Explanation

This risk was not identified in the FDD package. The audited financial statements in Exhibit G for Property Management Incorporated Franchise, LLC (PMI) show positive net income for the past three years and positive members' equity. An inability of a franchisor to meet its financial obligations can jeopardize the support and services you rely on, making their financial health a crucial aspect of your due diligence.

Potential Mitigations

• It is still advisable for your accountant to review the complete financial statements, including footnotes and the auditor's report, for any subtle signs of financial weakness.
• Discuss the franchisor's financial stability and capitalization with your financial advisor to gauge their capacity for long-term support.
• Your attorney can help you understand any financial performance guarantees or support obligations outlined in the franchise agreement.

Explanation

This risk was not identified in the FDD package. Item 20 data shows moderate, rather than rapid, system growth over the last three years. Unchecked rapid growth can strain a franchisor's ability to provide adequate training, site selection assistance, and ongoing support to its franchisees, potentially diluting brand quality and franchisee success. The growth depicted for PMI appears to be at a sustainable pace.

Potential Mitigations

• A discussion with your business advisor about the franchisor's capacity to support its current and future franchisees is still a valuable exercise.
• Engaging with a mix of new and established franchisees can provide insight into the consistency and quality of the support provided over time.
• Your accountant can review the franchisor's financial statements to ensure they are reinvesting in support infrastructure to match their growth.

Explanation

This risk was not identified in the FDD package. PMI began franchising in 2008 and, as of the end of 2024, had over 400 franchised outlets. This indicates a well-established system with a long operational history. Investing in a new or unproven system carries higher risks, including the possibility of an untested business model, undeveloped support systems, and a lack of brand recognition.

Potential Mitigations

• Speaking with long-tenured franchisees can provide valuable historical context on the system's evolution and the franchisor's performance over time.
• A review of the management team's history in Item 2 with your business advisor can confirm their long-term commitment to the system.
• Your attorney can review the stability of the franchise agreement terms over time by comparing it to older versions if available.

Explanation

This risk was not identified in the FDD package. The business of property management is a long-standing and essential service connected to the real estate industry, not a temporary trend. A fad-based business can be a significant risk, as your long-term franchise agreement could easily outlast the consumer interest that makes the business viable, leading to potential failure.

Potential Mitigations

• It is still prudent to discuss the long-term outlook for the specific property management sectors you plan to enter with a real estate professional.
• Your business advisor can help assess how technological changes, like AI, might impact the property management industry in the future.
• Reviewing the franchisor's commitment to innovation in Item 11 with your business advisor can offer insights into their long-term strategy.

Explanation

This risk was not identified in the FDD package. The executive biographies in Item 2 show that the management team has extensive experience in both the property management industry and in franchising. Key personnel have been with PMI for many years, indicating a stable leadership team. Inexperienced management can be a significant liability for a franchise system, potentially leading to poor strategic decisions and inadequate support for franchisees.

Potential Mitigations

• When speaking with current franchisees, it is still a good practice to inquire about their perception of the management team's competence and accessibility.
• Your business advisor can help you research the professional backgrounds of the key executives listed in Item 2 for additional context.
• Confirming the stability of the leadership team over the past several years can provide additional confidence in the system's direction.

Explanation

This risk was not identified in the FDD package. Item 1 does not indicate that PMI is owned by a private equity firm; it appears to be a privately held company. Private equity ownership can introduce risks, as the firm's primary goal may be a profitable exit within a few years, which can sometimes lead to decisions that favor short-term gains over the long-term health of the franchise system.

Potential Mitigations

• A consultation with your attorney to confirm the ownership structure detailed in Item 1 is a sound due diligence step.
• During franchisee validation calls, you can inquire if there have been any recent ownership changes or rumors of a potential sale.
• Your business advisor can help you understand the potential impacts if the franchise system were to be sold in the future.

Explanation

This risk was not identified in the FDD package. Item 1 discloses affiliated companies, and the provided financial statements in Exhibit G are for the franchisor entity itself. There is no indication of a controlling parent company whose financials are being withheld. Failing to disclose a parent company, especially if it provides guarantees or is financially unstable, can hide significant risks from a prospective franchisee.

Potential Mitigations

• Your attorney can review Item 1 and the corporate structure to ensure all relevant entities appear to be properly disclosed.
• An accountant's review of the financial statements can help confirm that they stand on their own without reliance on an undisclosed parent.
• Asking the franchisor directly about the role of the affiliates mentioned in Item 1 can provide additional clarity.

Explanation

This risk was not identified in the FDD package. Item 1 states that PMI has no predecessors. A franchisor with a predecessor could have an inherited history of issues, such as litigation or high franchisee failure rates, that may not be immediately apparent. The absence of a predecessor simplifies this aspect of due diligence.

Potential Mitigations

• Verifying the franchisor's formation date and history with your attorney is a good practice to confirm the information in Item 1.
• Asking long-tenured franchisees about the history of the company can provide additional comfort that there are no undisclosed predecessors.
• Your business advisor can assist with a public records search to confirm the corporate history provided.

Explanation

This risk was not identified in the FDD package. Item 3 states, 'No litigation is required to be disclosed in this Item.' This indicates there is no current, material litigation involving the franchisor that meets the disclosure requirements, such as actions alleging fraud or violation of franchise law. A pattern of such litigation can be a major red flag about a franchisor's practices.

Potential Mitigations

• Your attorney can conduct an independent public records search to verify if there is any litigation that might not have met the specific disclosure thresholds of Item 3.
• During calls with current and former franchisees, you should still ask about their awareness of any legal disputes within the system.
• It is wise to ask the franchisor directly if they have been involved in any mediations or arbitrations, which may not always be disclosed.