Explanation

The risk of investing in a new or unproven franchise system was not identified. Restoration Specialties Franchise Group, LLC (RSFG) began franchising its core services between 2012 and 2016. An unproven system can present risks because the business model, brand recognition, and support structures are not yet fully established, which can lead to higher uncertainty for new franchisees. It is important to verify the franchisor has a solid track record before investing.

Potential Mitigations

• A thorough review of the management team's experience in both the specific industry and in franchising with a business advisor is wise.
• Speaking with the earliest franchisees listed in Item 20 can provide insight into the system's evolution and support quality.
• It is prudent for an accountant to assess the franchisor's capitalization and financial stability, especially in younger systems.

Explanation

This risk was not identified in the FDD package. A 'fad' business is one tied to a fleeting trend with limited long-term consumer demand. Investing in such a business is risky because your long-term contractual obligations to pay fees remain even if public interest disappears, potentially leading to business failure. Evaluating the sustainability and adaptability of the core business model is a critical step in due diligence.

Potential Mitigations

• Engaging a business advisor to research the long-term market demand and competitive landscape for the product or service is beneficial.
• You should assess the franchisor's disclosed plans for innovation, research, and development to stay relevant in the market.
• Your financial advisor can help evaluate the business model's resilience to economic shifts and changing consumer tastes.

Explanation

This specific risk was not identified in the FDD package. The executive team listed in Item 2 appears to have prior experience in other franchise systems and related industries. Inexperienced management can be a significant risk, as they may lack the specific skills to run a franchise system effectively, potentially leading to poor strategic decisions, weak operational support, and inadequate training programs, which can negatively impact franchisee success.

Potential Mitigations

• A business advisor can help you thoroughly vet the specific roles and relevant franchising experience of each member of the management team.
• Discussing the quality of management's support and strategic direction with a range of existing franchisees is a crucial due diligence step.
• Your attorney can help you formulate questions to ask the franchisor about the management team's direct experience in your specific industry.

Explanation

This specific risk was not identified. The FDD discloses that the franchisor, Restoration Specialties Franchise Group, LLC (RSFG), is a subsidiary of EverSmith Brands Holding Company, which provides a performance guarantee. The FDD also includes the parent's audited financial statements. When a franchisor is a subsidiary, failure to disclose the parent or provide its financials (if the parent guarantees performance or is otherwise integral to the system) can obscure the true financial backing and viability of the franchise.

Potential Mitigations

• An accountant should always confirm that if a parent company is mentioned, its role and financial standing are made clear.
• If a parent company provides a guarantee, your attorney should ensure a copy of the guarantee is included and review its terms.
• It is wise to have your attorney verify the corporate structure if you suspect an undisclosed controlling entity exists.

Explanation

This specific risk was not identified, as Item 1 does not mention any predecessors to the current franchisor. When a franchisor has predecessors, it is important to scrutinize their history for issues like litigation, bankruptcy, or high franchisee turnover. An incomplete disclosure of a predecessor's negative history can hide systemic problems that may have been inherited by the current franchisor, preventing you from having a full picture of the brand's past performance and challenges.

Potential Mitigations

• Your attorney should always carefully review Item 1 for any mention of predecessors and cross-reference with Items 3, 4, and 20.
• If a predecessor exists, researching their history through public records can be a valuable task for your business advisor.
• Speaking with long-term franchisees who operated under a predecessor can provide crucial, firsthand historical context.

Explanation

Item 3 of the FDD states, 'No litigation is required to be disclosed in this Item.' A pattern of litigation, especially lawsuits initiated by franchisees alleging fraud, misrepresentation, or breach of contract, can be a major red flag indicating systemic problems. Similarly, a high volume of lawsuits initiated by the franchisor against its franchisees could suggest an overly aggressive or difficult relationship. This FDD does not disclose such a pattern.

Potential Mitigations

• It's beneficial to have your attorney review Item 3 in any FDD to analyze the nature, volume, and outcomes of all disclosed litigation.
• Even with no disclosed litigation, performing an independent online search for news or complaints related to the franchisor can be a useful step.
• Your business advisor can guide you in asking current and former franchisees about any disputes they may have had, even if they didn't lead to litigation.