with franchisees who have been through a PE acquisition can provide your attorney with valuable insights.

Explanation

This risk was not identified in the FDD Package. The franchisor does not disclose a parent company. If a franchisor is a subsidiary of a larger parent company, it is important that the parent's financial statements are also provided if the parent guarantees the franchisor's obligations or is otherwise fundamental to its operation. Without this information, a prospective franchisee may have an incomplete picture of the overall financial stability and resources backing the franchise system.

Potential Mitigations

• An attorney can help determine if a parent company exists and whether its financial disclosure is legally required.
• If a parent company's financials are provided, your accountant should review them as carefully as the franchisor's own statements.
• Your attorney should examine any parent guarantees to understand their scope and enforceability.

Explanation

This risk was not identified in the FDD Package. Preserve Services does not list any predecessors. When a franchisor has acquired a business from a predecessor, it's important to understand that predecessor's history. Information regarding past litigation, bankruptcies, or high franchisee turnover under a previous owner could indicate underlying problems with the system that may have been inherited by the current franchisor. A clean history is not guaranteed but a disclosed one must be examined.

Potential Mitigations

• An attorney can help investigate a predecessor's business and legal history if one is disclosed.
• When a predecessor exists, it is valuable to speak with franchisees who operated under their management.
• Your business advisor can assist in researching public records and news archives for information on any disclosed predecessor.

Explanation

This risk was not identified in the FDD Package. Item 3 states that no litigation is required to be disclosed. A pattern of lawsuits filed by franchisees alleging fraud, misrepresentation, or breach of contract is a significant red flag. It can indicate systemic problems within the franchise, such as unfulfilled promises, a flawed business model, or a contentious relationship between the franchisor and its franchisees, which could expose you to similar issues.

Potential Mitigations

• It is wise to have your attorney conduct an independent public records search for litigation involving the franchisor, just in case.
• Always ask current and former franchisees about any disputes they have had, even if they did not result in litigation.
• Your attorney should advise you on the significance of any litigation that is discovered or disclosed.